May 18, 2013

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Employee Misclassification and the Consequences

May 17, 2013 By

In their efforts to lower operational costs and maximize returns, some employers may resort to deliberate payroll-tax evasion strategies like deliberate employee misclassification. Some legitimate employees can deliberately be misclassified as contractors, and thus, the employers can strategically evade paying unemployment taxes or their portion of payroll taxes and other legally stipulated employee benefits.

Employee misclassification is associated with the tax law and sheer violation of the labor law. The IRS is fully aware of these schemes and is hunting down employers engaged in this dangerous malpractice that denies taxpayers their rights as well as Uncle Sam millions of dollars annually.

Employee misclassification is common in industries where workers suffer wage violations. These workers work for very long hours and are paid poorly. This does not only affect the well being of the employees, but that of their whole families, who rely on them for survival.

In their efforts to end work-related mistreatment, a partnered venture involving the U.S. Department of Labor, the IRS, and State labor departments encouraged mutual information sharing. To their surprise, they discovered that Uncle Sam is being swindled millions of dollars due to an alarmingly high amount of misclassified employees.

It is because of this that the ‘Voluntary Classification Settlement Program’ was launched by the IRS in September 2011. The program was mainly meant to persuade the falsifying employers to correctly reclassify the workers. This official pardon encourages companies to make the necessary amendments before an IRS audit is performed, which will investigate and penalise them for any unpaid taxes as a result of misclassification of workers.

The federal investigators on the other end ensure the workers are listed on the payrolls. In case an employee believes that he or she is being misclassified, they are encouraged to inform the federal agents. The biggest challenge facing this initiative is fear of the consequences of turning in your boss; you may just be shown the door the moment the federal investigators step out of the company gates.

Since the employers have control over their employees, it becomes their responsibility to split the FICA tax payments with their employees. Workers misclassified as contractors have to pay Social Security and Medicare taxes entirely on their own, which is very unfair, especially if their wages are pretty low.

Employees who feel that they are being misclassified are encouraged to talk to their employers about this issue. There are however, some employers who would rather keep you as a contractor for as long as they wish, but not as an employee. If they fail to act, then you can simply file the IRS Form SS-8 and let the IRS will look into the matter before acting accordingly.

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Tax Tips for the Recently Married and Those Planning to Tie the Knot

May 16, 2013 By

The only consistent thing in life is ironically, change. If you get married, you may not only change your home, you also may change your name, change your lifestyle, become kin to an extended family, but you may even open a joint bank account and everything in it. However, one of the biggest changes in marriage is your taxes and you must be prepared to adapt to these changes in your life. The following is a list of how marriage affects your taxes, and what has to be done to remain safe from IRS trouble.

Name Changes and SSN:  It is essential that you Social Security number and name match those on your tax returns.  For a bride who in most cases, takes up a new name, the first thing to do is to report the name change to the Social Security Administration and get a new Social Security card.  The application form can easily be obtained online or by calling the Social Security Administration office closest to you.

Address Changes: It is possible that you may have to move to a new home to accommodate your growing family. Inform the Postal Service of any address changes through the U.S. Postal Service website or by visiting the nearest post office. You will also have to inform the IRS of your new address.  Download the IRS Form 8822 online from the IRS official website and fill in the new address.  You can also update your Address by calling the IRS’s toll free number. Another person that must be informed about your address and status change is your employer to facilitate the Wage and Tax Statement Form W-2 yearly.

Withholding Check: Are you and your spouse both working? If yes, then you have to check your current withholdings and determine the amount of withholding that is appropriate for your new marital status. Fill out the necessary forms and take them to your employer for accurate withholding.

Right IRS Tax Forms: There may be too many different IRS tax forms out there, but it is not justified to fill the wrong ones. Did you know that you can save a lot of money by choosing and filing the right tax forms? As newly-weds, there will be more deductions that will set in. There are specific forms for itemized deductions, including the IRS Forms 1040EZ, 1040A, or 1040.

Filing Status: You marital Status as of December 31st determines if you are married or not for that full year for taxation. You also have the option of either filling for the income tax return as an individual or jointly as a couple. Each of these has its advantages and maybe some disadvantages; scrutinize your options and settle on what suits you best.

