House and Senate lawmakers have started their August recess, leaving pending tax legislation for after Labor Day. In past years, September has been a busy month for tax legislation and this year is likely to be the same. Before leaving Capitol Hill, lawmakers took actions in several areas related to tax reform.
House and Senate lawmakers have started their August recess, leaving pending tax legislation for after Labor Day. In past years, September has been a busy month for tax legislation and this year is likely to be the same. Before leaving Capitol Hill, lawmakers took actions in several areas related to tax reform.
House action
In the House, the Budget Committee approved along party lines a fiscal year (FY) 2018 budget resolution. The resolution calls for:
- Simplifying the tax code to promote fairness for American families and businesses;
- Lowering tax rates for individuals and consolidating the seven tax brackets into fewer brackets;
- Repealing the alternative minimum tax (AMT); and
- Reducing the corporate tax rate.
The budget resolution does not set out specific tax changes or include legislative language. Rather, according to GOP leaders in the House, the budget resolution will serve as the vehicle for tax legislation at a future date. House Budget Committee Chair Diane Black, R-Tennessee, predicted that tax reform will be "deficit neutral" and will "reduce tax rates and simplify the tax code." Budget Committee Ranking Member John Yarmuth, D-Kentucky, said that the resolution "adopts the worst extremes of the President's proposals by cutting taxes for millionaires and billionaires at the expense of everyone else."
Administration discussions
Since May, White House and Treasury Department officials have been meeting with business leaders, representatives of business and taxpayer groups, and other stakeholders in "listening sessions" about changes to the tax code. In July, Treasury Secretary Steven Mnuchin, after meeting with representatives from the agriculture sector, predicted that tax reform "would be done this year." Mnuchin said that "tax reform is one of our most important areas of focus.”
Bipartisan bills
Meanwhile, some stand-along tax bills have either passed committee or have been introduced. In July, the House Ways and Means Committee approved bipartisan legislation to overhaul the IRS's forfeiture authority. The Clyde-Hirsch-Sowers RESPECT Bill (HR 1843) was sponsored by Ways and Means Tax Policy Subcommittee Chair Peter Roskam, R-Illinois, and Democratic Caucus Chair Joe Crowley, D-New York. The RESPECT Act generally prohibits the IRS from seizing funds relating to a structuring transaction unless the property to be seized is from an illegal source.
In the Senate, the Senate Finance Committee may take up a bipartisan bill to encourage retirement savings by enhancing growth of S corporations owned by employee stock ownership plans (ESOPs). The Promotion and Expansion of Private Employee Ownership Bill was introduced by Sen. Ben Cardin, D-Maryland, and Sen. Pat Roberts, R-Kansas. The lawmakers explained that their bill would amend the tax code to eliminate barriers that business owners face in establishing or expanding S corporation ESOPs. Similar bipartisan legislation is pending in the House.
Other pending tax bills include:
- HR 3068, which would enhance the research tax credit for domestic manufacturers.
- HR 3126, which would provide a tax credit to individuals for legal expenses paid to establish guardianship of a family member with disabilities.
- HR 3138, which would generally treat Native American governments in the same manner as state governments for certain federal tax purposes.
Treasury tax position
The Treasury Department's top tax professional is the assistant secretary for tax policy. That position has been vacant since January 20. In July, the Senate Finance Committee unanimously approved President Trump’s nomination of David Kautter to serve as Treasury assistant secretary for tax policy. "This position is particularly important in the current environment as the administration is engaging with Congress on comprehensive tax reform," SFC Chair Orrin Hatch, R-Utah, said. Ranking member Ron Wyden, D-Oregon, said "it’s my hope that Mr. Kautter can help to bring Democrats and Republicans together." Kautter has worked at several major accounting firms over the past 30 years.
Please contact our office if you have any questions about tax legislation.
The IRS remains focused on an issue that doesn’t seem to be going away: the misclassification of workers as independent contractors rather than employees. Recently, the IRS issued still another fact sheet “reminding” employers about the importance of correctly classifying workers for purposes of federal employment taxes (FS-2017-9). Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. They are lifted of these obligations entirely for independent contractors, with usually the only IRS-related responsibility being information reporting on amounts of $600 or more paid to a contractor.
