It’s that time again and the holidays are fast approaching.  It’s a time of excitement, family, get togethers, and…finances!  For most, year-end is the time when we start thinking about taxes and our financial situation for the year.  December 31st is too late, but if you’re reading this now, you have a good chance to get things in order to make tax time and other year-end tasks less stressful.  Keep reading to see how to get ready!

Catch Up Your Bookkeeping

If you have some a back log of bookkeeping to do, now is the time to get caught up and ready for January.  Bookkeeping can be as simple as a spreadsheet if you’re a sole proprietor, or if you have LLC or Corporation, then you really should use software like Xero.  Don’t spend hours and hours on this.  Technology is come along away in the past 5 years so chances are “there’s an app for that”!

Having your books caught up will tell you how much income and expenses you have for the year.  Once you know that, then you’ll have a good idea of what your tax bill is going to look like.

Taxes

If you’re self-employed chanced are that you should be paying estimated tax payments–which are basically tax prepayments.  Reviewing how much you’ve paid in, and making any necessary catch up payments will help ensure you don’t have a large tax bill and will help you avoid any pre-payment penalties.

Additionally, you should review your net income to ensure you aren’t getting caught with a large unexpected tax bill.  Reviewing this will help you know what to expect when it’s time to file taxes.  And if you have extra cash, you can even pay some or all of your tax liability before you file your return.

 

Retirement Accounts

Saving for retirement has almost become a cliché term.  But did you know most business owners aren’t taking advantage of having their company pay themselves for retirement?  It’s one of the great tax planning tools that a business owner can use!  The company (which you own) pays into a retirement account for you.  So it’s like getting a double benefit!  Every business owner should be doing this.

There are many different options for retirement accounts.  Whether it’s a 401K, SEP, or SIMPLE IRA, find the one that works for you and get it started.

Re-evaluate Your Pricing & Costs

End of year is a great time to look at your pricing and costs.  It’s also a great time to review your Gross Profit % and make sure you’re charging enough for your products/services, or adjust your Cost of Goods Sold (COGS).  Keep in mind that generally speaking, your COGS should be no more than 30% of your revenue.  If it is, you could be bleeding cash and you may soon run out.  If you run out of cash, guess what?  The jig is up and you may be out of business.  In order to do this you’ll need to of course have your bookkeeping caught up so do that first, and then review these numbers.

 

…your COGS should be no more than 30% of your revenue

Review Your Systems and Processes

Finally, review your internal systems and processes.  Or, maybe this is the time where you commit to write them down.  Mapping out your systems and processes does a few things for you:

  1. You can discover inefficiencies that you may have never seen.  Writing something down  has the amazing effect of providing objectivity!  You can use paper or online tools like Google Docs or Evernote to do this.  That way, if you ever have staff taking over certain jobs, they’ll know what to do.
  2. It also prepares you to be able to hire staff and delegate tasks or jobs.  Doing this allows you to take on more of a managerial/strategy role and be less of a technician.  As business owners, we should all be moving away from the technical side of the business so we can work on the vision and growing the company.

 

As business owners we should all be moving away from the technical side of the business so we can work on the vision and growing the company

 

This isn’t meant to be an exhaustive list by any means, but it should get you started.  If you need help, just ask!  We’ve helped countless businesses do these things and we can offer down-to-earth advice that will make doing this, easy!

 

 

Read More


audit-proof-your-business-with-evernote

 

Going through an IRS Audit can be a big deal if you’re not prepared.  But with today’s technology, we’re going to show you an easy way to make sure you have all the documentation you need to prove your business expenses.  I’m not saying that all audits are the same, but most of the ones we’ve helped clients through ask for substantiation, or proof, of certain expenses that you’re claiming on your tax return.  If you can’t provide adequate records and prove the business purpose, then the IRS could disallow those expenses—and you don’t want that!

