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what-to-know-before-donating-appreciated-assets-to-charity

What to Know Before Donating Appreciated Assets to Charity
What to Know Before Donating Appreciated Assets to Charity 1600 941 smolinlupinco

If you often give to charity, you’re likely aware that long-term appreciated asset donations—stocks, for example—are more advantageous than cash donations. But in some instances, it may be a better idea to sell those appreciated assets and donate the proceeds instead. 

This is because, for cash donations, adjusted gross income (AGI) limitations on charitable deductions are higher. Additionally, the deduction rules can be different for assets that don’t qualify for long-term capital gain treatment. 

Tax treatments by donation type

If all were equal, it would be ideal to donate long-term appreciated assets directly to charity because you could:

  • Enjoy a charitable deduction equivalent to the assets’ fair market value on the date it was gifted (assuming deductions are itemized on your return) 
  • Avoid capital gains tax on their appreciation in value 

In this scenario, if you were to sell the assets and donate the proceeds, the resulting capital gains tax could then reduce the tax benefits of the donation. 

But all is not equal. Charitable donations of appreciated assets are typically limited to 30% of the AGI, while cash donations are deductible by up to 60% of the AGI. 

In either case, excess deductions may be carried forward for up to five years. 

Crunch the numbers

If you’re considering donating appreciated assets greater than 30% of your AGI, do the math first. 

Then, determine whether selling the assets, paying the capital gains tax, and donating cash up to 60% of the AGI will result in greater tax benefits during the donation year and the following five years. 

The answer will depend on a number of factors, such as: 

  • The size of the gift
  • Your AGI in the year that you made the donation
  • Your projected AGI in the following five years
  • Your ability to itemize deductions during those years 

Making charitable donations? Talk to a tax professional

Before making charitable donations, it’s helpful to discuss your options with a knowledgeable tax advisor. Contact us for assistance making charitable donations with the greatest tax benefits. 

too-good-to-be-true-be-wary-of-third-party-erc-mills

Too Good To Be True? Be Wary of Third-Party ERC Mills
Too Good To Be True? Be Wary of Third-Party ERC Mills 1600 941 smolinlupinco

During the height of the COVID-19 pandemic, the Employee Retention Credit (ERC) helped employees keep their staff members on payroll. While this tax credit is no longer available, eligible employers who have yet to claim it may be able to do so by filing amended payroll returns for 2020 and 2021. 

However, the IRS warns against third parties advising non-eligible employers to claim the ERC. 

ERC 101

The ERC is a refundable tax credit designed specifically for businesses that: 

  • Continued to pay employees while being closed due to the COVID-19 pandemic, or 
  • Had significant declines in gross receipts between March 13, 2020, and September 30, 2021 (or, for certain startup businesses, December 31, 2021) 

Eligible employers who did not claim the ERC on an original tax return may still be able to claim it on an amended return. 

Eligible businesses must have fully or partially suspended operations due to government orders limiting commerce, travel, or group meetings due to the pandemic during 2020 or the first three quarters of 2021. Those who qualified as a recovery startup business during the third or fourth quarters of 2021 may also be eligible. 

Note that for any quarter, eligible employers cannot claim the ERC on wages that were: 

  • Reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness 
  • Used to claim certain other tax credits 

The problem with third-party “ERC mills” 

Some third-party “ERC mills” are sending notices via email, postal mail, and voicemail—and even advertising on television—promising businesses that they can help them receive a refund, despite not knowing anything about the employers’ unique circumstances. 

When businesses respond, these third parties claim many improper write-offs relating to the tax credit, such as taxpayer eligibility and computation. These third parties often charge large fees, whether upfront or contingent on a refund, without informing taxpayers that wage deductions claimed on federal income tax returns must deduct the amount of the credit. 

Getting the facts straight

If a business filed an income tax return that deducted qualified wages prior to filing an employment tax return claiming the ERC, they should file an amended return correcting any overstated wage deductions. 

The IRS encourages businesses to be wary of advertisements and offerings that seem too good to be true. Regardless of the third parties involved, taxpayers are always held responsible for any information reported on their tax returns. By improperly claiming the ERC, you may be required to repay not only the credit, but also any penalty fees and interest.

