Hired Your First Employee? Your Tax Obligations

Hired Your First Employee? Your Tax Obligations

It’s a major milestone for you, but it comes with a lot of paperwork that must be done correctly.

Bringing a new employee into your business is a reason to celebrate. You’ve done well enough as a sole proprietor that you can’t handle the workload by yourself anymore.

Onboarding your first worker, though, comes with a great deal of extra effort for you at first. You have to show him or her the ropes so you can offload some of the extra weight you’ve been carrying.

But first things first. Before your employee even shows up for the first day of work, you should have assembled all the paperwork required to keep you compliant with the IRS and other federal and state agencies.

A New Number

As a one-person company, you’ve been using your Social Security number as your tax ID. You’re an employer now, so you’ll need an Employer Identification Number (EIN). You can apply for one here.

The IRS’s EIN Assistant walks you through the process of applying for an Employer Identification Number (EIN).

Once you’ve completed the steps in the IRS’s EIN Assistant, you’ll receive your EIN right away, and can start using it to open a business bank account, apply for a business license, etc.

You’ll also need an EIN before you start paying your employee. It’s required on the Form W-4. If you’ve ever worked for a business yourself, you’ve probably filled out this form. As an employer now, you should provide one to your new hire on the first day. When it’s completed, it will help you determine how much federal income tax to withhold every payday. If you’re not bringing in a full-time employee but, rather, an independent contractor, you won’t be responsible for withholding and paying income taxes for that individual. You’ll need to supply him or her with a Form W-9.

Note: Payroll processing is probably the most complex element of small business accounting. If you don’t have any experience with it, you’ll probably want to use an online payroll application. After you’re set up on one of these websites, you enter the hours worked every pay period. The site calculates tax withholding and payroll taxes due, then prints or direct deposits paychecks. Let us know if you want some guidance on this.

Don’t forget about state taxes if your state requires them, and any local obligations. The IRS maintains a page with links to each state’s website. You can get information about doing business in your geographical area, which includes taxation requirements.

More Forms

You also have to be in contact with your state to report a new hire (same goes if you ever re-hire someone). The Small Business Administration (SBA) can be helpful here, as it is in many other aspects of managing a small business. The organization maintains a list of links to state entities here.

All employees are required to fill out a Form I-9 on the first day of a new job. New employees must also prove that they’re legally eligible to work in the United States. To do this, they complete a Form I-9 from the Department of Homeland Security. As their employer, you’re charged with verifying that the information provided is accurate by looking at one or a combination of documents (U.S. Passport, driver’s license and birth certificate, etc.). By signing this form, you’re stating that you’ve done that.

You can also use the U.S. government’s E-Verify online tool to confirm eligibility.

A Helping Hand

The Department of Labor has a great website for new employers. The FirstStep Employment Law Advisor helps employers understand what DOL federal employment laws apply to them and what recordkeeping they they’re required to do. Please consider us a resource, too, as you take on a new employee. Preparing for a complex new set of tax obligations will be a challenge. We’d like to see you get everything right from the start.

You can Lower Your Taxes if You are Self-Employed

You can Lower Your Taxes if You are Self-Employed

When you are self-employed, your business profits are taxed to you at federal rates as high as 39.6%. Add self-employment taxes of 15.3% of the first $118,500 of your net self-employment earnings plus 2.9% of any earnings over that amount. Then there’s an additional 0.9% Medicare surtax on earnings in excess of $200,000 ($250,000 if married filing jointly). At tax rates like these, it pays to take steps to reduce your tax burden.

Step One: Deduct Business Expenses

Be sure you have an organized system for recording your expenses. To be deductible, a business expense must be “ordinary” (common and accepted in your trade or business) and “necessary” (helpful and appropriate for your trade or business). Since personal expenses are generally not deductible, it’s smart to have a separate business bank account and use a separate credit card for business purchases.

Step Two: Deduct Health Insurance Premiums

You may qualify to deduct premiums paid for medical, dental, and qualified long-term care insurance coverage for you, your spouse, and your dependents.* The coverage may include children who haven’t reached age 27 by the end of the year, even if you don’t claim them as dependents on your tax return.

Unlike health insurance premiums paid for employees, the self-employed health insurance deduction won’t save you self-employment taxes. However, it will lower your taxable income. You must meet certain requirements to qualify for the deduction.

