According to a recent study conducted by U.S. Bank, over 80% of all newly formed businesses that ultimately fail do so due to cash flow problems. If you needed a reason to believe that getting your spending in order and dedicating the time to drafting a proper budget for your new startup is important, look no further than that one.
If you are contemplating selling real estate property, there are a number of issues that could impact the taxes that you might owe, and there are steps you can take to minimize the gain, defer the gain, or spread it over a number of years.
A taxpayer’s filing status for the year is based upon his or her marital status at the close of the tax year. Thus, if you get married on the last day of the tax year, you are treated as married for the entire year. The options for married couples are to file jointly or separately. Both statuses can result in surprises – some pleasant and some unpleasant – for individuals who previously filed as unmarried.
Individuals filing jointly must combine their incomes, and if both spouses are working, combining income can trigger a number of unpleasant surprises, as many tax benefits are eliminated or reduced for higher-income taxpayers. The following are some of the more frequently encountered issues created by higher incomes:
Filing separately generally will not alleviate the aforementioned issues because the tax code includes provisions to prevent married taxpayers from circumventing the loss of tax benefits that apply to jointly filing higher-income taxpayers by filing separately.
On the other hand, if only one spouse has income, filing jointly will generally result in a lower tax because of the lower joint tax brackets and a higher standard deduction, double the amount for single individuals ($24,400 for 2019), if the couple does not itemize deductions. In addition, some of the higher-income limitations that might have applied to an unmarried individual with the same amount of income may be reduced or eliminated on a joint return.
Filing as married but separate will generally result in a higher combined income tax for married taxpayers. For instance, if a couple files separately, the tax code requires both to itemize their deductions if either does so, meaning that if one itemizes, the other cannot take the standard deduction. Another example relates to how a married couple’s Social Security (SS) benefits are taxed: on a joint return, none of the SS income is taxed until half of the SS benefits plus other income exceeds $32,000. On a married-but-separate return, and where the spouses have lived together at any time during the year, the taxable threshold is reduced to zero.
Aside from the amount of tax, another consideration that married couples need to be aware of when deciding on their filing status is that when married taxpayers file jointly, they become jointly and individually responsible (often referred to as “jointly and severally liable”) for the tax and interest or penalty due on their returns. This is true even if they later divorce. When using the married-but-separate filing status, each spouse is only responsible for his or her own tax liability.
Once a couple files as married filing jointly they cannot undo that. However, if they file separately, they can later amend that filing status to married filing jointly. Once the knot is tied, the Social Security Administration should be notified of any name changes, and if they’ve moved, the IRS needs to be notified of the couple’s new address.
If either or both of the newlyweds purchased their health insurance through a government marketplace, the marketplace should be advised of the couple’s marriage so that any advance premium tax credit (APTC) being applied to pay the insurance premiums can be adjusted when necessary. Doing so could prevent having to repay some or all of the APTC when filing their federal return(s) for the year of the marriage.
Of course the couple needs to notify their employers of their new marital status so any affected benefits can be updated. Usually new W-4 forms should be prepared and given to their employers so income tax withholding can be revised for the new filing status.
Other issues that may come into play and should be considered are:
If you have questions or would like an appointment to evaluate the impact of marriage on your tax liability before saying “I do,” please give this office a call.
Isler Northwest LLC is a firm of certified public accountants and business advisors based in Portland, Oregon. Our local, regional, and global resources, our expertise, and our emphasis on innovative solutions and continuity create value for our clients. Our service goals at Isler Northwest is to earn our clients trust as their primary business and financial advisors.
1300 SW 5th Avenue
Suite 2900
Portland, Oregon 97201
July 1 – Time for a Mid-Year Tax Check Up
Time to review your 2019 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.
You’re accustomed to money going in a certain direction, but sometimes you have to pay your customers. Here’s how it’s done.
QuickBooks is very good at helping you get paid by your customers. It comes equipped with customizable invoice templates for billing customers and sales receipts for recording instant sales. It supports online payments, so you can accept debit or credit cards and electronic checks. It simplifies the process of recording payments and it offers reports that let you keep track of it all.
The Treasury Department and the IRS have essentially shot down efforts by several states to help their residents circumvent the $10,000 cap on the itemized deduction for state and local taxes (SALT).
Taxpayers are often confused by the differences in tax treatment between businesses that are entered into for profit and those that are not, commonly referred to as hobbies. Recent tax law changes have added to the confusion. The differences are:
Taxpayers often will hire an individual or firm to provide services at the taxpayer’s home. Because the IRS requires employers to withhold taxes for employees and issue them W-2s at the end of the year, the big question is whether or not that individual is a household employee.
Determining whether a household worker is considered an employee depends a great deal on circumstances and the amount of control the hiring person has over the job and the worker they hire. Ordinarily, when someone has the last word about telling a worker what needs to be done and how the job should be done, then that worker is an employee. Having a right to discharge the worker and supplying tools and the place to perform a job are primary factors that show control.
