Payroll & Estimated Tax Chapter 7 pp. 205-234 2018 National Income Tax Workbook
Chapter Topics Payroll: pp. 206-234 Withholding, Tax deposits, Payroll reporting Penalties Federal Unemployment Taxes Paid Time Off Business Expense Reimbursements Fringe Benefits Independent Contractors Estimated Taxes
Income Tax Withholding pp. 206-207
Withholding Calculation p. 209 If using prior year W-4 data: Keep same number of withholding allowances Keep same additional withholding Assume lines 5, 6, 7, and 8 are zero New W-4: Basic withholding (Pub 15/15A) 2 allowances MFS or single 3 allowances for MFJ or H/H
Adjusting Withholding pp. 209-210 Adjust Withholding if entries on lines 5 through 9: 1. Divide amounts on lines 5, 6, 7, and 8 by the total number of pay periods in the year. 2. Add the results from step 1 to the employee s wages per pay period. 3. Subtract the result from step 1 for line 6 from the result from step 2. 4. Figure the income tax withholding using the result from step 3 as wages, allowances for the filing status on line 3
Adjusting Withholding, cont d pp. 209-210 5. Reduce the income tax withholding result from step 4 by the income tax credits per pay period figured in step 1 for line 7 (Not below zero). 6. Separately figure the income tax withholding on the amount, if any, from step 1 for line 8. 7. Subtract the income tax withholding result from step 6 from the result in step 5, to figure the amount of income tax withholding per pay period. 8. Add the amount, if any, from line 9, to the income tax withholding per pay period figured in step 7.
Social Security & Medicare Tax Social Security Tax 12.4% pp. 210-211 6.2% by employer and 6.2% by employee 2018 maximum wage limit: $128,400 Medicare Tax 2.9% 1.45% by employer and 1.45% employee no wage base limit
Additional Medicare Tax p. 211 Imposed on employees if wages greater than: $250,000 MFJ $200,000 Single or HOH $125,000 MFS Tax is.9% on wages > $200,000 No employer share for additional Medicare tax
Successor Employer p. 211 Predecessor wages treated as paid by successor if: 1. Acquired substantially all property used in trade or business or used in separate unit of predecessor 2. Employee employed by the predecessor prior to and by successor after 3. Wages were paid during the calendar year of acquisition and prior to acquisition
Deposit Schedule p. 212 Current or prior quarter liability < $2,500, deposit quarterly with Form 941 Accumulates $100,000, next business day Use lookback period 12 mos ending June 30 Aggregate tax $50,000, deposit Monthly By 15 th day of following month Aggregate tax > $50,000 deposit Semiweekly
Payroll Reporting pp. 213-214 Form 941: Filed quarterly: Form 944: Employment taxes $1,000 and receives written IRS notice to file Form W-2: To Social Security & Employee by 1/31
Failure to File Correct W-2 p. 214 Unfiled, untimely, incomplete, incorrect Amount based on when correct filed Not applicable if: Reasonable cause & not willful neglect Error/omission inconsequential Safe harbor for de minimis error applies No single amount off > $100 and No single amount withheld off > $25
Failure to Furnish Correct W-2 p. 214 Unfiled, untimely, incomplete, incorrect Amount based on when correct furnished N/A if error/omission inconsequential
Required Deposit Penalties p. 214 2% - if 1-5 days late 5% - if 6-15 days late 10% - if : 16 days late & < 10 days from 1st notice Not deposited - paid directly to IRS/with return 15% - if unpaid > 10 days after earlier of: 1st notice, or Date TP rec d notice & demand for payment
Trust Fund Recovery Penalty p. 215 Responsible person personally liable for penalty if: They are responsible for collecting/paying withholding amounts, and They willfully fail to collect/pay the taxes Responsible person: duty to perform & power to direct collection, accounting, paying the taxes Willful: Was/should have been aware of unpaid taxes & intentionally disregarded/was indifferent
Federal Unemployment Taxes Employer pays on wages to employees if: p. 215 Employer paid wages $1,500 in any QTR of 2017 or 2018, OR Employer had 1 employee part of a day in any 20 or more weeks in 2017 or in 2018 6% on first $7,000 paid to each employee Credit up to 5.4% for timely, fully pd state FUTA
FUTA Deposits p. 216 If liability < $500 for quarter, no deposit required Carry forward to next quarter If liability $500, EFT deposit by last day of 1st month following quarter Generally Form 940 due January 31 If all FUTA deposited timely - due Feb 10
Paid Time Off (PTO) Sick Pay Sickness, disability, personal injury Can be paid by employer or 3 rd party Does NOT include pay for: p. 216 Disability retirement, workers comp, public employees work-related injury, medical expenses & unrelated to work absence Generally subject to withholding, FICA, FUTA Not taxable to extent employee paid/taxed on prem. N/A if paid to estate in year after death
PTO Sick Pay pp. 216-217 If both employee and employer contributed Taxable portion = (Total sick pay) x (% of cost employer paid in 3 prior years) No SS, Medicare, FUTA if paid > 6 mos after last month in which employee worked Reporting requirements Same as for regular wages Box 1 W-2 required even if all nontaxable nontaxable sick pay in Box 12, code J
Paid Time Off (PTO) Vacation Pay pp. 217-218 Treat as regular wages for withholding/reporting If paid in addition to regular wages = supplemental $1M: withholding based on aggregate or flat rate Aggregate: Reg + supp = single wage paymt Flat rate: 22% on supplemental pd after 12-31-17 Subject to SS, Medicare, FUTA If > $1M/year, excess subject to 37% flat rate Accumulated PTO paymt = supplemental wage