 

Use Technology

We spend lots of time vetting out new technologies to find the ones that work well, and the ones that don’t.  Part of this process is actually using the apps, and analyzing a few things: 1. How easy is it to use and 2. Does it work well with a general small business work process?  Our favorite app for retaining information is Evernote.  If you’ve never heard of Evernote (that would be surprising), we recommend checking them out on the web.  We’re going to show how to use Evernote to audit-proof your business.

 

Introduction to Evernote

Evernote is a like a central hub for all data you want to put into it.  For me, I use it like an external hard drive for my brain!  The power of Evernote lies within it being accessible on every device you own, easy to get information into it, and easy to find the information later when you need it.  For the purpose of this post, we’re going to cover:

  • Using your mobile device to scan receipts
  • Organizing into Notebooks
  • Using tags
  • Using other services to connect to Evernote

 

Overview

To audit proof your business you need to track key elements about your expenses.

  • Date you purchased
  • Amount
  • Who you purchased from
  • Business purpose

Most of the time a receipt covers all that quite nicely.  The only thing you should add is Business Purpose (which we’re going to show you).  You should also keep bank/credit statements, and even cleared checks.

 

Using Evernote to Achieve Audit Protection Bliss

At the very basic level, Evernote is structured as Notebooks and Notes that live within those Notebooks.  You can also use Tags to help you organize and search easier.

Keep Receipts

Step 1: Create a Notebook called Receipts

8baec26e-c5bb-4f1e-9471-aee93d24ac22

 

Step 2: Use the mobile app to snap scans of your receipts as you make purchases

ca8bfcd6-99ff-403e-ad2c-24d6797f0418

 

Notice that the Notebooks is “Receipts” and we’re using a tag called “office supplies” so that we can easily search for office supplies.  Also, you’ll notice we put the business purpose as the name of the note.  You can do this on your computer, or on your mobile device.

Step 3: Do the same process for every receipt you get.  Evernote will become your repository for all your receipts.  You can easily search for your receipts by tag if you want to see all of your Office Supply receipts.

Keep Bank Statements

After using Evernote you’re going to find more useful ways to use it in your everyday life.  One key feature is being able to keep and store attachments in notes.  Now, downloading your bank statements and putting them in Evernote is not that hard, but it’s also not that convenient.  Remember we said that one of the key features to apps we use is convenience?

The solution to this is to use an Evernote Marketplace app called File This.  File This is simply an app that will automatically retrieve your bank, credit card, utility statements, and put them where you tell it.  While it will export directly to popular cloud-based file sharing apps like Google Drive & Dropbox, you can also connect it to Evernote.

Once you have it File This connected to Evernote, your bank statements will automatically appear in the designated Notebook within Evernote.  File This is pretty robust and even has a free version for you to get started on.

 

Start Scanning!

Scanning your receipts and storing bank statements within Evernote will start you down the path of preparedness if the IRS decides to “knock on your door”.  Of course, in order for this system to work you have to be committed and adopt it as a workflow/system you use in your day to day life.  We use this system, we have clients using this system, and we can tell you that with a bit of discipline, it works!

Want to learn more about Evernote?  I’m an Evernote Certified Consultant so drop us a line and we’ll help you figure which version is best for you, and discuss how you can use it in your business.

Here are some useful links where you can sign up for free trials:

Evernote Basic

Evernote Plus

Evernote Premium

Evernote Business

Read More


April 15 is the tax day deadline for most people. If you’re due a refund there’s no penalty if you file a late tax return. But if you owe taxes and you fail to file and pay on time, you’ll usually owe interest and penalties on the taxes you pay late. Here are eight facts that you should know about these penalties.

1. If you file late and owe federal taxes, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late.

2. The failure-to-file penalty is usually much more than the failure-to-pay penalty. In most cases, it’s 10 times more, so if you can’t pay what you owe by the due date, you should still file your tax return on time and pay as much as you can. You should try other options to pay, such as getting a loan or paying by credit card. The IRS will work with you to help you resolve your tax debt. Most people can set up a payment plan with the IRS using the Online Payment Agreement tool on IRS.gov.

