Payroll & Estimated TaxChapter 7 pp. 205-234

2018 National IncomeTax Workbook™

Chapter Topicspp. 206 - 234

Payroll:▪ Withholding, Tax deposits, Payroll reporting▪ Penalties▪ Federal Unemployment Taxes▪ Paid Time Off▪ Business Expense Reimbursements▪ Fringe Benefits▪ Independent Contractors

Estimated Taxes

Income Tax Withholding pp. 206 - 207

Withholding Calculationp. 209

If using prior year W-4 data:▪ Keep same number of withholding allowances▪ Keep same additional withholding▪ Assume lines 5, 6, 7, and 8 are zero

New W-4: Basic withholding (Pub 15/15A)▪ 2 allowances MFS or single▪ 3 allowances for MFJ or H/H

Adjusting Withholding pp. 209 - 210

Adjust Withholding if entries on lines 5 through 9:1. Divide amounts on lines 5, 6, 7, and 8 by the total

number of pay periods in the year. 2. Add the results from step 1 to the employee’s wages

per pay period. 3. Subtract the result from step 1 for line 6 from the

result from step 2. 4. Figure the income tax withholding using the result

from step 3 as wages, allowances for the filing status on line 3

Adjusting Withholding, cont’d pp. 209 - 210

5. Reduce the income tax withholding result from step 4 by the income tax credits per pay period figured in step 1 for line 7 (Not below zero).

6. Separately figure the income tax withholding on the amount, if any, from step 1 for line 8.

7. Subtract the income tax withholding result from step 6 from the result in step 5, to figure the amount of income tax withholding per pay period.

8. Add the amount, if any, from line 9, to the income tax withholding per pay period figured in step 7.

Social Security & Medicare Taxpp. 210 - 211

Social Security Tax – 12.4%▪ 6.2% by employer and 6.2% by employee▪ 2018 maximum wage limit: $128,400

Medicare Tax – 2.9%▪ 1.45% by employer and 1.45% employee ▪ no wage base limit

Additional Medicare Taxp. 211

Imposed on employees if wages greater than:▪ $250,000 MFJ▪ $200,000 Single or HOH▪ $125,000 MFS

Tax is .9% on wages > $200,000

No employer share for additional Medicare tax

Successor Employerp. 211

Predecessor wages treated as paid by successor if:

1. Acquired substantially all property used in trade or business or used in separate unit of predecessor

2. Employee employed by the predecessor prior to and by successor after

3. Wages were paid during the calendar year of acquisition and prior to acquisition

Deposit Schedule p. 212

Current or prior quarter liability < $2,500, deposit quarterly with Form 941

Accumulates $100,000, next business day Use lookback period – 12 mos ending June 30

▪ Aggregate tax ≤ $50,000, deposit Monthly By 15th day of following month

▪ Aggregate tax > $50,000 deposit Semiweekly

Payroll Reportingpp. 213 - 214

Form 941: Filed quarterly:

Form 944: Employment taxes ≤ $1,000 and receives written IRS notice to file Form W-2: ▪ To Social Security & Employee by 1/31

Failure to File Correct W-2 p. 214

Unfiled, untimely, incomplete, incorrect Amount based on when correct filed Not applicable if: Reasonable cause & not willful neglect Error/omission inconsequential Safe harbor for de minimis error applies No single amount off > $100 and No single amount withheld off > $25

Failure to Furnish Correct W-2 p. 214

Unfiled, untimely, incomplete, incorrect

Amount based on when correct furnished

N/A if error/omission inconsequential

Required Deposit Penalties p. 214

2% - if 1- 5 days late

5% - if 6 - 15 days late

10% - if : ▪ ≥ 16 days late & < 10 days from 1st notice▪ Not deposited - paid directly to IRS/with return

15% - if unpaid > 10 days after earlier of:▪ 1st notice, or ▪ Date TP rec’d notice & demand for payment

