Newsletter - October 2018

Featured Articles

Avoiding an Unexpected Tax Bill

Five Things to know before Starting a Business

Tax Considerations when Hiring Household Help

Avoiding an Unexpected Tax Bill

*Avoiding an Unexpected Tax Bill*

 

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 Receiving Large Refunds

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 with Complex Returns

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:   

  • Changes to tax rates and brackets.
  • Expansion of the child tax credit.
  • The standard deduction nearly doubled to $24,000 for joint filers and $12,000 for singles. 
  • A $10,000 cap on deductions for state and local property, sales and income taxes. 
  • New limits on deductions for some mortgage interest and home equity debt. 
  • Higher limits on the percent of income a taxpayer can deduct as charitable contributions.
  • No deductions for miscellaneous expenses including investment  expenses and unreimbursed employee expenses such as travel, meals,  entertainment and uniforms.

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.


Taxpayers with Dependents

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. 

Taxpayers Working in the Sharing Economy

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.


Taxpayers Owing Estimated Taxes

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.


Retirees with Pension and Annuity Income

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.

Questions about Withholding?

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.

Five Things to know before Starting a Business

 

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:

  • Form W-4, Employee's Withholding Allowance Certificate.  Completed by the employee and used to calculate their federal income tax  withholding. This form also includes necessary information such as  address and social security number.
  • Form I-9 Employment. Eligibility Verification. Completed by the employer, to verify that employees are legally permitted to work in the U.S.


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. 

Tax Considerations when Hiring Household Help

 

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.


Who Is a Household Employee?

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.

Can your Employee Legally Work in the United States?

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).


Do You Need to Pay Employment Taxes?

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 and Medicare Taxes

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:

  1. Your spouse. 
  2. Your child who is under age 21.
  3. Your parent. 

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.

  1. An employee who is under age 18 at any time during the year. 

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.