Should You Be Withholding Taxes for your Nanny or Babysitter?

Many people have taken on a nanny or babysitter to help with childcare.  If you have a nanny, you may have more than a casual contractor engagement, you may have a household employee and you have become an employer.  Employers of household employees must obtain an employer identification number, pay Social Security, Medicare, and unemployment tax for any employee wages.  Your state may require you to pay unemployment insurance as well.

How can I tell if I have a household employee?

In Publication 926, the IRS considers anyone who is an ongoing household helper to be a household employee, not an independent contractor.  If you control not only what work is done, but how it is done, you have an employee.  Whether part time, full time, or hired through an agency, hourly, salaried, or paid by the job, you have an employee.

If the worker controls how the work is done, without direction from you, the worker is self-employed.  A self-employed person is often one who offers their services to the general public in an independent business.

The IRS excludes spouses and related children under 21 years old as household employees.  Grandparents are not considered household employees unless meeting the following exception: they are caring for a child under 18 who has physical or mental conditions requiring adult care for at least 4 continuous weeks in a quarter and the paying party has a marital status meeting one of these conditions: divorced and still unmarried, a widow, or are living with a spouse whose physical or mental conditions prevents them from caring for the child for 4 continuous weeks in a quarter. Additionally, individuals who are under age 18 at any time during the year are also excluded, unless performing household work is that individual’s principal occupation. If he or she is a student, providing household work isn’t considered to be his or her principal occupation.

What are the taxes I must pay if I have an employee?

Federal unemployment taxes (FUTA) must be paid if gross wages are over a threshold, which the IRS has set to be $1,000 in any calendar quarter.  After the threshold is reached, FUTA must be paid on the first $7,000 of gross wages for that year. 

The IRS has set the 2021 annual requirement threshold for when to start paying Social Security and Medicare taxes to $2,300 ($2,400 for 2022).  The 2021 withholding amount for Social Security taxes was set at 6.2%, and Medicare taxes at 1.45%, for a total of 7.65%.  Employees and employers are responsible for paying 7.65% each on all cash wages.  An employer may choose to pay the employee’s share of these taxes on their behalf..

States also have unemployment taxes.  Here in Texas, unemployment is regulated by the Texas Workforce Commission, (TWC), which has specific rules relating to nannies, which they call domestic employment.  The threshold for unemployment tax liability is $1,000 gross wages in a quarter.  Once passing that threshold, wages must be reported and taxes are owed on all wages starting from January 1 of the same year, for the entire year.  TWC allows employers of domestic staff to pay either quarterly or annually.  The annual option requires the filing of an Annual Election Form C-20 by December 31st of the following year.

What about income tax withholding?

It is not required that federal income tax is withheld for household employees.  Employees should be informed that you will be reporting wages and issuing a W-2 for their taxes at the end of the year.  If you choose to withhold federal income tax, IRS publication 15-T will have the current tables used for withholding.  State income tax requirements will vary.  Luckily, here in Texas we don’t have to worry about state income tax.

What else must I do as an employer?

When you have a household employee, you must collect their information and determine if they can legally work in the United States, including Form I-9. This information will be necessary to issue a W-2 to your employee by January 31 of the following year.  The employee gets copies B, C, and 2 of the W-2.  The Social Security Administration gets copy 1 along with a Form W-3.  By April 15 of the following year, Schedule H should be filed along with your income tax return.  If you would not be required to file a return that year, Schedule H still needs to be filed.  Records must be kept for at least 7 years.

This seems like a lot for childcare help!

It’s true, once you become an employer there are more steps involved.  For this reason, some parents choose to use a service to help source nannies or do the payroll for them.  For a processing fee, they will inform parents how much to pay.  The processor then takes the money and does the work of withholding and paying federal and local taxes for parents, passing the appropriate net wages on to the nanny.  These providers give parents a report at the end of the year for their accountant.  Such service providers often also allow the nanny to have their federal income tax withholding done as well.

If you have any additional questions, please contact our office so we may assist.

IIJA’s New Digital Asset Reporting Requirement

The Infrastructure Investment and Jobs Act of 2021 (IIJA) was signed into law on Nov. 15, 2021. One major provision of the IIJA includes a requirement that cryptocurrency exchanges perform intermediary Form 1099 reporting for cryptocurrency transactions to the IRS. This will will require that cryptocurrency exchanges perform intermediary Form 1099 reporting for cryptocurrency transactions for all digital assets starting in 2023.

