If your child is planning to work this summer, make sure you know the tax basics.
Tax returns. Assuming no other sources of income, your child will be able to earn up to $6,300 in 2016 before a federal income tax return has to be filed. However, if income tax is withheld from paychecks, your child will have to file a return to claim a refund.
Federal income tax withholding. When hired, your child will have to fill out Form W-4, Employee’s Withholding Allowance Certificate. This form tells the employer how much federal income tax to withhold. If the job involves tips, remember that tips are taxable income. Have your child maintain records of amounts received.
Financial aid. Summer earnings can affect eligibility for college financial aid. If you’re counting on financial aid, check out the earnings limit ahead of time.
Retirement saving. Consider encouraging your child to open a Roth IRA. Amounts invested in a Roth can grow tremendously due to tax-free compounding over many years. As an incentive, you might match any amounts your child is willing to save.
For assistance with the tax issues relating to summer employment, contact us.
Awards of RSUs can provide tax deferral opportunity
Executives and other key employees are often compensated with more than just salary, fringe benefits and bonuses: They may also be awarded stock-based compensation, such as restricted stock or stock options. Another form that’s becoming more common is restricted stock units (RSUs). If RSUs are part of your compensation package, be sure you understand the tax consequences — and a valuable tax deferral opportunity.
RSUs vs. restricted stock
RSUs are contractual rights to receive stock (or its cash value) after the award has vested. Unlike restricted stock, RSUs aren’t eligible for the Section 83(b) election that can allow ordinary income to be converted into capital gains.
But RSUs do offer a limited ability to defer income taxes: Unlike restricted stock, which becomes taxable immediately upon vesting, RSUs aren’t taxable until the employee actually receives the stock.
Rather than having the stock delivered immediately upon vesting, you may be able to arrange with your employer to delay delivery. This will defer income tax and may allow you to reduce or avoid exposure to the additional 0.9% Medicare tax (because the RSUs are treated as FICA income).
However, any income deferral must satisfy the strict requirements of Internal Revenue Code Section 409A.
If RSUs — or other types of stock-based awards — are part of your compensation package, please contact us. The rules are complex, and careful tax planning is critical.
Happy employees can have a positive impact on your operations, customer support, and profit level. Here are suggestions for keeping your workforce upbeat.
Lead by example. Demonstrate the personal discipline and commitment you hope to instill in your workers by showing up every day with a positive attitude.
Emphasize the link between attendance and productivity. Absenteeism is a symptom of unhappy employees. Help your employees understand the importance of the role they play in the success of the business.
Learn what motivates your employees. Conduct an online survey to learn if money, recognition, promotion, or time off drives your employees.
Enrich skillsets. Cross-training and job rotation can improve appreciation for overall business operations and mitigate boredom and dissatisfaction.
Create a time-off bank. Modify the traditional offering of vacation, personal, and sick days. Give your employees the responsibility and ability to balance work and home obligations by empowering them to manage total available paid time off.
Other suggestions for a healthy working environment and happy employees include celebrations and team building. While these “soft” methods may seem a distraction from everyday business, your employees will appreciate the effort and your business will profit from the resulting improvements in performance.
If summertime is a busy time for your business, you may be ready to hire seasonal workers. Here are tax rules to keep in mind.
● Affordable Care Act exception. When you employ 50 or more full-time employees, you’re considered a “large employer” and are generally required to provide health insurance coverage or pay a penalty. However, the law provides an exception for seasonal workers, defined as those you employ for not more than 120 days during the prior calendar year. In general, your answer to two questions determines if you qualify for the exception. Did your workforce exceed 50 full-time employees for 120 days or fewer during the year? Were the employees in excess of 50 who were employed during that period seasonal workers? If both answers are yes, you’re generally not considered a large employer.
● Employment taxes. Temporary workers are typically subject to the same employment tax rules as regular employees. You’ll generally have to withhold social security and Medicare taxes, as well as federal income tax from wages. You’ll also have to follow payroll tax deposit rules and employment return filing requirements.
● Employment tax returns. Special filing rules may apply when you only hire employees at a specific season of the year, such as summertime. For each quarter that you pay wages, you can check the box for “seasonal employer” on Form 941, Employer’s Quarterly Federal Tax Return. By notifying the IRS of your seasonal status, you’re not required to file returns for quarters when you have no wages or tax liability.
Please contact us for more information about payroll tax rules, recordkeeping requirements, and documentation for seasonal employees. We’re here to make sure that your busy summer season goes smoothly.
Many businesses host a picnic for employees in the summer. It’s a fun activity for your staff and you may be able to take a larger deduction for the cost than you would on other meal and entertainment expenses.
Generally, businesses are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:
• For recreational or social activities for employees, such as summer picnics and holiday parties,
• For food and beverages furnished at the workplace primarily for employees, and
• That are excludable from employees’ income as de minimis fringe benefits.
There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.