Conclusion

As you make plans for your wedding, don’t forget to consider how saying “I do” will affect your taxes. A wedding presents an array of tax opportunities as well as challenges. Understanding these factors will simplify the process of settling into change.

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Working After Retirement and Social Security Benefits

May 3, 2013 By

The diligent ones who always work hard find it very difficult when they are “forced” to retire because of age to just sit at home after retirement, even if they are financially secure and do not need to work. Other times, financial constraints may force retirees to take up a job, even after retirement. For these reasons, some find it necessary to stretch their retirement funds for a few more years by taking up new jobs.

Before taking up that post-retirement job, it is highly recommended that you carefully consider the financial implications and effects on your Social Security benefits.

Retirement Age

If you were born between January 2, 1943 and January 1, 1955, your set retirement age would be at 66. Have you ever thought about using Social Security benefits before your retirement age? If you had sought to take Social Security benefits before retirement, the benefits are likely to come down once you take up the new job. So, it is always safer to sign up for Social Security benefits only after turning 66. This way, you can work after retirement as well as reap more on your Social Security benefits.

For those already using Social Security benefits prior to the set retirement age but still interested in new jobs, there may be a huge blow to their Social Security benefits.

Monthly Benefits

If you are fall under the group that is younger than 66 years for the whole year, then the total deductions of $1 will be made on every $2 you earn above $14,640 per year. If you are younger than 66 years only for a part of the year, $1 deductions will be made on every $3 you make above $38,880 a year until you reach the month of your retirement age. Your Social Security benefits are withheld from January to March that totals up to $3,000. The monthly benefits after March resumes as is with any change.

Social Security Benefits are Taxable

Social security benefits are taxable, but to calculate the amount of tax paid, the modified Adjusted Gross Income has to be calculated based on half the annual Social Security benefits, pension, interests, wages, dividends, capital gains, and tax exempt interests.

If you are single or married, and your MAGI is more than $25,000, half of the annual benefits should be included in the tax return. If it is greater than $34,000, then 85% of the benefits are taxable. On the downside, income earned as salary is also taxable and is combined along with the MAGI.

Earning Limits

The earning limits of job after retirement is set on wages and self employment earnings, but income from interest, pensions, annuities, dividends, capital gains and government benefits are excluded. In case you earn too much of wages that can endanger your benefits, the wages will be calculated for future Social Security benefits. That way, your retirement age is fully secured.

Before you decide to go back to work after retirement, think about the cost-benefits ratio. If it is reasonably acceptable, you may choose to go for a job. However, if the cost of taking up a job is higher than the wages and benefits gained, it is smart to stay home and reap the benefits of your Social Security in full.

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Payroll Taxes on Your Severance Pay

April 25, 2013 By

Jobs are scarce, and one would count oneself lucky if he or she has a stable one today. One thing that may concern those who have been laid off (as well as their former bosses) is: do they owe Medicare and Social Security on severance pay? Most would wish they be spared the tax ax, at least on the severance pay. After all, having just lost a job, one would hope for some “sympathy” from Uncle Sam. However, the truth is, the IRS wants a cut of your check, even if it’s severance pay.

Any basic employee and employer individually owe a 6.2% up to a maximum of about $110,000 at the moment of flat Social Security tax. Furthermore, they also owe Medicare tax of 1.45% on the wages (unlimited) which when combined, can shoot to as high as 15.3%. Generally, all these are known as payroll taxes or FICA.

For example: if you were an executive and landed on the chopping block in 2009 and in return, got $100,000 of severance, the overall tax in question could amount to approximately $15,000 that is equally shared between the employee and the employer. You might be wondering if the tax amount should be withheld from your severance pay. According to tax attorneys, there is no clear provision in the tax law that states that the FICA taxes should directly be withheld by the employer.

The amount paid will vary from one employer to another and also depend on the timing. If you were laid off after your pay had already reached the maximum Social Security earnings for the year, only the 2.9% Medicare tax will be imposed on your earnings. Note that this only applies for severance paid for involuntary termination like when businesses discontinue operations or have budget cut-backs and not for firings.

The way this is treated varies from one state to another. If the employer is uncertain of how to handle the severance pay to an employee, it is recommended that the FICA taxes be withheld as they seek clarification from relevant authorities. Employers are also expected to file refund claims for the taxes with the IRS within 3 years before the expiry of the statute of limitations. There are times when the IRS can explicitly deny the refund claim by the employer. The best way forward in such instances is to seek a “refund action” in a U.S District Court or the United States Court of Federal Claims. This has to be done within two years of claim denial.  