The IRS remains focused on an issue that doesn’t seem to be going away: the misclassification of workers as independent contractors rather than employees. Recently, the IRS issued still another fact sheet “reminding” employers about the importance of correctly classifying workers for purposes of federal employment taxes (FS-2017-9). Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. They are lifted of these obligations entirely for independent contractors, with usually the only IRS-related responsibility being information reporting on amounts of $600 or more paid to a contractor.
Weighing the factors
Whether a worker is an employee or an independent contractor depends on a number of considerations that fall into three categories: behavioral control, financial control and the type of relationship between the worker and the service recipient. Within these categories, the IRS has identified 20 factors that can be used to determine whether an individual is an independent contractor or effectively an "employee."
The determination of independent contractor versus employee status is based on all of the facts and circumstances surrounding the relationship. None of the identified factors is determinative. In addition, not all factors are present in all employee or independent contractor relationships. Frequently, the relationship of a worker is clear cut using these factors; but sometimes a worker can fall into a gray area.
The Form SS-8 route
An employer who is unsure of how to classify its workers can file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. There is no fee for requesting a worker classification determination. Because worker classification has become such a “hot” audit trigger, many employers opt for the Form SS-8 route, particularly because penalties on top of back employment taxes can result from a classification misstep.
Other relief
After emphasizing in its latest Fact Sheet that employee misclassification as independent contractors exposes the employer to employment tax liability, the IRS also highlighted two ways to escape or ameliorate liability, even for an after-the-fact classification: “Section 530 relief” and relief under the Voluntary Classification Settlement Program.
Section 530 relief: An employer that has a reasonable basis for classifying its workers as independent contractors may be entitled to special relief under section 530 of the Revenue Act of 1978. "Section 530 relief" protects taxpayers who have consistently treated workers as independent contractors and have a reasonable basis for doing so. The rule covers workers who are common law employees, but it does not cover certain third-party-arranged technical service workers.
A reasonable basis for classification for purposes of Section 530 relief generally includes an employer's treatment of the individual based on any of the following:
- judicial precedent, published rulings, technical advice to the employer or a letter ruling to the employer;
- a past examination of the taxpayer by the IRS in which there was no assessment attributable to the treatment for employment tax purposes of individuals holding positions substantially similar to the position held by this individual; or
- long-standing recognized practice of a significant segment of the industry in which the individual was engaged.
Voluntary Classification Settlement Program. Entry into the Voluntary Classification Settlement Program (VSCP) can provide an opportunity to reclassify workers as employees for future tax periods, with partial relief from federal employment taxes. Under the program, the employer:
- Agrees to prospectively treat the class of workers as employees for future tax periods;
- Will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under reduced rates;
- Will not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years; and
- Will not be liable for any interest or penalties on the liability.
Under the VCSP, an employer may reclassify some or all of their workers. Once reclassified, all workers in the same class must be treated as employees for employment tax purposes.
Worker initiative
The IRS also makes it clear in its latest Fact Sheet on employee misclassification that action on its part may take place not only based on an employer-based initiative; workers can also have indirect input on whether an audit will take place. “Workers who believe an employer improperly classified them as independent contractors may use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report the employee’s share of uncollected social security and Medicare taxes,” the IRS Fact Sheet concludes.
If you have any concerns surrounding possible worker misclassification within your business, please feel free to contact this office for a more targeted discussion.
A recent Tax Court decision and pending tax reform proposals have intersected in highlighting how stock sales can be timed for maximum tax advantage. The taxpayer in the recent case (Turan, TC Memo. 2017-141) failed to convince the Tax Court that he timely made an election with his broker to use the last-in-first-out (LIFO) method to set his cost-per-share cost basis for determining capital gains and losses on his stock trades on shares of the same company. As a result, he was required to calculate the capital gain or loss on his stock trades using the firm’s first-in-first-out (FIFO) “default” method, which, in his case, yielded a significant increase in tax liability for the year.
A recent Tax Court decision and pending tax reform proposals have intersected in highlighting how stock sales can be timed for maximum tax advantage. The taxpayer in the recent case (Turan, TC Memo. 2017-141) failed to convince the Tax Court that he timely made an election with his broker to use the last-in-first-out (LIFO) method to set his cost-per-share cost basis for determining capital gains and losses on his stock trades on shares of the same company. As a result, he was required to calculate the capital gain or loss on his stock trades using the firm’s first-in-first-out (FIFO) “default” method, which, in his case, yielded a significant increase in tax liability for the year.
