Tag: Payroll Taxes

  • IRS Releases New Draft of Form W-4

    IRS Releases New Draft of Form W-4

    The IRS has been trying to release a W-4 that more closely reflects the changes in the Tax Cuts and Jobs Act (TCJA) that was passed in 2017.  These changes made by the TCJA affected itemized deductions that were normally claimed on a Schedule A and eliminated personal exemptions.  While the IRS did give us a new W-4 in February 2018, this new form did not cover situations for all taxpayers.  In June of 2018, the IRS released another draft version of the W-4 for 2019.  Unfortunately, that draft was also met with criticism from tax professionals who felt that the form still wasn’t enough to protect taxpayers from claiming the wrong withholding.  Taking the criticism to heart, the IRS did not release a 2019 W-4.  Additionally, the IRS announced that penalty relief might be available and, in March of 2019, the IRS expanded the relief for those taxpayers making payments of at least 80% of the tax shown on the return for the 2018 taxable year.  Despite the penalty relief, concerns about withholding remained.

    Yet Another Draft

    Because of these concerns, W-4 revisions have remained a priority to the IRS.  This morning, the IRS premiered another draft version of the W-4 to be used in 2020.  That draft can be viewed here (downloads as a PDF).  The draft form is a little bigger than the older W-4 – taking up a whole page and including additional worksheets. 

    “The new draft Form W-4 reflects important feedback from the payroll community and others in the tax community,” said IRS Commissioner Chuck Rettig. “The primary goals of the new design are to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors.”

    While the IRS may believe this form is more simplistic, they want you to account for multiple jobs within your household, including whether you held more than one position or you and your spouse work and file jointly.  Another section asks taxpayers to claim their dependents and to include the $2,000 child tax credit for each child under 17 or the $500 credit for other dependents.  Additionally, taxpayers can use this form to clearly outline other types of income that didn’t have taxes withheld such as interest, dividends, or retirement income.  Lastly, you can list the number of deductions you expect to claim if you think you’ll be itemizing. 

    For many, this form is anything but simplistic.

    What About 2019

    As we approach the mid-year point, we are running out of time for taxpayers who may have been unhappy with their 2018 tax return.  “Two-income families and people with multiple jobs may be more vulnerable to being underwithheld or overwithheld following these major law changes,” the agency said in a statement.

    In order to feel more certain about your 2019 return, we suggest you work with your CPA or take a look at the IRS Withholding Calculator to figure out how much to have withheld from your paychecks.

    More Changes Coming

    Although the IRS has given us a new draft to review, they are taking public comments at WI.W4.Comments@IRS.gov.  Comments should be submitted before July 1, 2019 and they won’t be responding to any comments.  The IRS is planning to release employer instructions soon.  They advise that you see this website for the latest Form W-4 information and this website for the latest information on employer instructions.

  • Employee or Contractor

    Employee or Contractor

    Businesses must examine the relationship between it and the worker to determine if the worker is an employee or a contractor.  Distinguishing between these two is important to determine if an employer must withhold income taxes and pay Social Security, Medicare taxes, and unemployment tax wages paid to an employee.  Generally, the rule is that an individual is a contractor if the payer has a right to control or direct only the result of the work, not what will be done or how it will be done.  To better determine how to properly classify a worker, the IRS asks that you consider these three categories:

    Behavioral Control

    A worker is an employee when the business has the right to direct and control the work performed by the worker, even if they don’t exercise that right.  The categories that fall under behavioral control are:

    • When and where to work, what tools to use, where to purchase supplies and services, etc.  If a business gives these types of instructions, chances are, the worker is an employee.
    • If instructions are more detailed it may indicate that the worker is an employee.  Fewer direction means less control and the worker may be a contractor.
    • Does the business use evaluation systems to measure the details of how the work is done?  This would mean the worker is likely an employee.
    • Is there on-the-job training?  If yes, this is a strong indication the worker is an employee.

    Financial Control

    If the business controls the financial and business aspects of the worker’s job, they may be an employee.  Consider these points:

    • If the company invests significantly in the equipment the worker uses for someone else, they are likely an employee.
    • If there are unreimbursed expenses, contractors are more likely to incur those than employees.
    • Is there an opportunity for profit or loss?  If yes, the worker is likely a contractor.
    • Is the worker free to seek out other business opportunities of this same type?  If no, they are most likely an employee.
    • Do you pay a regular wage for an hourly, weekly, or commission?  Then your worker is probably an employee.  If you are paying for a specific project, they may be a contractor.

