What The Self-Employed Need to Know About Employment Taxes

What The Self-Employed Need to Know About Employment Taxes

In addition to income tax, you must pay Social Security and Medicare taxes on earned income, such as salary and self-employment income. The 12.4% Social Security tax applies only up to the Social Security wage base of $118,500 for 2016. All earned income is subject to the 2.9% Medicare tax. The taxes are split equally between the employee and the employer. But if you’re self-employed, you pay both the employee and employer portions of these taxes on your self-employment income. Additional 0.9% Medicare tax Another employment tax that higher-income taxpayers must be aware of is the additional 0.9% Medicare tax. It applies to FICA wages and net self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately). If your wages or self-employment income varies significantly from year to year or you’re close to the threshold for triggering the additional Medicare tax, income timing strategies may help you avoid or minimize it. For example, as a self-employed taxpayer, you may have flexibility on when you purchase new equipment or invoice customers. If your self-employment income is from a part-time activity and you’re also an employee elsewhere, perhaps you can time with your employer when you receive a bonus. Something else to consider in this situation is the withholding rules. Employers must withhold the additional Medicare tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So your employer might not withhold the tax even though you are liable for it due to your self-employment income. If...
Tax Impact of Investor vs. Trader Status

Tax Impact of Investor vs. Trader Status

If you invest, whether you’re considered an investor or a trader can have a significant impact on your tax bill. Do you know the difference? Investors Most people who trade stocks are classified as investors for tax purposes. This means any net gains are treated as capital gains rather than ordinary income. That’s good if your net gains are long-term (that is, you’ve held the investment more than a year) because you can enjoy the lower long-term capital gains rate. However, any investment-related expenses (such as margin interest, stock tracking software, etc.) are deductible only if you itemize and, in some cases, only if the total of the expenses exceeds 2% of your adjusted gross income. Traders Traders have it better in some situations. Their expenses reduce gross income even if they can’t itemize deductions and not just for regular tax purposes, but also for alternative minimum tax purposes. Plus, in certain circumstances, if traders have a net loss for the year, they can claim it as an ordinary loss (so it can offset other ordinary income) rather than a capital loss. Capital losses are limited to a $3,000 ($1,500 if married filing separately) per year deduction once any capital gains have been offset. Passing the trader test What does it take to successfully meet the test for trader status? The answer is twofold: 1. The trading must be “substantial.” While there’s no bright line test, the courts have tended to view more than a thousand trades a year, spread over most of the available trading days, as substantial. 2. The trading must be designed to try to catch...
There’s Still Time for Homeowners to Save with Green Tax Credits

There’s Still Time for Homeowners to Save with Green Tax Credits

  There’s Still Time for Homeowners to Save With Green Tax Credits The income tax credit for certain energy-efficient home improvements and equipment purchases was extended through 2016 by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). So, you still have time to save both energy and taxes by making these eco-friendly investments. What qualifies The credit is for expenses related to your principal residence. It equals 10% of certain qualified improvement expenses plus 100% of certain other qualified equipment expenses, subject to a maximum overall credit of $500, which is reduced by any credits claimed in earlier years. (Because of this reduction, many people who previously claimed the credit will be ineligible for any further credits in 2016.) Examples of improvement investments potentially eligible for the 10% of expense credit include: • Insulation systems that reduce heat loss or gain, • Metal and asphalt roofs with heat-reduction components that meet Energy Star requirements, and • Exterior windows (including skylights) and doors that meet Energy Star requirements. These expenditures are subject to a separate $200 credit cap. Examples of equipment investments potentially eligible for the 100% of expense credit include: • Qualified central air conditioners; electric heat pumps; electric heat pump water heaters; water heaters that run on natural gas, propane, or oil; and biomass fuel stoves used for heating or hot water, which are subject to a separate $300 credit cap. • Qualified furnaces and hot water boilers that run on natural gas, propane or oil, which are subject to a separate $150 credit cap. • Qualified main air circulating fans used in natural...
Special Year-End Payroll Considerations for 2015

Special Year-End Payroll Considerations for 2015

By Claudia Womack, Small Business Advisor It is that time of the year to be thinking of processing your Special YE Payrolls for 2015.  Remember these payrolls must be reported as W2 wages for 2015. The Special YE Payrolls are: ·         Personal Auto Wages ·         S-Corporations Health Insurance ·         Year-End Bonuses ·         Gifts ($25.00 and over) ·         Maxing retirement deferrals for officers, owners, etc. Please review the following information and if any of the Special YE Payrolls pertains to you and your business, please be sure to process a payroll before 12/31/15. PERSONAL USAGE OF BUSINESS VEHICLES The personal usage to commute between work and home with a company owned or leased vehicle by an employee (including corporate shareholder/officers) is classified as payroll compensation and must be reported on the employee’s W2.  The personal auto usage compensation is subjected to FUTA, SUTA, LTD, Federal W/H, State W/H, and FICA. This auto payroll should be recorded on the employee’s W2 in box 14. We are available to help with the personal usage calculation, please send us the following information and we will be happy to do it for you.  Remember, if an employee drove more than one vehicle in 2015, then we need the information below for each vehicle that was driven by the employee. 1.    Vehicle make, type and year 2.    Total 2015 mileage and ending mileage for each vehicle 3.    2015 total personal mileage or percentage of total usage 4.    If an employee’s gross wage exceeds the Social Security limit, we will need the employee’s 2015 Social Security wages to determine Social Security tax for calculating the personal...
PTO contribution arrangements can help  prevent the year-end vacation-time scramble

PTO contribution arrangements can help prevent the year-end vacation-time scramble

From the Thanksgiving kick-off of the holiday season through December 31, many businesses find themselves short-staffed as employees take time off to spend with family and friends. But if you limit how many vacation days employees can roll over to the new year, you might find your workplace to be nearly a ghost town as employees scramble to use their time off rather than lose it. A paid time off (PTO) contribution arrangement may be the solution. It allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting the excess PTO amounts to employer contributions. A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books. To offer a PTO contribution arrangement, you simply need to amend your plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms, and additional rules apply. To learn more about PTO contribution arrangements, including their tax implications, please contact us. ©...