Hiring Out of State Employees
In the connected work environment that we live in today it is not uncommon to be able to find your perfect employee half way across the US rather than around the block. What happens if your employee works in a different state than your business is in? Do you file returns in both states? Which state do you withhold taxes for? How do you send in those taxes? What if your dream employee moves away but you still want to employ them?
Payroll can seem simple on the surface however as your company grows so will the complexity of payroll. Rely on the experts to help you decode the compliance law.
Understanding Your W-2
Your W-2 has a lot of information contained on it about your compensation, however it has to be decoded.
• Box 1: Box 1 reports your total taxable wages or salary for federal income tax purposes. The number includes your wages, salary, tips you reported, bonuses and other taxable compensation. For example, taxable fringe benefits such as group term life insurance will be included here. But Box 1 does not include any pre-tax benefits, such as savings contributions to a 401(k) plan, 403(b) plan or health insurance.
• Box 2: Box 2 reports the total amount your employer withheld from your paychecks for federal income taxes. This represents the amount of federal taxes you have paid in throughout the year.
• Box 3: Box 3 reports the total amount of your wages subject to the Social Security tax. The Social Security tax is assessed on wages up to $118,500 as of 2017. If Box 3 shows an amount over the wage base, ask your employer correct your W-2. Tips reported to your employer are not included in the Box 3 amount. They're reported in Box 7.
• Box 4: Box 4 reports the total amount of Social Security taxes withheld from your paychecks. The Social Security tax is a flat tax rate of 6.2 percent on your wage income up to $118,500 as of 2017. Any wages you earn over $118,500 aren't subject to the Social Security tax.
• Box 5: Box 5 reports the amount of wages subject to the Medicare tax. There is no maximum wage base for Medicare, so the amount showing in Box 5 may be larger than the amount showing in Box 1. Medicare wages include any deferred compensation, 401(k) contributions or other fringe benefits that are excluded from the federal income tax. The amount in Box 5 typically matches your entire compensation from your job.
• Box 6: Box 6 reports the amount of taxes that were withheld from your paycheck for the Medicare tax, which is a flat tax rate of 1.45 percent of your total Medicare wages as of 2017. You might find that the amount in Box 6 is greater than the amount in Box 5 multiplied by 1.45 percent if you earn a significant income. That would be due to the additional Medicare tax which was implemented in 2013. It's an additional 0.9 percent on incomes over certain thresholds.
• Box 7: Box 7 shows any tip income you reported to your employer. It will be empty if you didn't report any tips. The total of Boxes 7 and Box 3 should not exceed the $118,500 Social Security wage base. The amount from Box 7 is already included in the Box 1 amount.
• Box 8: Allocated tips. Box 8 reports any tip income that was allocated to you by your employer. This amount is not included in the wages reported in Boxes 1, 3, 5 or 7. Instead, you must add it to your taxable wages on Form 1040 Line 7, and you must calculate your Social Security and Medicare taxes including this tip income using IRS Form 4137. You might want to review the information in Publication 531 concerning allocated tips or consult with a tax professional if any income shows in Box 8 of your W-2.
• Box 9: Box 9 should be empty.
• Box 10: Box 10 reports any amounts you might have been reimbursed for dependent care expenses through a flexible spending account, or the dollar value of dependent care services provided to you by your employer. Amounts under $5,000 aren't taxable, but any amount over $5,000 should be reported as taxable wages in Boxes 1, 3 and 5.
• Box 11: This box reports any amounts that were distributed to you from your employer's non-qualified deferred compensation plan or non-government Section 457 pension plan.