Business Expense Reimbursements p. 218 General Rules: Nonaccountable plan reimbursements are taxable Accountable plan reimbursements are not taxable Accountable Plan 1. Business connection 2. Substantiation 3. Returns amounts in excess of expenses If not returned, excess is taxed
Nonaccountable Plans pp. 218-219 Considered a nonaccountable plan if: Expense has no business connection No substantiation required Excess amounts are not returned All treated as under nonaccountable Employee cannot make plan accountable by substantiating and returning excess
Fringe Benefits Taxable unless specifically excluded Examples of includable items: pp. 219-220 Vehicle provided for personal use Flight on employer-provided aircraft Free/discounted commercial flights Vacations Discounts on property or services Country Club or Social Club membership Ticket s to events
Excluded Fringe Benefits p. 220 Examples of excludable items: Qualified tuition reductions - IRC 117 (d) Meals/lodging - IRC 119 Dependent care assistance - IRC 129 No additional cost, discounts, working condition fringe, & de minimis - IRC 132
Fringe Benefits Reporting & Withholding p. 220 Determine FMV of fringe by Jan 31 Can treat noncash as paid on any frequency but not less than annually Exception: Investment and real property treated as paid on actual transfer date Period can differ among EEs Must be treated as paid no later than Dec 31 Withhold on aggregate or flat rate
Noncash Wages for Farm Labor p. 221 Not subject to: Federal income tax withholding Social Security Medicare taxes Exception: If substance of payment is cash payment, treated as cash wages Subject to all wage taxes
Independent Contractor Withholding p. 221 No obligation to withhold on payments unless subject to backup withholding: 1. Fails to furnish TIN 2. IRS notifies payer that TIN incorrect 3. IRS notifies payer to withhold on interest or dividends due to prior nonreporting 4. Fails to certify not subject to backup withholding 24% rate
Backup Withholding & Reporting pp. 221-222 Generally no backup withholding on F1099 if: Paid < $600 No 1099 to payee previous year and No prior year payments subject to B/U If backup withholding required: File F945 (annual) by January 31 < $2,500 pay with return or EFT
Estimated Tax Topics pp. 223 234 When estimated payments required Calculating estimated payments When to make estimated payments How payments are applied How to pay estimated payments Estimated tax penalties Annualized income installment method
Estimated Tax p. 223 Estimated tax may be needed if withholding is less than your tax liability
Estimated Payments Required p. 223 Estimated payments required if: 1. TP owes $1,000 after withholding & refundable credits 2. Withholding & refundable credits to be less than the smaller of: a. 90% of tax on current year return, OR b. 100% of tax on prior-year return (110% if AGI > $150,000 ($75,000 MFS)
Special Rules for Farmers & Fisherman p. 223 If ⅔ gross income from farming/fishing: Estimated tax required if withholding & refundable credits is < smaller of: 66 ⅔ % of tax on current year, OR 100% prior year tax Make one estimated payment by Jan 15 File & pay full amount by Mar 1
Estimated Tax Not Required p. 223 No estimated payments required if: No tax liability for the prior year, AND US citizen/resident alien entire year, AND Prior tax year covered a 12-month period
Estimated Tax Flowchart p. 224
When to Make Estimated Payments p. 227 For the Period 2019 Estimated Tax Payment Due Dates Due Date Jan 1 - March 31 April 15, 2019 April 1 May 31 June 17, 2019 June 1 Aug 31 Sept 16, 2019 Sept 1 Dec 31 Jan 15, 2020 If files by Jan 31 and pays remaining tax owed, no estimated payment required by January 15.
How Payments are Applied p. 227 If TP fails to make one payment, subsequent payment is applied to earlier liability
How Payments are Applied p. 227 Withholding & Excess Social Security Applied evenly among installments To apply withholding against specific income, must file Form 2210 Joint payments of estimated tax Allocate to MFS returns as spouses agree No agreement, IRS will allocate based on spouses separate tax liabilities
How to Pay Estimated Tax p. 228 Credit an overpayment Pay online account transfer, debit/credit card, online payment agreement Mail a payment with Form 1040-ES voucher By phone IRS2Go mobile app
Estimated Tax Penalty pp. 228-229 Payments due when income earned Penalty can apply even if refund due Penalty calculation Based on underpayment rate (Individuals: federal short-term rate + 3%) Calculated separately for each payment Based on # days - due date to paymt date
Form 2210 p. 229 Form 2210 used to: Determine if penalty owed Calculate penalty Request a reduction in the penalty Apply excess withholding to specific income
Waiver of Estimated Tax Penalty p. 230 Waiver of the Penalty Casualty or other unusual circumstance Taxpayer retired (after 62) Became disabled in either of 2 preceding years Reasonable cause, not willful neglect To request waiver check Box A or B in Part II May require explanation & documentation
Annualized Income Installment Method p. 230 Use if income not earned evenly through the year Calculates tax liability at end of each payment period using income/deductions from beginning of year to end of period