3. The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes.

4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100 percent of the unpaid tax.

5. The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.

6. If the 5 percent failure-to-file penalty and the 0.5 percent failure-to-pay penalty both apply in any month, the maximum penalty amount charged for that month is 5 percent.

7. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.

8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time.

 

Reach out to us if you have questions, or think you’re going to owe penalties and interest!  No one wants to pay more than they’re fair share to the IRS!

Read More


In our effort to educate the small business owner in how to keep more of their hard earned money, often we get asked: So what is better ROTH or Traditional IRA’s?  So we asked a local Financial Expert to explain the differences.

 

What type of IRA (Traditional or Roth) best meets your financial goals?

Tax Benefits:

Roth:  Tax-free growth.  Tax-free qualified withdrawals.

Traditional:  Tax-deferred growth Contributions may be tax-deductible..

 

Eligibility Age:

Roth:  Any age with employment compensation.

Traditional:  Under age 70½ with employment compensation.

 

Taxation at Withdrawal:  

Roth:  Contributions are always withdrawn tax-free.  Earnings are federally tax-free after the five-year aging requirement has been satisfied and certain conditions are met.

Traditional:  Withdrawals of pre-tax contributions and any earnings are taxable when distributed.

 

Penalties at Withdrawal: 

Roth:  A non-qualified distribution is subject to taxation of earnings and a 10% additional tax unless an exception applies.  (A distribution from a Roth IRA is federally tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, qualified first time home purchase, or death.)

Traditional: Withdrawals before 59½ may be subject to a 10% early withdrawal penalty unless an exception applies.  (For Traditional IRAs, penalty-free withdrawals include but are not limited to: qualified higher education expenses; qualified first home purchase (lifetime limit of $10,000); certain major medical expenses; certain long-term unemployment expenses; disability; or substantially equal periodic payments.)

 

Required Minimum Distributions (RMD’s)

Roth:  Not subject to minimum required distributions during the lifetime of the original owner

Traditional:  RMD’s starting at 70½

 

Maximum Contribution: 

For both 2013 and 2014: $5,500 ($6,500 if you are 50 or older) or 100% of employment compensation, whichever is less

* Catch up contributions:  Individuals age 50 or older (in the calendar year of their contribution) can contribute an additional $1,000 each year

** Contribution deadline:  Tuesday, April 15, 2014, for the 2013 tax year

Note: A Rollover IRA is a Traditional IRA often used for rollovers from an old workplace plan, such as a 401(k).

Feel free to reach out to either us if you have further questions.
Read More


22495836-tax-documents-with-accessories

 

 

 

 

If you run a small business, then chances are you maybe required to file 1099’s.  These are probably one of the most misunderstood forms business owners file.

Here’s the scoop:

What are they for?

Form 1099 is used to report money paid to individuals who are not your employees.  The IRS uses your 1099 to make sure the people you pay are reporting the income on their tax returns.

Who should I file a 1099 for?

File a 1099 for everyone that is not an employee (individuals you’re not withholding taxes for) that you pay more than $600 to in a calendar year.  You are not required to file 1099’s for money paid to company’s (LLC, Corps).

 How do I file a 1099?

There are many service providers that will do this for you.  Whether it’s your accountant, or a web service, we recommend using one to assure that they are accurate, and filed timely.  All 1099’s should be filed and in the mail by Jan 31st.  But if you’re a DIY (do it yourself) type of person, there are plenty of services on the web that do this for you at a very reasonable cost.  Our favorite is Track1099

How do I keep track of how much and who to file 1099’s for?

This is easily done in accounting software like Xero and QuickBooks.  You can designate contacts/vendors as 1099 recipients, and as long as you record all your transactions, you can run a report at the end of the year that will tell you how much to file them for.  We recommend using Xero for this.  It’s easy, and will be a breeze to setup and do.

