JANUARY 21ST, 2011
By CPA SAM
By now, most employees in the United States have received their first paycheck of 2011. About the same time the first check is received, payroll departments across the country were deluged with questions about the changes on employee checks. This edition of the blog should help to clear up some of the confusion regarding a couple of these changes.
The Making Work Pay Credit is gone! The implementation of this tax cut was sloppy anyway. Single folks received up to $400 of tax cuts per year factored into their withholding. Married folks received twice this amount or up to $800. There was an upper limit to allowable income. The credit itself was described in detail in a blog post almost two years ago. In the tax cut bill that Congress finally passed in mid December, the Making Work Pay credit was happily missing. That means however, that employees of nearly every income level will see their Federal Income Tax withholding increase for 2011. It’s quite a shock in the amount of increase. However, there are no more funny games to play when preparing your tax return or figuring out your W-4 values. In summary, most employees will see their Federal Income Tax Withholding line increase.
Part two of the changes to employee checks this year has to do with the Social Security component of FICA withholding. Normally, Social Security withholding is 6.2% of taxable wages up to a base. That base is $106,800 per year as it has been for 3 years now. Employers must match the 6.2% value meaning total Social Security taxes are actually 12.4% of taxable wages up to the base or up to $13243.20 per year per employee. Self employed individuals paid the entire 12.4%. This is a lot of money! The above referenced tax cut bill cut the employee portion of Social Security by 2 percentage points. Now the total is 4.2% up to the base. Employers still are required to pay their portion at 6.2%. Self-employed individuals now pay only 10.4% as well.
PaycheckCity, a site run by Symmetry Software (my day job employer), had implemented these changes and placed them on the site in late December. To my surprise, the help desk team at PaycheckCity reported that CPAs and payroll staff members were writing with questions on why the Social Security rate was different. Some even adamantly (and ignorantly) proclaimed that we were wrong and they would never use the site again. The details of the tax plan have been all over the media in the last month. Social media has trumpeted the changes as well through the many different outlets. How anyone can still be unaware of this change just baffles me. Hopefully, I have provided some knowledge to those who hadn’t heard yet, while clearing up the confusion for those who had and were surprised at the change on their check.
FEBRUARY 5TH, 2010
By CPA SAM
Q. I utilize the withholding calculator on the IRS website to ensure my W-4 amounts are correct. This has gotten me very close to the amounts figured on my 1040 for the past 5-6 years since I’d begun utilizing the calculator. I do a final check with the calculator after the last pay date in the year (in this case, on 12/28) to get a rough idea of what to expect come tax time. On my final 12/28 check, as on the bi-monthly checks, it showed that I would be getting a refund of just under $2K. Since the withholding calculator accounts for mortgage interest but not real estate taxes, I assumed the refund would be even greater. However, when I fired up my 2009 copy of HR Block’s tax software, I was shocked and horrified to see that it calculated an amount owed of almost $6000! Sure that it must be incorrect, I downloaded Intuit’s Turbo Tax, and that showed I owed even more. I went back to my printout from the 12/28 visit to the IRS withholding calculator utility, and the values entered were within $200 of the actuals. What factors could the withholding calculator not be accounting for that could cause such a vast difference in liabilities? I ran my expected 2010 numbers through so I could fill out my 2010 W-4 correctly, and was presented with an equally low liability and high number of withholding allowances, which I am now concerned are incorrect. My situation is pretty vanilla: Married filing jointly, only one income, one child dependent. Claiming mortgage interest credit, and the associated taxes paid to taxing authorities and nothing else.
A. The answer to your question is truly impossible to solve using a forum like this because I can’t possibly know everything about your financial and tax situation. What I can tell you is the the IRS withholding calculator and the official IRS W-4 form are designed to recommend withholding settings that will slightly overpay your liability if completed properly. Judging by your statement that it has always been relatively close until this year, there must be something affecting either your tax prep software, or your values from the withholding calculator.
There are two possible causes for your dilemma.
1- The Making Work Pay Credit gave an $800 credit to those who utilize the married withholding tables. The problem is that if both spouses work, they would both get the credit on their withholding. Certain individuals are actually not eligible for the credit and the withholding tables don’t account for this either. This could cause huge under withholding problems such as you described.
2- Which leads to the second solution. The Making Work Pay Credit problem was a hot topic of discussion all year in tax preparation and CPA circles. It created a serious problem for two-income families. Had you been utilizing the services of a tax professional over the years, you would have been notified of this potential problem and been able to appropriately adjust withholding for one or both spouses. Turbo Tax and the Block product are designed to simplify the tax preparation process. They cannot use the judgment that a tax preparer can. While they are both great products, everyone has to admit that we have very complex tax laws in this country. There simply is no substitute for the advice and assistance of a professional tax preparer or CPA.
I would recommend making an appointment as soon as possible. $6000 is worth the extra effort to get this right.
MARCH 25TH, 2009
By CPA SAM
Q. My paycheck increased this week for some reason. My payroll department says it is because of the Stimulus package that was just passed. They can’t find any details. What changed?
A. This was supposed to be so easy. Congress passed legislation giving single individuals a $400 credit for the year and married folks $800 per year. Media outlets broadcasted the news of the tax credit. It seemed that everyone was talking about it from the time it was signed until early March. The IRS was to implement this through a reduction in withholding rates. So…new tables were published in Publication 15-T. Employers were required to implement the new tables by April 1. Most payroll service bureaus have already implemented the change. Hopefully most employers not using payroll providers have the new rates and can begin withholding using the reduced rates.
Now, as the credit actually begins hitting paychecks, employees are wondering, “why am I getting more money?” The credit works out to around $13 less per week being withheld for single filers. For married filers, the credit works out to about $26 per week. There is a free calculator available to help your employees understand the effect of the credit on their paycheck. You can find it here. I encourage everyone to play around with the tool to understand these changes. For more information, you can read the IRS press release about it here.
The credit does not mean you will owe more taxes at the end of the year for federal purposes. When completing your 1040 form, you will determine the amount of tax liability, then subtract the credit amount as a payment against that liability just like the child tax credit. In situations where both spouses work, it will be very important to check with your tax advisor regarding this credit. If you both claim married on your Form W-4, you will both be given the credit in your paychecks. This has the potential to greatly under-withhold tax for your situation.