Existing reporting rules. As might already be aware if you have a stock brokerage account, whenever you sell stock or other securities you receive a Form 1099-B at the end of the year reporting your security gains and losses. This Form 1099-B reports the details of transactions, such as sale proceeds, relevant sale or purchase dates, your tax basis for the sale, and the character of gains or losses (long-term, short-term, etc.). Additionally, if you were to transfer stock or securities from one broker to another, your old broker is required to provide your new broker with information on the holdings that were transferred, such as tax basis or date acquired.

Digital asset broker reporting. The IIJA expanded the definition of brokers to include Crypto Exchanges and other service providers that are providing transfers of digital assets on behalf of another person. This means that any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS at the end of each year.

Transfer reporting. Sometimes you may have a transfer transaction that is not a sale or exchange. For example, if you transfer cryptocurrency from your wallet at one Crypto Exchange to your wallet at another Crypto Exchange, the transaction is not a sale or exchange. For that type of transfer, as with stock, the old Crypto Exchange will be required to furnish relevant basis and other information to the new Crypto Exchange. Additionally, if the transfer is to an account maintained by a party that is not a Crypto Exchange (or broker), the IIJA requires the old Crypto Exchange to file a return with the IRS. We expect that this filing will include generally the same information that is furnished in a broker-to-broker transfer.

What are Digital assets. For the reporting requirements, a “digital asset” is any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. The IRS can (and may) modify this definition. As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Cash transaction reporting. Historically, when a business receives $10,000 or more in cash in a transaction, that business is required to report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. The IIJA now requires that businesses treat digital assets like cash for purposes of this reporting requirement, for reporting that is due after December 31, 2023.

Closing. Some things to keep in mind: First, if you use a Crypto Exchange, and it has not already performed a KYC (Know Your Customer), expect it to do so soon. Second, the transactions subject to the reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies. Third, a reporting intermediary does not always have perfect information, especially when it comes to an entirely new type of reporting. Expect the first information reporting cycle for this reporting requirement to be a bit bumpy.

Remember that as your trusted CPA advisors, we are here to help you and can provide solutions for any challenges that may develop.

IRS issues standard mileage rates for 2019

WASHINGTON — The Internal Revenue Service today issued the 2019 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2019, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 58 cents per mile driven for business use, up 3.5 cents from the rate for 2018,
  • 20 cents per mile driven for medical or moving purposes, up 2 cents from the rate for 2018, and
  • 14 cents per mile driven in service of charitable organizations.

The business mileage rate increased 3.5 cents for business travel driven and 2 cents for medical and certain moving expense from the rates for 2018. The charitable rate is set by statute and remains unchanged.

It is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station. For more details see Notice-2019-02.

The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously. These and other limitations are described in section 4.05 of Rev. Proc. 2010-51.

Notice 2018-02, posted today on IRS.gov, contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Tax reform expands availability of cash accounting

Under the Tax Cuts and Jobs Act (TCJA), many more businesses are now eligible to use the cash method of accounting for federal tax purposes. The cash method offers greater tax-planning flexibility, allowing some businesses to defer taxable income. Newly eligible businesses should determine whether the cash method would be advantageous and, if so, consider switching methods.

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Now’s the time to review your business expenses

As we approach the end of the year, it’s a good idea to review your business’s expenses for deductibility. At the same time, consider whether your business would benefit from accelerating certain expenses into this year.

Be sure to evaluate the impact of the Tax Cuts and Jobs Act (TCJA), which reduces or eliminates many deductions. In some cases, it may be necessary or desirable to change your expense and reimbursement policies.

What’s deductible, anyway?

There’s no master list of deductible business expenses in the Internal Revenue Code (IRC). Although some deductions are expressly authorized or excluded, most are governed by the general rule of IRC Sec. 162, which permits businesses to deduct their “ordinary and necessary” expenses.

An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your business. (It need not be indispensable.) Even if an expense is ordinary and necessary, it may not be deductible if the IRS considers it lavish or extravagant.

What did the TCJA change?

The TCJA contains many provisions that affect the deductibility of business expenses. Significant changes include these deductions:

Meals and entertainment. The act eliminates most deductions for entertainment expenses, but retains the 50% deduction for business meals. What about business meals provided in connection with nondeductible entertainment? In a recent notice, the IRS clarified that such meals continue to be 50% deductible, provided they’re purchased separately from the entertainment or their cost is separately stated on invoices or receipts.