What happens if I don’t file 1099’s?

You may get away with it…for awhile.  But if the IRS decides to audit you, and you didn’t file, then watch for penalties coming your way!

What do I do if I have no clue what to do?

Easy, reach out to us and we can take care of from start to finish!  We can help no matter what state you live in.

 

Have questions, feel free to leave comments and we’ll answer them ASAP.  Want to reach out directly, fill out our “Contact” page and we’ll get back to you within 1 business day.

Thanks for reading!

Read More


18476406-doodle-style-health-care-costs-illustration-in-vector-format-includes-text-and-currency

Health Care Reform is here!  We’ve invited a special guest to discuss what to expect.  The rest of this post is written by John Heaton of JMH Insurance Solutions.  This is a MUST read for any small business, especially if you are in California!

 

It is finally here.  We are three weeks into open enrollment.  The Affordable Care Act has definitely seen its detractors but it has survived up to this point.  No matter what happens in Washington D.C., the exchange in California is here to stay (that is, at least for 2014).

So after 3 weeks what have we learned?

  • While it has had it’s issues, Covered California has been the most ready exchange in the country
  • The federal exchange has been a train wreck
  • Pricing is higher, but not as much as expected
  • Qualifying for a tax subsidy seems to be a moving target

And finally:

  • Most people still don’t know much about the Affordable Care Act and the mere topic scares them to death

For those of you who are still in the dark about “ObamaCare”, you are not alone.  Here is a quick rundown …

Covered California is the new state run exchange that serves as a market place to shop for and purchase health insurance.  On the exchange you can see the different carriers, plans, and if you qualify for premium assistance.  I was asked the other day, “Do I have to buy on the exchange?” The answer is no.  You will be able to purchase health insurance on or off the exchange.  As a matter of fact, the only reason to purchase on the exchange is if you want to qualify for a premium subsidy or a tax credit if you are a business owner.

Here a couple of highlights about the new health care law:

  • All plans starting in 2014 are guaranteed issue (meaning no one can get decline insurance coverage)
  • Everyone will be required to have health insurance or face a penalty
  • Businesses with 50 or more employees must offer health insurance (the enforcement of this has been pushed back to 2015)
  • All health insurance plans will have minimum essential coverage

As the short history of this legislation has shown, I anticipate more changes to the program in the next few months as we get closer to the actual roll-out of coverage Jan.1, 2014.

 

November 7th we will be hosting a special webinar dedicated to explaining what health care reform means to the small business.  Stay tuned for more info on how to sign up!

Read More


15756731-you-are-getting-audited-mail-illustration-design-over-white Today, I received a news alert from the IRS.  I thought I would share as it’s chalked full of useful information.

Here are some tips from the IRS on tax recordkeeping.

• You should keep copies of your filed tax returns as part of your tax records. They can help you prepare future tax returns. You’ll also need them if you need to file an amended return. 

• You must keep records to support items reported on your tax return. You should keep basic records that relate to your federal tax return for at least three years. Basic records are documents that prove your income and expenses. This includes income information such as Forms W-2 and 1099. It also includes information that supports tax credits or deductionsyou claimed. This might include sales slips, credit card receipts and other proofs of payment, invoices, cancelled checks, bank statements and mileage logs.

• If you own a home or investment property, you should keep records of your purchases and other records related to those items. You should typically keep these records, including home improvements, at least three years after you have sold or disposed of the property.

• If you own a business, you should keep records that show total receipts, proof of purchases of business expenses and assets. These may include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices. Also include credit card receipts, sales slips, canceled checks, account statements and petty cash slips. Electronic records can include databases, saved files, emails, instant messages, faxes and voice messages.

• If you own a business with employees, you should generally keep all employment-related tax records for at least four years after the tax is due, or after the tax is paid, whichever is later.

