Payroll

Taxpayers Should Review Their Withholding; Avoid Having Too Much or Too Little Federal Income Tax Withheld

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WASHINGTON — The Internal Revenue Service today encouraged taxpayers to consider checking their tax withholding, keeping in mind several factors that could affect potential refunds or taxes they may owe in 2018.

Reviewing the amount of taxes withheld can help taxpayers avoid having too much or too little federal income tax taken from their paychecks. Having the correct amount taken out helps to move taxpayers closer to a zero balance at the end of the year when they file their tax return, which means no taxes owed or refund due.

During the year, changes sometimes occur in a taxpayer’s life, such as in their marital status, that impacts exemptions, adjustments or credits that they will claim on their tax return. When this happens, they need to give their employer a new Form W-4, Employee’s Withholding Allowance Certificate, to change their withholding status or number of allowances.

Employers use the form to figure the amount of federal income tax to be withheld from pay. Making these changes in the late summer or early fall can give taxpayers enough time to adjust their withholdings before the tax year ends in December.

The withholding review takes on even more importance now that federal law requires the IRS to hold refunds a few weeks for some early filers claiming the Earned Income Tax Credit and the Additional Child Tax Credit. In addition, the steps the IRS and state tax administrators are now taking to strengthen protections against identity theft and refund fraud mean some tax returns could face additional review time next year.

So far in 2017, the IRS has issued more than 106 million tax refunds out of the 142 million total individual tax returns processed, with the average refund well over $2,700. Historically, refund dollar amounts have increased over time.

Making a Withholding Adjustment

In many cases, a new Form W-4, Employee’s Withholding Allowance Certificate, is all that is needed to make an adjustment. Taxpayers submit it to their employer, and the employer uses the form to figure the amount of federal income tax to be withheld from their employee’s pay.

The IRS offers several online resources to help taxpayers bring taxes paid closer to what they owe. They are available anytime on IRS.gov. They include:

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Get to Know the Health Care Law’s Employer Shared Responsibility Payment

IRS Tax Tip 2015-36, June 17, 2015
Under the Affordable Care Act, applicable large employers – those with 50 or more full-time employees, including full-time equivalent employees – are required to take some new actions. To prepare for 2016, if your organization is an ALE, you need to track information each month in 2015, including:
Whether you offered full-time employees and their dependents minimum essential coverage that meets the minimum value requirements and is affordable
Whether your employees enrolled in the minimum essential coverage you offered
You need to track this information because you could be subject to an employer shared responsibility payment if your organization falls into either of these circumstances:
You offered coverage to fewer than 70 percent of your full-time employees and their dependents in 2015 and at least one full-time employee enrolled in coverage through the Health Insurance Marketplace and receives a premium tax credit. The 70 percent threshold is for 2015, after 2015 this increases to 95 percent.
You offered coverage to at least 70 percent of your full-time employees and their dependents in 2015, but at least one full-time employee receives a premium tax credit because coverage offered was not affordable, did not provide minimum value or the full-time employee was not offered coverage. After 2015, this threshold increases to 95 percent.
For more information, visit the Employer Shared Responsibility Provisions Questions and Answers page on IRS.gov/aca.

IRS Rule Leads Restaurants to Rethink Automatic Tips Gratuities Added for Large Groups Will Be Taxed as Service Charges

An updated tax rule is causing restaurants to rethink the practice of adding automatic tips to the tabs of large parties.

Starting in January, the Internal Revenue Service will begin classifying those automatic gratuities as service charges—which it treats as regular wages, subject to payroll tax withholding—instead of tips, which restaurants leave up to the employees to report as income.

The change would mean more paperwork and added costs for the restaurants—and a potential financial hit for waiters and waitresses who live on their tips but don’t always report them fully.

The change will complicate payroll accounting for restaurants that stick with automatic tips, because they will need to factor those tips into pay, meaning hourly pay rates—could vary day to day depending on how many large parties are served.

Restaurants are required to report to the IRS what its employees report receiving for tips and to pay Medicare and Social Security taxes on those amounts. Restaurants are eligible for an income-tax credit for some or all of those payments, but service charges aren’t eligible, according to Marianna Dyson, a payroll tax attorney in Washington, D.C., who represents restaurant chains.

The change comes amid increasing costs and record-keeping requirements for restaurants. In January, restaurants with 50 or more full-time workers will be required to offer health coverage to employees working 30 or more hours a week, though penalties don’t begin until 2015.

Restaurants adopted automatic gratuities to help ensure that their servers—whose tips supplement a salary that is often less than the federal minimum wage of $7.25 an hour—weren’t stiffed on large tabs. But many servers are likely to support dropping the practice because they don’t like the idea of their tips being treated as wages, which requires upfront withholding of federal taxes, and means they won’t see that tip money until payday.

The IRS ruling was issued in 2012 to clarify and update earlier tax guidance on tips, which didn’t spell out how automatic tips were to be treated. Restaurants persuaded the agency to delay implementation until next year.

In a statement, the IRS said it noticed an increase in the use of “auto-gratuities” and that it believed “additional clarification in this area would be in the best interest of tax administration.”

The updated rule says the automatic tips are service charges because they aren’t voluntary. In a question-and-answer section of the ruling, the IRS provided an example of a restaurant suggesting different tip amounts, and said that practice isn’t subject to federal withholdings because the customer is still free to choose whether and how much to tip.

Still, the ruling has caused some confusion. Some restaurants insert an amount on the tip line and then remind guests on the check that they are free to adjust that amount up or down. Ms. Dyson, the payroll tax attorney, said that practice could come under scrutiny from the IRS. “How far can you go before the IRS says that looks like a service charge?”

 

View Original Article

IRS Ruling: http://www.irs.gov/taxtopics/tc761.html

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