Transportation. The act eliminates most deductions for qualified transportation fringe benefits, such as parking, vanpooling and transit passes. This change may lead some employers to discontinue these benefits, although others will continue to provide them because 1) they’re a valuable employee benefit (they’re still tax-free to employees) or 2) they’re required by local law.

Employee expenses. The act suspends employee deductions for unreimbursed job expenses — previously treated as miscellaneous itemized deductions — through 2025. Some businesses may want to implement a reimbursement plan for these expenses. So long as the plan meets IRS requirements, reimbursements are deductible by the business and tax-free to employees.

Need help?

The deductibility of certain expenses, such as employee wages or office supplies, is obvious. In other cases, it may be necessary to consult IRS rulings or court cases for guidance.

For questions about tax deductions specific to your business, give Launch Consulting a call today.

Tax-free fringe benefits help small businesses and their employees

Tax-free fringe benefits help small businesses and their employees.

In today’s tightening job market, to attract and retain the best employees, small businesses need to offer not only competitive pay, but also appealing fringe benefits. Benefits that are tax-free are especially attractive to employees. Let’s take a quick look at some popular options.

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Accelerated Due Date for FinCEN Form 114

FinCEN Form 114, formerly referred to as “FBAR”, Report of Foreign Bank and Financial Accounts, is used to report a financial interest in or signature authority over a foreign financial account. The “FBAR” is due June 30 this year to report 2015 accounts, with no extensions allowed.

As part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, tax years beginning after December 31, 2015 (beginning Jan 1, 2016), will be due April 15 with a maximum extension of 6 months.

The IRS has done a pretty good job with assuming this role on behalf of the Financial Crimes Enforcement Network and the Department of the Treasury. The first step they took was the electronic filing mandate a few years ago, and now, matching the deadline to the individual taxpayer deadline and adding an extension makes for a smoother filing season.

For more information on whether you may be required to file FinCEN Form 114, contact Paul Glantz, CPA at paul@launchconsultinginc.com

Due Date for Forms 1099 Quickly Approaching

Form 1099-MISC along with many other informational returns are due to recipients at the end of this month. Last year, I gave a brief outline of who may be be required to file.

Penalties for late filing range from $30-100 per late or incorrectly filed return. The maximum penalty is $250,000 per year. ($75,000 for small businesses).

These are pretty steep penalties for an informational return, and they are set to increase for the 2016 filing period ($50 for the minimum and up to $175,000 for small businesses).

 

For instructions on how to prepare Form 1099-MISC for the 2015 reporting tax year, visit the IRS website.

For information on due dates, and when and where to file, check out this IRS Publication.

If you have any questions about Form 1099-MISC contact Paul Glantz, CPA at paul@launchconsultinginc.com

Controversial Charitable Contribution Regulation Withdrawn

This past September, the IRS proposed a regulation that would require charitable organizations to collect personal information from its donors and file information returns with the IRS with this personal information for donations over $250. The IRS would, in turn, would use informational returns received from the donee to match the amounts with the social security numbers of the donors.

A few days ago, we received notice that the IRS has scrapped these regulations. (whew!) This could have only led to more paperwork for non-profit organizations and greater risks for individuals to become victims of identity theft.

As a reminder, the IRS still requires contemporaneous written acknowledgement of a contribution from a charitable organization if the donation exceeds $250.  The acknowledgement must state the amount of cash or a description (but not the value) of property other than cash contributed. The letter must also state whether the donee provided any “goods or services” in consideration for the contribution. Lastly, if the goods or services received were entirely intangible religious benefits, the letter must provide a statement to that effect.

For more information on charitable contributions, please contact Paul Glantz, CPA at paul@launchconsultinginc.com

 

IRS to Begin Contacting Employers with Late Payroll Tax Payments

Falling behind on payroll taxes? Expect a call from the IRS soon.

In a recent news release, the IRS announced its plans to launch a new initiative aimed at monitoring payroll deposit patterns. Employers that are falling behind on payments will receive a letter or automated phone message reminding them of their payroll tax responsibilities.

For more information on Employment Tax & Reporting due dates, visit the IRS website.

For questions about payroll reports or taxes, contact Paul Glantz, CPA at paul@launchconsultinginc.com