• Box 12: This box applies to deferred compensation and other compensation. Several types of compensation and benefits can be reported in Box 12 so the IRS has simplified this as much as possible by allowing your employer to enter a single letter or double letter code followed by the dollar amount of your compensation. Some of the common codes are:
o Code D, E, F, G, H – Retirement account contributions
o Code V – Income from the exercise of stock options
o Code W – Health Savings Account (HSA) account contributions
o Code DD – Cost of employer- sponsored health coverage
o The IRS has additional detail on Box 12
What is a 1099-Misc
A 1099 is an information return that is submitted to the IRS when you pay an independent entity or contractor to do work for you business. If you pay them more than $600 in the year you are required to file for 1099 and form 1096. These forms are due by January 31st of the following year. You should have any contractors fill out a form W-9 prior to engaging them to work for you. This will ensure that you have all the necessary information when it is time to file but it will also help you determine if one is even necessary. If the contractor who is doing the work is a corporation then you are not required to issue a 1099.
You are not required to issue you a 1099-Misc in order to deduct payment s to independent contractors. You are required to file the correct paperwork required by the W-9.
How Do I Fill Out My W-4
The W-4 form asks for your name, address, marital status and other basic personal information. You’ll fill these out and sign at the end. That is the easy part. The hard part is deciding the number of allowances you want to claim — which determines how much of your paycheck is set aside for taxes. The more allowances you claim, the less money will be taken out of your pay to go toward taxes. That is why the W-4 exists: It’s a form that instructs your employer how much tax to withhold from each paycheck.
The number of allowances will be determined by what happened with last year’s taxes. Here’s the general strategy: If you got a huge tax bill in April and don’t want another, reduce the number of allowances you claim. Doing this will increase the amount of taxes taken out each paycheck and will reduce your bill the following April. If you got a huge refund last year and would rather not have that money withheld throughout the year, do the opposite and reduce your allowances.
Let’s get into specifics. The W-4’s goal is to determine two things:
ARE YOU EXEMPT FROM WITHHOLDING?
Being exempt means your employer will not withhold any federal income tax from your pay. Exempt does not affect the Social Security and Medicare taxes that will still come out of your check.
Exempt means a very specific thing and generally, the only way you can claim exemption from withholding is if two things are true:
• You received a refund of all your federal income tax withheld last year
• You expect the same thing to happen this year
HOW MUCH DO YOU WANT THE IRS TO TAKE OUT OF YOUR CHECK?
Generally, the more withholding allowances you claim — and we’ll define these in a moment — the less income tax will be withheld from your paycheck. The exact amount depends on your wages and your W-4.
Three things go into the mix:
1. Whether you’re single or married
2. How many withholding allowances you claim
3. Whether you want any extra money withheld
Here are some examples of things that get you an allowance — that is, they decrease the amount of tax withheld from your paycheck:
• Having a spouse
• Having kids
• Filing as head of household on your tax return
• Planning to take the Child and Dependent Care Credit
HOW TO MAKE SURE YOUR W-4 DOESN'T STING YOU IN APRIL
It is easy to just throw a couple of numbers onto your W-4 and be done with it, but rushing might come back to bite you later. Here are a few things to remember. Take a conservative approach when you claim allowances, it is easier to get a slightly larger refund in April rather than owe.
FILE A NEW W-4 AT WORK WHEN LIFE CHANGES
A w-4 is not a set it and forget it type of thing. If any of these events happen to you during the year, update your W-4 so your withholdings reflect your new tax situation:
• You get married or divorced
• You have a kid
• You buy a house
• You take a pay cut or receive a big raise
• You work only part of the year
• You have a lot of dividend income
• You or your spouse freelance on the side
You’ll receive a W-4 when you start a job, but you can change your W-4 any time. Just download it from the IRS website, fill it out and give it to your payroll team. The IRS requires employers to put your new W-4 into effect by the start of the first payroll period ending 30 or more days after you turn it in.
BE WILLING TO FIDDLE WITH YOUR WITHHOLDINGS
Once you have figured out the sweet spot for your tax situation then you can adjust your w-4 based on your tax goals. If you want a big refund then reduce your allowances by a one or two. If you don’t want the government to have your money then increase your allowances by one or two. Compare from paystub to paystub to determine the net effect before you get to the end of the year.