The laid-off employees should also check with their old employers if the FICA tax refunds are being pursued. Preferably, the employer should only inform the former employee after the IRS has agreed to the claim so that the two claims can be joined. If the refund claim is successful, the employer has to do the honorable thing and give the former employee his or her own share as they celebrate the win. But knowing the IRS, they sure will put up a tough fight.

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Tax Consequences of Getting Married

March 11, 2013 By

It feels amazing to finally tie the knot with the love of your life. Marriage changes important statuses in your life, including your tax filing status, that changes to either married filing separately or jointly. Most weddings take place in summer and late spring but as you say “I DO” and speed off to your honeymoon, think about the following tax consequences.

Change of Name: You must promptly inform the Social Security Administration of any name changes, especially if you are dropping your last name and acquiring your spouse’s or adding your spouse’s name to your current name. To do this, file Form SS-5, Application for a Social Security Card that is available for download from the SSA’s website. You can also call or visit the nearest SSA office for help.

Relocation and Address Change: Since you must stay as husband and wife under one roof, one or both of you may move to a new residence. As you move, don’t forget to alert the IRS about the change of address; use the IRS Form 8822-Change of Address. You risk missing out on future IRS correspondence, some that might have some serious tax consequences, if you fail to notify them. You must subsequently inform the U.S. Postal Service and provide a forwarding address. This can be done online or by visiting the nearest post office.

Alert Your Employer: Inform your employer of any name and/or address changes. This will guarantee that you get the IRS Form Form W-2, Wage and Tax Statement at the end of the year with appropriate details.

Withholding: If both you and spouse receive taxable income, combining your income might push you to a different and higher tax bracket. To establish the right withholding amount based on your new marital status, use the IRS Publication 505-Tax Withholding and Estimated Tax. This will also go a long way in enabling you to fill Form W-4-Employee’s Withholding Allowance Certificate. This form can be filled online, printed, and given to the employer(s) indicating the right amount to be withheld monthly from your paycheck.

Form Selection: You must carefully choose the IRS tax forms as they may help you save some extra bucks. You possibly will find it appropriate to claim itemized deductions than standard deductions because of the combined incomes. Use Forms 1040, 1040A, and 1040EZ to claim itemized deduction.

Finally, carefully choose your filing status, either jointly or separately. In most cases, joint filing is preferred, but vary from one case to another-choose one that saves you money.

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Tax Consequences of Name Changes in Marriages or Divorce

February 20, 2013 By

More than 2 million couples in the United States get married annually. As more Americans seal their relationships, an equally large number is seeking a way out of the same marriages by filing for divorce. Marriages and divorces are the two biggest lifestyle changes with various tax consequences.

Changing your name (either after a marriage or upon divorce) is of great tax significance. You may face a series of tax problems if the name on your Social Security Administration records and the one on federal income tax return don’t match. To avoid any name-related troubles with the IRS, make sure that any change in names is sufficiently communicated to the Internal Revenue Service as well as the Social Security Administration (SSA). You can always add your spouse’s name to your own when getting married and resort to your earlier name if the marriage doesn’t last by notifying the SSA.

The name changing process with the Social Security Administration is easy and the process has been streamlined to save time. You have to file a Form SS-5-Application for Social Security Card that can be downloaded as PDF from their website. You must have identification documents and clearly explain the reason behind the name change.

For marriages, the SSA will require and only accept an original or a certified copy of the marriage certificate. For divorces, you must present an original or certified copy of the divorce decree. If you don’t have these documents, try to get them from relevant authorities. Unless you reside and got divorced in the few states that still recognize common law divorces, you are supposed to acquire an authentic divorce order to be divorced.

The SS-5 form can be filed alongside the required documents at any SSA office near you. The same can also be mailed to the local SSA office-just see to it that the method used is traceable as the documents are normally returned after verification. The new card is more often than not ready in ten days, with the new name (Social Security number is not changed).

It is important to note that the highlighted rules are only applicable to those seeking to change their names as a result of divorce or marriage. There is a different set of rules for individuals petitioning to legally change their names for other reasons. Contact the Social Security Administration for more information.