Whether you deduct 50% or 100% of allowable expenses, there are a number of requirements, including certain records you must keep to prove your expenses.
If your company has substantial meal and entertainment expenses, you can reduce your tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.
For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction, please contact us.
The Child and Dependent Care Credit is valuable because it reduces the amount of tax you owe dollar-for-dollar. Here’s an overview of the rules.
● Child care expenses must be work-related. This requirement means you have to pay for child care so you can work or actively look for work. If you’re married, you and your spouse must both work. Exceptions to this “earned income” rule include spouses who are full-time students or who are not able to care for themselves due to mental or physical limitations.
● Expenses generally must be paid for care of your under-age-13 child. However, expenses you pay to care for a physically or mentally disabled spouse or adult dependent may also count.
● Expenses must be paid to someone who is not your dependent. Amounts you pay your spouse, your child’s parent (such as an ex-spouse), anyone claimed as a dependent on your tax return, or your own child age 18 or younger do not qualify for the credit. For example, if you pay your 17-year-old dependent child to watch a younger sibling, that expense doesn’t count for purposes of claiming the credit.
● The care provider has to be identified on your tax return. You’ll typically need to show the name, address, and taxpayer identification number. You can request this information by asking your provider to complete Form W-10, Dependent Care Provider’s Identification and Certification.
● The amount you can claim depends on how much you spend for the care up to a dollar limit of $3,000 of expenses for one dependent and $6,000 for two or more dependents.
Contact us for more information.
With health care costs continuing to climb, tax-friendly ways to pay for these expenses are more attractive than ever. Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) all provide opportunities for tax-advantaged funding of health care expenses. But what’s the difference between these three accounts?Here’s an overview:
HSA. If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,350 for self-only coverage and $6,750 for family coverage for 2016. Plus, if you’re age 55 or older, you may contribute an additional $1,000.
You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
FSA. Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,550 in 2016. The plan pays or reimburses you for qualified medical expenses.
What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2 1/2-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.
HRA. An HRA is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.
Questions? We’d be happy to answer them — or discuss other ways to save taxes in relation to your health care expenses.
The latest credit cards have a new feature: a half-inch square on the card’s face that looks like a mini circuit board. The square is a small computer chip called an EMV. The acronym stands for Europay, MasterCard, and VISA, the developers of the technology. Over the next several years, these chip-embedded cards are expected to replace the familiar magnetic strip technology on cards that you now swipe at point-of-sale devices. When you use your EMV card, you’ll need to “dip,” or insert, it into a new type of reader.
Why the change? The new chips are expected to improve credit and debit card security. Data on cards with the older technology is much easier for crooks to steal because the information on the magnetic strip is static and can be copied. As a result, a thief can use your card for multiple fraudulent transactions. Cards with the new chip are different. Every time you use an EMV card, the chip creates a unique transaction code. As a result, the newer cards aren’t as useful to counterfeiters and card thieves
Are you thinking about turning a business trip into a family vacation this summer? This can be a great way to fund a portion of your vacation costs. But if you’re not careful, you could lose the tax benefits of business travel.
Reasonable and necessary
Generally, if the primary purpose of your trip is business, expenses directly attributable to business will be deductible (or excludable from your taxable income if your employer is paying the expenses or reimbursing you through an accountable plan). Reasonable and necessary travel expenses generally include:
• Air, taxi and rail fares,
• Baggage handling,
• Car use or rental,
• Meals, and
Expenses associated with taking extra days for sightseeing, relaxation or other personal activities generally aren’t deductible. Nor is the cost of your spouse or children traveling with you.
Business vs. pleasure
How do you determine if your trip is “primarily” for business? One factor is the number of days spent on business vs. pleasure. But some days that you might think are “pleasure” days might actually be “business” days for tax purposes. “Standby days,” for example, may be considered business days, even if you’re not engaged in business-related activities. You also may be able to deduct certain expenses on personal days if tacking the days onto your trip reduces the overall cost.
During your trip it’s critical to carefully document your business vs. personal expenses. Also keep in mind that special limitations apply to foreign travel, luxury water travel and certain convention expenses.
Maximize your tax savings
For more information on how to maximize your tax savings when combining business travel with a vacation, please contact us. In some cases you may be able to deduct expenses that you might not think would be deductible.
June 30, 2016, is the deadline for filing the 2015 Form 114, Report of Foreign Bank and Financial Accounts, known as the FBAR. Not sure if you need to file? The general rule is that a return is due when you have a financial interest in, or signature authority over, foreign financial accounts if the aggregate value of those accounts exceeds $10,000 at any time during the calendar year. The requirement applies to both individuals and entities such as trusts and businesses, and you may need to file even if your foreign account produces no income.
Be aware that June 30, 2016, is a “hard” deadline. Your 2015 Form 114 must be filed electronically with the Treasury Department no later than that date. No filing extension is available for 2015 forms – even if you filed an extension for your federal income tax return.
Contact us for assistance.