Archives for June 2019

ACTION STEPS NEEDED IF YOU RECEIVE A BONUS

June 24, 2019 by Frank

IRS Announces New Withholding Rate on Bonuses Paid to Employees – Action Steps Required To Avoid IRS Underwithholding Penalty

The Good News

A company bonus paid to an employee is great news – it means more money in your wallet.

The Bad News

As with any form of compensation an employer pays to an employee, income tax withholdings (federal, state and local) are required. The amount of federal tax withholdings is dependent upon whether the employer includes the bonus in the employee’s regular paycheck or in a separately issued bonus check.

If the employer issues a separate bonus check, the IRS requires that such supplemental payments have a federal tax withholding rate of 22% (IR-2019-88). If the bonus is included with your normal paycheck, then your Form W-4 withholding allowances controls the taxes withheld.

Day of Reckoning

When the current year tax return is filed (usually by April 15 of the following year), if those bonus withholdings resulted in you overpaying your taxes, then you will recover those overpaid taxes when you file Form 1040. You may find this undesirable because you have given the IRS an interest-free loan.

If your bonus withholdings were too low, then you will not only owe the IRS a payment come April 15, but you may also have to pay a penalty for failure to pay sufficient taxes during the year.

Tax Planning Tip #1:

After the bonus is paid, provide your tax professional with your year-to-date pay stub and ask that s/he provide you with a projection of your current year taxes. If the finding is that you will be significantly overpaid, then a revised W-4 can be submitted to your employer to have fewer taxes withheld over the remainder of the year to get you closer to a break-even position. If you are significantly underpaid, again a revised W-4 can be submitted to your employer.

Some taxpayers do not realize that bonuses can create an underpayment situation for them. Assume that your effective tax rate is 37%. If the bonus payment is withheld at 22%, you can readily see that an underpayment situation may develop.

Tax Planning Tip #2:

If there is a significant balance due, you have two options. You can provide your employer with a revised W-4 to increase your withholdings during the remainder of the tax year to get you closer to a break-even position. You can also remit an estimated tax payment (Form 1040-ES) to the IRS to pay the shortfall.

We prefer the former because W-2 tax withholdings are considered ratably made throughout the calendar year, whereas an estimated tax payment is credited to your account on the date paid. For example, assume you receive a bonus payment in January but that you don’t meet with your tax advisor until May and then remit the estimated payment. Since the estimated tax payment was not made on or before April 15 (the first due date for making an estimated tax payment), you may have underpaid your taxes in the first quarter and be subject to an underpayment penalty.

Tax Planning Tip #3:

Change your mindset about paying income taxes. Rather than being reactive and wondering how to reduce your taxes in the waning days of the tax year, be proactive and consult with your tax advisor during the year to discuss life-changing events and changes to your financial situation.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

Copyright © 2019 Keystone Financial Solutions, Inc. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

IRS ADVISES ITS AUDITORS HOW TO AVOID TAXPAYER’S RIGHT TO GO TO TAX COURT

June 11, 2019 by Frank

IRS Challenges Corporate Taxpayers Who Fail to Pay Shareholder Employees a Reasonable Compensation by Denying Taxpayers Access to the Tax Court

Background

Since 2005, the IRS has focused more attention of the issue of compliance and reasonable compensation to improve it enforcement and compliance strategies. If a taxpayer fails to pay its key shareholder/employees a reasonable compensation, the non-compliance by the taxpayer can be very costly. The IRS will assess the taxpayer payroll tax penalties and interest for failure to timely remit its required payroll taxes on the unreported compensation when the taxpayer filed its quarterly Form 941 and the required remittances.

Tax Court Advantage

When a taxpayer has the right to file a petition with the Tax Court, the taxpayer can avoid paying the IRS assessment until the case is resolved. Another significant possible benefit of going to Tax Court is that the IRS Appeals Office, if the taxpayer appeals the audit exam decision, needs to consider the risk of litigation. Generally this means that the Appeals Officer will often look for a compromise payment to have the taxpayer agree not to go to Tax Court if the IRS Appeals Officer feels that the IRS position may not be upheld by the Tax Court.

