What Do You Need to Know about Deductions?
May 24th, 2010 | Posted by taxAs an employer, you are responsible for calculating and deducting the correct amounts from your employees’ paychecks. Doing your homework in this area is a necessary evil that will pay off in terms of avoiding penalties and other troubles with tax authorities.
Payroll deductions cover a wide range of items such as federal, state and local income taxes. Rules vary from time to time and state to state, so it is important to keep abreast of new IRS and state government mandates. Who pays the deductions also varies — some deductions are paid by the employer, some by the employee and some by both.
Both the employee and the employer contribute to Medicare and Social Security. Make sure your business adheres to the correct payment schedule (quarterly, monthly or semiweekly), which varies according to how much your business collects in employment taxes.
Employers pay for federal unemployment insurance, which funds the federal unemployment program.
State unemployment insurance is a tricky area. Some states view this solely as an employer tax, meaning you do not have to deduct this amount from payroll. Other states impose this tax on employers as well as employees. The same goes for workers’ compensation insurance, which also depends on what type of business are you in.
State and local tax liabilities are just as complicated — if not more so. Start by recognizing that not all states require withholding of state taxes and not all states have local taxes. Things get even more complicated if your business operates in more than one state or if some of your employees live in one state and work in another.
Payments for disability insurance also vary widely according to the state in which you operate. Employers and employees share the responsibility differently in different states.
Since deductions vary from state to state, be sure to check with your tax advisor or state and local tax authorities to determine your specific deduction requirements.
For more useful information on business taxes, read Special Report: Top 10 Tax Tips for Small and Growing Businesses.
Adjusting Your Tax Withholding
May 24th, 2010 | Posted by taxThe act of withholding taxes is supposed to provide an accurate picture of how much you’ll pay in taxes for a given year. Nonetheless, like everything else related to paying taxes, we can (and do) find ways to try to make the system more beneficial for our needs. This being said, you should increase or decrease your withholding if you are having too little or too much withheld from your paychecks.
By filling out a new W-4 Form for your employer, you can make the necessary adjustments to your withholding. On line 5 of the W-4, you can decrease the number of allowances, or on line 6, you can add the amount you wish to have withheld. The more you have withheld, the more likely your tax bill will be covered and you will not owe money at tax time. In fact, you may benefit from a refund check. For those who are not very good at setting money aside for taxes, having more taken out of your weekly or biweekly paycheck is a benefit.
For a married couple where one person has a steady income and the other is an independent contractor or freelancer, adjusting the withholding can be very helpful. Claiming more withholding for the person with the steady salary will be beneficial when the spouse with the independent income has higher earnings. This can be adjusted, should the independent working spouse have lower earnings, and can help ensure that they are covered at tax time.
While you certainly want to make sure you have enough withheld to cover your tax obligations, you do not want to have too much money withheld. While many people look forward to receiving a big tax refund check, this is actually not sound financial planning. The money that appears in the refund check is your money; the government has been holding it because you’re paying too much in withholding. This money could be invested and earning interest for you, rather than just sitting with the government and showing up in your refund check.
Events throughout the year can also alter your tax status at the end of the year. For this reason, it’s important that you review your exemptions at least once during the course of the year, allowing you time to make adjustments. Among the many life situations that can raise or lower the amount of withholding include: buying or selling a home, marriage, divorce, death, birth or adoption of a child, taking care of a parent, and a situation where one spouse starts or stop working.
Make sure to look at income from other sources, which might include the sale of real estate or capital gains from investments. Consider this when adjusting your tax withholding or when paying estimated taxes.
In short, stay on top of your tax withholding. Do the calculations — use online calculators if necessary — to try to get the accurate amount you should have withheld, which should be slightly more than your tax bill.
Claiming Dependents on Your Tax Returns
May 24th, 2010 | Posted by taxWhile it’s easy to look at your two young children sitting across from you at the breakfast table and know that they are indeed your dependents, it’s not always as simple to define who does and does not qualify as a dependent on your tax return. Today, there are numerous living situations that can present gray areas when trying to determine whether someone is a dependent for whom you can claim an exemption.
Due to the many possible scenarios, the IRS has come up with a few simple tests to determine whether you can claim someone as a dependent on your tax return:
1. Relationship: You can claim relatives even if they’re not living with you. You can also claim a nonrelative if he or she has been living with you for the entire year.
2. Citizenship: To qualify for an exemption, your dependent must be either a U.S. citizen or a resident of Canada, Mexico, or the United States for part of the year. If you have adopted internationally and the adoption is not yet finalized, or the child did not automatically become a citizen through the Child Citizenship Act of 2000, you can still claim the child as a dependent if he or she was living with you as a member of your household for the year. Foster children fall under special exemptions.
3. Joint return: If you file a joint return with your spouse, you cannot claim him or her as a dependent. If, however, your spouse meets the other four requirements and files a separate tax return, he or she can be claimed as a dependent.
4. Gross income: For the 2008 tax year, a person’s income must be under $5,350 for you to claim that person as a dependent. All income in the form of money, goods, property, or services that’s not exempt from tax is considered gross income. If your children are under the age of 19, or if they’re under the age of 24 and are full-time students for at least five months during the year, they are exempt from this rule.
5. Support: The person must receive more than half of his or her support for the year from you. Again, this is not the case for children under age 19 or a child who is a full-time student under the age of 24. Children of divorced parents, or parents who have been living apart for some portion of the year, are generally dependents of the parent who has custody or has provided more than half the child’s support for the year.
Using these five tests, you should be able to qualify your deductions. For special situations where you’re unsure of someone’s status, you can find more detailed information by looking at IRS Publication 501. When claiming dependents, remember to include their Social Security numbers on your tax form.
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