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Household Employees and Withholding Taxes
If you employ someone to work for you around your house, it is important to consider the tax implications of this arrangement. While many people disregard the need to pay taxes on household employees, they do so at the risk of stiff tax penalties.
As you will see, these rules are quite complex, even for such a relatively minor employee, and a mistake can bring on tax headaches.
Who Is a Household Employee?
The "nanny tax" rules apply to you only if (1) you pay someone for household work and (2) that worker is your employee.
Can Your Employee Legally Work in the United States?
It is unlawful for you to knowingly hire or continue to employ an alien who cannot 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 the employee part of the Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification. You must 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. Keep the completed form for your records.
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 you may need to do both. To find out, read the table below.
You do not need to withhold federal income tax from your household employee's wages. But if your employee asks you to withhold it, you can choose to do so.
State Unemployment Taxes
You should contact your state unemployment tax agency to find out whether you need to pay state unemployment tax for your household employee. You should also find out whether you need to pay or collect other state employment taxes or carry workers' compensation insurance.
Social Security and Medicare Taxes
Both you and your household employee may owe Social Security and Medicare taxes. The taxes for each of you are 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax) of the employee's Social Security and Medicare wages. 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. Note the limits on the table above.
Wages Not Counted
Do not count wages you pay to any of the following individuals as Social Security and Medicare wages:
Also, if your employee's Social Security and Medicare wages reach $106,800 in 2010 or 2009, do not count any wages you pay that employee during the rest of the year as Social Security wages to figure Social Security tax. (But continue to count the employee's cash wages as Medicare wages to figure Medicare tax.) You figure federal income tax withholding on both cash and non-cash wages (based on their value). However, do not count as wages any of the following items:
As you can see, the tax considerations for household employees are complex. Therefore, professional tax guidance is highly recommended. Please contact us for further information.
Haven't Filed an Income Tax Return? What to Do
Filing a past due return may not be as difficult as you think. Taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual's circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved. It is important, however, to know that full payment of taxes saves you money.
Here's What to Do
Gather Past Due Return Information
In order for the IRS to assist with preparing a tax return, taxpayers should bring any and all information related to income and deductions for the tax years for which a return is required to be filed.
Prepare and File Forms
You'll need to get the proper forms and publications. Then sign and date your tax return and send to the correct address.
Getting Free Help
The IRS offers free assistance by computer, telephone, and facsimile, and in person. The IRS can assist taxpayers with obtaining forms, publications, and answers to a wide range of tax questions.
Payment Options - Ways to Make a Payment
There are several different ways to make a payment on your taxes. Payments can be made by credit card, electronic funds transfer, check, money order, cashier's check, or cash.
Payment Options - For Those Who Can't Pay in Full
Taxpayers unable to pay all taxes due on the bill are encouraged to pay as much as possible. By paying as much as possible now, the amount of interest and penalties owed will be lessened. Based on the circumstances, a taxpayer could qualify for an extension of time to pay, an Installment Agreement, temporary delay, or Offer in Compromise.
Taxpayers who need more time to pay can find out in just a few minutes whether they qualify for a payment agreement with the IRS. Just click on the Online Payment Agreement link and follow the prompts. By entering some basic information about their tax situation, eligible taxpayers can set up in a matter of minutes either a short-term payment extension or a monthly payment plan.
What Will Happen If You Don't File Your Past Due Return or Contact the IRS
It's important to understand the ramifications of not filing a past due return and the steps that the IRS will take. Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may be considered for a variety of enforcement actions.
Please contact us for further information and support on your late returns.
Hiring New Employees? New HIRE Tax Benefits
Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part-time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law by President Obama on March 18, 2010.
Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after March 18, 2010.
This reduced tax withholding will have no effect on the employee's future Social Security benefits, and employers would still need to withhold the employee's 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee's shares of Medicare taxes would also still apply to these wages.
In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.
The two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify.
In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement.
Businesses, agricultural employers, tax-exempt organizations, and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly hired employees. Household employers cannot claim this new tax benefit.
Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010.
Revised forms and further details on these two new tax provisions will be posted on IRS.gov during the next few weeks.
Small Businesses and Health Care
Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees now qualify for a special tax credit.
Included in the health care reform legislation - the Patient Protection and Affordable Care Act - which was approved by Congress and signed by President Obama on March 23, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.
The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax-exempt organizations.
The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low- and moderate-income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers.
The maximum credit goes to smaller employers - those with 10 or fewer FTEs - paying annual average wages of $25,000 or less.
Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.
The IRS will use postcards to reach out to millions of small businesses that may qualify for the credit. The postcards will encourage small business owners to take advantage of the credit if they qualify.
For more information about the credit, please call us or visit the IRS Web site, IRS.gov.
Looking for Status of Refund?
You can go online to check the status of your 2009 refund 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after you mail a paper return. Be sure to have a copy of your 2009 tax return available because you will need to know your filing status, the first Social Security number shown on the return, and the exact whole-dollar amount of the refund. You have three options for checking on your refund:
IRS Impersonation Schemes Flourish
The IRS does not send taxpayers unsolicited e-mails about their tax accounts, tax situations, or personal tax issues. If you receive such an e-mail, most likely it's a scam.
