QUESTIONS FROM A CLIENT

A client recently emailed me some questions that I think are often asked of tax preparers, especially now with the changes made by the GOP Tax Act.  The answer to these questions, and the debunking of some common misconceptions the answer includes, are important to understand.

Robert -

1. Just wanted to ask you how do you report taxes at end of year on a 1099?  I imagine in this case you report less than if your employer was reporting on a W-2. Please explain what is advantage AND disadvantage?

2. I hear is that when you are working on your own or providing home care you can report whatever you want, but I still want to accumulate for my Social Security.  Am sure in this case you don’t have to pay city taxes or Medicare, etc.

Madame X

My response:

Madame X -

1. Income from a Form 1099 is reported based on the source of the income.  If it is a Form 1099-MISC reporting “non-employee compensation” it is reported on a Schedule C or C-EZ of Form 1040, with deductions for directly related out of pocket expenses allowed.  The net amount is subject to federal and state, and if applicable city, income tax and federal “self-employment” tax, which is the equivalent of both halves of Social Security and Medicare.  A new special tax deduction of 20% of the net income may be allowed.  However, this new deduction does not reduce net income subject to the self-employment tax.

The amount that is reported by the payee on a Form 1099-MISC for non-employee compensation is the same as the amount of gross wages reported for an employee – the gross amount of the payment to you for services provided.  Less income may be actually subject to tax because of the deduction of direct out of pocket expenses related to earning the income.

The advantage of receiving income as a “sub-contractor” on a Form 1099-MISC vs receiving income as an employee on W-2 is the availability of the deduction for directly related out of pocket expenses and the new 20% deduction for “pass-through” business income.  The disadvantage is that you pay both halves of the Social Security and Medicare tax – as an employee you pay half and your employer pays half - although the amount of income on which the self-employment tax is paid may be less than the gross wages reported on a W-2 that are subject to these payroll taxes.

2. It is NOT true that if you are working on your own you can report “whatever you want”.  By law you MUST report WHATEVER YOU RECEIVE in full, whether or not you actually receive a Form 1099-MISC. 

A person being paid for providing home care is a “household employee” of the person who is being cared for.  The person being cared for would need to withhold income and Social Security and Medicare taxes, as any other employer would, and issue the person providing the home care a Form W-2.

As a self-employed person, you would continue to pay into Social Security via the “self-employment tax” and your net income would count toward the determination of Social Security benefits.

RDF

Do you have any questions?

TTFN

NEW JERSEY 2018 SUI, SDI AND FLI NUMBERS

For New Jersey employers, here is the information on 2018 unemployment, disability and family leave insurance contributions and payments.

For calendar year 2018, the maximum unemployment insurance, temporary disability insurance and workers' compensation benefit rates, the alternative earnings and base week amounts, and the taxable wage base are listed below.

2018 Maximum Workers' Compensation weekly benefit rate: $903

2018 Maximum Unemployment Insurance weekly benefits rate: $681

2018 Maximum Temporary Disability Insurance weekly benefit rate: $637

2018 Alternative earnings test amount for UI and TDI: $8,500

2018 Base week amount: $169

2018 Taxable Wage Base under UI, TDI and FLI: $33,700

U.I.	D.I.	W.F./S.W.F.	F.L.I
0.003825	0.0019	0.000425	0.0009	January 1, 2018 to December 31, 2018

2018 = 33,700

SUI = 143.23

SDI =   64.03

FLI =    30.33

          237.59

TTFN

A PAY CUT OR NOT A PAY CUT, THAT IS THE QUESTION

I recently wrote a piece for www.TheStreet.com about the expiration of the 2% payroll tax “holiday” titled “Everyone Got a 2% Cut In Pay”.  A reader commented –

“’So starting Jan. 1, everyone got a 2% cut in pay!’  WRONG, wrong, wrong!!!  The rate went back to what it had been for YEARS.”

We are both right.

Beginning with the first paycheck issued in 2013, all employees had 2% more withheld for the Social Security component of FICA tax.  So everyone’s pay was reduced by 2% - a 2% pay cut.

But this was NOT a tax increase.  As the comment writer correctly pointed out, the employee’s share of FICA tax merely went back to the way it had been for many, many years prior to the enactment of this temporary tax benefit.

The 2% payroll tax cut was a temporary measure that applied to 2011 and 2012 only.  It was a political gimmick.  As I pointed out in my piece, it was the latest reincarnation of the rebate check political gimmick that was implemented during the Dubya years.

The rebate check/credit became the Making Work Pay Credit under BO, which was replaced by this 2% payroll tax holiday. 