Timing stock trades to maximize the tax advantage of long- and short-term capital gains and losses has always made sense, particularly as a year-end planning technique. This year, tax reform may make such strategies considerably more lucrative. If tax rates are suddenly set lower, either retroactively for this year or, more probably, starting January 1, 2018, managing stock basis becomes more significant. As a result, investors should consider carefully whether they may be better off tax-wise to give their brokers specific instructions in certain cases not to use the default FIFO method when selling certain holdings of the same company purchased at different times.
General FIFO rule
If a taxpayer purchases identical shares of stock at different prices or on different dates and then sells only part of the stock, the basis and holding period of the shares sold are determined on a FIFO basis unless the specific shares sold are adequately identified. The date of acquisition for purposes of the FIFO rule is determined by reference to the holding period of the securities for capital gain or loss purposes, including any prior holding period that has been tacked on.
Comment. Securities in a margin or other account with a broker are considered sold in the order in which they were purchased, not the order in which they were placed in the account. The FIFO rule is applied by allocating the earliest lots acquired to the securities sold rather than to the securities removed from the brokerage account but still owned.
Alternate identification
When the securities to be sold are specifically identifiable, FIFO does not apply for purposes of allocating basis. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee.
Planning Tip: Thus, taxpayers who have records showing the cost and holding period of securities represented by separate certificates can control the amount of gain or loss realized by selecting the certificates to be transferred.
A standing order or instruction to a broker is treated as adequate identification. The instructions need not be in writing. Sufficient instruction to a broker or other agent of the particular securities to be sold or transferred does not require designation by certificate number; any designation that specifically identifies the securities to be transferred is adequate. Orders to sell the highest priced shares, shares with the highest cost basis, or the shares purchased at a certain price or on a specific date have been ruled acceptable.
Broker reporting
A broker is required to report the customer’s basis in securities sold, classifying the gain as short or long term. Identification of the securities is made at the time of sale, transfer, delivery, or distribution. Clarifying instructions before the sale takes place, or immediately thereafter, is important since a broker is obligated to report to the IRS on Form 1099-B. Once the report is sent to the IRS, changing basis is more likely to raise a red flag with the IRS.
Please contact this office if you need to discuss a strategy of tax selling that is more specific to your portfolio and Congress’s plans for tax reform.
Country-by-Country (CbC) reporting is part of a larger initiative by the Organisation for Economic Cooperation and Development (OECD) known as the Base Erosion and Profit Shifting (BEPS) project. CbC reporting generally impacts large multi-national businesses. Because CbC is part of BEPS it is important to be familiar with the core concepts.
Country-by-Country (CbC) reporting is part of a larger initiative by the Organisation for Economic Cooperation and Development (OECD) known as the Base Erosion and Profit Shifting (BEPS) project. CbC reporting generally impacts large multi-national businesses. Because CbC is part of BEPS it is important to be familiar with the core concepts.
BEPS
The BEPS project is designed to curb tax avoidance. "No single rule or provision is the root cause of base erosion," the OECD has explained. "It is the interplay among different rules that generate base erosion and profit shifting: domestic laws and rules, international standards, and the lack of data and information."
As part of BEPS, the OECD recommended that jurisdictions adopt CbC reporting by multinational groups to report their business activity for each country where they operate. The U.S. has signed on.
IRS regulations
The IRS issued regulations last year. The "ultimate parent entity" of a multinational entity (MNE) generally must file a CbC report with the IRS. The MNE group must include at least one business entity organized in, or be a tax resident of, a jurisdiction outside the U.S., and must have revenues of $850 million or more for its preceding annual accounting period.
Special form
The IRS is developing a special form for CbC reporting. This is Form 8975, Country-by-Country Report. Currently, Form 8975 is in draft form.
Form 8975 is to be used to report a U.S. multinational entity (MNE) group’s income, taxes paid, and other indicators of economic activity on a country-by-country basis. The reporting period covered by Form 8975 is the period of the ultimate parent’s annual applicable financial statement that ends with or within the parent’s tax year, or, if the parent does not prepare an annual applicable financial statement, the ultimate parent’s tax year.