Step Three: Deduct Retirement Plan Contributions

Funding a retirement plan can also save you significant tax dollars. Within limits, plan contributions will be tax deductible.** Several types of plans may be suitable for you as a self-employed taxpayer, including a simplified employee pension (SEP) plan, a savings incentive match plan (SIMPLE), or a solo (individual) 401(k) plan. Each plan has specific features and requirements that you will want to weigh carefully before making a choice.

Will Changes in Tax Law Provisions Affect You?

Will Changes in Tax Law Provisions Affect You?

Last summer’s highway trust fund extension law* includes a few important federal tax provisions that affect business and individual taxpayers.

Return due dates

The new law accelerates the filing deadline for partnership returns by one month, effective with returns for tax years that begin after December 31. As a result, the due date for partnership returns will be the fifteenth day of the third month after the end of the partnership’s tax year — March 15 for a partnership with a calendar year.

C corporations will have an additional month to file their returns, generally effective with returns for tax years beginning after December 31.  As a result, C corporation returns will be due by the fifteenth day of the fourth month after the end of the tax year (by April 15 for a C corporation with a calendar year). The extended deadline doesn’t take effect until tax years beginning after December 31, 2025, for C corporations with fiscal years ending on June 30.

Basis reporting

For federal estate-tax purposes, property included in the gross estate is generally valued at its fair market value on the decedent’s date of death. That same fair market value then becomes the property’s income-tax basis in the hands of the person who acquires the property from the decedent.

The new law doesn’t change this rule. However, it requires the executor of any estate required to file a federal estate-tax return to furnish an information statement to the IRS and to each person receiving property from the estate. The statement must show the value of the property as reported on the return (and any other information the IRS may require). There are penalties for failure to file and for tax understatements resulting from inconsistencies in basis reporting.

Mortgage information returns

Under the new law, mortgage lenders must include additional items, such as the amount of principal outstanding at the beginning of the year, on information returns required to be furnished after December 31.

Preparing for Upcoming Taxes: 5 Things You Can Do Now

Preparing for Upcoming Taxes: 5 Things You Can Do Now

Your income tax obligation needs to be on your mind year-round. Here are some ways you can get a jump on your taxes.

Whether you’re a small business or an individual taxpayer, year-round tax planning is more than just a way to make tax preparation an easier, faster process. By keeping taxes in mind as you go through every 12-month period, you’ll be able to see where you might take specific actions early that will have an impact on what you end up owing. Make it a habit, and you’ll find that it just comes naturally to consider the tax implications of purchase and sales decisions.

Create a System

Effective tax planning requires more than just saving receipts and organizing tax-related documents in physical or digital file folders – though that’s a good start. Create a system in early January that you can maintain throughout the year (of course, a lot of your information will be stored in your accounting or personal finance application, if you use one). But you should be saving statements, receipts, sales forms – anything related to your income and expenses that will eventually feed into IRS forms or schedules.

Evaluate Your Expense-Tracking

Businesses: How do you—and your employees, if you have them—keep track of daily expenses? You may have forms like purchase orders and bills for the big ones, but you probably buy things on occasion that are just documented by paper receipts. How do you categorize and organize these so you won’t miss any when it’s time to complete a Schedule C? Is there a better way?

Do any of your employees make trips on behalf of your business? You really should consider subscribing to an online service that automates the process of creating and approving expense reports.

Know Your Tax Forms

Individuals and businesses file some of the same forms and schedules, but some, of course, are different. Your previous years’ tax returns can be good resources for you. Refer to them occasionally as you go through the year and do some comparing, especially if you must pay quarterly estimated taxes. You may not remember from year to year what’s deductible and what’s not. Revisiting your returns will jog your memory and remind you.

Consider Generosity

Are you having a good year? You’ll have an idea of how your financial health is if you’re keeping up with income and expenses. You don’t have to wait until the end of the year to do any charitable giving that you’re going to do (although it’s usually best to hold off until the fourth quarter).

Learn How Changes Will Affect Your Taxes

This is so important for individual taxpayers. Did you get married or divorced, or have a child? Did you move? Buy or sell a home? Get a raise or, conversely, lose regular income for some reason? Did you have educational expenses? All these life events—and more—can change your income tax obligation.