Not all those hired to work in a taxpayer’s home are considered household employees. For example, an individual may hire a self-employed gardener who handles the yard work for that individual as well as some of the individual’s neighbors. The gardener supplies all tools and brings in other helpers needed to do the job. Under these circumstances, the gardener isn’t an employee and the person hiring him/her isn’t responsible for paying employment taxes. The same would apply to the person hired to maintain an individual’s swimming pool or to contractors making repairs or improvements on the home.
Contrast the following example to the self-employed gardener described above: The Johnson family hired Maclovia to clean their home and care for their 3-year old daughter, Kim, while they are at work. Mrs. Johnson gave Maclovia instructions about the job to be done, explained how the various tasks should be done, and provided the tools and supplies; Mrs. Johnson, and not Maclovia, had control over the job. Under these circumstances, Maclovia is a household employee, and the Johnsons are responsible for withholding and paying certain employment taxes for her and issuing her a W-2 for the year.
W-2 forms are to be provided to the employee by January 31 of the year following the year when the wages were paid and the government’s copy of the form – sent to the Social Security Administration – is also due by January 31.
If an individual you hire is considered an employee, then you must withhold both Social Security and Medicare taxes (collectively often referred to as FICA tax) from the household employee’s cash wages if they equal or exceed the $2,100 threshold for 2019.
The employer must match from his/her own funds the FICA amounts withheld from the employee’s wages. Wages paid to a household employee who is under age 18 at any time during the year are exempt from Social Security and Medicare taxes unless household work is the employee’s principal occupation.
Although the value of food, lodging, clothing or other non-cash items given to household employees is generally treated as wages, it is not subject to FICA taxes. However, cash given in place of these items is subject to such taxes.
A household employer doesn’t have to withhold income taxes on wages paid to a household employee, but if the employee asks to have withholding, the employer can agree to it. When income taxes are to be withheld, the employer should have the employee complete IRS Form W-4 and base the withholding amount upon the federal income tax and FICA withholding tables.
The wage amount subject to income tax withholding includes salary, vacation and holiday pay, bonuses, clothing and other non-cash items, meals and lodging. However, if furnished for the employer’s convenience and on the employer’s premises, meals are not taxable, and therefore they are not subject to income tax withholding. The same goes for lodging if the employee lives on the employer’s premises. In lieu of withholding the employee’s share of FICA taxes from the employee’s wages, some employers prefer to pay the employee’s share themselves. In that case, the FICA taxes paid on behalf of the employee are treated as additional wages for income tax purposes.
Although this may seem quite complicated, the IRS provides a single form (Schedule H) that generally allows a household employer to report and pay employment taxes on household employees’ wages as part of the employer’s Form 1040 filing. This includes Social Security, Medicare, and income tax withholdings and FUTA taxes.
If the employer runs a sole proprietorship with employees, the household employees’ Social Security and Medicare taxes and income tax withholding may be included as part of the individual’s business employee payroll reporting but are not deductible as a business expense.
Although the federal requirements can generally be handled on an individual’s 1040 tax return, there may also be state reporting requirements for your state that entail separate filings.
Another form that is required to be completed when hiring a household employee who works for an employer on a regular basis, is the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. By the first day of work, the employee must complete the employee section of the form by providing certain required information and attesting to his or her current work eligibility status in the United States. The employer must complete the employer section by examining documents (acceptable documents are listed on the I-9) presented by the employee as evidence of his or her identity and employment eligibility. The employer should keep the completed Form I-9 in his or her records and make it available upon request of the U.S. government. It is unlawful to knowingly to hire or continue to employ an alien who can’t legally work in the United States.
If the individual providing household services is determined to be an independent contractor, there is currently no requirement that the person who hired the contractor file an information return such as Form 1099-MISC. This is so even if the services performed are eligible for a tax deduction or credit (such as for medical services or child care). The 1099-MISC is used only by businesses to report their payments of $600 or more to independent contractors. Most individuals who hire other individuals to provide services in or around their homes are not doing so as a business owner.
Please call this office if you need assistance with your household employee reporting requirements or need information related to the reporting requirements for your state.
Isler Northwest LLC is a firm of certified public accountants and business advisors based in Portland, Oregon. Our local, regional, and global resources, our expertise, and our emphasis on innovative solutions and continuity create value for our clients. Our service goals at Isler Northwest is to earn our clients trust as their primary business and financial advisors.
1300 SW 5th Avenue
Suite 2900
Portland, Oregon 97201
Note: effective for years 2018 through 2025, the Tax Cuts and Jobs Act of 2017 suspended the deduction of miscellaneous itemized expenses that must be reduced by 2% of the taxpayer’s adjusted gross income. Employee business expenses, including travel expenses, fall into this category. Therefore, this discussion only applies to self-employed individuals for years 2018-2025.
June 15th falls on the weekend this year, so the due date for the second installment of estimated taxes is the next business day, June 17, which is just around the corner. So, it is time to determine if your estimated tax payment should be lowered if you overestimated your income for 2019 or increased if you underestimated it.