• The IRS doesn’t require any special method to keep records, but it’s a good idea to keep them organized and in one place. This will make it easier for you to prepare and file a complete and accurate return. You’ll also be better able to respond if there are questions about your tax return after you file.

 

What are you thoughts on these?  Do you have any questions?

Give us a call or shoot us an email if you have questions about any of these recordkeeping topics!



Although the 2012 tax season is officially over, tax scams unfortunately are not, which is why the IRS issues an annual “Dirty Dozen” list that includes common tax scams affecting taxpayers.

Taxpayers should be aware of these tax scams so they can protect themselves against claims that sound too good to be true, and because taxpayers who buy into illegal tax scams can end up facing significant penalties and interest and even criminal prosecution.

Here are the tax scams that made the IRS “Dirty Dozen” list this filing season:

1. Identity Theft. Tax fraud through the use of identity theft tops this year’s “Dirty Dozen” list. Combating identity theft and refund fraud is a top priority for the IRS. The IRS’s ID theft strategy focuses on prevention, detection and victim assistance. During 2012, the IRS protected $20 billion of fraudulent refunds, including those related to identity theft. This compares to $14 billion in 2011. Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should immediately contact the IRS so the agency can take action to secure their tax account. If you have received a notice from the IRS, call the phone number on the notice.

2. Phishing. Phishing typically involves an unsolicited email or a fake website that seems legitimate but lures victims into providing personal and financial information. Once scammers obtain that information, they can commit identity theft or financial theft. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. If you receive an unsolicited email that appears to be from the IRS, send it to phishing@irs.gov.

3. Return Preparer Fraud. Although most return preparers are reputable and provide good service, you should choose carefully when hiring someone to prepare your tax return. Only use a preparer who signs the return they prepare for you and enters their IRS Preparer Tax Identification Number (PTIN).

4. Hiding Income Offshore. One form of tax evasion is hiding income in offshore accounts. This includes using debit cards, credit cards or wire transfers to access those funds. While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements taxpayers need to fulfill. Failing to comply can lead to penalties or criminal prosecution.

5. “Free Money” from the IRS & Tax Scams Involving Social Security. Beware of scammers who prey on people with low income, the elderly and church members around the country. Scammers use flyers and ads with bogus promises of refunds that don’t exist. The schemes target people who have little or no income and normally don’t have to file a tax return. In some cases, a victim may be due a legitimate tax credit or refund but scammers fraudulently inflate income or use other false information to file a return to obtain a larger refund. By the time people find out the IRS has rejected their claim, the promoters are long gone.

6. Impersonation of Charitable Organizations. Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds. Taxpayers need to be sure they donate to recognized charities.

7. False/Inflated Income and Expenses. Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. In many cases the taxpayer ends up repaying the refund, including penalties and interest. In some cases the taxpayer faces criminal prosecution. In one particular scam, taxpayers file excessive claims for the fuel tax credit. Fraud involving the fuel tax credit is a frivolous claim and can result in a penalty of $5,000.

8. False Form 1099 Refund Claims. In this scam, the perpetrator files a fake information return, such as a Form 1099-OID, to justify a false refund claim.

9. Frivolous Arguments. Promoters of frivolous schemes advise taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These are false arguments that the courts have consistently thrown out. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

10. Falsely Claiming Zero Wages. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, scammers use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 to improperly reduce taxable income to zero. Filing this type of return can result in a $5,000 penalty.

11. Disguised Corporate Ownership. Scammers improperly use third parties form corporations that hide the true ownership of the business. They help dishonest individuals underreport income, claim fake deductions and avoid filing tax returns. They also facilitate money laundering and other financial crimes.

12. Misuse of Trusts. There are legitimate uses of trusts in tax and estate planning. But some questionable transactions promise to reduce the amount of income that is subject to tax, offer deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits. They primarily help avoid taxes and hide assets from creditors, including the IRS.

If you think you’ve been scammed, call our office immediately.

