The U.S. economy is showing some signs of life again. Some employers may be more apt to give some small raises this year. According to a Mercer survey, the average rate of base salary increase in 2013 will be around 2.9%. This compares to 2.7% average increase in 2011 and 2012. S0 you’ve done your best this year and showed your employer that you are not only incredibly valuable, but also the most productive and irreplaceable of the employee population at your company. You think you’re due a much bigger raise than usual because you are a much better employee than average. But…do you ever stop to think about what your true cost is to your employer? That annual salary number is very likely a lot lower than your actual cost. Let’s do a quick calculation.
Annual salary: $45,000 per year paid twice per month or semi-monthly. You have a nice relaxing desk job.
401(k) match: 3%
Insurance paid 50% by employer
In your paycheck, you notice that Social Security and Medicare are withheld first (and likely Federal and State tax too) before you even get your check. Did you know that your employer matches that amount as well? In this case, you have 6.2%, or $116.25, withheld for Social Security and 1.45% or $27.19 withheld for Medicare. Your employer must pay that as well. In our example, there is a 3% match from your employer towards your 401(k) contributions. That means $56.25 per check. Group health insurance varies depending on the make up of the group, but lets say that costs $450 per month. You and your employer then contribute $112.50 per check. Your employer also pays anywhere from .5% to 10% of your salary towards Unemployment Insurance for you. There in an income limit to this that I will assume is $10,000. Your employer must also carry workman’s compensation insurance on you in case you are injured on the job. These premiums depend on how risky your job is and can range from 1% to 10 or 11% of your salary.
There are other costs as well, but these are the typical extras employers pay that are invisible to the employee. Let’s see how all this adds up on an annual basis.
Salary – $45000
401(k) match – $1350
Health Insurance – $2700
Matching Taxes – $3442.56
Work Comp Ins – $450
UI Insurance – $100
Your total cost = $53042.56 which is an 18% premium above your stated rate.
How can you use this information? Use the free Salary Calculator at PaycheckCity to figure out how much of your paycheck you will take home based on your withholding settings after your desired raise. Adat the estimated employer calculations above to your company to see how much any increase in your salary will cost your employer. Are you worth it? Will they go for it? Now it’s up to you to prove how valuable you are as an employee. But that’s another article!
Q. As the owner of a brand new small business, when is the best time to hire an accountant? What are the main reasons I would want to do this? Where would I find a good accountant?
A. Congratulations on starting out on your own! It’s an exciting and frightening to leave behind a sure paycheck. But, the most satisfied and financially secure people on this earth are those who work for themselves.
Unless your business is to be an accountant, you are not an accountant and you don’t think like one. You are the best at whatever activity your business is based on. That could be a florist or programmer or auto mechanic. Setting aside the millions of jokes about the type of people who go into this profession, what are accountants good at? Posting your financial data correctly and analyzing that data to help the owner of the business plan for the future. Proper planning means your business can thrive and grow into something that eventually could be sold someday. Bad planning means the business will never succeed and be as successful as it could be.
Through my company AskCPASam, PLC, I get to work with several small businesses. Most of the time, I get new small business clients looking to have their tax returns prepared. This seems like an easy task, but the average small business keeps very poor books. Items are categorized in strange places or lumped into “miscellaneous” or simply not categorized at all. I’ve even seen expense accounts set up as negative income accounts in Quickbooks. (That means those expense items show up in the income section of the Income Statement.) It’s impossible to plan when the reports you get from your accounting system basically make no sense.
Hire an accountant as soon as you have the funds to do so. This does not mean you have to bring an accountant onto your payroll. You could contract with a firm that provides accounting and bookkeeping services for many small clients. Your exposure would then be minimal from a cost perspective, yet you would gain the experience of having some accounting expertise in house.
Some business events that could trigger your need to search for professional accounting help include: starting up, selling the business, a new product line, a new territory for operations, an acquisition, your first employees or for income tax preparation. There are many specialties within the accounting profession. To find the right accountant, most states have an organization that promotes the accounting profession within that state. In Arizona, it’s called the Arizona Society of CPAs. You can search for someone in your geographic area, and the area of expertise you need. You could hire someone who advertises bookkeeping services or look for a CPA firm specializing in small business work. It may cost a little more, but a firm with the CPA license behind it will more often provide better insight and experience into your questions.