IRS Strategy to Avoid Going to Tax Court

Tax Planning Tip #1:

The easiest, best and most cost-effective course of action is by avoiding the challenge in the first place by having your tax professional prepare a comprehensive reasonable compensation analysis. These studies can usually be prepared for a cost of approximately $750.00 for the initial year and approximately $300.00 in subsequent years to keep the study current. Compared to audit representation fees that can run in the thousands of dollars, this would be money well spent.

Tax Planning Tip #2:

If you did not do Tax Planning Tip #1, be advised that the IRS examining agent will likely take two steps to keep the dispute out of Tax Court.

First, the IRS will ask that the taxpayer confirm that the corporate officers are employees under IRC Sec. 3121(d)(1) and will not send the taxpayer IRS Letter 3523: Notice of Determination of Worker Classification.

Second, the agent will ask the taxpayer to confirm that it is not entitled to relief under Sec. 530 of the Revenue Act of 1978.

Tax Planning Tip #3:

We recommend that a taxpayer not represent themselves in an IRS audit. Rather, an experienced tax professional, preferably a tax resolution specialist, be engaged to resolve the IRS’s audit concerns. The IRS agent’s job is to collect the monies due the IRS. Sometimes tax issues are not black or while, but are gray and open to interpretation. The IRS will interpret these issues to maximize the tax assessment. A tax pro, who understands the tax law and how the IRS operates, will be an advocate for the taxpayer with the objective of minimizing the audit assessment.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA EMPLOYERS & INDEPENDENT CONTRACTORS – LEARN FROM NJ AUDITS

June 5, 2019 by Frank

NJ WARNS EMPLOYERS & ACCOUNTANTS WHO ISSUE FORM 1099-MISC TO EMPLOYEES

NJ says employers are misinformed if they believe that by simply reporting a worker’s earnings to the federal government using Form 1099, as opposed to Form W-2, that the worker becomes as an independent contractor.

NJ SOLICITS HELP OF ACCOUNTANTS ABOUT EMPLOYERS WHO MISCLASSIFY INDEPENDENT CONTRACTORS

The New Jersey Department of Labor recently released a message to NJ’s licensed accountants regarding misclassifying employees as independent contractors. NJ is solicitating the assistance of the state’s accountants to educate their business owners as to who is an employee and who is an independent contractor. The misclassification of workers is not a new issue to our firm. We have previously discussed the rules in our August 19, 2011, October 15, 2012, September 10, 2013 and February 15, 2015 posts.

JOINT AUDIT EFFORTS OF U.S. DEPT. OF LABOR (DOL), IRS & STATE DOL

What is important about this NJ announcement is that the state realizes it is losing tax revenues (uncollected unemployment compensation and disability benefits tax funds) and will focus its audit exams on small business owners misclassifying their employees. Now, in addition to the IRS and U.S. Department of Labor audits looking for employer misclassifications of its workers, NJ employers will see NJ auditors in their rear view mirrors.

WILL PA EMPLOYERS BE NEXT?

States are copycats. If NJ is “seeing the light” and collecting additional tax revenues, soon other states will be doing the same.

STATE TAX REVENUES ARE AT RISK

NJ says it has seen a number of cases where small and medium sized employers believe that by simply making the decision to report a worker’s earnings to the federal government using Form 1099, as opposed to Form W-2, a potential employer may unilaterally deem that individual to be an independent contractor, thereby avoiding the responsibility under N.J.S.A. 43:21-7 to make contributions respecting that individual to the unemployment compensation and State disability benefits funds.

EMPLOYERS NEED TO UNDERSTAND AN AUDITOR’S APPROACH

If a service is performed for remuneration or under any contract of hire, written or oral, express or implied, it is considered to be covered W-2 employment, unless the potential employer is able to establish the following with regard to the service at issue and the individual providing that service:

(A) Such individual has been and will continue to be free from control or
direction over the performance of such service, both under his contract of
service and in fact; and

(B) Such service is either outside the usual course of the business for which
such service is performed, or that such service is performed outside of all
the places of business of the enterprise for which such service is performed;
AND

(C) Such individual is customarily engaged in an independently established
trade, occupation, profession or business.

Accordingly, where an employer fails to meet any one of the three criteria listed above with regard to an individual who has performed a service for remuneration, that individual is considered to be an employee and the service performed is considered to be employment subject to all payroll withholding taxes.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.