It’s time: Check the number’s ya’ll. Also known as ‘paycheck checkup’.

It’s almost halfway through the year (2019) and it’s time to review some data that surrounds your life. If you’re an “employee” and receive a W2 at the end of the year, this means reviewing your latest paycheck stub(s) to ensure that you are withholding enough to cover the annual tax due; even if your paycheck is direct deposited you should be able to review the voided stub.

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What’s your ‘year to date’ income so far?

How much have you withheld for federal and state taxes ‘year to date’ so far?

How much have you paid into social security and medicaid thus far? Keep in mind, your employer pays the same amounts on your behalf, theses are considered payroll and employment taxes, not part of income taxes.

Below is an example of what page 2 of the 1040 looks like, feel free to locate your actual tax return and follow along. Line 11 of your 1040 page 2 is the tax you owe for the year based on “taxable income”, and line 15 is the actual tax due for the year based on any credits subtracted plus additional tax due.

line 16 is what was actually withheld from your paychecks (or other forms like 1099’s) combined.

2018 1040 page 2

Your tax due (which I often refer to as tax liability), can change from year to year. For example, kids under 16 qualify for the child tax credit which lowers the tax liability due for the year. Your tax liability will increase when your kid turns 17 and no longer qualifies for that credit. This can easily be determined ahead of time so you shouldn’t be shocked that 17th year and should plan accordingly.

Below is some information from the IRS on the topic.

IRS: Doing a ‘Paycheck Checkup’ is a good idea for workers with multiple jobs

WASHINGTON — The Internal Revenue Service urges taxpayers who work multiple jobs or who may be adding summer employment to complete a Paycheck Checkup. Doing so will help them check if they are having the right amount of tax withheld from their paychecks.

Checking and adjusting tax withholding as early as possible in 2019 is the best way to head off a tax-time surprise next year.

The Tax Cuts and Jobs Act (TCJA) made changes to the tax law. Among other things, the new law increased the standard deduction, eliminated personal exemptions, increased the child tax credit, limited or discontinued certain deductions and changed the tax rates and brackets. As a result, many taxpayers ended up receiving refunds that were larger or smaller than expected, while others unexpectedly owed additional tax when they filed their 2018 tax returns.

Two-income families and people with multiple jobs may be more vulnerable to being under-withheld or over-withheld following these major law changes. For 2019, a Paycheck Checkup is especially important for taxpayers who adjusted their withholding in 2018, specifcally in the middle or later parts of the year. Doing a Paycheck Checkup can help determine the correct amount of tax for each of their employers to withhold.

The IRS urges everyone to do a Paycheck Checkup as early in the year as possible so that if an adjustment is needed, there is more time for withholding to happen evenly during the rest of the year. Waiting means there are fewer pay periods to withhold the necessary federal tax.

The easiest way to do a Paycheck Checkup is to use the Withholding Calculator on IRS.gov. The Withholding Calculator can help taxpayers estimate their income, credits, adjustments and deductions more accurately and check if they have the right amount of tax withheld for their financial situation. When using the calculator, it’s helpful to have a completed 2018 tax return and a recent pay stub available.

Based on the Withholding Calculator’s recommendations, the taxpayer can then fill out and submit a new Form W-4 to their employer. In many instances, this means claiming fewer withholding allowances or having an extra flat-dollar amount withheld from their pay.

Self-employment
Some workers are considered self-employed and are responsible for paying taxes directly to the IRS. Often, this includes people involved in the sharing economy. One way to pay taxes directly to the IRS is by making estimated tax payments during the year.

TCJA changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. As a result, many taxpayers may need to raise or lower the amount of tax they pay each quarter through the estimated tax system.

The revised estimated tax package, Form 1040-ES, on IRS.gov is designed to help taxpayers figure these payments correctly. The package includes a quick rundown of key tax changes, income tax rate schedules for 2019 and a useful worksheet for figuring the right amount to pay.

Other situations
Anyone who had a life change, such as getting married or divorced, buying a home or having a baby should also consider a Paycheck Checkup.

Pay electronically anytime
Taxpayers can pay their 2019 estimated tax payments electronically anytime before the final due date for the tax year. Most taxpayers make estimated tax payments in equal amounts by the four established due dates. The three remaining due dates for tax year 2019 estimated taxes are June 17, Sept. 16, and the final payment is due Jan. 15, 2020. Direct Pay and EFTPS are both free payments options, and taxpayers can schedule their payments in advance as well as receive email notifications about the payment. Visit IRS.gov/payments to schedule electronic payments online, by phone or the IRS2go mobile app.

More information:

http://www.paulinestaxservices.com

DIY: Do you have a nanny or babysitter? They might be considered a household employee for tax purposes and you might be responsible for paying employment taxes.