The rebate check caused more problems than it was worth (as I observed here at the time – “These checks cost the IRS a fortune, created tons of confusion, and resulted in millions of errors on 2008 tax returns! And it is doubtful that they did anything to stimulate the economy.”) and the Making Work Pay Credit FU-ed withholding.  As a method of distribution, the payroll tax holiday was “more better” (i.e. caused less administrative problems) than its predecessors.  But it was a political gimmick all the same.

The original rebate check, like New Jersey’s original homestead rebate checks, was a way to buy votes.  Originally the NJ homestead rebate check went out on November 1st.  The hope was that taxpayers would say, “Look what the Democrats just gave me” and run out on Election Day and vote for all the Democratic candidates.  Prior to the issuance of the federal rebate checks taxpayers often received a letter from their representative idiot in Congress telling them that the check was coming.  “Look what the Republicans just gave me.  I will thank them by voting Republican!”

This 2% payroll tax holiday is a great example of the danger of “temporary” tax benefits.  Taxpayers get used to them, and when they expire it appears that there has been a tax increase.  It never should have been passed in the first place.  It never should have been extended for 2012.  And the idiots in Congress were right not to extend it for 2013. 

TTFN

THIS JUST IN – WHAT FOOLS THESE CONGRESSPERSONS BE!

The idiots in Congress have finally acted on extending the payroll tax reduction so they would not have to sacrifice any of their (certainly undeserved) holiday leave.  There were back-to-back voice vote approvals of the measure by the Senate and House this morning.  President Barack Obama is expected to sign the new bill today before he heads to Hawaii to join his family for what's left of the holidays.

I can’t describe this action any better than my fellow tax blogger TAX GIRL Kelly Phillips Erb - “When Dumb Meets Stupid: Payroll Tax Cut ‘Compromise’”.

“So months and months of debate on the payroll tax cut has resulted in this: a two month extension.”

“But it’s paid for!” is the excuse of the idiots in Congress.  Kelly correctly points out –

“You know what’s not paid for? The agita that employers, tax pros and the IRS will face trying to sort out a bifurcated tax year.”

While I selfishly liked having to pay less Social Security tax on my wages, I tend to agree with Kelly when she described the measure –

“It was clearly a vote-getting scheme to replace the confusing Making Work Pay Credit.”

And I agree with Kelly’s when she suggests that preparing the 1st Quarter 2012 Form 941 will result in unnecessary agita for both accountants and the IRS –

“Those forms 941 will be a joy, huh?”

It is relatively easy for employers to extend the payroll tax reduction for a 2 month period.  They can identify what wages were paid during the first 2 months of the year.  But what of the self-employed taxpayer filing a Schedule C?  Does he now have to prepare 2 Schedule Cs – one for January and February and one for the rest of the year?  Of will the reduction just be pro-rated on 1/6th of net earnings from self-employment?

I suppose that Congress will vote during the last week of February 2012 to extend the cut for another 2 months.

This action proves once again that the idiots in Congress cannot accomplish anything – even if both parties support an item (such as the extension of the payroll tax reduction in this case).  It also shows the idiocy of “temporary” tax cuts.

What fools these Congresspersons be!

A RAISE IN PAY!

Did you notice an increase in your first paycheck of the year?

No – your boss did not decide to give you a raise. Congress did! The Tax Hike Prevention Act passed in mid-December gave all workers, both employed and self-employed, a 2% raise.

The Act reduced, for 2011 only, the employee share of the Social Security component of the FICA tax by 2%, from 6.2% to 4.2%.

If you earn $1,000 a week your Social Security withholding had been $62.00. For 2011 it will be $42.00.

Social Security withholding stops when your wages for the year reach $106,800. So the maximum you can save is $2,136.00. The maximum amount of employee Social Security withholding for 2011 is $4,485.60.

If you have more than one employer in 2011 and the total amount withheld for Social Security by all employers exceeds $4,485.60 you can get a refund of the excess withholding when you file your 2011 Form 1040.

The employer share of Social Security remains unchanged. Your boss will continue to pay 6.2% of your earnings, up t $106,800, into Social Security.

Self-employed individuals pay into Social Security via the “self-employment tax”. They also get the 2% savings. The Social Security component of the self-employment tax for 2011 drops from 12.4% to 10.4%.

If you did not notice the 2% increase in your first paycheck it may be because your employer’s payroll software has not yet been adjusted to reflect the change. The reduction is required to be in place by January 31, 2011. You must get a “catch-up” adjustment for any over-withholding no later than March 31st.

This 2% reduction in payroll taxes replaces BO’s “Making Work Pay” credit, which replaced Dubya’s disastrous rebate checks. While the MWP credit maxed out at $400.00 ($800.00 for a married couple), as I mentioned above this method can put a maximum of $2,136 ($4,272 for couples) in your pocket! However those who earn $10,000 per year will only get $200, where under Making Work Pay they got $400.

This tax cut is projected to cost $120 Billion.

TTFN