2019 Social Security Wage Base and Nanny Threshold

Social Security Wage Base: The maximum amount of wages subject to the 6.2% Social Security tax will rise from $128,400 to $132,900 in 2019. Medicare tax rates and wages bases will remain the same as 2018.

Nanny Tax Threshold: The maximum wages that can be earned by a household employee without being subject to Social Security or Medicare tax, often referred to as the “nanny tax”, will remain at $2,100, the same as it was in 2018. Amounts paid above this threshold to anyone who works in and/or around your home such as babysitters, housekeepers and yard workers, are subject to payroll tax.

IRS Makes Changes to Taxpayer Transcript Requests

Did you know the IRS will no longer fax copies of taxpayer’s transcripts to their tax preparers? In an effort to protect taxpayer information and prevent identity theft, beginning in January 2019, when taxpayers or third parties call the IRS with an individual or business transcript request, the transcript will be mailed to the taxpayer’s address of record. This change may cause delays in a tax professional’s ability to complete client tax returns, especially if the address on file is no longer accurate. We recommend taxpayers diligently keep relevant tax documents in a safe place to avoid needing to request transcripts. If you have concerns about your tax return records, please contact us for assistance.

IRS Delays Changes to Form W-4

Following feedback from the payroll and tax communities, the Treasury Department and the IRS have decided to implement the new version of the Form W-4, Employee’s Withholding Allowance Certificate, in 2020, rather than 2019. The 2019 version of the Form W-4 will be similar to the current 2018 version. While the new form is intended to assist the taxpayer in more accurately estimating withholdings, the implementation delay provides employers with additional time to consider the impact of the changes, how to communicate the change with employees and time to modify their internal processes.

Tax Strategies to Consider Before Year-End

Most of the changes under the Tax Cuts and Jobs Act of 2017 were effective at the beginning of 2018. Below are some things to consider before year-end that may help you maximize the benefits and minimize the burdens of the new tax law.

Withholdings
Use the IRS Withholding Calculator to help determine if you need to change your current withholdings before year-end to more closely match your expected tax obligations. The tax savings you anticipate might have already been given to you through your withholding. Take a few minutes to perform a paycheck checkup to protect yourself against an unexpected tax bill or penalty!

Managing Itemizing
The Tax Cuts and Jobs Act significantly increases the standard deduction, so many taxpayers may no longer be itemizing. Compare the itemized deductions to which you may be entitled to this year to the new standard deduction. If you won’t benefit from increasing itemized deductions because the standard deduction will be greater, consider bunching charitable contributions into every other year, setting up a donor-advised fund, or, if over 70-1/2 years old, making charitable contributions through IRA distributions. If you are taking the deduction this year, add to it by donating unused items to charitable organizations or by scheduling routine medical procedures and refilling medical prescriptions before year-end.

Reasonable Compensation
The rules surrounding the new 20% deduction for “qualified business income” from a partnership, sole proprietorship, or S corporation will create more IRS scrutiny of wages paid to shareholders of S corporations. Make sure as an S corporation owner, your salary meets the “reasonable compensation” standard – what you would pay someone else to do the job you do. If you have not taken a salary, you should do so by the end of the year.

Healthcare
As the 2019 Marketplace Open Enrollment period draws closer, remember that the Tax Cuts and Jobs Act eliminates the shared responsibility payment. Individuals failing to maintain minimum essential health care coverage will no longer be penalized for years after 12/31/18.

Alimony
For divorces and legal separations after 2018, alimony payments will no longer be deductible by the payer nor included as gross income by the recipient. If you are in the middle of a divorce and will be ordered to pay alimony, consider finalizing the divorce before the end of 2018. However, if you will be the recipient of alimony payments you may want to hold off finalizing the divorce until 2019.

We hope you found these tips helpful. It would be our pleasure to assist you in applying some of these strategies to your unique situation, so please make an appointment to stop by our office.

Relief for Victims of Hurricane Florence

The IRS has provided tax relief for victims of Hurricane Florence residing in parts of North Carolina. The relief postpones various tax filing and payment deadlines that occur on or after September 27th, 2018. If you were impacted by this storm, you may have until January 31st, 2019 to make tax payments and file your income and quarterly payroll tax returns. Some states are also providing special tax relief because of this storm. Contact us for more information.

