AUGUST 12TH, 2011
By CPA SAM
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.
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.
JULY 14TH, 2010
By CPA SAM
Q. I have a full-time and a part-time job with different companies. My employers are both taking out Social Security tax. Is this correct?
A. Good Question! There are several common misconceptions about Social Security withholding from a paycheck. This is probably one of the biggest. The answer is….a resounding YES!!! Each employer of record is required to withholding 6.2% of your taxable wage for Social Security purposes up to the annual limit. That is $106,800 for 2010. Even if you have 5 jobs at once, each employer is required to withhold this amount. Even if you are retired and collecting Social Security and have a job somewhere just for fun, the employer is still required to withhold Social Security tax.
You may ask, “What happens if the income from all my jobs add up to more than that limit? Can I get all my employers to stop withholding Social Security?” The answer is no. You do have the ability to get a refund on your tax return if the total Social Security tax paid during the year was more than the maximum required. That is $6621.60 for 2010. You’ll see this on line 69 of the 1040 form. The biggest drawback to this is that the multiple employers are not permitted to recover the overpaid Social Security. They will match 6.2% up to the limit for everyone regardless whether that employee will be refunded overpaid tax later in the year.
JUNE 25TH, 2010
By CPA SAM
Q. My question is: I work for a school. Sometimes parents gift money or gift cards at holiday time or for an appreciation event. Are these taxable. How about gift cards from a school committee (holiday drawing etc.) Even a child will offer a dollar in a card. If they are I am really upset. These are given from the heart, and not meant to be a burden. But I must know, as I’ve gotten different answers from different sources. thanks so much!
A. There are two things that come to mind in answering your question. First, money given to a teacher from a child would generally not be considered taxable. This would fall under the gift provisions of the IRS code. Most children will give a $10 or $20 gift or gift card. Unless the parent of the child is an employer of the teacher as well, there is probably no tax liability created by this gift. If the child gives a large, extravagant gift to the teacher, it would be best to consult with a tax advisor regarding the potential liability issues in this case.
Let’s say the same class of students decided to be very efficient. Instead of donating 25 or 30 different gifts cards or cash items to a teacher, they instead collected money and donated to the school. The school was instructed to pay this to the teacher as a lump sum. In this scenario, the gift idea is thrown out the window. Now the money transfers as part of an employee/employer relationship and must be considered income because the school is the employer. The employer will either need to withhold on the payment or “gross up” the payment and pay the taxes on behalf of the employee. This is the same as providing gift cards to teachers in lieu of cash. I wrote about that topic in another blog article here.
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Samuel Kerch, CPA
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.
JUNE 18TH, 2010
By CPA SAM
A good question today for discussion:
“My husband is self-employed with no other employees. I generate his paychecks. This year, he has been doing a few jobs outside of our county; therefore, the local tax amounts vary from county to county. The payroll program I use is a very basic program so there are not a lot of different options to use. (This is a new program I started using this year.) To keep local taxes correct, I have to issue him a check for each job completed outside of our county. When I generated a paycheck to him for a small job in a different county, ($300 paycheck), I noticed there were no federal withholding taxes. I didn’t know this before, but it appears tax calculations are different based on daily, weekly, monthly, etc. pay periods. I played around with this in the program and noticed the variance each time I changed this option. With the flexibility of him being self-employed, I generate a paycheck on an as-needed basis to cover our personal needs. It is never a fixed amount and the frequency varies. Taking the issue of local tax variances out of the picture, I am now worried if the federal and state taxes are being calculated correctly because of the varied amounts and time frames of the paychecks. I don’t know whether to choose the option of him getting paid daily, weekly, bi-monthly or monthly. The federal and state withholdings changes in each of these categories. I feel that it is incorrect to have no federal withholding if I generate a paycheck to him for only $300.00. Can you help?”