Wondering if you can still claim the ERC? Contact a knowledgeable tax professional

If you’re an employer who didn’t previously claim the ERC and believe you may be eligible, Smolin’s tax advisors can help you determine how to proceed. Contact us today. 

cash-tax-or-accrual-basis-whats-the-right-accounting-method-for-your-business

Cash, Tax, or Accrual Basis: What’s the Right Accounting Method for Your Business?
Cash, Tax, or Accrual Basis: What’s the Right Accounting Method for Your Business? 1594 938 smolinlupinco

One of the most critical aspects of running a business is having access to timely, accurate financial information. When it comes to tracking your business’s financial performance, there are several accounting methods to choose from—but how do you know what’s right for your situation? 

Here’s an overview of cash, tax, and accrual basis accounting to help you determine what’s right for your business. 

Cash basis

Startups and sole proprietorships often default to the cash method of accounting because of its simplicity. It also provides an immediate look at all available funds, which tends to suffice for small businesses with finances that aren’t overly complicated. 

While the recordkeeping process is easy, cash basis accounting can make it difficult to get an accurate picture of your finances, as transactions are only recorded when money changes hands. For example, if you bought a new computer using credit, you would only record it as an expense after paying for it in cash. (Note that this method is also not suitable for tax purposes.) 

You can often tell whether a company is using cash basis accounting by looking at its balance sheet, which won’t report accrual-basis items like accounts receivable, prepaid assets, accounts payable, or deferred expenses. 

Tax basis

Companies that want to minimize their tax liability may choose to use tax basis accounting, where transactions are only recorded when they relate to tax. With this reporting option, you use the same accounting method for both book and tax purposes. 

This can also be beneficial for businesses that don’t have complicated financial affairs and who don’t require up-to-date financial information. 

Accrual basis

As your business grows, it will have more complex reporting requirements. Larger companies may decide (or be required to) to use the accrual method of accounting, where revenue is recognized when earned (regardless of when it’s received), and expenses are recognized when incurred (rather than paid). This method matches revenue to corresponding expenses in the proper period, which helps with accurately evaluating growth and profit margins over time and against competitors. 

Businesses that issue financial statements under U.S. Generally Accepted Accounting Principles (GAAP) are required to use this accounting method—and most lenders and investors prefer this method due to its reliability for long-term financial planning purposes. 

An additional benefit of accrual basis accounting is that it can help manage cash flow. For example, timely financial data helps negotiate payment terms with suppliers, plan for significant expenses, and forecast future cash needs. 

Not sure which method is right for your business? Contact us

Choosing the right accounting method for your business is not a decision that should be made lightly. You need to consider your financial needs and accounting skills, and whether the methods used in the past have served you well. You may even choose to use a hybrid approach, incorporating elements from multiple methods. 

A knowledgeable tax advisor can help you find the right solution. Contact us to learn more. 

getting-the-most-out-of-your-401k-plan

Getting the Most Out of Your 401(k) Plan
Getting the Most Out of Your 401(k) Plan 1594 938 smolinlupinco

The best way to reduce taxes and set yourself up for a comfortable retirement? Putting money toward a tax-advantaged retirement plan. If you’re not already making the most of an employer-offered 401(k) or Roth 401(k), now is the time to start. The sooner you start contributing to your retirement plan, the more substantial your nest egg will be. 

Looking to build up that nest egg even more? Consider increasing your contribution (if you’re not already contributing the maximum amount allowed). Thanks to tax-deferred compounding—or, in the case of Roth accounts, tax-free—boosting contributions can significantly impact the amount of money you’ll have once you retire. 

Retirement plan contributions in 2023

With a 401(k), an employee can elect to have a certain payment amount deferred and then contributed to their plan by an employer on their behalf. Due to inflation, these amounts are unsurprisingly increasing—the contribution limit in 2023 will be $22,500, compared to $20,500 in 2022. 

Employees who will be 50 years of age or older by the end of the year will also be able to make additional “catch-up” contributions of $7,500 in 2023 (compared to $6,500 in 2022). As a result, these employees can save a total of $30,000 in 2023 (compared to $27,000 in 2022). 

401(k) contributions

There are many benefits to contributing to a traditional 401(k). For example: 

  • Contributions are pre-tax, which reduces your modified adjusted gross income (MAGI), and can also help to reduce or avoid the 3.8% net investment income tax.
  • Plan assets can grow tax-deferred, which means you don’t have to pay any income tax until you take distributions.
  • All or some of your contributions can be matched by your employer pre-tax. 