It finally happened. There was a tax deal! Congress settled half of the giant cloud of uncertainty strangely named the “Fiscal Cliff.” As a tax professional, I am charged with helping my clients navigate through the confusing web of tax laws created by Congress to make sure they pay only as much tax as they are required to. For many, that means planning months and years ahead for certain events that are about to take place to make sure correct decisions are made. How are we supposed to do that when Congress can’t even decide what the tax law is going to look like? Thankfully, most of the uncertainty is past. This post will be a short summary of the changes you can expect for 2013 in the way of payroll and tax laws. I’ll have some suggestions and warnings as well for some of these issues.
- Tax rates – Starting in 2013, Congress allowed the top tax rate to go back to the levels that existed prior to 2001, which is 39.6%. That means annual income above $450,000 for married-joint filers and above $400,000 for single filers will be taxed at the new higher rate. The other rates remain the same as before. You can see the brackets of withholding rates for 2013 here, on page 4. .
- Social Security tax increase – For 2011 and 2012 tax years, employees have been paying Social Security tax at the rate of 4.2% on taxable earning. Starting in 2013, the rate increases to 6.2% for all taxpayers. The limit on wages subject to this tax is $113,700.
- Additional Medicare tax – For withholding purposes, all taxable wages in excess of $200,000 will have an extra 0.9% tax for each individual employee. The challenge with this one is that the actual tax liability is calculated for married couples with wages in excess of $250,000. There are two issues. First, if a married couple will have total wages between $200,000 and $250,000, they will be over withheld by the Medicare tax of .9%. Secondly, if both spouses earn under the $200,000 threshold, but together earn more than $250,000, they will owe additional Medicare tax on their tax return of .9%. Your tax adviser can help you do this calculation. You will need to adjust your Form W-4 to accommodate the tax change.
- Tax on “Unearned Income” – I’ve always thought that name was silly since all income is earned. But Congress means income beyond your regular salary will be taxed at 3.8% which up until this point has not been subject to a Medicare tax. This means dividends, rental income, interest and some other items. None of this is taken into account in payroll systems. You would need to lower your allowances claimed or make estimated payments to cover the shortfall. The income levels where this takes effect are the same as the Additional Medicare tax, AGI over $250,000 for joint married filers and $200,000 for single filers.
- Itemized deduction phaseouts – For tax year 2013 and beyond, the phaseout of itemized deductions has returned. That means that up to 80% of most Schedule A items can be phased out for taxpayers above certain limits. Those limits are now indexed for inflation.
- Increased retirement contributions – Employees can now contribute $5,500 to their IRAs and up to $17,500 to their 401(k) plans. Catch up provisions still apply to allow extra contributions if you are over 50.
- Alternative Minimum Tax – This one scared me the most. A large number of my clients would have been subject to the tax for 2012 without the permanent patch passed by Congress. For 2013, AMT exemption amounts were set at $78,750 for married filing joint and $50,600 for head of household filers. Finally, these amounts were permanently indexed for inflation.
There are of course many more changes. Check with your tax adviser to see which of them affect you directly. You may need to adjust your W-4 form. Remember, the ultimate goal is to have your payments (withholding) match your liability (calculated on your tax return) so that your refund or amount owed is as close to zero as possible. You can always use the free calculators at PaycheckCity to see what your check will look like under the new tax laws or under different withholding scenarios.
Q. What is Bring Your Own Device (BYOD) and why is it so controversial?
A. Remember the days when you started a new job and you were directed to a cubicle that contained a dusty desktop computer with a huge CRT monitor? Gone are those days! Today’s computing environment is so complex and fluid. Many in the workforce utilize smartphones and tablets to access company emails and programs. People can work from home or access company programs without regards to their physical location. How did this get so easy?