A. Your question contains one of the most common misconceptions of those who are self-employed. You did not state if you were an LLC, S corp or a C corp. I assume by your use of the words “self-employed” that you are simply a Schedule C filer with the IRS. Most of the included fact pattern is actually irrelevant to answer your question. Simply put, schedule C sole proprietors do not receive paychecks. The profit earned from the business each year is the “paycheck” for your husband for tax purposes. You will pay income taxes based on the profit of the business, less any allowed personal deductions on the form 1040. Self-employed individuals make estimated payments to the IRS based on their estimated tax liability each year. These estimated payments are made on a quarterly basis. Your CPA or tax adviser should be able to look at your situation and determine what estimated payments are required.
While you do not have employees now, it is important to note that when you do have employees, you should match your pay frequency with the way you pay. If you are having employees work in a different city each day, and your payroll system cannot accommodate multiple city tax rates, you would pay based upon a daily frequency for federal, state and local purposes. If you pay daily and use any other table, the amount of wages will be too low to trigger withholding for federal and state in most cases. If you think about it, $300 per day is about $81,000 when annualized (assuming a 270 day work year). If you annualized $300 using a weekly table, it only adds up to $15,600 of gross wages. There must be a low-cost system available that could handle such a problem when you get to the point of actually having employees and needing it.
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Samuel Kerch, CPA
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.
JANUARY 29TH, 2010
By CPA SAM
Q. I just started as a temp through an agency. I work full-time and just received my first paycheck. I want to ask about the OASDI and the NY 2010-NYCNY withholdings. I was taxed heavily for the OASDI. What is the NYCNY withholding? Most importantly, I wanted to ask you is there any way to check whether I had overpaid for taxes in a paycheck?
A. The items that came out of your check look completely appropriate. The most common questions from employees to payroll departments about paychecks come from the cryptic descriptions of deductions shown on the paystub. In your case, OASDI is the abbreviation for “Old age, survivors, and disability insurance.” This is the official name for Social Security. It is calculated as 6.2% of taxable wages up to a maximum of $106,800. This means, you can pay up to $6,621.60 this year towards this tax. Your employer(s) will also match 6.2% of your taxable wages. For lower income individuals, this tax can be the highest amount taken from the paycheck. There is another tax that is closely associated with this called Medicare. It is 1.45% of all taxable wages.
NYCNY looks like New York City Tax. All residents of New York City get to pay an extra tax. Rates on this tax range from 1.9 to 4% depending on your level of income.
As for your last question, there are only three ways to determine the correct amount of withholding. First, you download withholding formulas from each jurisdiction in which you owe tax and run hand calculations to see what is correct. Since that is time consuming and too difficult for most of us, I recommend the second method. PaycheckCity.com has a free Salary Calculator that calculates all your taxes for you using the formulas from each jurisdiction. You simply need to know what settings are on the W-4 Form you gave to the payroll department.
Most importantly, if you have specific questions about your paycheck, your payroll department should be able to assist you as long as you are not asking for tax advice.
SEPTEMBER 23RD, 2009
By CPA SAM
Q. I just got a bonus from my company and noticed the taxes were way higher than my normal tax bracket. What is going on? I live in California.
A. I have good news and bad news for you. The bad news is, the calculation is probably correct. You did not supply any numbers with your question, but hopefully, the following example will help to clear some of this up.
Congratulations on your bonus. Many folks these days would love to be in your situation instead of standing in the unemployment line.
Your payroll department has two ways to calculate withholding on bonuses or supplemental payments as we say in the payroll industry. They can either calculate using a flat percentage or they can add the bonus to your previous check, calculate taxes on the total and subtract out the values from the last check. The latter method is called the aggregate method. What is left after subtracting is nothing more than the bonus and associated taxes. Because it is much more involved, most employers will choose not to use the aggregate method. Unfortunately, this is the more accurate method since it aligns with your regular pay to get closer to your actual tax liability. It is also a better method for higher income individuals whose marginal rate may be higher than the flat rate.