IRS impersonation schemes flourish during filing season. These schemes may take place via phone, fax, Internet sites, social networking sites, and particularly e-mail.
Many impersonations are identity theft scams that try to trick victims into revealing personal and financial information that can be used to access their financial accounts. Some e-mail scams contain attachments or links that, when clicked, download malicious code (a virus) that infects your computer or directs you to a bogus form or site posing as an IRS form or Web site.
Some impersonations may be commercial Internet sites that consumers unknowingly visit, thinking they're accessing the genuine IRS Web site, IRS.gov. However, such sites have no connection to the IRS.
The Post-Tax Blues: How to Accelerate Receivables
Well, the taxes are paid (hopefully) for the 2009 tax year, and you're almost a third of the way into 2010. How's your cash flow doing this year?
If tax payments caught you short, you may be scrambling to build a cash reserve that protects your bottom line. There are many ways to do that, some less desirable - and possible - than others. Raise your prices. Apply for a loan. Freeze employee raises and minimize benefits (or, in the extreme, lay off a worker). Put off investments in new technology.
But there's another option: Accelerate your receivables. It's likely that in this economy at least some of your customers are slow to pay off invoices. Here are some suggestions to help improve your bottom line starting today.
Evaluate your Current Invoicing Methods
Are you sending invoices immediately, while the purchase is still fresh in the customer's mind? Old invoices feel stale, and your timeliness in dispatching them says something to the customer about your need for the funds and your business efficiency.
Enter a strong message on your invoices, creating a new one if the boilerplate examples provided aren't emphatic enough. To change the message, open an invoice by going to the Customer Center and clicking New Transactions | Invoices.
The Customer Message box is in the lower left. Click on the arrow there, and then Add New, and the window shown in Figure 1 opens.
Figure 1: To help encourage your customers to pay promptly, customize the Customer Message on your invoices.
Enter your new message and click OK. It will now be available as an option whenever you send an invoice.
Consider Finance Charges
In your message(s), remind your customers of any applicable finance charges. If you haven't yet incorporated finance charges because you think you're too small or you think it's too hard, reconsider that stance. To explore this feature, click Edit | Preferences | Finance Charge | Company Preferences, as shown in Figure 2.
Figure 2: If you have customers who are chronically late paying invoices, you may want to consider applying finance charges to tardy payments. Consult your accountant for help on this.
As you can see, you have several decisions to make that are best made with the help of your accountant.
When it comes time to bill finance charges, click Customers | Assess Finance Charges. The window in Figure 3 opens, displaying customers in arrears and the extra amount they owe.
Figure 3: You can select and unselect customers who should be assessed finance charges by clicking the check marks next to their names.
The income you receive from finance charges may not be significant, but their psychological impact on customers may bring in invoices closer to the due date. Customers like knowing they're saving some money, and no one wants to be a deadbeat.
Make It Easier for Customers to Pay You
This is a no-brainer. The simpler it is for customers to pay and for you to receive payments, the faster you're likely to turn around receivables.
If you don't yet have a merchant account, which lets you receive credit and debit card payments, you should. Intuit can help. QuickBooks already contains all the tools you need for the Intuit Merchant Service ($59.95 one-time setup fee; $19.95/monthly plus some minor additional fees).
Using the service, you can accept payments online or by phone, fax, or email. It also accommodates recurring charges, as shown in Figure 4.
Figure 4: Intuit Merchant Service integrates seamlessly into your QuickBooks operations. It lets you receive payments by phone, fax, or email (fees apply).
Tip: If you deal with a lot of checks, consider Intuit Check Solution for QuickBooks, which lets you scan checks and deposit them without a trip to the bank. Subscription and scanner required.
Ask the Expert
There are other small steps you can take to accelerate the speed of your receivables. These include:
Finally, remember that we run a business, too, and must battle our own receivables. If slow receivables have really become a problem, give us a call to see how we can help.
When to Review Your Life Insurance Coverage
It makes good financial sense to periodically examine your life insurance coverage to make sure the coverage is still sufficient. After all, life insurance is often a family's most important financial and estate planning tool.
With today's frequent changes in financial circumstances and goals, it's a good idea to re-examine your life insurance coverage on the occurrence of any of the following:
A Slip of the Lip May Bring on a Tax Audit
Many taxpayers have learned, to their dismay, that it generally isn't wise to talk carelessly about their taxes - especially about sensitive areas. Why? Because the wrong person overheard their careless talk and "turned informer," either for revenge or in the hope of an "informer's reward."
An informer's "tip" to the IRS will often trigger a tax audit. Even though the taxpayer has done nothing improper, he or she may have to suffer through the audit. Not only is this time-consuming, but it can also result in additional taxes due to the discovery of an innocent error on the return or the disallowance of a marginal deduction.
Check Your Credit Report
Order a copy of your credit report from one of the major credit reporting agencies. Read the report carefully and report any discrepancies to the appropriate agencies. This not only ensures that the records are accurate, but also helps prevent others from obtaining credit in your name.
Review Budget vs. Actuals
Compare April income and expenditures with your budget. Make adjustments as appropriate to your May expenditures. Make sure you have invested your planned savings amount for April.
Make Withholding Adjustments
Based on the results of your prior year's tax return, make any necessary adjustments to your tax withholding by completing Form W-4 and giving it to your employer.
Tax Due Dates for May 2010
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