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Access Your Social Security Statement Online

January 16, 2013 By

Taxpayers can now access their Social Security benefits online. According to an announcement by Social Security Administration (SSA), the online version is a facsimile of the normal statements that are mailed to taxpayers annually. All you have to do is go through the registration process and upon identity verification; you will be able to see how much retirement benefits you have. It is also possible to make corrections to the contribution history for any inaccurate or missing information.

The main notable shortcoming that dampens the otherwise good news, is the complex process involved in setting up an account. The Social Security Administration (SSA) is relying on information from Experian to authenticate the identity of the taxpayers. To sign up for an account, one has to be at least 18 years, and then read through the usual terms of service and requirements. Fortunately, they are written in a very simple language and are not so long and boring.

You have to go through three basic steps to create an account. First, you will be required to fill in your full name, address, contact details, and Social Security number. Thereafter, answer some basic questions about your credit rating via Experian. There is a question about how old your car loan is and the bank used. This information is only used for verification purposes but not stored by the SSA.

Finally, you are required to set up a username and password for future access to your SS account and statement. You will also be required to provide an email and some security questions to be used in regaining your password, just in case you forget it. There is a possibility that some problems could make it impossible to verify a taxpayer’s identity. If this happens, the statement could be requested online or simply visit the nearby Social Security office with a valid ID and you will be able to set up an account.

The online statements are best suited for individuals involved in retirement or tax planning. It is recommended that every taxpayer checks his or her statement every few years to ensure that what is contained in the account is exactly what they have saved for. The Social Security Administration (SSA) uses the W-2 that is sent out by employers and not whatever is contained on the taxpayer’s tax return. If they don’t match, the problem can always be corrected with ease.

Taxpayers aged over 60 years should expect statements from the Social Security Administration (SSA). This is done to all taxpayers nearing retirement but have yet to start drawing SS. Plans are underway to send these statements to taxpayers starting from the age of 25.

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Beware of Common Tax Scams

November 7, 2012 By

The IRS publishes an annual list of dirty tax scams and warns taxpayers against tax fraud. Some tax scams are self inflicted, while others appear to be unbelievable tax refund offers or masquerading third parties. The IRS has over the years, singled out some common and easy-to-detect tax scams like reporting false income to earn high refundable credits, inflating the fuel tax credit, or even falsely claiming undeserved deductions. However, crooks are coming up with fresher scams that are not easy to detect.

Identity theft is one of the leading tax frauds and taxpayers are warned against sharing any personal information with strangers. It is possible for fraudsters to file a tax return in a taxpayer’s name and use their Social Security numbers to claim refunds they are not entitled to. The IRS has improved its screening process to spot falsely filed tax returns and appeals to taxpayers to report any suspicion to the IRS Special Identity Theft page on their website. Many victims only learn of this after receiving a note from the IRS notifying them of an already-processed tax return they actually didn’t file.
Another common scam is phishing which involves the use of fake or unsolicited emails posing as having originated from the IRS. Taxpayers can be lured into sharing personal or financial details with the senders of such emails. Such cases should be reported to the IRS at phishing@irs.gov. Be informed that the IRS does not ask for personal or financial data via email, neither does it initiate communication with taxpayers using this medium. Any attachments or links in suspicious emails should never be opened or clicked on.
Tax preparer fraud is another common scam that many taxpayers risk falling victims of. More than 60% of taxpayers seek the assistance of tax preparers when filing taxes. Some tax scammers are taking advantage of this to either steal from taxpayers, inflate their fees, or direct taxpayers’ refunds to their own accounts. In this regard, every taxpayers in now required to produce a Preparer Tax Identification Number (“PTIN”) issued by the IRS. Watch out for tax preparers without one or those who fail to enter the PTIN on the return or are reluctant to sign these documents.
Other common tax scams according to the IRS involves hiding of income in offshore accounts, foreign banks issued credit cards, and many other approaches. The IRS is collaborating with other countries to discover these culprits. Finally, some entrepreneurs disguise real ownership of businesses or trusts. The IRS is treating all these scams with seriousness and anyone found culpable risks facing harsh penalties, interests, or even court prosecution.

