Getting read to wrap up your end of year finances? Here are some tips on those pesky taxes.
The “Occasional Baby Sitting” Tax Exemption
So if you need a baby sitter during the holidays keep in mind that it could be tax deductible! The current FICA threshold of $1,700 per calendar year will increase to $1,800 in 2012. Sometimes referred to as the “Casual Babysitting Exemption,” the new FICA threshold means that families who hire employees on a temporary basis will be able to pay each temporary employee up to $1,799 in the calendar year without being required to withhold and pay FICA taxes.
Once an employee reaches the $1,800 threshold, however, the family will be required to report and remit both the employer and employee portions of the FICA tax starting with the first dollar of wages. For that reason, unless a family is absolutely sure they won’t cross the threshold, we advise them to go ahead and withhold the employee’s FICA taxes from day one. That way, if they reach the $1,800 threshold for that individual, the appropriate taxes will already have been collected from the employee. If they don’t reach it, they can simply return the FICA taxes back to the employee.
Most Americans realize the importance of saving for the golden years of retirement. While Social Security benefits will help, (if it is still available when you retire!) individual retirement plans are commonly used as a tax-advantaged way to supplement those funds. Although there are many retirement plans available, many require contributions from both employee and employer. In addition, managing the tax requirements on many of the plans can be quite complex. Since families don’t have a “benefits department” to establish and manage retirement plans, we recommend plans that are easy to set up and administer. Below are two excellent options:
• Traditional IRA: Employees can contribute up to $5,000 (2011) of their salary per year to a Traditional IRA. Contributions are tax-deferred, meaning that the contributions are not subject to certain payroll taxes and are taxed when withdrawn at retirement. Contributions to a Traditional IRA may also be tax-deductible each April via Form 1040 (federal income tax return). Employers are not eligible to contribute to Traditional IRAs. These plans are very “portable” as they are not dependent on administration by or contribution from the employer.
• Roth IRA: Employees, employers or both may contribute up to $5,000 per year (2011) to a Roth IRA. Contributions are not tax-deferred, meaning that contributions are made using after-tax income and, therefore, there are no taxes when funds are withdrawn at retirement. This plan gives employees the flexibility to contribute solely or to involve their employers in the retirement plan contributions.
Here are two additional options.
They are recommended only for someone who is able to make a large annual contribution to the plan and willing to incur the cost of administering these plans.
• SIMPLE IRA (Savings Incentive Match Plan for Employees): This plan allows employees to contribute up to $11,500 (2011) per year and requires employers to make matching contributions of up to 3 percent of their employee’s pay. Contributions to a SIMPLE IRA are tax-deferred, meaning that the contributions are not subject to certain payroll taxes and are taxed when withdrawn at retirement.
• 401(k) Plans: A 401(k) allows employees to contribute a portion of pre-tax salary into a tax deferred, interest-bearing retirement account. In some cases, employers can agree to match each dollar that employees contribute to the account and receive a tax deduction on their contributions. Please know that this option may not be available to you since 401(k) plan are generally restricted to commercial enterprises.
Although you can establish a retirement plan online, it is not recommended unless you have a strong working knowledge of retirement plans. Remember you can take advantage of a contribution to any retirement plan and get a tax deduction on your 2011 tax return by making a contribution before the end of the year!
Give us a call if you have any further questions on planning for retirement, or better yet, call and take advantage of your Kingman Winslow, LLC year end planning appointment!
Health Insurance Tax Credit
Small employers (less than 25 employees) who contribute to their employee’s health insurance policy are entitled to a tax credit on that expense. So, in addition to being a non-taxable form of compensation (see Non-Taxable Compensation below), health insurance contributions made by an employer have the added benefit of savings from tax credits. So if you’re looking for an additional tax offset for 2011 you might consider contributing to your employee’s health insurance plan before the year ends to get a tax credit on your 2011 tax return!
Note: The average annual employee compensation for the employer cannot exceed $50,000. The tax credit percentage is determined by the average annual salary of the employees. At $25,000, the tax credit is 35% of the contribution. For example, if the Johnsons pay their nanny $25,000 in 2010 and contribute $350 per month to her health insurance policy, their 2010 tax credit would be
$1,470 ($350 x 12 = $4,200 x .35 = $1,470).
Additional Notes: As the average annual salary increases above $25,000, the tax credit percentage gradually decreases. In addition to the sliding tax credit percentage, each state has created a ceiling for the contribution portion of the formula based on that state’s average premium cost.
If you’d like an estimate of your tax credit – based on your state ceiling and your tax credit percentage – just give us a call.
SEPTEMBER 2011-AUGUST 2012 TAX FILING DEADLINE CALENDAR
Individuals and Employees Repeating Payment Deadlines:
Estimated tax Individuals’ payments due: Sept. 15, 2011, and Jan. 16, April 16 and June 15, 2012.
Oct. 17, 2011: 2010 filing deadline for individuals who requested an automatic extension.
Jan. 31, 2012: Individuals must file Form 1040 and pay tax due to avoid penalties for underpaying the Jan. 16 installment of 2011 estimated taxes.
April 16, 2012: Individuals must file their 2011 tax returns (Form 1040, 1040A or 1040EZ) or request an automatic six-month extension (Form 4868) and pay any tax due.
April 16, 2012: Last date to make 2011 contributions to an IRA.
April 16, 2012: Individuals must file their 2011 gift tax returns (Form 709) or an automatic six-month extension (Form 8892) and pay any gift tax due.
April 16, 2012: Household employers must file Schedule H (Form 1040) if wages paid in 2011 exceed the annual limit.
June 15, 2012: Individuals living outside the United States must file their 2011 tax returns (Form 1040) or request a four-month extension (Form 4868) and pay any tax due.
Businesses and Employers Repeating Payment Deadlines:
Withholding Employers must file Form 941 and pay any tax due: Nov. 1, 2011, and Jan. 31, May 1 and Aug. 1, 2012.and FICA taxes
Estimated tax Calendar-year corporation payments due: Sept. 15 and Dec. 15, 2011; April 16 and June 15, 2012.
Sept. 15, 2011: 2010 filing deadline for calendar-year corporations and partnerships that requested an automatic extension.
Dec. 31, 2011: Last date for employers to establish a retirement plan for 2011 (other than a SEP or SIMPLE).
Feb. 28, 2012: Employers must file Form W-2 (Copy A) and transmittal Form W-3 with the Social Security Administration. (Electronic filers have until April 1.)
Feb. 28, 2012: Businesses must file Form 1099 for 2011 interest, dividends and miscellaneous payments.
March 15, 2012: Corporations must file their 2011 tax returns (Form 1120 or 1120-A) or request an automatic six-month extension (Form 4868) and pay any tax due.
April 16, 2012: Calendar-year partnerships must file their 2011 tax returns (Form 1065 or 1065-B for partnerships, Form 1041 for trusts and estates) or request an automatic six-month extension (Form 7004) and pay any tax due.
Aug. 1, 2012: Employers must file their retirement plan reports (Form 5500 or 5500-EZ) or request an extension.