Tips for Reconstructing Records after a Disaster
In the aftermath of a disaster like a hurricane, you may need to reconstruct certain records which were destroyed. This may be essential to file your tax return, get federal assistance, or receive an insurance reimbursement. Below are some tips to help you with this process:

  • Use the “Get Transcript” tool on IRS.gov or call (800) 908-9946 to order a free transcript of your tax return, which will be sent by mail to your last known address.
  • Take pictures or video to establish the extent of the damage as soon after the disaster as possible.
  • Review your insurance policy to try to obtain a value of your home for replacement purposes.
  • Check the county assessor’s office when no other records are available to establish your property’s value.
  • If you recently made home improvements, contact the contractors to see if records are available.
  • To determine the FMV of your vehicle, check Kelley’s Blue Book, National Automobile Dealers Association, or Edmunds.
  • Check your phone for pictures of your home before the disaster. The IRS recommends taking pictures of the contents of a house or business, with a focus on high-value items to help support insurance claims or claims for tax benefits.
  • If pictures and videos are unavailable, sketch pictures of each room of your home that was impacted.
  • Contact your credit card company or bank for past statements. Consider cloud-based backup services to store records like bank statements, family photos, and other files outside of your home. The IRS even recommends storing copies of documents with a family member or trusted friend somewhere outside the area that may be affected by the disaster.

Are You Paying Yourself Correctly as a Shareholder of an S Corporation?

If you operate your business as an S corporation and pay yourself on a 1099-MISC, then you’re possibly in violation of tax law, which can subject you to substantial tax liabilities and penalties.

The law requires you to pay yourself a salary for the work you do for the corporation. Your salary should be reasonable based upon your position, hours worked, and duties performed. It should also be equivalent to executives or employees in similar businesses. The salary shouldn’t be in the form of distributions or 1099 payments. The payments should be run through payroll to ensure the proper income tax, social security and unemployment taxes are deducted as they are for a non-shareholder employee or a worker in another company. The business can deduct the wages and taxes from income as operating expenses.

You may be tempted to pay yourself as a 1099 recipient, as life seems so much simpler this way — no payroll taxes to deal with, no payroll tax returns to file, and no payroll services fees to pay. However, having your S corporation pay you this way could cost you thousands of dollars in taxes, interest, and penalties! Because this is a violation of tax law, the IRS can reclassify your 1099 payments as W-2 wages and collect the back payroll taxes and interest on the payroll taxes. With the passage of the Tax Cuts and Jobs Act, failure to pay reasonable compensation is no longer just a payroll tax issue. The Act introduced a new deduction that allows shareholders of an S-Corporation, as well as sole proprietors and partners to deduct 20% of the qualified income from their business on their personal returns. However, qualified business income excludes reasonable compensation paid to the shareholder of an S-Corporation. Failure to pay yourself a reasonable salary will falsely inflate the amount of this deduction, which may lead to the IRS to recalculate the amount of your deduction based upon the amount of compensation that should’ve been excluded.

There’s no requirement that an S corporation pay out all its profits to the shareholder as wages. You may be able to apportion the payments between wages and distributions. Distributions are deemed to be a return on the shareholder’s investment. They’re included in a shareholder’s taxable income but aren’t subject to payroll taxes and aren’t considered self-employment income subject to self-employment tax. Determining this apportionment can be tricky, so contact us for assistance.

Expensing Assets Under the Tax Cuts and Jobs Act

Because of the Tax Cuts and Jobs Act (TCJA), taxpayers can now deduct 100% of the cost of most new or used tangible property, other than buildings, acquired and placed in service after Sept 27, 2017. The new law also made Section 179 expensing more favorable by allowing taxpayers to immediately deduct the entire cost of qualified property on an asset-by asset basis up to a maximum of $520,000 annually. This limit is reduced by one dollar for every dollar that the costs of all section 179 property exceeds $2,070,00 for assets placed in service beginning in 2018.

The Act also consolidates various leasehold improvement categories into one category – qualified improvement property. Qualified improvement property consists of improvements made to the interior of nonresidential real property after the building was placed into service. Qualified improvement property is also eligible for Section 179 expensing.

Should you take 100% bonus depreciation or select Section 179 expensing? It depends! Here are several considerations to keep in mind when deciding between Section 179 expensing and 100% bonus depreciation:

  • Neither bonus depreciation nor Section 179 expensing affect Alternative Minimum Tax (AMT).
  • Bonus depreciation must be elected out of by asset class; Section 179 expensing is elected on an asset by asset basis.
  • Section 179 expensing is limited to taxable income; bonus depreciation is not limited by taxable income.
  • Bonus depreciation can create a Net Operating Loss (NOL), which can be carried back and possibly generate a refund from a prior tax year.
  • Section 179 expensing can control taxable income to maximize the new 20% Qualified Business Income (QBI) deduction or limit the new $500,000 business loss limitation.

