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How to Avoid Penalties on Your Household Helpers
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 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 you must 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 both. Refer to this table for details:
If neither of these two contingencies applies, you do not need to pay any federal unemployment taxes. But you may still need to pay state unemployment taxes. (See below for more on this.)
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
The Social Security tax 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% (6.2% for Social Security tax and 1.45% for Medicare tax) of the employee's Social Security and Medicare wages. Your employee's share is 4.2% for Social Security tax and 1.45% 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. Note the limits in 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 2011 or they did reach that level in 2010, 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, we highly recommend professional tax guidance in these complicated matters. This is definitely an area where it's better to be safe than sorry.
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 full payment can be made with the return. Depending on an individual's circumstances, a taxpayer filing late may qualify for a payment plan. It is important, however, to know that full payment of taxes upfront saves you money.
Here's What to Do When Your Return Is Late
Gather Past Due Return Information
Gather return information and come see us. You should bring any and all information related to income and deductions for the tax years for which a return is required to be filed.
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, a temporary delay, or an offer in compromise.
Taxpayers who need more time to pay can set up 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.
Employee or Independent Contractor - Which Is It?
If you hire someone for a long-term, full-time project or a series of projects that are likely to last for an extended period, you must pay special attention to the difference between independent contractors and employees.
Why It Matters
The Internal Revenue Service and state regulators scrutinize the distinction between employees and independent contractors because many business owners try to categorize as many of their workers as possible as independent contractors rather than as employees. They do this because independent contractors are not covered by unemployment and workers' compensation, or by federal and state wage, hour, anti-discrimination, and labor laws. In addition, businesses do not have to pay federal payroll taxes on amounts paid to independent contractors.
The Difference Between Employees and Independent Contractors
Independent Contractors are individuals who contract with a business to perform a specific project or set of projects. You, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
Employees provide work in an ongoing, structured basis. In general, anyone who performs services for you is your employee if you can control what will be done and how it will be done. A worker is still considered an employee even when you give them freedom of action. What matters is that you have the right to control the details of how the services are performed.
Independent Contractor Qualification Checklist
The IRS, workers' compensation boards, unemployment compensation boards, federal agencies, and even courts all have slightly different definitions of what an independent contractor is, though their means of categorizing workers as independent contractors are similar.
One of the most prevalent approaches used to categorize a worker as either an employee or independent contractor is the analysis created by the IRS. The IRS considers the following:
Minimize the Risk of Misclassification
If you misclassify an employee as an independent contractor, you may end up before a state taxing authority or the IRS.
Sometimes the issue comes up when a terminated worker files for unemployment benefits and it's unclear whether the worker was an independent contractor or employee. The filing can trigger state or federal investigations that can cost many thousands of dollars to defend, even if you successfully fight the challenge.
There are ways to reduce the risk of an investigation or challenge by a state or federal authority. At a minimum, you should:
If you have any questions about how to classify your employees, please give us a call. We can help guide you in the right direction in the eyes of the IRS.
Looking for Your Tax Refund?
You can go online to check the status of your 2010 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 2010 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:
How to Spot an IRS Impersonation Scheme
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.
If you want to know whether a site is legitimate or you think you have been the victim of fraud, please contact us. We definitely don't want you to get scammed.
Employers Must Now Report Health Care Benefits
Under the Affordable Health Care Act, employers are now required to report the value of health care benefits. Beginning in 2011, employers must report the value of health care benefits for each employee. This amount will appear on the new 2011 form W-2 to be issued in 2012. This is a reporting item and will not affect taxable income.
To give employers more time to update their payroll system, the IRS has made this requirement optional for 2011. For small businesses with fewer than 250 employees, it will remain optional for 2012.
If you have questions about this requirement, please contact our office.
Check Out Exemptions and Deductions for 2011
With the 2010 tax filing deadline behind us, it's time to plan for 2011.
The standard and itemized deductions for 2011 are as follows:
Standard Deduction for 2011:
Personal Exemption for 2011:
The personal exemption amount is $3,700 (up from $3,650 in 2010).
Remember that there's a temporary repeal of the standard deduction and personal exemption income limit phaseout until 2012. This means that all taxpayers will receive the full deduction and exemption amounts. Give us a call if you have questions about this.
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:
Consult with us if you think it might be time to adjust your life insurance coverage.
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 2011
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