Disclaimer: Information contained below was accurate as of the date of publication. Due to frequent tax law changes, information may no longer be accurate. For the latest tax information, please contact a member CPA.

WHAT'S THE TAX PLAN, MAN?

by Andrew D. Schwartz, CPA

Election Day finally arrives on Tuesday, November 4th.  As part of the long and arduous campaign process, each candidate has carefully detailed the changes they would like to make to the current income tax code.   Let's compare the tax plans as reflected on each of the candidates' websites - www.barackobama.com and www.johnmccain.com.  

Obama's tax philosophy is quite clear when he states, "The Bush tax cuts give those who earn over $1 million dollars a tax cut nearly 160 times greater than that received by middle-income Americans....Obama and Biden will protect tax cuts for poor and middle class families, but they will reverse most of the Bush tax cuts for the wealthiest taxpayers." 

McCain on the other hand states on his site, "Small business is the key to job growth.  Small business will benefit from low individual tax rates....[and] access to capital from the low rates on dividends and capital gains."

Top Tax Bracket:

Seven years ago, The Economic Growth and Tax Relief Reconciliation Act of 2001 reduced the top tax rate from 39.6% to it's current level of 35 percent.  While McCain promises to "keep the top tax rate at 35 percent", Obama indicates that he'd prefer to see the rates return to the levels of the pre-Bush years.

Tax on Capital Gains and Corporate Dividends:

Following the 2001 Tax Act by a few years, The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced to maximum tax rate on capital gains and corporate dividends to it's current level of 15 percent.  While McCain is in favor of "maintaining the 15 percent rate on dividends and capital gains," Obama prefers to undo this tax break.  As an interesting twist, however, Obama hopes to "eliminate all capital gains taxes on start-up and small businesses to encourage innovation and job creation."

Alternative Minimum Tax:

With each passing year, the AMT becomes a larger problem for millions of taxpayers.  Established forty years ago to ensure that wealthy taxpayers paid at least a minimum amount of taxes each year, the AMT now routinely hits middle income taxpayers.

While McCain promises to "phase-out the Alternative Minimum Tax", there does not appear to be any mention of the AMT on Obama's site.  Perhaps he believes that if the tax rules revert to the pre-2001 rules, the AMT will once again not be a major tax headache to millions of middle income taxpayers.

Other Tax Breaks:

McCain would like to "cut the corporate tax rate from 35 to 25 percent [since] a lower corporate tax rate is essential to keeping good jobs in the United States."

Obama, meanwhile, has introduced a variety of new tax breaks including:

• "Enact a Windfall Profits Tax to provide a $1,000 Emergency Energy Rebate to American families."  (Sounds a little Bushian to me, since his administration orchestrated three tax rebates during his two terms in office.)

• "Create a new 'Making Work Pay' tax credit of up to $500 per person, or $1,000 per working family."

• "Eliminate income taxes on seniors making less than $50,000."

• Expand the current retirement savings incentives by matching "50 percent of the first $1,000 in savings for families that earn less than $75,000."

Social Security:

The candidates have very different ideas about the Social Security program.  Under the 2008 rules, you pay Social Security taxes at a rate of 6.2% on the first $102,000 you earn.  Plus, your employer matches any Social Security taxes withheld from your pay.

John McCain "believes that we may meet our obligations to the retirees of today and the future without raising taxes.  [He also] supports supplementing the current Social Security system with personal accounts."

Obama plans to "strengthen Social Security and prevent privatization while protecting middle class families from tax increases or benefit cuts....He would ask those making over $250,000 to contribute a bit more to Social Security to keep it sound....in the range of 2 to 4 percent more in total (combined employer and employee)."

Estate Taxes:

No part of the tax code is more in flux than the Estate Tax rules.  Thanks to the 2001 Tax Act, the Estate Tax is slated to disappear in 2010, and then will return to the pre-2001 rules in 2011.  Whoever is elected president in November will surely need to deal with these rules.

"John McCain proposes reducing the Estate Tax rate to 15 percent and permit a generous $10 million exemption" for a married couple.  While Obama's site does not address the Estate Tax, other sources indicate that he is in favor of extending the 2009 Estate Tax rules that call for a 45% Estate Tax rate and an exemption of $7 million per married couple.

Best Laid Plans:

Laying out a coherent tax policy is an integral part of running for President.  Ultimately, Congress decides which provisions will be included in any future tax acts.  Whether our next president is Obama or McCain, it will be interesting to see which recommendations become part of our continually evolving and overly complex tax code.

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EMPLOYEE  VERSUS INDEPENDENT CONTRACTOR

Wondering if you should be classified as an employee or an independent contractor?  Or, do you have someone working for you, and you're not sure how that person should be classified?   Well, believe it or not, the IRS has a form for that.

According to our friends at the IRS:

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral - Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial - Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship - Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Form SS-8

After reviewing the three categories of evidence, if you are still unsure if a worker is an employee or an independent contractor, the business can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.

Be aware that it can take up to six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form Form SS-8 (PDF).