When company computing systems were based on client/server technology, much of the software that ran corporate networks was installed locally on high-powered servers. A Virtual Private Network was required to allow access to anyone who needed to get in to perform work when away from the office. As cloud-based systems became more popular, important data was accessible from anywhere without fancy programming or access programs. That means travelers could access CRM systems, accounting and finance data, download files and collaborate with co-workers by accessing the company portal on the internet. Laptops became all the rage.
Then…along came Apple with the iPad. A very portable laptop suddenly seemed like a boat anchor in comparison to this table device. Android powered versions soon evolved to be a major force as well. Smartphones, which are really small tablets that make phone calls, could be the only thing a traveling employee needed to stay connected at the office.
BYOD begins when employees start making the decision of which device they will use to accomplish their work. It provides flexibility for the employee to work in a computing environment that they are most comfortable with. That could mean iOS, Android, OSX, Windows, Linux etc. Employees get to choose the device and are given a stipend to purchase that device with some guidance on the types of devices that will work best. Employees then own the computer and can do whatever they wish with that device.
IT departments hate this concept however. No longer can they standardize on a particular type of equipment or operating system. That means support is very difficult. What if a user has trouble accessing files or they computer starts to malfunction. What if a user’s machine is infected with a virus at home and then they bring that machine to work and infect everyone around them? What if the corporate computing environment does not support the operating system the employee chose? This is a frequent issue tablet computers that run operating systems that are not designed to be as robust due to portability and storage constraints.
So, what does a company do? If you develop strict policies about the use of external devices on the internal network and educate your employees on those policies, you are more apt to miss the experience of the spreading virus. By providing some simple, minimum requirements to your employees on what does and does not work on your network, you can alleviate compatibility issues as well. As for the multitude of unique devices, only flexibility and patience from your IT folks will alleviate this concern.
Q. I work for a business located in NM, but have worked from home for more than 4 years, until recently my home office was in NM. I just moved to CO. I am still employed by the NM business and still work from home in CO now. My employer is saying they can’t withhold CO taxes because they are not registered (incorporated) to do business in CO so they say I will need to become an independent contractor in order to stay “employed”. Can they just withhold NM taxes still and can I file in NM and CO since I am doing work for a NM business?
A. Working from home is an awesome choice if you have the ability to do it and can stay motivated. Working from home in a different state than your employer is physically located becomes a challenge for most smaller employers. You brought up several issues that can create a potential problem.
The main issue in your scenario is nexus. By definition this is simply business presence. When you and your employer were both in New Mexico, the situation was easy. You simply withheld New Mexico tax because the business is physically located there as well. The situation becomes cloudier when an employee is no longer in the same state as the employer. If you are doing the same work in Colorado as you were in New Mexico, your employer cannot simply call you an independent contractor to avoid withholding. Contractors are self-employed individuals who maintain all the risk of the business endeavor. If you offered this service to many different companies, you may be able to fall into that category. Read my article here on the independent contractor classification.
When you moved to Colorado and continued working for your present employer, you technically created nexus in Colorado for that company. Because you are no longer performing services in New Mexico, your employer needs to stop withholding New Mexico tax and paying New Mexico unemployment tax on you. Both of these taxes should now shift to Colorado if your services are being performed there. That means they have a business presence in Colorado because you are physically located there. This also means that company could be liable to collect sales tax, pay property, income and unemployment tax and withhold Colorado tax from your paycheck.
When companies make the decision to relocate an employee into another state, there should be a big discussion if the company does not already have a business presence there because of the reasons mentioned earlier. If it makes business sense for an employer to begin operating in a new state, companies may do it anyway and file for the necessary tax accounts. By you moving to another state, you have created this problem for your company. If you are truly an employee, you may not be re-classified simply to avoid the new tax obligations. However, if your employer wants to continue utilizing your services, you have just caused him/her a lot more work. If it is too much hassle, you may have placed your job in jeopardy.
I discussed a similar situation to this between two states with a reciprocal agreement a few years back. You can read that post here.
Q. I have a question regarding payroll tax withholding, and personal income tax reporting. When an employee is a resident of state X, but works in state A, B anc C, as a travelling consultant. And where B has reciprocity agreement with state X. What are the employees income tax reporting responsibility. Does the employee have to file income tax in all 4 states, assuming the income threshold is satisfied? Can the employee,claim tax credits for taxes witheld from other states?What are the employer’s state payroll tax responsibility, does the company have to withold payroll taxes based on where the employee is working (A, B, and C)?
