Check your W4 Now to avoid year-end surprises!

In late 2017 Congress passed a major tax bill called the TCJA, which resulted in lower total Federal income taxes for many Americans. Most Americans pay their Federal income tax through withholding taxes taken out of your check every pay period, and at the end of the year many people find that they have overpaid and receive a nice Federal tax refund.

 

The law change this year will result in less total tax, but the way it is structured most people will see less tax withheld every pay period rather than through a refund check at the end of the year. We are quite concerned about this effect and the surprise you may see at tax filing time next spring. Without a review of your tax situation, you may go from a history of receiving refund checks to a balance due to the government at tax time. The good news is that we still have time to change the year-end result if we act soon.

 

We very, very strongly suggest that every client with withholding, whether from a W-2 job, retirement or Social Security, contact us to set up a time to meet (or to drop off your information and let us calculate and call you) for us to calculate your 2018 tax situation and withholding, and to make changes if needed. We will need a copy of your most recent paystubs and some information about any changes in your family or tax status, and we will then calculate our estimates. We will determine where you will be without a change, and how to change your withholding, if needed, to obtain a refund. If you need to change withholding we will even fill out a new W-4 to provide to your employer to change and “catch up”. Because of the time and knowledge necessary to recalculate your 2018 tax withholding, we will charge a small discounted flat fee for this service, without regard to the time it takes to recalculate your 2018 tax estimates, but we strongly urge you to contact us immediately to determine where you will stand, tax-wise, at the end of 2018. We don’t want any surprises either!

First Time Summer Jobs - Understanding Taxes!

With the summer comes the opportunity for our children to learn about money --- earning it, spending it, saving it and of course, paying taxes on it!  It’s important to teach the next generation of tax payers about taxes and the differences between being paid as a W2 employee or a self-employed contractor.  If you are being paid as a W2 employee, then taxes are being taxen out of your check and you will include your W2 on your tax return.  If you are being paid as an independent contractor, or someone who is self-employed, you will receive a 1099 for your earnings and it is important to understand that no taxes are being taken out of your checks.  This means you are responsible for submitting those taxes throughout the year as “estimated tax payments”.  This also means that if you are self- employed, you may have related expenses (deductions) that could reduce the amount of tax that will be owed at the end of the year.  It’s important to understand how you are being taxed and then seek guidance from an accountant so there are no surprises at the end of the year.

 

Some specific examples to be aware of include the following as noted by the IRS in their publication, Tax Tip 2018-82:

  • Tip income. Someone working as a waiter or a camp counselor who receives tips as part of their summer income should know that tip income is taxable income and subject to federal income tax. They should keep a daily log to accurately report them, as they will report tips of $20 or more received in cash in any single month.
  • Payroll taxes. This tax pays for benefits under the Social Security system. While taxpayers may earn too little from their summer job to owe income tax, employers usually must still withhold Social Security and Medicare taxes from their pay. If a taxpayer is self-employed, then Social Security and Medicare taxes may still be due and are generally paid by the taxpayer.
  • Reserve Officers' Training Corps pay. If a taxpayer is in an ROTC program, active duty pay, such as pay for summer advanced camp, is taxable. Other allowances the taxpayer may receive – like food and lodging allowances paid to ROTC students participating in advanced training - may not be taxable. The Armed Forces' Tax Guide on IRS.gov has more details.

 

Remember, if this is your first time earning money from a job, then make sure to ask questions and be informed about your take-home pay and how you are being taxed!  If you are being claimed as a dependent by your parents, it’s a conversation that everyone should be involved in.  You may or may not be required to file a separate tax return depending on the amount that you earned so make sure to ask questions and receive guidance!  

The Certainty of Taxes… everything is NOT so certain!

