The “Nanny Tax” Must Be Paid for More than Just Nannies

You may have heard of the “nanny tax.” But even if you don’t employ a nanny, it may apply to you. Hiring a housekeeper, gardener or other household employee (who isn’t an independent contractor) may make you liable for federal income and other taxes. You may also have state tax obligations.

If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you may choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.

FICA and FUTA tax

In 2019, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,100 or more (excluding the value of food and lodging). If you reach the threshold, all the wages (not just the excess) are subject to FICA.

However, if a nanny is under age 18 and child care isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time babysitter who is a student, there’s no FICA tax liability.

Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for both the employer and the worker (2.9% total).

If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.

You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

Reporting and paying

You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.

As a household worker employer, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.

When you report the taxes on your return, you include your employer identification number (not the same as your Social Security number). You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) that you file for your business. And you use your sole proprietorship EIN to report the taxes.

Keep careful records

Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, dates and amount of wages paid and taxes withheld, and copies of forms filed.

Contact us for assistance or questions about how to comply with these employment tax requirements.

2019 Q3 Tax Calendar: Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

  • Report income tax withholding and FICA taxes for the second quarter of 2019 (Form 941) and pay any tax due. (See the exception below, under “August 12.”)
  • File a 2018 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 12

  • Report income tax withholding and FICA taxes for the second quarter of 2019 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 16

  • If a calendar-year C corporation, pay the third installment of 2019 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
    • File a 2018 income tax return (Form 1120S, Form 1065, or Form 1065-B) and pay any tax, interest and penalties due.
    • Make contributions for 2018 to certain employer-sponsored retirement plans.

A Refresher on Major Tax Law Changes for Small-Business Owners

The dawning of 2019 means the 2018 income tax filing season will soon be upon us. After year end, it’s generally too late to take action to reduce 2018 taxes. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring, so they can plan accordingly.

With the biggest tax law changes in decades — under the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea.

Taxation of pass-through entities

These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as sole proprietors:

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35%, and 37%
  • A new 20% qualified business income deduction for eligible owners (the Section 199A deduction)
  • Changes to many other tax breaks for individuals that will impact owners’ overall tax liability

Taxation of corporations

These changes generally affect C corporations, personal service corporations (PSCs) and LLCs treated as C corporations:

  • Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
  • Replacement of the flat PSC rate of 35% with a flat rate of 21%
  • Repeal of the 20% corporate alternative minimum tax (AMT)

Tax break positives

These changes generally apply to both pass-through entities and corporations:

  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
  • A new tax credit for employer-paid family and medical leave

Tax break negatives

These changes generally also apply to both pass-through entities and corporations:

  • A new disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions
  • Elimination of the Section 199 deduction (not to be confused with the new Sec.199A deduction), which was for qualified domestic production activities and commonly referred to as the “manufacturers’ deduction”
  • A new rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
  • New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Preparing for 2018 filing

Keep in mind that additional rules and limits apply to the rates and breaks covered here. Also, these are only some of the most significant and widely applicable TCJA changes; you and your business could be affected by other changes as well. Contact us to learn precisely how you might be affected and for help preparing for your 2018 tax return filing — and beginning to plan for 2019, too.

Reduce Insurance Costs by Encouraging Employee Wellness

Protecting your company through the purchase of various forms of insurance is a risk-management necessity. But just because you must buy coverage doesn’t mean you can’t manage the cost of doing so.

Obviously, the safer your workplace, the less likely you’ll incur costly claims and high workers’ compensation premiums. There are, however, bigger-picture issues that you can confront to also lessen the likelihood of expensive payouts. These issues tend to fall under the broad category of employee wellness.

Physical well-being

When you read the word “wellness,” your first thought may be of a formal wellness program at your workplace. Indeed, one of these — properly designed and implemented — can help lower or at least control health care coverage costs.

Wellness programs typically focus on one or more of three types of services/activities:

  1. Health screenings to identify medical risks (with employee consent),
  2. Disease management to support people with existing chronic conditions, and
  3. Lifestyle management to encourage healthier behavior (for example, diet or smoking cessation).

The Affordable Care Act offers incentives to employers that establish qualifying company wellness programs. As mentioned, though, it’s critical to choose the right “size and shape” program to get a worthwhile return on investment.

Mental health

Beyond promoting physical well-being, your business can also encourage mental health wellness to help you avoid or prevent claims involving:

  • Discrimination,
  • Wrongful termination,
  • Sexual harassment, or
  • Other toxic workplace issues.

If you’ve already invested in employment practices liability insurance, you know that it doesn’t come cheap and premiums can skyrocket after just one or two incidents. But, in today’s highly litigious society, many businesses consider such coverage a must-have.