 

[contact-form to=’info@iaccountingsolutions.com’ subject=’Feedback from Blog’][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][contact-field label=’Website’ type=’url’/][contact-field label=’Comment’ type=’textarea’ required=’1’/][/contact-form]

Read More


If you have income that is not subject to withholding you may need to pay estimated taxes to the IRS during the year. Whether you need to pay estimated taxes is dependent upon your financial circumstances, what you do for a living (if you’re self-employed for example), and the types of income you receive. Here are six tips that explain estimated taxes and how to pay them.

1. If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, then you may have to pay estimated tax.

2. As a general rule, you must pay estimated taxes in 2013 if both of these statements apply:

1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and tax credits, and

2) You expect your withholding and credits to be less than the smaller of 90 percent of your 2013 taxes or 100 percent of the tax on your 2012 return. Special rules apply for farmers, fishermen, certain household employers and certain higher income taxpayers.

3. Sole Proprietors, Partners, and S Corporation shareholders generally have to make estimated tax payments if they expect to owe $1,000 or more in taxes when they file a return.

4. To figure estimated tax, include expected gross income, taxable income, taxes, deductions and credits for the year. You’ll want to be as accurate as possible to avoid penalties and don’t forget to consider changes in your situation and recent tax law changes.

5. For estimated tax purposes the year is divided into four payment periods or due dates. These dates are generally April 15, June 15, Sept. 15 and Jan. 15 of the next or following year.

6. The easiest way to pay estimated taxes is electronically through the Electronic Federal Tax Payment System, or EFTPS, but you can also figure your tax using Form 1040-ES, Estimated Tax for Individuals and pay any estimated taxes by check or money order using the Estimated Tax Payment Voucher, or by credit or debit card.

Give us a call today if you need help making estimated payments.

Read More


If you employ someone to work for you around your house, it is important to consider the tax implications of this arrangement. While many people disregard the need to pay taxes on household employees, they do so at the risk of paying stiff tax penalties down the road.

As you will see, the rules for hiring household help are quite complex, even for a relatively minor employee, and a mistake can bring on a tax headache that most of us would prefer to avoid.

Who Is a Household Employee?

Commonly referred to as the “nanny tax”, these rules apply to you only if (1) you pay someone for household work and (2) that worker is your employee.

  1. Household work is work that is performed in or around your home by baby-sitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers.
  2. A household worker is your employee if you control not only what work is done, but how it is done.

    If the worker is your employee, it does not matter whether the work is full-time or part-time, or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.

    If the worker controls how the work is done, the worker is not your employee, but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business.

    Also, if an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.

Example: You pay Betty to baby-sit your child and do light housework four days a week in your home. Betty follows your specific instructions about household and child care duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee.

Example: You pay John to care for your lawn. John also offers lawn care services to other homeowners in your neighborhood. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither John nor his helpers are your household employees.

Can Your Employee Legally Work in the United States?

It is unlawful for you to knowingly hire or continue to employ a person who cannot legally work in the United States.

When you hire a household employee to work for you on a regular basis, he or she must complete USCIS Form I-9 Employment Eligibility Verification. It is your responsibility to verify that the employee is either a U.S. citizen or an alien who can legally work and then complete the employer part of the form. Keep the completed form for your records. Do not return the form to the U.S. Citizenship and Immigration Services (USCIS).

Tip: Two copies of Form I-9 are contained in the UCIS Employer Handbook. Visit the USCIS website or call 800-767-1833 to order the handbook, additional copies of the form, or to get more information, or give us a call.

Do You Need to Pay Employment Taxes?

If you have a household employee, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or both. Refer to this table for details:

If you…

Then you need to…

Will pay cash wages of $1,800 or more in 2013 to any one household employee.Do not count wages you pay to:

  • your spouse,
  • your child under age 21,
  • your parent, or
  • any employee under age 18 during 2012.
Withhold and pay Social Security and Medicare taxes.

