Payroll

Interest rates remain the same for the first quarter of 2020

WASHINGTON —The Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2020.  The rates will be:  

  • 5% for overpayments [4% in the case of a corporation];
  • 2.5% for the portion of a corporate overpayment exceeding $10,000;
  • 5% for underpayments; and
  • 7% for large corporate underpayments. 

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. 

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate determined during Oct. 2019, to take effect Nov. 1, 2019, based on daily compounding.

Revenue Ruling 2019-28, announcing the rates of interest, is attached and will appear in Internal Revenue Bulletin 2019-52, dated Dec. 23, 2019.

Get ready to take the guesswork out of paycheck withholding

The tax filing season is quickly approaching. With that in mind, taxpayers should remember there’s still time to make an estimated or additional tax payment to ensure their tax withholding is still accurate.

Those who need to make an estimated tax payment for 2019 should remember that the fourth quarter payment is due Wednesday, January 15, 2020.

These taxpayers will want to check to see if their 2019 federal income tax withholding will unexpectedly fall short of their tax liability for the year. They can check this by using the Tax Withholding Estimator on IRS.gov.

All taxpayers can use the results from the Tax Withholding Estimator to determine if they should:

This tool helps employees avoid having too much or too little tax withheld from their wages. It also helps those working for themselves make accurate estimated tax payments. Having too little withheld can result in an unexpected tax bill or even a penalty at tax time in 2020. Having too much withheld results in less money in their pocket.

The Tax Withholding Estimator asks taxpayers to estimate:

  • Their 2019 income.
  • The number of children to be claimed for the Child Tax Credit and Earned Income Tax Credit.
  • Other items that will affect their 2019 taxes.

The IRS Withholding Estimator does not ask for personally-identifiable information, such as a name, Social Security number, address and bank account numbers. The IRS doesn’t save or record the information entered in the Estimator.

Before using the Tax Withholding Estimator, taxpayers should gather their most recent pay stubs and income documents from all sources. They should gather documents related to pensions, annuities, Social Security benefits and self-employment income. They should also have a copy of their 2018 federal tax return. This will help estimate 2019 income and answer other questions asked during the process.

If a taxpayer follows the recommendations at the end of the Tax Withholding Estimator and changes their withholding for 2019, they should recheck their withholding at the start of 2020. A withholding change made in 2019 may have a different full-year impact in 2020. So, if a taxpayer does not file a new Form W-4 for 2020, their withholding might be higher or lower than they intend.

Taxpayers should remember that the Tax Withholding Estimator’s results will only be as accurate as the information provided. People with more complex tax situations should use the instructions in Publication 505, Tax Withholding and Estimated Tax . This includes taxpayers who owe alternative minimum tax or certain other taxes, and people with long-term capital gains or qualified dividends.

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IRS recommends business owners e-file payroll tax returns

WASHINGTON — With the Oct. 31 quarterly payroll tax return due date just around the corner, the Internal Revenue Service today urged business owners to take advantage of the speed and

IRS Forms 940, 941, 943, 944 or 945 are used to report employment tax information. The IRS recommends electronic filing, or e-filing, of these returns.

E-filing saves taxpayers time by performing calculations and populating forms and schedules using a step-by-step interview process. Once submitted, the information is quickly available to the IRS thus reducing processing time.

E-filing is the most accurate method to file returns. Those who e-file receive missing information alerts. Electronically filed returns have fewer errors, which reduces a taxpayer’s chance of receiving an IRS notice.

The IRS takes safeguarding personal information seriously and e-filing security is a top priority at the agency. E-file security standards ensure tax information is protected from security breaches. The IRS requires all authorized IRS e-file providers to ensure only authorized users have access to secure information.

The IRS acknowledges receipt of e-filed returns within 24 hours. The agency retains the information on the tax return, making it accessible to the filer or tax professional around the clock. Unlike filing a return on paper, e-filing assures the filer that the tax return is with the IRS and not misplaced or lost in the mail.

There are two options for electronically filing payroll tax returns: 

Only the business owner can apply for an online signature PIN. Third parties, such as attorneys, CPAs, tax return preparers or other tax professionals can’t request a PIN on behalf of the business, nor can they use the PIN to sign returns on behalf of their clients.

For more information on electronic filing of payroll tax returns, see the E-File Employment Tax Forms Page.

More information:

Guide for Reporting Tip Income by Employers & Employees

MIKE D’AVOLIO, CPA, JD

SEPTEMBER 2, 2019

Employers and employees in the service industries that involve tipping need to comply with a unique set of tax rules.  Like wages, you must pay income tax, Social Security tax and Medicare tax on tip income. Tax professionals can share the following guide with clients and prospects to educate and encourage them to stay compliant with the rules.

Basics

In general, tips are discretionary payments made by customers to employees and can be paid in cash, credit cards, noncash (such as tickets) and through tip pools from other employees (indirect tips).  To qualify, the tip must be voluntary and the amount cannot be negotiated. 