A. This is a great question. At my day job at Symmetry Software, we try to come up with scenarios like you described that are as difficult as possible to test the accuracy of our withholding calculations. We have no idea if they really exist outside the theoretical realm. If this situation is true, we’ll have to add this to the list that we test with for new versions.
To answer your question, yes, no and maybe for both scenarios. Let’s tackle these situations one at a time. If an employee is working in a state that has a reciprocal agreement with the state of the employee’s residence, the employer does not withhold, and the employee has no filing obligation in that state. A good example of this is Indiana and Ohio. The requirement is that the employee file a certificate of Non-Residence with the employer in the state where they do not live. Withholding in this situation would only be in the resident state of the employee. Certain situations cloud this answer but those go beyond the scope of this blog. You can find copies of these non-resident withholding certificates on StateW4.
As for the other states without reciprocity with your home state, your employer should withhold in the state where you perform the work. If you have taxes withheld for work performed in a state, you need to file a tax return in that state for those wages. Depending on the amount of earnings, you may get a refund for all of that withholding. Your home state obviously requires a tax return and may give you credit for taxes paid to the other states on those wages. Much depends on the states involved. Tax returns with the level of complexity you described are very involved and may require that you work with a professional tax preparer to make sure you aren’t paying too much in taxes.
Q. The Indiana State Form WH-4 doesn’t have a place for the employee to indicate Married or Single. However, our payroll system (ADP Enterprise) requires us to complete this with entering state tax information. The employee has indicated Married on the Federal W4 form so should we also use Married for the state?
A. State W-4 forms are so much fun. Some of them follow the format of the federal form W-4. Others have a completely unique format. The main thing to keep in mind when dealing with State W-4 forms is that they are asking only for information that is necessary to calculate payroll withholding correctly for that state. For the state of Indiana, the WH-4 form does not ask for marital status because there is only one withholding formula in that state. Marital status is irrelevant to the calculation for state purposes. While I am not an ADP expert by any means, it is very likely that you could pick either filing status in the program and get the same withholding result. Is there some way you can run a sample calculation for that employee without actually running payroll to see the difference?
On a broader note, some employers use the filing status found on W-4 forms to keep track of the marital status of their employees. While this has potentially questionable legality, the employee is under no obligation to actually select their filing status on this withholding form. If your married employee has a lot of non-wage income, he/she may need to have a large amount of additional withholding. Choosing the single filing status will cause his withholding calculation to come from the “Single” status withholding formula. This method and the use of the “Additional Withholding” line on federal and State W-4 are ways for your employees to plan their tax payments throughout the year.
Finally, with another successful tax season behind me, I get a little bit of free time back. Thanks to those readers who have submitted questions over the last couple of months. You’ll see discussions of those questions start appearing over the next few weeks.
Q1. If I was paid a cash bonus in 2010 and 2011, can my employer report both years of bonus on my 2011 w-2?
A. The answer to your question is really quite simple. When did you receive the money? Payroll taxes are calculated like cash accounting. When funds are “constructively received,” they become taxable. If your employer gave you a check in 2011 and you didn’t deposit it until 2012, those funds are still taxable in 2011. If your employer pays you a bonus in 2010, it is to be reported and taxed in 2010. The only way a 2010 bonus could be added into a 2011 W-2 would be if the bonus was announced, but not actually paid until the following year.
Q2. What if I never get my W-2 from my employer for last year’s work?
A2. You need a W-2 to get your tax return right. No tax preparer should be trying to make a return based on a pay stub. The IRS has issued Tax Tip 2012-20 to address this issue.
- Contact your employer to see if the W-2 was even mailed yet. Employers are required to have these in the mail before February 1st. Perhaps they have an old address for you? Once you contact the employer, give them some time to get the W-2 into the mail system.