The IRS generally will make the reports available to tax authorities. However, there will be limits on disclosure. The IRS has explained that the data captured by Form 8975 will be used for "high-level assessment of transfer pricing, and other base erosion and profit shifting tax risks, and for economic and statistical analysis."
Filing period
Beginning on September 1, 2017, Form 8975 may be filed for a reporting period with the income tax return for the tax year of the ultimate parent of the U.S. MNE with or within which the reporting period ends. In Revenue Procedure 2017-23, the IRS allowed U.S. ultimate parents to file Form 8975 for periods beginning after January 1, 2016, and prior to the required reporting period.
Other developments
Recently, a group of lawmakers in Congress asked the Financial Accounting Standards Board (FASB) to look at country-by-country reporting. The lawmakers recommended that FASB "require multinational corporations to disclose their income, assets, number of employees, and taxes paid on an annual, country-by-country basis.”
If you have any questions about CbC reporting, please contact our office.
An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student's qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds.
An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student's qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds.
The maximum deduction allowed for educational loan interest is $2,500. This amount is not adjusted for inflation. For tax years beginning in 2017, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified adjusted gross income (AGI) exceeds $65,000 ($135,000 for joint returns), and is completely eliminated when modified AGI reaches $80,000 ($165,000 for joint returns).
Planning tip: Some taxpayers may choose to take out a home equity loan to pay off their student debt. Use of a home-equity loan of up to $100,000 principal is allowed for purposes other than home improvement or purchase. Interest up to that amount is fully deduction, as an itemized mortgage interest deduction.
Student loan interest is an “above-the-line” deduction; the taxpayer need not itemize.
Eligible student. An eligible student for purposes of eligible debt is a student enrolled in a college degree, certificate or other program, including a program of study abroad approved for credit at an institution of higher learning where the student is enrolled, and leading to a recognized educational credential at an eligible educational institution. The student must also carry at least one half of the normal full-time workload for the course of study being pursued during at least one academic period beginning during the tax year.
Student loan interest is not deductible if a dependency exemption is allowed for the taxpayer on someone else's return. Thus, if parents take a dependency exemption for a student who is the only person legally obligated to pay interest on a qualified loan, neither the parents nor the student is entitled to deduct any interest paid by the student during the time he is claimed as a dependent. A student may deduct interest paid in years after the student has ceased to be a dependent.
Legal obligation. The taxpayer claiming the deduction must be legally obligated to make the interest payments. Thus, a parent who had signed for the student loan and is liable personally for its payment may deduct interest paid on the loan.
If a third party who is not legally obligated makes an interest payment on behalf of a taxpayer who is legally obligated, the taxpayer is treated as receiving the payment from the third party and using it to pay the interest. For instance, if an employer makes an interest payment on behalf of the employee, and the payment is included in the employee's income as compensation, the employee can deduct the payment. Similarly, if a parent pays interest on behalf of a non-dependent borrower, the borrower may deduct the interest.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2017.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2017.
August 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 26-28.
August 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 29- Aug. 1.
August 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates Aug. 2-4.
August 10
Employees who work for tips. Employees who received $20 or more in tips during July must report them to their employer using Form 4070.
Social security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2017. This due date applies only if you deposited the tax for the quarter timely, properly, and in full.
August 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 5-8.
August 15
Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in July. Nonpayroll withholding: If the monthly deposit rule applies, deposit the tax for payments in July.
August 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 9–11.
August 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 12–15.
August 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 16–18.
August 25
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 19–22.
August 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 23-25.
September 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 26-29.
The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.
The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.
Even with a wait time of 120 days, taxpayers who find themselves victims of tax refund identity theft likely find the road to resolution a frustrating and time consuming process. This article seeks to explain the various pulleys and levers at play when communicating with the IRS about an identity theft case.
Initiating an ID theft case
A taxpayer may become aware that he or she is a victim of tax-related identity theft when the IRS rejects their tax return because someone has already filed a return using the taxpayer's name and/or social security number. A taxpayer may also receive correspondence directly from the IRS that informs them, prior to filing, that someone has filed a suspicious return under their information. In other cases, a taxpayer may have had his or her identity information compromised and wishes to alert the IRS as to the possibility that he or she may be targeted by an identity thief.