It is said that Benjamin Franklin wrote in this world nothing can be said to be certain, except death and taxes.”  While the fact that we must pay taxes is a certain, just how much we need to pay and what types of deductions and credits may apply is certainly NOT certain in 2018.  With the new tax law that went into effect on January 1st, many changes took place and many deductions that many of us are used to were eliminated.  However, there are also members of Congress and multiple discussions happening right now that include reinstating certain deductions as well as interpretations of the very complex guidelines as it relates to certain business deductions and calculations.  So, while paying our taxes is certain, the guidance that tax professionals can provide you at this point in time is definitely not.  While we are watching the rules change and trying to keep up with the new game, it is uncertain what the best play is as of now.  So here is what we suggest:

 

  1. If you deducted something in the past, continue to track the amounts just in case.
  2. Continue to keep all receipts as this will eliminate the headache of trying to find a year’s worth of receipts next January.
  3. Don’t make any changes to your business based on the new tax law change at this time.  It is unclear as to which tax entity (s-corp, c-corp or LLC taxed as a sole proprietor) will have the best tax advantage based on your specific situation at this time so when in doubt, keep it the same!

 

We are hopeful that better guidance will become available by July, 2018 and at that time, taxpayers should be able to receive a clear understanding as to what deductions are “still in the game” and how to move forward with their business tax planning. 

The Parallels of Business and Sports

In an article that was published in Forbes Magazine by Ryan Westwood on July 8, 2015, a comparison was made between Sports and Business.  Four of the main points were as follows:  “1) Appoint a Team Captain, 2) Smart Passing Keeps the Ball Moving Forward, 3) If A Play Stops Working, Smart Players Change It, and 4) Well matched positions make great players”.  This morning as I was attending a business networking meeting, the feature presentation also discussed a parallel between business and sports.  Some additional comments included “Start With a Purpose”, “Run a good Huddle”, “Don’t Coast on Last Year’s Successes”, “Develop a Mentoring Culture” and “Education through Questions”. 

 

I thought that these were great items to chat about in our weekly article.  When your employees are on the same page as you are, and everyone is working towards a common goal or purpose, there isn’t confusion about what should be done or where everyone is headed.  It’s important to include your employees in the conversation of your long-term goals so they can also have purpose and help you achieve your own goals. I also thought the line about “Don’t Coast on Last Year’s Successes” was worth mentioning as well.  While it is really important to focus on the future and obtaining new clients, it is equally as important to focus on the clients we have.  Retention is very important because it takes less effort to keep a happy customer than it is to go out, recruit, market, on-board a brand new client.  So we want to keep our current clients happy and if there is something we can do to improve our service, we should definitely address it. 

  

 

Tommy Lasorda once said, “There are 3 types of baseball players:  Those who make it happen; Those who watch it happen; and those who wonder what happens.”  In running a business, I think it is safe to say that we all want to be in the group who “makes it happen”.  If we are “watching it happen,” then we may be losing clients to our competition, not making changes that we should and not keeping an eye on the “game” and in this topic, that means our company’s books, accounting and tax planning.  And if you are wondering “what happened” when you finished filing your taxes, then you want to make a proactive change so you understand your business, your tax structure and what you can do to reduce your tax liability.  By speaking with a trusted tax advisor, go from “what happened” to “make it happen” and take charge of your taxes!

Filing a Tax Extension (For Time)

As the filing deadline approaches for individual tax filers and C-Corporation Tax Filers (both on April 17th), you may find yourself in need of an Extension.  It is important to note that a Tax Extension is one of time, and not an extension to pay.  If you are going to owe taxes, you must pay them by your tax deadline to avoid interest and penalties.  For example, if you know you will owe tax and file your tax return in July (with a valid extension of time accepted by the IRS), that amount due was still due on April 17th. 

 

Something that we’ve been made aware of is that the IRS could reject your extension if you knew you had tax liability and listed zero tax liability on the extension form.  The new extension forms require tax filers to list any potential tax liability.  If you simply write zero, the IRS could reject the extension based on the following court case.

 

Crocker v. Commissioner, 92 TC 899 (1989) -- the court held that if a taxpayer files an extension reflecting an anticipated tax liability of zero, but had in his possession at the time of the filing enough evidence to know that the liability would not in fact be zero, the Form 4868 is invalid.

 

So what does this mean for you?  When completing an extension of time, at least use your prior year tax liability as a minimum guideline and make sure to send some estimated tax payment to the IRS prior to your filing date.

 

If you are unsure about your tax liability, filing an extension, or any other tax-specific question, make sure to reach out to your Tax Professional with enough time prior to the deadline to answer your questions and provide the help you need.