- Contact the IRS. If you do not receive your W-2 by Feb. 14, contact the IRS for assistance at 800-829-1040. When you call, you will be asked for your name, address, Social Security number, phone number. You will be verbally creating a new W-2. The IRS will ask for the employer’s name, address and phone number, dates of employment and an estimate of wages and withholding. You may be required to get this from your final pay stub if you still have it. This will probably initiate some inquiries from the IRS to your employer as to the reason they are ignoring their requirements.
- File your return using Form 4852, which is the substitute W-2. This may delay any refunds you are entitled to because of the verification process.
- If your W-2 unexpectedly shows up after filing your return, examine it to see if it matches the substitute values you reported. If they are different, you will need to file an amended tax return.
W-2s are a serious business with the IRS, make sure, as an employer, you take care to get them right. Employees count on them to process a correct tax return and determine their actual legal tax liability.
Q. I am a 1 person (no employees) sole proprietor. What would be the best way for me to calculate taxes and make quarterly tax payments (both Fed. and State)?
A. This is one of the most common questions I get from self-employed individuals who are just starting out. Basically, estimated payments in a self-employed environment is the equivalent to withholding from an employee. The object is to not pay too much and of course, not pay too little. Let’s look at a few scenarios to answer your question completely:
- new business with no history
- business with history
- going out of business
You must make estimated payments if you think your tax liability will be more than $1,000 in a calendar year. The tricky part however is guessing how much income, and therefore tax liability, you will have. In scenario 3, if your business is losing money and you anticipate having no profit, you may not actually need to make payments. In scenario 1, if you previously had W-2 wages, you may wish to make payments equivalent to the previous year’s liability. This number is found on your tax return. In scenario 2, you need to pay at least 90% of the estimated liability due for the current year, or 100% of the tax liability from the previous year as estimated payments.
There are penalties for underpaying your liability as well. The best way to get this right is to meet with a CPA or well-qualified tax preparer and go over your estimates for the current year. CPAs can also help with other parts of your business plan as well to set you up for the best chance of success.
Also keep in mind that the IRS no longer accepts paper coupons for estimated payments. You need to remit through the Electronic Federal Tax Payment System (EFTPS).
The rules for making estimated payments to your state depends on the state. Check with the Department of Revenue in your states. Your CPA/tax preparer can help with this as well.
Q. Because of the economic situation, I now have to work two jobs because my main job cut my hours. I have Medicare and Social Security tax coming out of both checks. Isn’t there a way to stop this tax deduction from one of them?
A. Unfortunately…no. Medicare withholding is required on all your wages. It is calculated at 1.45% of taxable gross. Your employer matches this amount as well. There is no limit on Medicare withholding tax. Therefore, it should be withheld from wages at all jobs, even if you are retired. Those who are self-employed must make estimated tax payments to cover this obligation as well. Self-employed individuals should get with a tax preparer or adviser to ensure they are making enough estimated tax payments and to determine what that liability might look like in their situation.
Social Security on the other hand has some different rules. Like Medicare, Social Security withholding is required to be withheld from every job even if you are retired. However, there are two quirks to this tax. For 2011, the most income that can be taxed for Social Security purposes is $106,800. This number changes almost every year. In 2011, as the result of a tax cut, employees pay only 4.2% of their taxable wages towards the Social Security liability. Employers must pay 6.2%. That means in 2011, 10.4% of all taxable wages go towards Social Security. Employees, however, pay at most $4485.60 per year.
But wait! There is a catch. If you have multiple jobs during the year, and your withholding is more than $4485.60 for Social Security purposes, you can get a refund of the extra Social Security tax you paid during 2011 on your tax return when you file in 2012. When would this happen? As mentioned, you could have multiple jobs that push you over the limit. You could also change jobs after meeting the limit. The employer at your second job would also start withholding as if there was none taken during the year.
The seemingly unfair part about the Social Security tax is the employee gets a refund for overwithheld Social Security tax. The employer does not. The employer must pay 6.2% of all wages up to the limit on each employee regardless if they met the withholding limit somewhere else.
Remember, if you want to see how changes in your W-4 status or benefits affect your paycheck, PaycheckCity offers free Paycheck Calculators that are simple to use. They provide quick, accurate answers to payroll questions. Check them out.