Controlling these costs starts with training. When employees are taught (and reminded) to behave appropriately and understand company policies, they have much less ground to stand on when considering lawsuits. And, on a more positive note, a well-trained workforce should get along better and, thereby, operate in a more upbeat, friendly environment.

To take mental health wellness one step further, you could implement an employee assistance program (EAP). This is a voluntary and confidential way to connect employees to outside providers who can help them manage substance abuse and mental health issues. Although it will call for an upfront investment, an EAP can lower insurance costs over the long term by discouraging lifestyle choices that tend to lead to accidents and lawsuits.

Hand in hand

Happy and healthy — there’s a reason these two words go hand in hand. Create a workforce that’s both and you’ll stand a much better chance of maintaining affordable insurance premiums. We can provide further information on how to reduce potential liability and lower the costs of various forms of business insurance.

A Strong BYOD Policy Combines Convenience & Security

It’s easy to understand why more and more businesses are taking a “bring your own device” (BYOD) approach to the smartphones, tablets, and laptops many employees rely on to do their jobs. BYOD can boost employee efficiency and satisfaction, often while reducing a company’s IT costs. But the approach isn’t without risk for both you and your staff. So, it’s highly advisable to create a strong formal policy that combines convenience with security.

Primary concerns

As an employer, your primary concern with BYOD is no doubt the inevitable security risks that arise when your networks are accessible to personal devices that could be stolen, lost, or hacked. But you also must think about various legal compliance issues, such as electronic document retention for litigation purposes or liability for overtime pay when nonexempt employees use their devices to work outside of normal hours.

For employees, the main worry comes down to privacy. Will you, their employer, have access to personal information, photos and other non-work-related data on the device? Could an employee lose all of that if you’re forced to “wipe” the device because it’s been lost or stolen, or when the employee leaves your company?

Important obligations

A BYOD policy must address these and other issues. Each company’s individual circumstances will determine the final details, but most employers should, at minimum, require employees to sign an acknowledgment of their obligations to:

  • Use strong passwords and automatic lock-outs after periods of inactivity,
  • Immediately report lost or stolen devices,
  • Install mandated antivirus software and other protective measures,
  • Regularly back up their devices,
  • Keep apps and operating systems up to date, and
  • Encrypt their devices.

The policy also should prohibit the use of public wi-fi networks or require employees to log in through a secure virtual private network when connecting via public wi-fi. You may want to forbid certain apps, too.

In addition, you need to spell out your rights to access, monitor and delete data on employees’ devices — including the types of data you can access and under which conditions. In particular, explain your wiping procedures and the steps employees can take to protect their personal information from permanent erasure.

Protection now

Nearly everyone who works for your company likely has a smartphone at this point. As such devices integrate themselves ever more deeply into our daily lives, it’s only natural that they’ll affect our jobs. Establishing a BYOD policy now can help prevent costly mistakes and potential litigation down the road. We can provide further information.

Contemplating Compensation Increases and Pay for Performance

As a business grows, one of many challenges it faces is identifying a competitive yet manageable compensation structure. After all, offer too little and you likely won’t have much success in hiring. Offer too much and you may compromise cash flow and profitability.

But the challenge doesn’t end there. Once you have a feasible compensation structure in place, your organization must then set its course for determining the best way for employees to progress through it. And this is when you must contemplate the nature and efficacy of linking pay to performance.

Issues in play

Some observers believe that companies shouldn’t use compensation to motivate employees because workers might stop focusing on quality of work and start focusing on money. Additionally, employees may feel that the merit — or “pay-for-performance” — model pits staff members against each other for the highest raises.

Thus, some businesses give uniform pay adjustments to everyone. In doing so, these companies hope to eliminate competition and ensure that all employees are working toward the same goal. But, if everyone gets the same raise, is there any motivation for employees to continually improve?

Two critical factors

Many businesses don’t think so and do use additional money to motivate employees, whether by bonuses, commissions or bigger raises. In its most basic form, a merit increase is the amount of additional compensation added to current base pay following an employee’s performance review. Two critical factors typically determine the increase:

  1. The amount of money a company sets aside in its “merit” budget for performance-based increases — usually based on competitive market practice, and
  2. Employee performance as determined through a performance review process conducted by management

Although pay-for-performance can achieve its original intent — recognizing employee performance and outstanding contributions to the company’s success — beware that your employees may perceive merit increases as an entitlement or even nothing more than an inflation adjustment. If they do, pay-for-performance may not be effective as a motivational tool.