Trust Fund Recovery Penaltyp. 215

Responsible person personally liable for penalty if:▪ They are responsible for collecting/paying

withholding amounts, and▪ They willfully fail to collect/pay the taxes

Responsible person: duty to perform & power to direct collection, accounting, paying the taxes

Willful: Was/should have been aware of unpaid taxes & intentionally disregarded/was indifferent

Federal Unemployment Taxes p. 215

Employer pays on wages to employees if:

▪ Employer paid wages ≥ $1,500 in any QTR of 2017 or 2018,

OR▪ Employer had ≥ 1 employee part of a day in any 20

or more weeks in 2017 or in 2018

6% on first $7,000 paid to each employee

Credit up to 5.4% for timely, fully pd state FUTA

FUTA Deposits p. 216

If liability < $500 for quarter, no deposit required▪ Carry forward to next quarter

If liability ≥ $500, EFT deposit by last day of 1st month following quarter

Generally Form 940 due January 31▪ If all FUTA deposited timely - due Feb 10

Paid Time Off (PTO) – Sick Pay p. 216

Sickness, disability, personal injury Can be paid by employer or 3rd party Does NOT include pay for:

▪ Disability retirement, workers’ comp, public employees work-related injury, medical expenses & unrelated to work absence

Generally subject to withholding, FICA, FUTA▪ Not taxable to extent employee paid/taxed on prem.▪ N/A if paid to estate in year after death

PTO – Sick Pay pp. 216 - 217

If both employee and employer contributed▪ Taxable portion = (Total sick pay) x (% of cost

employer paid in 3 prior years)

No SS, Medicare, FUTA if paid > 6 mos after last month in which employee worked

Reporting requirements▪ Same as for regular wages – Box 1▪ W-2 required even if all nontaxable –

nontaxable sick pay in Box 12, code J

Paid Time Off (PTO) –Vacation Pay pp. 217 - 218

Treat as regular wages for withholding/reporting

If paid in addition to regular wages = supplemental▪ ≤ $1M: withholding based on aggregate or flat rate▪ Aggregate: Reg + supp = single wage paymt▪ Flat rate: 22% on supplemental pd after 12-31-17▪ Subject to SS, Medicare, FUTA▪ If > $1M/year, excess subject to 37% flat rate

Accumulated PTO paymt = supplemental wage

Business Expense Reimbursements p. 218

General Rules:▪ Nonaccountable plan reimbursements are taxable▪ Accountable plan reimbursements are not taxable

Accountable Plan1. Business connection2. Substantiation3. Returns amounts in excess of expenses If not returned, excess is taxed

Nonaccountable Planspp. 218 - 219

Considered a nonaccountable plan if: ▪ Expense has no business connection▪ No substantiation required▪ Excess amounts are not returned

All treated as under nonaccountable

Employee cannot make plan accountable by substantiating and returning excess

Fringe Benefitspp. 219 - 220

Taxable unless specifically excluded

Examples of includable items:▪ Vehicle provided for personal use ▪ Flight on employer-provided aircraft ▪ Free/discounted commercial flights ▪ Vacations ▪ Discounts on property or services ▪ Country Club or Social Club membership ▪ Ticket’s to events

Excluded Fringe Benefitsp. 220

Examples of excludable items:

▪ Qualified tuition reductions - IRC § 117 (d)

▪ Meals/lodging - IRC § 119

▪ Dependent care assistance - IRC § 129

▪ No additional cost, discounts, working condition fringe, & de minimis - IRC § 132

Fringe Benefits Reporting & Withholding p. 220

Determine FMV of fringe by Jan 31 Can treat noncash as paid on any

frequency but not less than annually Exception: Investment and real property

treated as paid on actual transfer date Period can differ among EEs Must be treated as paid no later than Dec 31

Withhold on aggregate or flat rate

Noncash Wages for Farm Labor p. 221

Not subject to:▪ Federal income tax withholding▪ Social Security ▪ Medicare taxes