For all such cases, the IRS has created Form 14039, Identity Theft Affidavit. Taxpayers who are actual or potential victims of tax-related identity theft may complete and submit the Affidavit to ensure that the IRS flags the tax account for review of any suspicious activity. Taxpayers who have been victimized are asked to provide a short explanation of the problem and how they became aware of it.
The Identity Theft Affidavit may also be submitted by taxpayers that have not yet become victims of tax-related identity theft, but who have experienced the misuse of their personal identity information to obtain credit or who have lost a purse or wallet or had one stolen, who suspect they have been targeted by a phishing or phone scam, etc. The form asks these taxpayers to briefly describe the identity theft violation, the event of concern, and to include the relevant dates.
Once the Form 14039 has been completed and submitted, the taxpayer should expect to receive a Notice CP01S from the IRS by mail. The Notice CP01S simply acknowledges that the IRS has received the taxpayer's Identity Theft Affidavit and reminds the taxpayer to continue to file all federal tax returns.
IDVerify.irs.gov
The IRS has implemented a pre-screening procedure for suspicious tax returns. Rather than halt the refund process entirely, which can prevent a refund claimed on a legitimately filed return, the IRS has provided taxpayers with the opportunity to verify their identity.
Now when the IRS receives a suspicious return, it will send a Letter 5071C or Notice CP01B to the taxpayer requesting him or her to either visit idverify.irs.gov or call the toll-free number listed on the header of the letter (1-800-830-5084) within 30 days. When the taxpayer does this, the taxpayer will encounter a series of questions asking for personal information. If the taxpayer fails to respond to the verification request or responds and answers a question incorrectly the IRS will flag the return as fraudulent and follow the prescribed procedures for resolving identity theft cases.
Resolving the case
After a tax return has been flagged with the special identity theft processing code, the IRS will assign the case to a tax assistor. TIGTA reported that the IRS assigns each case priority based first on its age and then by case type—for example, with cases nearing the statute of limitations placed first, followed by cases claiming disaster relief, and then identity theft cases. However, TIGTA has reported that cases are frequently reassigned to multiple tax assistors, and there are often long lag times where no work is accomplished toward resolution. National Taxpayer Advocate Nina Olson also noted in her recent "Identity Theft Case Review Report" on a statistical analysis of 409 identity theft cases closed in June 2014 that a significant number of cases experience a period of inactivity averaging 78 days.
After resolution
The IRS has also created the Identity Protection Personal Identification Number (IP PIN) project, which is meant to prevent taxpayers from being victimized by identity thieves a second time after the IRS has resolved their cases and closed them. The IP PIN is a unique six-digit code that taxpayers must entered on their tax return instead
The IRS assigns an IP PIN to a taxpayer by sending him or her a Notice CP01A. Generally this Notice is issued in December in preparation for the upcoming filing season. The taxpayer then enters it into the appropriate box of his or her federal tax return (i.e. Forms 1040, 1040A, 1040EZ or 1040 PR/SS). On paper returns, this box is located on the second page, near the signature line. When e-filing, the tax software or tax return preparer will indicate where the taxpayer should enter the IP PIN, social security number or taxpayer identification number (TIN) at time they file their tax return. The IP PIN is only good for one tax year.
Taxpayers who have been assigned an IP PIN, but who have lost or misplaced it cannot electronically file their tax returns until they have located it. Previously such taxpayers had no way to retrieve their IP PIN and had to file on paper. Beginning on January 14, 2015, however, taxpayers who had lost their IP PINs were able to retrieve them by accessing their online accounts and providing the IRS with specific personal information and answer a series of questions to verify identity.
Latest breach
The IRS announced on May 26th that 100,000 taxpayers became victims of a new identity theft scheme discovered in mid-May 2015. Identity theft criminals used stolen personal identification information to access the IRS's online "Get Transcript" application and illegally download these taxpayers' tax transcripts. The IRS is concerned that the criminals intend to use taxpayers' past-year return information to file false tax returns claiming tax items and refunds that look legitimate and that do not trigger the IRS's filters for finding suspicious returns.