 

https://www.irs.gov/publications/p926

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A client of mine recently had a baby.  Yay, Baby!!  With that bundle of joy comes additional tax responsibilities and implications… and sometimes credits and deductions.

 

She had two questions.  What is the nanny tax? And Is it simple to do it yourself or should you pay a professional payroll company? (Ultimately, my client decided to try it out herself before she hires a payroll service.  As with any business there are initial startup costs and then monthly bookkeeping and filings. Sometimes certain forms can be filed on a quarterly or annual basis. Record keeping and organization is imperative for “keeping the books” long term.)

 

 

Many years ago, nanny’s and day care providers were simply considered self employed and filed their income and expenses on the Schedule C (attached to the 1040). The family would pay cash or check and the nanny or sitter would account for it on their own returns.   However, now, the tax law states that if nanny’s are paid more than $2,000 a year they are considered employees and are subject to all of the regular employment taxes, unemployment insurance and workman’s comp. Thus creating additional paperwork and costs.

 

What is the nanny tax? And is it easy to DIY

This weird sounding tax is actually just basic employment and payroll taxes.  All employees and/or employers are required to pay social security taxes, Medicare taxes, and sometimes unemployment insurance.  The “employers” may or may not withhold and pay federal /state too.  You’ll save quite a bit of money doing it yourself and its not that difficult.  Although, it is work in a sense and it takes a bit of time.

Requirements:

  1. Be able to read and follow directions. Have some patience.
  2. Be organized: calculate hours worked, gross income and net income.
  3. Be tech savvy. Most of this stuff can be done online. It’s also handy to have a scanner/copier/ printer handy but it’s not required necessarily.
  4. Be able to follow due dates and pay on time (or you’ll be subject to fees and penalties).  Ex: for unemployment insurance,  you usually calculate January thru March and the money is due in April.

 

 

Startup

Go to irs.gov and search for form SS-4 (fss4), Employers federal ID number.  Fill it in and apply online, or download the pdf to a computer and fill it out by hand then mail it in. Im sure the agencies hate it, but I still do alot by hand and use my stamps.com account to mail it in.

Go to Colorado.gov/revenueonline and apply for a state wage withholding license (only if withholding state tax for your employee).

 

IRS’s publication 926  instructs household employers of their duties.  I’m going to use a combination of that publication and my own insight and experience to describe the process to do your own bookkeeping and payroll when you have certain employees.

 

The Numbers for Social Security and Medicare tax  Employer W-2 Filing Instructions & Information

The social security tax rate is 6.2% each for the employee and employer, unchanged from 2016. The social security wage base limit is $127,200.  The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2016. There is no wage base limit for Medicare tax. Social security and Medicare taxes apply to the wages of household employees you pay $2,000 or more in cash in 2017.

 

The process *not including responsibilities for withholding federal and state taxes for the employee*

Example. On February 13, 2017, Mary Brown hired Jane A. Oak (who is an unrelated individual over age 18) to care for her child and agreed to pay cash wages of $50 every Friday. Jane worked for the remainder of the year (a total of 46 weeks). Jane didn’t give Mary a Form W-4 to request income tax withholding. The following is the information Mary will need to complete Schedule H, Form W-2, and Form W-3. See the completed examples of Form W-2 and Form W-3 for 2017 at the end of this publication

 

Total cash wages paid to Jane                                      $2,300.00

($50 x 46 weeks)

 

Jane’s share of: Social security tax is $142.60             EE share

($2,300 x 6.2% (0.062))

 

Medicare tax is $33.35                                                     EE share

($2,300 x 1.45% (0.0145))

 

Mary’s share of:Social security tax is $142.60             ER share

($2,300 x 6.2% (0.062))

 

Medicare tax $33.35                                                         ER share

($2,300 x 1.45% (0.0145))

 

Amounts reported on Form W-2 and Form W-3:Annual reconciliation at tax time.  Additionally, the schedule K will be added to the individual 1040 and reconciled that way.  You may or may not be required to pay estimated quarterly tax payments to ensure you don’t owe more than $1000 at the end of the year.  Talk to your tax professional.

Box 1: Wages, tips                          $2,300.00

Box 3: Social security wages        $2,300.00

Box 4: Social security tax withheld $142.60

Box 5: Medicare wages and tips  $2,300.00

Box 6: Medicare tax withheld is     $33.35

 

The  social  security  tax  pays  for  old-age,  survivors,  and disability benefits for workers and their families. The Medicare tax pays for hospital insurance. Both you and your household employee may owe social  security  and  Medicare  taxes.  Your  share  is  7.65% (6.2% for social security tax and 1.45% for Medicare tax) of  the  employee’s  social  security  and  Medicare  wages. Your employee’s share is also 7.65% (6.2% for social security tax and 1.45% for Medicare tax). Continue reading “DIY: Do you have a nanny or babysitter? They might be considered a household employee for tax purposes and you might be responsible for paying employment taxes.”