Exception: If substance of payment is cash payment, treated as cash wages▪ Subject to all wage taxes

Independent Contractor Withholding p. 221

No obligation to withhold on payments unless subject to backup withholding:

1. Fails to furnish TIN2. IRS notifies payer that TIN incorrect3. IRS notifies payer to withhold on interest or

dividends due to prior nonreporting4. Fails to certify not subject to backup withholding

24% rate

Backup Withholding & Reporting pp. 221 - 222

Generally no backup withholding on F1099 if:

▪ Paid < $600 ▪ No 1099 to payee previous year and▪ No prior year payments subject to B/U

If backup withholding required:

▪ File F945 (annual) by January 31▪ < $2,500 pay with return or EFT

Estimated Tax Topics pp. 223 – 234

When estimated payments required Calculating estimated payments When to make estimated payments How payments are applied How to pay estimated payments Estimated tax penalties Annualized income installment method

Estimated Tax p. 223

Estimated tax may be needed if withholding is less

than your tax liability

Estimated Payments Required p. 223

Estimated payments required if:

1. TP owes ≥ $1,000 after withholding & refundable credits

2. Withholding & refundable credits to be less than the smaller of:

a. 90% of tax on current year return, ORb. 100% of tax on prior-year return

(110% if AGI > $150,000 ($75,000 MFS)

Special Rules for Farmers & Fisherman p. 223

If ≥ ⅔ gross income from farming/fishing:

• Estimated tax required if withholding & refundable credits is < smaller of:• 66 ⅔ % of tax on current year, OR• 100% prior year tax

• Make one estimated payment by Jan 15

• File & pay full amount by Mar 1

Estimated Tax Not Required p. 223

No estimated payments required if:

▪ No tax liability for the prior year, AND

▪ US citizen/resident alien entire year, AND

▪ Prior tax year covered a 12-month period

Estimated Tax Flowchartp. 224

When to Make Estimated Payments p. 227

2019 Estimated Tax Payment Due Dates

For the Period Due DateJan 1 - March 31 April 15, 2019April 1 – May 31 June 17, 2019June 1 – Aug 31 Sept 16, 2019Sept 1 – Dec 31 Jan 15, 2020

If files by Jan 31 and pays remaining tax owed, no estimated payment required by January 15.

How Payments are Applied p. 227

If TP fails to make one payment, subsequent payment is applied

to earlier liability

How Payments are Applied p. 227

Withholding & Excess Social Security▪ Applied evenly among installments▪ To apply withholding against specific

income, must file Form 2210

Joint payments of estimated tax▪ Allocate to MFS returns as spouses agree▪ No agreement, IRS will allocate based on

spouses’ separate tax liabilities

How to Pay Estimated Tax p. 228

Credit an overpayment

Pay online – account transfer, debit/credit card, online payment agreement

Mail a payment with Form 1040-ES voucher

By phone

IRS2Go mobile app

Estimated Tax Penaltypp. 228 - 229

Payments due when income earned Penalty can apply even if refund due Penalty calculation

▪ Based on underpayment rate (Individuals: federal short-term rate + 3%)

▪ Calculated separately for each payment▪ Based on # days - due date to paymt date

Form 2210 p. 229

Form 2210 used to:

▪ Determine if penalty owed

▪ Calculate penalty

▪ Request a reduction in the penalty

▪ Apply excess withholding to specific income

Waiver of Estimated Tax Penalty p. 230

Waiver of the Penalty▪ Casualty or other unusual circumstance▪ Taxpayer retired (after 62)▪ Became disabled in either of 2 preceding years▪ Reasonable cause, not willful neglect

To request waiver check Box A or B in Part II▪ May require explanation & documentation

Annualized Income Installment Method p. 230

Use if income not earned evenly through the year

Calculates tax liability at end of each payment period using income/deductions from beginning of year to end of period