    Relationship

    The perceived relationship between the worker and business often indicates the classification of the worker.  This may include:

    • Written contracts describing the relationship between the parties.  However, a contract stating a worker is an employee or contractor is not sufficient to classify a worker’s status.
    • Benefits.  If your business provides benefits, you are likely hiring an employee.  Benefits are not usually extended to contractors.
    • Is your relationship permanent?  If you believe the relationship will last indefinitely as opposed to a specific period of time, you may be hiring an employee.
    • Services provided are a key activity of the business.  If the services the worker provides are a key aspect of the regular business of the company, you should classify them as an employee.

    Consequences of Misclassification

    If you accidentally classify a worker as an independent contractor and it is later discovered, your business will be liable for employment taxes.  The IRS can help you determine the status of your workers with Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.  IRS Publication 15-A, Employer’s Supplemental Tax Guide, is also a great resource.

    If you have any additional questions or concerns about your workforce, please, reach out to us at Sound Accounts!  We would love to help and “our strength is YOUR numbers!”

  • Changes to Payroll Withholding

    Changes to Payroll Withholding

    The IRS is tired of processing tax returns. While this may not be entirely true, the proposed changes to payroll withholding and their impact to the small business owner, make it feel that way.

    The IRS recently announced that they are changing the W-4 form. This is the form that employees use to select the amount of taxes they want withheld from their paychecks. Testers state it’s more like filling out a tax form than what the W-4 has traditionally been.

    The goal of all of this is to have your withholding and your tax liability match up. The government wants to get out of the business of offering refunds. Unfortunately, these changes are always most difficult on the hardest working people, the small business owner.

    Most small business owners have unique challenges just filing their taxes. If calculating payroll withholding becomes just as difficult as filing your annual taxes, the task will seem unending. This is one of the many reasons that small business owners must stay current on changes in the IRS law.

    Watch this space. We will post the latest information and its impact, as it becomes known. We will work with you to ensure that you stay compliant with the law. Remember, at Sound Accounts, our strength is your numbers.

  • Payroll Tax Changes

    Payroll Tax Changes

    Payroll deductions

    Payroll taxes are changing, but how?  Right now, the best answer we have is that we don’t really know.  We have tax law but not regulations.  The regulations give us instruction on how to apply the laws.  There are some things we do know about the changes to payroll taxes.  Look at a few of them below:

    Social Security

    Social Security is still 6.2% of gross pay.  However, the new wage base increases to $128,400.  This means that the most Social Security tax your employees will pay in 2018 would be $7,960.80.

    Medicare

    Medicare is 1.45% of an employee’s gross pay and has no cap.  Earnings greater than $200,000 will be taxed at 1.54%.  The employee, not the employer, will pay the additional 0.9%.

    Federal Unemployment Rate

    The wage base for Federal Unemployment remains at $7,000 and the effective tax rate will be 0.6%.

    Federal Income Tax

    This is where payroll taxes may get tricky.  W-4s submitted by your employees determine the Federal Income Tax.  This form shows their filing status and their chosen number of exemptions.  Because we know that the tax brackets are changing, the W-4 will need to be updated.  In an announcement on December 13, 2017, the IRS stated that, “We anticipate issuing the initial withholding guidance (Notice 1036) in January reflecting the new legislation, which would allow taxpayers to begin seeing the benefits of the change as early as February.”  Until then, we will be using the 2017 tax brackets and W-4 and make any adjustments once the new information is available.

    Supplemental Wages

    Traditionally, since 2007, bonuses, commissions, and other supplemental wages have been taxed at 25%.  With the new tax law, however, the tax rate may increase to 28%.

    What Now?

    We wait and we continue doing what we have always done until the IRS gives us a new W-4 and releases the notice.  We also suggest that employees keep an eye on their withholding.  Later in 2018 employees should look at their earnings, compare their withholding to the new tax tables, and make any adjustments necessary.

    Does all of this still worry you?  Do you find payroll taxes way too confusing already?  Give us a call and we would be happy to take those worries off of your hands!