  • The combined taxes are generally 15.3% of cash wages.
  • Your employee’s share is 7.65%.

(You can choose to pay the employee’s share yourself and not withhold it.)

  • Your share is 7.65%.
Have paid or will pay total cash wages of $1,000 or more in any calendar quarter of 2012 or 2013 to household employees.Do not count wages you pay to:

  • your spouse,
  • your child under age 21, or
  • your parent.
Pay federal unemployment tax.

  • The tax is 0.6% of cash wages.
  • Wages over $7,000 a year per employee are not taxed.
  • You also may owe state unemployment tax.

If neither of these two contingencies applies, you do not need to pay any federal unemployment taxes. But you may still need to pay state unemployment taxes. (See below for more on this.)

You do not need to withhold federal income tax from your household employee’s wages. But if your employee asks you to withhold it, you can choose to do so.

Tip: If your household employee cares for your dependent who is under age 13 or your spouse or dependent who is not capable of self care, so that you can work, you may be able to take an income tax credit of up to 35% (or $1,050) of your expenses for each qualifying dependent. If you can take the credit, then you can include your share of the federal and state employment taxes you pay, as well as the employee’s wages, in your qualifying expenses.

State Unemployment Taxes

You should contact your state unemployment tax agency to find out whether you need to pay state unemployment tax for your household employee. You should also find out whether you need to pay or collect other state employment taxes or carry workers’ compensation insurance.

Note: If you do not need to pay Social Security, Medicare, or federal unemployment tax and do not choose to withhold federal income tax, the rest of this article does not apply to you.

Social Security and Medicare Taxes

Social Security taxes pays for old-age, survivor, and disability benefits for workers and their families. The Medicare tax pays for hospital insurance.

Both you and your household employee may owe Social Security and Medicare taxes. Your share is 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax) of the employee’s Social Security and Medicare wages. Your employee’s share is 6.2% for Social Security tax and 1.45% for Medicare tax.

You are responsible for payment of your employee’s share of the taxes as well as your own. You can either withhold your employee’s share from the employee’s wages or pay it from your own funds. Note the limits in the table above.

Wages Not Counted

Do not count wages you pay to any of the following individuals as Social Security and Medicare wages:

    1. Your spouse.

 

    1. Your child who is under age 21.

 

    1. Your parent.

 

Note: However, you should count wages to your parent if both of the following apply: (a) your child lives with you and is either under age 18 or has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter, and (b) you are divorced and have not remarried, or you are a widow or widower, or you are married to and living with a person whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in a calendar quarter.

    1. An employee who is under age 18 at any time during the year.

 

Note: However, you should count these wages to an employee under 18 if providing household services is the employee’s principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.

Also, if your employee’s Social Security and Medicare wages reach $113,700 in 2013 ($110,000 in 2012), then do not count any wages you pay that employee during the rest of the year as Social Security wages to figure Social Security tax. You should however, continue to count the employee’s cash wages as Medicare wages to figure Medicare tax. You figure federal income tax withholding on both cash and non-cash wages (based on their value), but do not count as wages any of the following items:

    • Meals provided at your home for your convenience.

 

    • Lodging provided at your home for your convenience and as a condition of employment.

 

    • Up to $240 a month in 2013 for transit passes that you give your employee or, in some cases, for cash reimbursement you make for the amount your employee pays to commute to your home by public transit. A transit pass includes any pass, token, fare card, voucher, or similar item entitling a person to ride on mass transit, such as a bus or train.

 

    • Up to $240 a month in 2013 to reimburse your employee for the cost of parking at or near your home or at or near a location from which your employee commutes to your home.

 

As you can see, tax considerations for household employees are complex. Therefore, we highly recommend professional tax guidance in these complicated matters. This is definitely an area where it’s better to be safe than sorry, so if you have any questions at all, please contact us. We’re happy to assist you.

Read More