On the other hand, service charges are required to be paid by the customer even if it’s called a tip or gratuity.  Examples of service charges include an automatic gratuity for a large dining party, a banquet event fee, a hotel room service charge and a bottle service charge.  In general, service charges are reported as non-tip wages paid to the employee, excluding the portion retained by the employer.

Reporting tip income

Employees must report all cash tips received to the employer, except total tips under $20 for a given month.  Employees need to report tips to the employer by the 10th of the month after the month the tips are received. Noncash tips received from customers are not reported to the employer.

All cash and noncash tips are required to be included in the employee’s gross income and are subject to tax.  Both direct tips and indirect tips (e.g. bussers and cooks) must be reported to the employer, but you can reduce the number of reportable tips you share with other employees.  For example, if you receive a $150 tip and give the bartender $25, you would only report $125.

Employer requirements:

  • Retain employee tip reports
  • Withhold income taxes and the employee’s share of FICA taxes
  • Pay employer’s share of FICA taxes
  • File Form 941, Employer’s Quarterly Federal Tax Return along with federal deposits
  • Include tip income on Form W-2, Box 1 (Wages, tips & other compensation), Box 5 (Medicare wages and tips) and Box 7 (Social Security tips)

Reporting service charges

Service charges that are distributed to an employee by an employer are treated the same as regular wages. Service charges are:

  • Not included in the employee’s daily tip record
  • Included on Form W-2, Boxes 1, 3 and 5
  • Subject to FICA taxes and income tax withholding

Allocated tips

If the total tips reported by all employees at a large food or beverage establishment (see below) are less than 8 percent of gross receipts, the employer is required to allocate the difference between 8 percent of gross receipts and the actual tip income among all employees who received tips.

If the employer allocates tips:

  • They are shown separately on Form W-2, Box 8 (Allocated tips)
  • They are not included in Boxes, 1, 5 or 7 (i.e. income tax and FICA is not withheld since the employee didn’t report the amount to the employer)
  • The employee includes the allocated tips in income and files Form 4137, Social Security and Medicare Tax on Unreported Tip income

Large food or beverage establishments

An employer who operates a large food or beverage establishment must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.  The report includes receipts from food and beverages, tips reported by employees and allocated tips.

An establishment is considered a large food or beverage establishment if all of the following requirements are met:

  • The operation is located in the 50 states or D.C.
  • Food or beverages are provided for consumption on the premises, excluding fast food operations
  • Tipping employees for food or beverages by customers is customary
  • The employer normally employed more than 10 employees on a typical business day during the preceding calendar year

Employer’s share of Social Security & Medicare taxes on unreported tips

If an employee fails to report their tips to the employer, the employer is not liable for the employer’s share of Social Security and Medicare taxes (FICA) on the unreported tips until the IRS notifies and demands the taxes.  The employer is not liable to withhold and pay the employee’s share of Social Security and Medicare taxes on any unreported tip income.

Voluntary tip compliance agreements

The IRS has established voluntary tip compliance agreements for industries where tipping is customary, such as restaurants and bars.  Among the benefits, the agreements help the employer and employee understand and meet their tax obligations through education, instead of through enforcement and examination actions by the IRS.

Wrap-up

As discussed, the rules surrounding the proper reporting of tip income offer a few twists to reporting typical wages.  The bottom line is that tip income is taxed just like wages.  Be sure your employer and employee clients that work in the service industries remain compliant with these filing requirements.

IRS resources

It’s summertime…and these tips can help make livin’ easy for teens with jobs

With summer almost here, many students will turn their attention to making money from a summer job. Whether it’s flipping burgers or filing documents, the IRS wants student workers to know some facts about their summer jobs and taxes.

Not all the money they earn will make it to their pocket because employers must withhold taxes from their paycheck. Here are some tax tips young individuals should know when starting a summer job.

New employees:  Employees – including those who are students – normally have taxes withheld from their paychecks by their employer. When anyone gets a new job, they need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from the new employee’s pay. The Withholding Calculator on IRS.gov can help a taxpayer fill out this form.
 
Self-employment: Students who do odd jobs over the summer to make extra cash are self-employed. This include jobs like baby-sitting or lawn care. Money earned from self-employment is taxable, and self-employed workers may be responsible for paying taxes directly to the IRS. One way they can do this is by making estimated tax payments during the year.
 
Tip income: Students working as waiters or camp counselors who earn tips as part of their summer income should know tip income is taxable. They should keep a daily log to accurately report tips. They must report cash tips to their employer for any month that totals $20 or more.

Payroll taxes: This tax pays for benefits under the Social Security system. While students 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 student is self-employed, Social Security and Medicare taxes may still be due and are generally paid by the student.

Reserve Officers’ Training Corps pay: If a student is in an ROTC program, and receives pay for activities such as summer advanced camp, it is taxable. Other allowances the student may receive – like food and lodging – may not be taxable. The Armed Forces’ Tax Guide on IRS.gov provides details.

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National Association of Tax Professionals