Tax withholding can be complicated, and with the passage of the Tax Cuts and Jobs Act (TCJA) legislation, it's even more so since a number of tax provisions have changed. As such, it's important to make sure the right amount of tax is withheld for your particular tax situation.
Many taxpayers have already adjusted their withholding, but for those with more complicated tax situations who have been putting it off, it's not too late. You should be aware, however, that the longer you wait, the fewer pay periods there are to withhold the necessary federal tax. In other words, more tax will have to be withheld from each remaining paycheck.
Let's take a look at which taxpayers would benefit from a "paycheck checkup" right now to avoid an unexpected tax bill next year.
Taxpayers who typically adjust their tax withholding so that they receive a large refund at tax time could be affected by tax law changes in the TCJA including reduced tax rates and significantly different tax brackets, as well as the removal of personal exemptions and doubling of the standard deduction. Adjusting tax withholding now will help taxpayers make sure the amount withheld is best for their particular tax situation--and avoid an unpleasant tax surprise next year.
High-income taxpayers often find that itemizing instead of taking the standard deduction is more beneficial, but with the passage of tax reform legislation, that might no longer be the case. Taxpayers affected by any of the following tax changes should check and adjust their withholding as soon as possible:
It is especially important for those with high incomes and complex returns to review withholding because these taxpayers are often affected by more of these changes than people with simpler returns. This is also true if they also make quarterly estimated tax payments to cover other sources of income or are subject to the self-employment tax or alternative minimum tax.
In addition to expanding the Child Tax Credit, the TCJA added a new tax credit for parents or other qualifying relatives supporting a dependent age 17 or older at the end of 2018. This new tax credit – Credit for Other Dependents - is a non-refundable credit of up to $500 per qualifying person. This change, along with others, can affect a family's tax situation in 2018 and it's important to check and adjusted withholding amounts if necessary to prevent an unexpected tax bill and even penalties next year at tax time.
Tip: Families with qualifying children under the age of 17 should first review their eligibility for the expanded Child Tax Credit, which is larger. Taxpayers should also note that both credits begin to phase out at $400,000 of modified adjusted gross income for joint filers and $200,000 for other taxpayers.
Because the U.S. tax system operates on a pay-as-you-go basis, taxes must be paid on income as it is received rather than at the end of the year. Generally, people who are part of the sharing economy and who do not have an employer need to make sure they pay their taxes either through withholding from other jobs they may have or by making quarterly estimated tax payments to cover their tax obligations.
Underpayment of taxes is a common scenario with more than 10 million taxpayers facing a penalty for underpayment of estimated tax last year alone. Tax is typically withheld for most people who receive salaries, wages, pensions, unemployment compensation and the taxable part of Social Security benefits. However, with numerous changes to the tax system due to tax reform many taxpayers may need to adjust withholding on their paychecks or the amount of their estimated tax payments to help prevent penalties.
While most income is subject to tax withholding, some income from self-employment or rental activities is not. Furthermore, individuals, including sole proprietors, partners, and S corporation shareholders, may need to make estimated tax payments unless they owe less than $1,000 when they file their tax return or they had no tax liability in the prior year (subject to certain conditions). As a reminder, in the U.S. taxes are required to be paid as income is earned or received during the year.
The TCJA also changed the way tax is calculated for retirees, many of whom have income from pensions and annuities. As such, retirees who receive a monthly pension or annuity check may need to raise or lower the amount of tax they pay during the year. Retirees should treat their pension similar to income from a job. Pension recipients that need to change their withholding can do so by filling out Form W-4P and submitting it to their payor. Retirees should submit Forms W-4P to their payors as soon as they can to give payors enough time to apply any changes to withholding to as many payments as possible this year.
Note: Because it is already November, some retirees may be unable to cover their expected tax liability through withholding, and could instead make estimated or additional tax payments directly to the IRS. Please call if you need more information about this option.
If you have any questions about Form W-4 or need to make adjustments to your withholding, don't hesitate to contact the office and speak to a tax professional you can trust.
Starting a new business is an exciting, but busy time with so much to be done and so little time to do it in. Also, if you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That's where a tax professional can help.
1. Business Structure
The first decision you will need to make is determining which business structure you will use. The most common types are a sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you file.
2. Employer Identification Number (EIN)
Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The IRS issues EINS to employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes.
Note: Even if you already have an EIN as a sole proprietor, for example, if you start a new business with a different business entity you will need to apply for a new EIN.
The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks, and you can apply for one EIN per day. There is no cost to apply.