Communication is the key

The ideal solution to both compensation structure and pay raises will vary based on factors such as the size of the business and typical compensation levels of its industry. Nonetheless, to avoid unintended ill effects of the pay-for-performance model, be sure to communicate clearly with employees. Be as specific as possible about what contributes to merit increases and ensure that your performance review process is transparent, interactive and understandable. Contact us to discuss this or other compensation-related issues further.

2018 Q3 Tax Calendar: Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

  • Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), and pay any tax due. (See the exception below, under “August 10.”)
  • File a 2017 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

  • Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 17

  • If a calendar-year C corporation, pay the third installment of 2018 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
    • File a 2017 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    • Make contributions for 2017 to certain employer-sponsored retirement plans.

Manage Costs of Health Benefits with a Multi-pronged Approach

Many companies offer health care benefits to help ensure employee wellness and compete for better job candidates. And the Affordable Care Act has been using both carrots and sticks (depending on employer size) to encourage businesses to offer health coverage.

If you sponsor a health care plan, you know this is no small investment. It may seem next to impossible to control rising plan costs, which are subject to a variety of factors beyond your control. But the truth is, all business owners can control at least a portion of their health care expenses. The trick is taking a multi-pronged approach.  Here are some ideas:

Interact with employees to find the best fit. The ideal size and shape of your plan depends on the needs of your workforce. Rather than relying exclusively on vendor-provided materials, actively manage communications with employees regarding health care costs and other topics. Determine which benefits are truly valued and which ones aren’t.

Use metrics. Business owners can apply analytics to just about everything these days, including health care coverage. Measure the financial impacts of gaps between benefits offered and those employees actually use. Then appropriately adjust plan design to close these costly gaps.

Engage an outside consultant. Secure independent (that is, non-vendor-generated) return-on-investment analyses of your existing benefits package, as well as prospective initiatives. This will entail some expense, but an expert external perspective could help you save money in the long run.

Audit medical claims payments and pharmacy benefits management services. Mistakes happen — and fraud is always a possibility. By regularly re-evaluating claims and pharmacy services, you can identify whether you’re losing money to inaccuracies or even wrongdoing.

Renegotiate pharmacy benefits contracts. As the old saying goes, “Everything is negotiable.” The next time your pharmacy benefits contract comes up for renewal, see whether the vendor will do better. In addition, look around the marketplace for other providers and see if one of them can make a more economical offer.

No silver bullet exists for lowering the expense of health care benefits. To manage these costs, you must understand the specifics of your plan as well as the economic factors that drive expenses up and down. Please contact our firm for assistance and additional information.

2018 Q2 Tax Calendar: Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 2

  • Electronically file 2017 Form 1096, Form 1098, Form 1099 (except if an earlier deadline applies) and Form W-2G.

April 17

  • If a calendar-year C corporation, file a 2017 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.
  • If a calendar-year C corporation, pay the first installment of 2018 estimated income taxes.

April 30

  • Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), and pay any tax due. (See exception below under “May 10.”)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

  • If a calendar-year C corporation, pay the second installment of 2018 estimated income taxes.

It’s Time to Get More Creative with Retirement Benefits Communications

Employees tend not to fully appreciate or use their retirement benefits unless their employer communicates with them about the plan clearly and regularly. But workers may miss or ignore your messaging if it all looks and “sounds” the same. That’s why you might want to consider getting more creative. Consider these ideas.

Brighter, more dynamic print materials

There’s no getting around the fact that printed materials remain a widely used method of conveying retirement plan info to participants. But if yours still look the same way they did 10 years ago, employees may file them directly into the recycle bin. Look into whether you should redesign your materials to bring them up to date.

A targeted number of well-formatted e-mails

You probably augment printed materials with email communications. But finding the right balance here is key. If you’re bombarding employees with too many messages, they might get in the habit of deleting them with barely a glance. Then again, too few messages means your message probably isn’t getting through. Also, like your printed materials, emails need to be well written and formatted.

Social media

Some employers have tried using their social media accounts to keep employees engaged and reminded about benefits. The effectiveness of this will depend on how active you are on social media and how many staff members follow you. It may work well if you have a younger workforce.

“Gamification”

As the name suggests, gamification involves incorporating some fun and a competitive element into benefits education — offering virtual rewards, status indicators or gift cards to successful competitors. Games can include quizzes testing employees’ understanding of their benefits or the fundamentals of retirement planning.

Robocalls

Granted, this may not be an immediately enticing option. These prerecorded calls have largely gotten a bad reputation because of their overuse for sales purposes. But, some employees may appreciate an occasional robocall as a reminder or update that they may have otherwise missed.

Making the problem of benefits communication even tougher is the fact that many companies budget little or even nothing to accomplish this important task. But, considering the cost and effort you put into choosing and maintaining your retirement benefits, effective communication is worth some investment. Let us know how we can help.