Within this latest breach of security, identity thieves had attempted to download a total of 200,000 transcripts, but had only been successful half of the time, according to an announcement by IRS Commissioner John Koskinen. Because the IRS has yet to see how many taxpayers were actually victimized, the IRS may not provide IP PINs to all of these 200,000 taxpayers. However, the 100,000 taxpayers whose tax transcripts were downloaded will receive free credit monitoring services at the IRS's expense, Koskinen stated.
Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.
Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.
Payments and Withholding
As a household employer, the parent must withhold and pay Social Security and Medicare taxes if the cash wages paid to the nanny exceed the threshold amount for the year. If the amount paid is less than the threshold, the parent does not owe any Social Security or Medicare taxes. For 2017, the domestic employee coverage threshold, as adjusted for a slightly different inflation factor and subject to rounding, will be $2,000, which is the same as for 2016 after rising from $1,900 in 2015. Earnings of any domestic employee are not subject to Social Security taxes if they do not exceed that threshold for the year. If the employee earns more than $1,000 in any calendar quarter, the parent must also pay federal unemployment (FUTA) tax on wages paid, up to $7,000. Publication 926, Household Employer's Tax Guide, has more information about withholding and paying employment taxes.
If the amount paid is more than the threshold, the parent must withhold the employee's share of Social Security and Medicare taxes unless the parent chooses to pay both the employee's and the employer's share. The taxes are 15.3 percent of cash wages, 7.65 percent each for the employee and the employer. This includes 6.2 percent for Social Security and 1.45 percent for Medicare (hospitalization insurance).
The parent is not required to withhold income tax from the nanny's wages. However, the parent and the nanny may agree to withholding income tax from the nanny's wages. The nanny must provide a filled-out Form W-4, Employee's Withholding Allowance Certificate, to the employer.
The employment taxes amounts are part of the parent's tax liability and can trigger an estimated tax penalty if not enough is paid during the year. The parent submits estimated tax payments on Form 1040-ES, Estimated Tax for Individuals.
Forms to File
If the parent must pay Social Security and Medicare taxes, or if the parent withholds income tax, the parent must file Schedule H, Household Employment Taxes, with the parent's Form 1040. The parent may also need to file a Form W-2, Wage and Tax Statement, and furnish a copy of the form to the nanny. To complete Form W-2, the parent must obtain an employer identification number (EIN) from the IRS, either by applying online or by submitting Form SS-4, Application for Employer Identification Number.
Please do not hesitate to contact this office if you have any questions regarding your “nanny tax” responsibilities.
The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.
The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.
Tax-related identity theft
Tax-related identity theft most often occurs when a criminal uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Often, criminals will claim bogus tax credits or deductions to generate large refunds. Fraud is particularly prevalent for the earned income tax credit, residential energy credits and others. In many cases, the victims of tax-related identity theft only discover the crime when they file their genuine return with the IRS. By this time, all the taxpayer can do is to take steps to prevent a recurrence.
Being proactive
However, there are steps taxpayers can take to reduce the likelihood of being a victim of tax-related identity theft. Personal information must be kept confidential. This includes not only an individual's Social Security number (SSN) but other identification materials, such as bank and other financial account numbers, credit and debit card numbers, and medical and insurance information. Paper documents, including old tax returns if they were filed on paper returns, should be kept in a secure location. Documents that are no longer needed should be shredded.
Online information is especially vulnerable and should be protected by using firewalls, anti-spam/virus software, updating security patches and changing passwords frequently. Identity thieves are very skilled at leveraging whatever information they can find online to create a false tax return.
Impersonators
Criminals do not only steal a taxpayer's identity from documents. Telephone tax scams soared during the 2015 filing season. Indeed, a government watchdog reported that this year was a record high for telephone tax scams. These criminals impersonate IRS officials and threaten legal action unless a taxpayer immediately pays a purported tax debt. These criminals sound convincing when they call and use fake names and bogus IRS identification badge numbers. One sure sign of a telephone tax scam is a demand for payment by prepaid debit card. The IRS never demands payment using a prepaid debit card, nor does the IRS ask for credit or debit card numbers over the phone.
The IRS, the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Tax Commission (FTC) are investigating telephone tax fraud. Individuals who have received these types of calls should alert the IRS, TIGTA or the FTC, even if they have not been victimized.
Tax-related identity theft is a time consuming process for victims so the best defense is a good offense. Please contact our office if you have any questions about tax-related identity theft.