Businesses often experience major changes, too, and your financial state at the end of the year is way harder to predict than it is for an individual with W-2 income. Stay on top of the impact of deviations in income and expenses created by events like the introduction of new products (or the loss of existing ones), personnel fluctuations, and major acquisitions.

Comprehensive Planning

Tax planning should be an element of your overall financial planning. If you have a business or household budget, you’re way ahead of the game. You can compare your actual income and expenses every month to those you built into your budget. A budget can be a tremendous tool as you plan for the current year’s taxes.

Is a Tax Refund Really a Good Idea?

Is a Tax Refund Really a Good Idea?

It’s hard not to like a tax refund. And many taxpayers receive them — over 111 million federal income-tax refunds were issued to individual taxpayers in 2016, according to IRS data.

If you expect to receive a refund this year, here is some food for thought.

Plan for Your Taxes

The reason you are receiving a refund is that you paid too much tax, either through wage withholding or by making payments of estimated tax. Instead of giving the IRS what amounts to an interest-free loan, you could have invested your money or used it for other things during the year.

It might make sense to have your employer withhold less tax from your wages or to reduce your quarterly estimated tax payments. But don’t pay too little. Then, you would have a large tax bill to pay when you file your taxes — and you could be subject to an underpayment penalty.

Make Hay This Year

Now let’s look at this year’s refund. What are you planning to do with it? Something impulsive, like take a vacation or make a purchase you wouldn’t otherwise make? If your finances are in good shape, then go for it. If not, you might want to consider the following possibilities.

Debt reduction. If you routinely carry credit card balances, use your refund to make a dent in your debt. With the average interest rate on credit cards around 18%, any reduction will help improve your financial situation.

 

Retirement savings. Unless you already have a healthy nest egg, investing your tax refund in a tax-advantaged retirement account is a step toward a more secure future.

 

College savings. Both Coverdell education savings accounts (ESAs) and Section 529 college savings plans provide tax benefits — two good ways to use your refund to save taxes and help with future expenses.

 

Emergency fund. If the money you have socked away for emergencies is running low, your tax refund could replenish it. If you don’t have an emergency fund, consider using your tax refund to start one. Aim for having enough liquid savings to cover between three and six months’ worth of expenses.

Take Control of Your Tip Income

Take Control of Your Tip Income

In a recent Tax Court case,* the IRS challenged a bartender’s income-tax return, arguing that he had made substantially more in tip income than he had reported. The judge ruled in favor of the bartender, finding that the bartender’s daily tip diary was more reliable than the IRS’s estimates. Like the bartender, all taxpayers who earn tip income need to maintain proper records.

Three General Rules

Tips are subject to both income and employment (Social Security and Medicare) taxes. To report their tips correctly, employees need to:

Keep a daily tip record

Report tips to their employers in a timely manner

Report all tips on their income-tax returns

Keeping Records

To record daily tips, employees can either keep a tip diary or retain copies of relevant documents, such as restaurant bills and charge slips. The IRS has provided a convenient tip diary (Form 4070A) in Publication 1244, which can be downloaded from www.irs.gov. Alternatively, employers may provide an electronic form for recording daily tips — employees should just be sure to retain paper backups.

Employee records should include the following information:

Employee name and address

Name of the employer/establishment

Amount of both cash tips and charge/debit card tips received from customers and/or from other employees through a tip-sharing arrangement

Amount paid out each day to other employees through a tip-sharing arrangement and the names of those employees

Date each entry was made

Reporting to the Employer

Additionally, employees must make timely reports of their tip income to their employer. For any month an employee has $20 or more in tips (both cash and debit/credit card charges), the employee must report the amount by the 10th day of the following month.

Reporting on the Tax Return

Employers report both wages and reported tip income in Box 1 of a tipped employee’s W-2. The employee reports this amount on his or her tax return. Employees also are required to report any additional tips not already reported to their employers during the year.

Employer/IRS Tip Reporting Programs

Tipped employees may want to check with their employers to see whether they participate in one of the IRS’s tip reporting compliance programs. One such program is the Tip Rate Determination/Education Program (TRD/EP). Under the program, an employer can enter into a Tip Reporting Alternative Commitment (TRAC), which allows it to establish specific procedures for tip reporting. In return, the IRS agrees not to challenge employers or employees who are in compliance.

* Sabolic v. Comm’r, TC Memo. 2015-32 (2/26/2015)

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