3. State Withholding, Unemployment, Sales, and other Business Taxes
Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable). Business taxes include income tax, self-employment tax, employment tax, and excise tax. Generally, the types of tax your business pays depends on the type of business structure you set up. Keep in mind that you may also need to make estimated tax payments.
4. Payroll Record Keeping
Payroll reporting and record keeping can be very time-consuming and costly, especially if it isn't handled correctly. Also, keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee's employment application as well as the following:
5. Employee Healthcare
As an employer with employees, you may have certain healthcare requirements you need to comply with as well. If so, you should know about the Small Business Health Care Tax Credit, which helps small businesses (fewer than 25 employees who work full-time, or a combination of full-time and part-time) pay for health care coverage they offer their employees. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.
If you need help setting up or completing any tax-related paperwork needed for your business, don't hesitate to call.
If you employ someone to work for you around your house, it is important to consider the tax implications of this type of arrangement. While many people disregard the need to pay taxes on household employees, they do so at the risk of paying stiff tax penalties down the road.
If a worker is your employee, it does not matter whether the work is full-time or part-time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily or weekly basis or by the job.
If the worker controls how the work is done, the worker is not your employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business.
Also, if an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.
Example: You pay Jane to babysit your child and do light housework four days a week in your home. Jane follows your specific instructions about household and childcare duties. You provide the household equipment and supplies that Jane needs to do her work. Jane is your household employee.
Example: You pay Roger to care for your lawn. Roger also offers lawn care services to other homeowners in your neighborhood. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither Roger nor his helpers are your household employees.
When you hire a household employee to work for you on a regular basis, he or she must complete USCIS Form I-9 Employment Eligibility Verification. It is your responsibility to verify that the employee is either a U.S. citizen or an alien who can legally work and then complete the employer part of the form. It is unlawful for you to knowingly hire or continue to employ a person who cannot legally work in the United States. Keep the completed form for your records. Do not return the form to the U.S. Citizenship and Immigration Services (USCIS).
If you have a household employee, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax or both. If you pay cash wages of $2,100 or more in 2018 to any one household employee, then you will need to withhold and pay Social Security and Medicare taxes. Also, if you pay total cash wages of $1,000 or more in any calendar quarter of 2017 or 2018 to household employees, you are also required to pay federal unemployment tax.
If neither of these two contingencies applies, you do not need to pay any federal unemployment taxes; however, you may still need to pay state unemployment taxes. Please contact the office if you're not sure whether you need to pay state unemployment tax for your household employee. A tax professional will help you figure out whether you need to pay or collect other state employment taxes or carry workers' compensation insurance.
Note: If you do not need to pay Social Security, Medicare, or federal unemployment tax and do not choose to withhold federal income tax, the rest of this article does not apply to you.
Social Security taxes pays for old-age, survivor, and disability benefits for workers and their families. The Medicare tax pays for hospital insurance. Both you and your household employee may owe Social Security and Medicare taxes. Your share is 7.65 percent (6.2 percent for Social Security tax and 1.45 percent for Medicare tax) of the employee's Social Security and Medicare wages. Your employee's share is 6.2 percent for Social Security tax and 1.45 percent for Medicare tax.
You are responsible for payment of your employee's share of the taxes as well as your own. You can either withhold your employee's share from the employee's wages or pay it from your own funds.
Do not count wages you pay to any of the following individuals as Social Security and Medicare wages:
Note: However, you should count wages to your parent if they are caring for your child and both of the following apply:
(a) your child lives with you and is either under age 18 or has a physical or mental condition that requires the personal care of an adult for at least four continuous weeks in a calendar quarter; and
(b) you are divorced and have not remarried, or you are a widow or widower, or you are married to and living with a person whose physical or mental condition prevents him or her from caring for your child for at least four continuous weeks in a calendar quarter.
Note: However, you should count these wages to an employee under 18 if providing household services is the employee's principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.
Also, if your employee's Social Security and Medicare wages reach $128,400 in 2018, then do not count any wages you pay that employee during the rest of the year as Social Security wages to figure Social Security tax. You should, however, continue to count the employee's cash wages as Medicare wages to figure Medicare tax. Meals provided at your home for your convenience and lodging provided at your home for your convenience and as a condition of employment are not counted as wages
As you can see, tax rules for hiring household employees are complex; therefore, professional tax guidance is highly recommended. This is definitely an area where it's better to be safe than sorry. If you have any questions at all, please contact the office to set up a consultation.