Selecting between 100% bonus depreciation and Section 179 expensing will not only affect your taxes in the current year but also in a future year when the asset is sold. Contact us to discuss how this can impact you!

4th Quarter 2018 Due Dates

October 1:

  • Businesses: Deadline for establishing a new SIMPLE retirement plan for 2018; Deadline to provide written notice to employees related to Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) plans that begin on January 1, 2019

October 15:

  • Individuals: 2017 return due (Form 1040) if on extension
  • Calendar-year C corporations: 2017 return due (Form 1120) if on extension

October 31:

  • Employers: File Form 941 for 3rd quarter 2018

During November:

  • Employers: Request Form W-4s from employees whose withholding allowances will be different in 2019

December 17:

  • Calendar-year C Corporations: 4th installment of 2018 estimated tax due

Tax Cuts and Jobs Act Update

Changes to Qualified Tuition Plans:
Qualified tuition plans, commonly known as 529 plans, are a popular way to ease the financial burden of paying for college. Before the Tax Cuts and Jobs Act, earnings in a 529 plan could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. With the passage of the Tax Cuts and Jobs Act, 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Another change came as a result of the 2015 Protecting Americans From Tax Hikes (PATH) Act, which addresses refunds of tuition or other qualified education expenses. If a student withdraws from a class, there is often a refund issued by the institution. As long as the beneficiary recontributes the refund to 529 plan within 60 days, the refund is nontaxable! To discuss these two changes or the overall benefits of 529 plans, give us a call.

Changes to the Meals & Entertainment Deduction:
The Tax Cuts and Jobs Act of 2017 has made many important business tax changes, but one significant change relates to the deductibility of meals and entertainment. Prior to 2018, a business engagement at a local sports venue involving the cost of admission, food, or beverage was eligible for a 50% deduction. With the passage of the Tax Cuts and Jobs Act, entertainment expenses are now entirely nondeductible, regardless of the nature of the meeting. The Tax Cuts and Jobs Act also limits the deductibility of business meals provided for the convenience of the employer to 50%, which had been 100% deductible by the employer. Given these changes, businesses should consider any internal adjustments they need to make for tracking and reporting these costs. If you need guidance on the proper treatment of meals and entertainment expenditures, don’t hesitate to contact us for help!

Examples of Common Types of Meals & Entertainment Expenditures (Before & After the Act)
meals and expenditures after tax cuts and jobs act

Outsourcing Payroll? Payroll Taxes are Still YOUR Responsibility!

pay statement

Padgett has long encouraged clients to use reputable vendors, particularly when it comes to payroll. However, did you know that YOU are ultimately responsible for the payment of withheld taxes, even if you use a payroll service provider? Although outsourcing payroll to a third party can help ensure that filing deadlines and deposit requirements are met and greatly streamline business operations, it's your ultimate responsibility to pay these taxes, even if the failure to pay is entirely due to the payroll service provider's negligence or fraud.

Best Business Practices:

  1. Don’t change the address on file with the IRS to that of the payroll service provider. Changing the address may prevent your being informed a problem in time to do anything about it.
  2. Ask the payroll service provider if they have a fiduciary bond. This could protect you in the event of default. Padgett Payroll offers this.
  3. Ensure that your service provider is using the Electronic Federal Tax Payment System (EFTPS) as Padgett Payroll does. Payment history is tracked and can be viewed on-line, allowing you to easily confirm payments. A red flag should go up the first time a payroll service provider misses or makes a late payment. Once you have an EFTPS account, you’ll also be able to make tax payments that your payroll service provider typically doesn’t make for you (e.g., estimated tax payments).
  4. If you’re not using Padgett Payroll Service as your outsourced provider, ensure that your provider is listed as having passed the IRS Assurance Testing System (ATS) and/or Business Acceptance Testing (BATS) requirements.

Outsourcing your complete payroll needs can save you time, help you run your business better, and protect you from payroll tax penalties. We suggest you consider a payroll service, such as Padgett Payroll Services, that’s designed specifically for small businesses like yours. For additional information, please contact our office for an appointment. We will be happy to discuss your options.

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