The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS's requirements.
The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS's requirements.
Substantiation
One way to understand the IRS's requirements is to break them down by monetary amount and the type of donation, money and/or household items or clothing.
- To deduct a contribution of cash, check, or other monetary gift (of less than $250), a taxpayer must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.
- To claim a deduction for contributions of cash or property equaling $250 or more, the taxpayer must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
- If the total deduction for all noncash contributions for the year is over $500, the taxpayer must file Form 8283, Noncash Charitable Contributions, with the IRS.
- Donations valued at more than $5,000 generally require an appraisal by a qualified appraiser.
The IRS also requires that donations of clothing and household items be in good used condition or better to be deductible. Special rules apply to donations of motor vehicles, boats and aircraft.
Tax Court sheds light
In April, the U.S. Tax Court issued an instructive decision (Kunkel, TC Memo. 2015-71) on the steps taxpayers must take to deduct a contribution to a charitable organization. The taxpayers in Kunkel made a number of donations, some by cash and others of household items and clothing, but the court disallowed nearly all of the claimed deductions because the taxpayers failed to follow the rules.
In this case, the taxpayers reported $42,000 in charitable contributions, comprising $5,000 in cash and $37,000 in noncash donations. The noncash contributions were donations of books, clothing, furniture, and household items. The taxpayers told the IRS that they took the household items, clothing and books to charities in batches, which they claimed were worth less than $250 because they believed this eliminated the need to get receipts. Other times, one or more charities came to the taxpayers' residence and picked up the household items (however, the taxpayers were not home at the time of the pickup and the charities left undated doorknob hangers as receipts).
The Tax Court reminded the taxpayers that for all contributions of $250 or more, a taxpayer generally must obtain a contemporaneous written acknowledgment from the charity. The court found it implausible that the taxpayers had made their donations in batches worth less than $250. The court calculated that this would mean they had made these donations on 97 different occasions in one year. The court also found that the doorknob hangers were inadequate substantiation of their claimed donations. The doorknob hangers not specific to taxpayer, did not describe the property contributed, and were not contemporaneous written acknowledgments, the court found.
This article is a very high level overview of the IRS's substantiation requirements for donations to charity. If you have any questions about the substantiation or other requirements for a gift you are making to a charity, please contact our office for more details.
Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.
Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.
For 2010-2013, for-profit employers can claim a credit of 35 percent of the employer's nonelective contributions, increasing to 50 percent for 2014 and 2015. Nonprofit employers can claim a credit of 25 percent through 2013, and 35 percent for the two succeeding years. Beginning in 2012, the credit for nonprofit employers is limited to the payroll taxes paid by the employer.
Small employers
Employers can claim the full credit if their full-time equivalent (FTE) employees are 10 or less, and their average annual wages per employee are $25,000 or less. FTEs are determined by figuring total hours of service for all employees and dividing the total by 2,080.
The credit is phased out for employers with 11 to 25 employees or with average wages between $25,000 and $50,000. The credit percentage is reduced 6.67 percent per "excess" employee (over 10) and four percent for each $1,000 of average wages in excess of $25,000.
To determine the amount of the credit, employers must add up the total premiums they paid on behalf of their employees during the year, subject to the state average premium limit. This total is then multiplied by the applicable percentage (25 or 35 percent for 2013, minus any phase-out). The credit is then reduced for FTEs in excess of 10, and for average annual wages (in units of $1,000) over $25,000. The result is the total credit that the employer can claim.
Other requirements
Under current law, employers must pay at least 50 percent of the insurance costs and must pay a uniform percentage for all employees. The credit is reduced if the employer premiums exceed the state's average premium for small group markets.
In its proposed fiscal year 2014 budget, the Obama administration would modify or eliminate some of these requirements. The credit phase-out would apply to employers with 21-50 employees, rather than 11-25. The phase-out rate would also be more gradual. Furthermore, the administration would eliminate the requirement that employers make a uniform contribution for each employee, and would eliminate the limit for state average premiums.
Reports indicate that the small business health insurance credit is being underutilized, with many businesses leaving this tax money on the table without claiming it or arranging their affairs to do so.
If you have any questions about how you might be able to position your business to claim this credit or claim a larger credit, do not hesitate to call this office for an update.