Plan B: Complete For Your Records Only

Instead of sending this form to the IRS and then waiting six months to hear back, it's not uncommon for people to complete the Form SS-8 as a way to facilitate a conversation between the employer and the worker, and help both parties decide how to most appropriately classify the worker. 

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COMPLYING WITH THE NANNY TAX RULES

by Andrew D. Schwartz, CPA

Do you have a household employee that you're paying above board?  If so, are you complying with the Nanny Tax rules?  Currently, as many as five different taxes may apply to household employees:

• Social security and Medicare taxes

• Federal unemployment taxes

• Federal income taxes withheld

• State unemployment taxes

• State withholding taxes withheld 

Applying for an Employer Identification Number

For starters, household employers need to have an employer identification number (EIN) assigned to them by the IRS.  Social security numbers will not be accepted by any of the government agencies.  Household employers are required to report their employer identification number on the Schedule H as well as on any Form W-2’s issued to their employees.

Social security and Medicare taxes

Cash wages paid to a household employee are only subject to social security (FICA) and Medicare taxes if total cash wages paid to that employee during any calendar year exceed $1,600 (in 2008). Employees under the age of 18 whose principal occupation is not that of a household employee are not subject to these taxes.

For those household employees who earned more than $1,600 during the calendar year, social security taxes should be withheld from their compensation at a rate of 6.2% and Medicare taxes should be withheld at a rate of 1.45%. The household employer is required to match any social security and Medicare taxes withheld. The value of food, lodging, clothing, and other non-cash items provided to the employee is not subject to social security or Medicare taxes. 

Household employers have the option of paying the employee's portion of the social security and Medicare taxes instead of withholding those taxes from the employee's wages.  In that case, the employee's federal and state taxable wages will be increased by the amount of taxes paid on their behalf.

Federal Unemployment Taxes

Federal unemployment taxes (FUTA) will be due for household employees if, during any calendar quarter of the current or prior year, total cash wages paid to all employees exceed $1,000. The effective rate of this tax is 0.8% and will generally be limited to the first $7,000 earned during the year by each employee. However, if the state unemployment taxes are not paid in a timely manner, the FUTA rate increases to 6.2%.

Federal Income Taxes Withheld

Some household employees will request that federal taxes be withheld from each paycheck and submitted to the government. Tables contained in the "Circular E" (available at www.irs.gov) determine the rate at which federal income taxes should be withheld for these employees. Each year, the IRS provides employers with a Circular E. 

State Unemployment Taxes

In most states, a household employer is required to register with the state's Division of Unemployment Assistance and remit taxes to that agency on a quarterly basis if total cash wages paid to all employees exceed $1,000 in any calendar quarter of the current or previous year.  Household employers need to comply with their state's rules.  Failure to make timely payments of the quarterly unemployment taxes due will result in the federal unemployment tax rate increasing from 0.8% to 6.2%.

State Income Taxes Withheld

Some household employees may request that state income taxes be withheld from each paycheck and submitted to the government. The department of revenue of your state will be able to provide information regarding the proper method of submitting any amounts withheld.

Reporting Taxes Due

Individuals who employ household employees need to complete and attach a Schedule H to their Form 1040 reflecting any social security and Medicare taxes, federal unemployment taxes, and federal income taxes withheld or otherwise due.

Any state unemployment taxes or state income taxes withheld or otherwise due will need to be reported to the proper government agency in accordance with their specific guidelines.  Most states have web-based reporting and payment options available.

Submitting Taxes Due

Any social security and Medicare taxes, federal unemployment taxes, or federal income taxes withheld or otherwise due should be submitted once a year in connection with filing the personal income tax return (Form 1040). Those individuals who employ household employees should either have additional federal income taxes withheld from their salaries or make quarterly estimated tax payments.

Any state unemployment taxes or state income taxes withheld or otherwise due will need to be submitted to the proper government agency in accordance with the agency’s specific guidelines.

Issuing W-2's

All household employers are required to issue a completed Form W-2 to their employees prior to January 31st.  The W-2 should reflect the employee's gross taxable earnings as well as the taxes withheld.  Copies of the W-2's must be submitted to the Social Security Administration prior to February 28th along with a Form W-3. 

Worker’s Compensation Insurance

Very important!! Most homeowner’s insurance will only protect household employers up to a certain limit. Individuals who employ household employees, therefore, may be required to purchase an additional type of insurance known as worker’s compensation insurance. Prior to hiring any household employees, individuals should always remember to notify their insurance agents.  And if you’re a renter, maintaining renter’s insurance is a must if you have a domestic employee.

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TAX AND FINANCIAL PLANNING CALENDAR FOR OCTOBER, 2008

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2007 & 2008 TAX FACTS

• For 2008, the standard deduction for a single individual is $5,450 and for a married couple is $10,900. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2008, the personal exemption is $3,500. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $102,000 for 2008, up from $97,500 in 2007.
  
• The standard mileage rate is $.585 per business mile as of July 1, 2008, up from $.505 per mile for the first six months of 2008.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,500 in 2008.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,000 into your 401(k) or 403(b) account that year.
• The maximum annual contribution to your IRA is $5,000 for 2008.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2009 to make your 2008 IRA contributions. 

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