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.
APRIL 19TH, 2012
By CPA SAM
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.
FEBRUARY 7TH, 2012
By CPA SAM
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.
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.
OCTOBER 20TH, 2010
By CPA SAM
Working in the payroll software industry during the day has certainly opened my eyes to problems created by our federal elected officials. Under normal circumstances, Congress decides on a budget for the next year with significant lead time for the president to sign the legislation and the Treasury department (IRS) to issue tax tables based upon that law. Tax tables, if issued in early November, can be coded, tested and released by software companies well in advance of the next tax year. Once software companies release these tables, payroll and accounting software providers must update their customers with the new calculations after performing tests of their own. This entire process can take up to a month.
Now, mix in this year’s congressional indecision. The federal government’s budget has still not been finalized as of the writing of this post. Many analysts and representatives are saying nothing will happen until the “lame duck” session following the election in November. With no tax law available for writing next year’s tax tables, there can be no software coding and testing at the tax table software level or the payroll software provider level. To add even more complexity to the situation, how is anyone supposed to plan for their tax liability with no rules in place to determine how much liability will exist?
The Treasury Department has three choices:
- Issue new tables assuming all Bush-era tax cuts will be continued
- Issue tables assuming all Bush-era tax cuts expire
- Issue tables similar to this year with small adjustments for inflation
If Treasury and Congress do not follow the same path, any mix of two of these scenarios would cause tax confusion like we have never experienced before. Think about the Treasury Department assuming tax cuts will continue while Congress lets them all expire. Not only would there be two releases of withholding rules (expensive!) within a short amount of time, everyone would experience underwithholding. This would require that everyone re-evaluate their tax position to ensure withholding or estimated payments would be enough to cover liability.
While I normally don’t get political in this blog, this time I’ll make an exception. Please write or contact your Congressman and make a good case for the urgency of a new budget. Delaying will cause withholding problems with all taxpayers and prohibit those who wish to plan from making those plans. Should we withhold on an unpatched AMT, reduced child tax credits, Making Work Pay credit? Please Congress, let’s get this resolved.
SEPTEMBER 3RD, 2010
By CPA SAM
Q. I am a OTR driver and am the only person working for this company. Now he’s shutting down the company. He classified me as self employed. Can I draw unemployment? I do not have a home, but license is North Carolina. Employer was in Nebraska.
A. The arrangement between you and the company providing your work is very important to get right. The key here is, how much financial and behavioral control over your work did the hiring entity have? If he provided your truck and directed all of the shipments you hauled, you may have been an employee. If you have your own truck and were allowed to contract with other companies, you may actually be independent. How have you filed your tax return since working with this individual? Did you use Schedule C, which is typical for self-employed individuals? Were you provided a 1099 or W-2 at the end of previous years?
The biggest problem with mis-classification is when termination, layoff or work stoppage occurs. Employers typically attempt to avoid the employee classification simply to save money on the Social Security/Medicare match, unemployment taxes and workmen’s compensation insurance. If you were actually an employee, then you are due unemployment compensation. If you were not, then you are not eligible to collect unemployment benefits. It makes sense that as a self-employed individual, it is my responsibility to keep myself busy. If I am not finding enough work and lose clients, it is my own responsibility to find more business. No unemployment benefits should be received. In an employee/employer situation, it is the employer’s responsibility to pay into the unemployment system and thus provide benefits for those employees who are terminated.
The state where you were based is likely the state where you will need to attempt to collect unemployment. That state will make the determination if you were truly an employee or not. If it is determined that you were not, you are out of luck. This may take some time to sort out unfortunately. In the meantime, the best thing you can do is find another source or income instead of waiting around for an answer. You can read a more in depth article a few years back regarding this topic as well.
The IRS also has a very good publication regarding worker classification. You can read it 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.
AUGUST 4TH, 2010
By CPA SAM
Q. I have a unique variation of your “Social Security Tax on Everything” post… My wife’s small company decided to change their paycheck provider in July. The provider “reset” all employees yearly total earnings to zero and are therefore collecting the Social security tax from scratch. The provider claims they have to do this by IRS law. My wife had already paid the maximum of $6621.60. Will we be able to get the overpayment for the rest of the year back on our taxes? The instructions for line 69 of 1040, and form 843, seem to indicate that if your employer overwitholds then you are ineligible for a refund. She has not changed employers, just paycheck providers.
A. This is a very good question. Unfortunately, there is not enough information to answer your question. It sounds like this employer may have switched to a PEO also known as a Professional Employer Organization. Sometimes these are referred to as Employee Leasing Companies. When an employer joins a PEO, the employer of record changes from the employee perspective and all Social Security and unemployment taxes start over for each employee. PEOs can be a big cost savings for an employer by allowing a bunch of smaller employers to pool together for health insurance purposes to become one big client. In your case, it would restart SS withholding however because technically, there is a different employer. If this is not the case, I have no idea why SS would have started over. Simply switching payroll providers would not cause this problem because the employer would be the same. The employer would also feed in all Year-To-Date information from the old payroll provider to keep this kind of problem from surfacing.
Your second comment however is incorrect. You can still obtain a refund of excess Social Security withholding from a single employer. However, you must first ask the employer to refund the tax. This quote is taken directly from the instructions from IRS Form 843 which is needed to request this kind of repayment, “A refund of excess social security or railroad retirement (RRTA) tax withheld by any one employer, but only if the employer will not adjust the overcollection.” Refunds are available if your employer simply will not work with you.
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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.
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.