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A Guide through the Latest Tax Changes

May 14, 2012 By

If you have filed for an extension, you have more time to learn about the tax updates for the 2011 year. Here is a list of what is new for the 2011 tax regulations:

  1. Schedule M and Making Work Pay Credit are no longer there – These were available in 2009 and 2010 but are not available in 2011 since there is no Schedule M to file and no additional credit for the year.
  2. Payroll tax cut for employees – employees who receive form W-2 enjoyed a tax break of 2% on FICA contributions during the year. Contributions from Social Security taxes were 4.2% instead of 6.2%. Medicare contributions did not change. Presently, there is no need to fill forms, or schedules, since the break is automatic and will not affect your 2011 federal income tax return since it is tied to Social Security payroll taxes. Taxpayers who did not pay Social Security system during the year will not receive any benefit.
  3. Payroll tax cut equivalent for self-employed taxpayers – for the self-employed, you will receive the benefit of the payroll tax cut when you file your federal income tax return in the form of an adjustment to your self-employment (SE) tax due. The SE tax rate reduces from 12.4% to 10.4%.
  4. Federal 1099-K – this is the new form called Merchant Card and Third Party Network Payments making a debut in 2011. This is for taxpayers who have a credit card merchant account, PayPal account or similar account and otherwise meet the criteria.
  5. Visible Health Care benefits on form W-2 – Companies with more than 20 employees must indicate the value of health care benefits they pay on the behalf of employees on the form W-2 in 2012. Do not panic if this amount shows on Box 12, using code DD. It has no effect on your taxable income.
  6. Unchanged deductions – The Standard Deduction rates for 2012 have not changed from 2011. The rates are $5,800 for single taxpayers or those married but filing separately, $11,600 for married taxpayers, and $8,500 for taxpayers filing as head of a household. The additional standard rates allowed for senior citizens and taxpayers who are blind are $1,150 for married taxpayers filing jointly and $1,450 for single taxpayers.
  7. Small change in Personal exemptions – This has increased from $3,650 to $3,700 in 2011.
  8. Brokers report cost basis for certain stocks on 1099-B – The form 1099-B has new boxes indicating when you bought a stock, cost or basis, long-term or short-term gain or loss, or if the sale was a wash sale.
  9. Alternative Minimum Tax – There is no reform for AMT. It is unadjusted for inflation
  10. Report of Foreign Bank and Financial Accounts (FBAR) – IRS has made FBAR reporting a compliance issue. You need to check the applicable box on Schedule B when you send in your return.

This is a brief summary of the changes worth noting in the 2011 tax year. For more information, it would be advisable to approach a tax professional.

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Tax Tips for the Self-Employed

May 10, 2012 By

The self-employed have countless advantages that come with being their own bosses. Working for yourself, as an independent contractor, or as a sole proprietor, earns you the title “self-employed.” The IRS offers some key tips for the self-employed about self-employment taxes:

  1. Self-employment includes work you do in addition to your fulltime business, or income generating activities; it includes part-time work you do at home or as a bonus to the regular employed job.
  2. The self-employed have to pay self-employment tax in addition to the regular income tax. The self-employment tax is a form of Social Security and Medicare tax fundamentally for persons who work for themselves. In many ways, it is like the Social Security and Medicare taxes in remission from the pay of most income earners. Form 1040 Schedule SE if used to compute self-employment tax. You can deduct an employer’s equivalent portion of your self-employment tax in figuring your adjusted gross income. In previous years, the deduction was equal to a half of self-employment tax.
  3. Form 1040 is used to file an IRS Schedule C, details of profit or loss from your business, C-EZ, and net profit from business.
  4. When self-employed, one sometimes has to make estimated tax payments. This is applicable even if when on a full-time or part-time job, and the employer withholds taxes from the regular income. This estimated tax method is used to pay tax on income that is not subject to withholding. Failure to make quarterly payments can lead to underpayment penalties at the end of the tax year.
  5. Self-employed people incur costs when running their businesses. These are known as business expenses and are subject to deductions. These costs must be recurrent in nature.
  6. For a business expense to qualify to be deductible, it must be both ordinary and necessary. An ordinary expense is one that is universal and accepted in your domain of business. A necessary expense is one that is supportive and fitting for your business. An expense does not have to be indispensible to be considered necessary.

The IRS has more on these details from the Self-employmentTaxCenterin IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses, and Publication 505, Tax Withholding and Estimated Tax. One can visit their website www.irs.gov, or call 800-TAX-FORM (80-829-3676).

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