If your bonus is $500, most payroll departments will simply use the flat percentage method to get your withholding. If you have received less than $1million of bonuses for the year, the federal withholding percentage will be 25%. That means right off the top, you pay $125 in taxes. Social Security and Medicare remove another 7.65% or $38.25. In California, there are two percentages possible: 9.3% and 6%. Bonuses use the 9.3% rate which takes another $23.25. If you have not reached the limit on California SDI (State Disability Insurance) withholding for the year, this will be calculated at 1.1% for 2009 for another $5.50. This is a total withholding burden of 43.05%. You will take home $284.75 unless your employer grosses up the bonus and pays the taxes for you. Tax withholding on your regular wages may be lower for federal and state purposes which is why this seems so high.
The good news is that if this is actually too much withholding, you will get some of it back when you file your tax returns for federal and state purposes. But until then, check with your tax planner or CPA, you may be able to adjust your W-4 to have less withholding on your regular wages and reduce the size of your eventual refund. If you always end up owing extra when you file your tax return, this is a great time to catch up.
JUNE 3RD, 2009
By CPA SAM
Q. First, please explain the notes on line G of the W4 that talks about what to put on the form for children using different income levels. Secondly, I claimed 8 allowances last year and there were no taxes taken out of my check. This year when I complete the form it shows 9 or 10 (bought a house). How does that work, if 8 had already put me at no taxes?
A. See form W-4 before reading this explanation. Most of the credits enacted in the last few years are phased out for higher income earners. Line G of the Form W-4 deals with child tax credits and these credits are no different. The credit begins to phase out when Adjusted Gross Income (AGI) reaches the following levels:
- Married Filing Joint: $110,000
- Single and Head of Household Filers: $75,000
- Married Filing Separately: $55,000
To accommodate the reduction in the credit, you need to reduce the number of allowances you claim towards that credit. This makes your withholding increase but is correct because you will receive less credit and owe more in tax. Therefore your withholding needs to increase anyway. Those under the income threshold will still be able to claim extra allowances since they receive the full credit.
Regarding your second question, the number of allowances you claim should not be based on the number it takes to get your withholding to zero for federal purposes. In your case, you bought a house. If the mortgage qualifies, that means you now get to claim property taxes and mortgage interest on the itemized deduction form of the 1040. Normally, this reduces taxable income and thus you get to claim more allowances. If you think about it, now you have extra deductions available to absorb any salary increases that may happen in the future. Talk you to tax preparer or CPA if you have specific questions regarding your situation.
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.
FEBRUARY 25TH, 2009
By CPA SAM
Q. I am thinking of hiring someone and would like to know if there is any benefit to me if I pay the employee’s taxes. For example is my payment of the employees local and/or federal taxes am I allowed to deduct any of these on my own tax returns. I would also like to know how to accomplish this payment of taxes for the employee and how it affects their net pay.
A. Your question sends shivers down the spine of auditors and CPAs everywhere. It is not the decision of the employer whether or not they can decide to withhold taxes calling the person an employee. If you have an employer/employee relationship, you must withhold taxes following the guidelines in Publication 15. If you are a sole proprietor, all expenses you incur in the hiring of employees are deductible on your schedule C along with your other business expenses. Consider the following example:
employee is paid weekly $10 per hour and works 30 hours per week. Employee is single with 1 withholding allowance.
Gross pay = $300.00
Social Sec = $ 18.60
Medicare = $ 4.35
Fed tax = $ 20.00 (per publication 15)
Net Pay = $257.05
You as the employer are required to match the Social Security and Medicare tax. You are also required to pay Federal and state unemployment tax. All of this is explained in Publication 15. I would suggest you retain the services of a payroll company or a CPA to help you get the payroll process under control for awhile. Once you learn all the ins and outs of reporting and paying the liabilities, you may wish to bring the process back in house. Payroll is simply too complicated and too expensive if you don’t know what you are doing. The penalties and interest charged by the IRS for even the smallest mistake can add up quickly.