If you’re already contributing to a 401(k) plan, you may want to take a closer look at your contributions for 2023, aiming to increase your contribution rate to get as close to the $22,500 limit as possible—with an extra $7,500 for those aged 50 or older. 

Note that your paycheck will be reduced by the amount of contribution only, as these are pre-tax and income tax is not withheld. 

Roth 401(k) contributions

High-income earners may benefit from Roth 401(k) contributions, as they don’t have Roth IRA contributions as an option. This is because if your adjusted gross income exceeds a certain threshold, your ability to contribute to a Roth IRA is reduced or eliminated. 

If your employer offers a Roth option in their 401(k) plans, you can designate some or all of your contributions as Roth contributions. While these contributions won’t reduce your MAGI, qualified distributions will be tax-free. 

Plan your financial future with Smolin

If you’re not sure how much to contribute, or how to determine the best combination of traditional and Roth 401(k) contributions, our knowledgeable tax advisors can help. 

Contact us to get the most out of your 401(k) plan or to discuss other tax and retirement-saving strategies.

financial-reporting-tips-for-nonprofits

Financial Reporting Tips for Nonprofits
Financial Reporting Tips for Nonprofits 1488 875 smolinlupinco

Financial reporting isn’t just about profits. A lot that falls under the umbrella of accounting, from preparing budgets and monitoring finances to paying invoices and managing payroll tax—and nonprofits can certainly benefit from formal accounting processes. 

If you’re a nonprofit entity, consider whether your accounting processes are managed as efficiently as possible. Not sure where to start? Check out these helpful tips. 

Create invoicing policies and procedures

If you’re unsure of where to start, take a look at your invoicing. Do you have policies and procedures for monthly cutoffs of recording vendor invoices and expenses? 

One option is to require that all invoices be submitted within one week of the month’s end. Otherwise, you may spend valuable time waiting on weigh-ins from employees or other departments—and ultimately, delaying the completion of your financial statements. 

By reconciling balance sheet amounts each month, you may also be able to save time at the end of the year by catching and correcting any errors early. It’s also helpful to reconcile your accounts payable and accounts receivable ledgers to statements of financial position. 

An extra tip: when you have multiple invoices to process, it’s best to set aside a block of time to enter invoices and cut checks all at once. 

Streamline data collection

Accounting clerks and bookkeepers need a variety of information to enter vendor bills and donor bills into your accounting system. One way to make this process more efficient is to design a coding cover sheet or stamp to collect information on the invoice or donor check copy. This helps to route invoices pending approval into a folder that lists your nonprofit’s general ledger account numbers—that way, the person entering data doesn’t have to look them up every time. 

In your cover sheet or stamp, you should also include a place for invoice payment approvals. For example, multiple-choice boxes can be used to indicate the cost centers to which amounts should be allocated. 

Be sure that the invoice’s payment is also documented for reference, and that your development staff provides details for donor gifts before recording them in the accounting system. 

Make the most of your accounting software

If you’ve purchased an accounting software package, there’s a chance you’re not taking advantage of all the tools it has to offer. Have you invested enough time to learn the full functionality of your software package? If not, consider hiring a trainer to review all of its functions and teach you and your team shortcuts and other time-saving tricks.

It’s also helpful to standardize the financial reports that come from your accounting software, so you don’t have to spend extra time modifying them to meet your organization’s needs. Not only will this reduce input errors, but it will also offer helpful financial insight at any point—not just at the end of the month.

Your accounting software can also help you automatically perform standard journal entries and payroll allocations. For example, many systems can automate payroll allocations to certain programs or vacation accrual reports. That said, be sure to review any estimates against the actual figures every so often, and always adjust to the actual amount before closing your books at the end of the year. 

Monitor your processes

If they’re not consistently monitored, even the most robust accounting processes can become inefficient over time. Every so often, assess your processes for any tedious or labor-intensive steps that could be automated, or steps that don’t add value and could be removed altogether. 

Additionally, make sure that the department responsible for overseeing your finances—CFO, treasurer, or finance committee, for example—reviews monthly bank statements and financial statements promptly. The earlier you catch errors or unexpected amounts, the better. 

Need more tips? 

If you’re interested in learning more about how to improve the accounting function at your nonprofit, our knowledgeable advisors are here to help. Contact us to learn more.

5-ways-to-update-your-accounting-practices

5 Ways to Update Your Accounting Practices
5 Ways to Update Your Accounting Practices 1594 938 smolinlupinco

When you think about the internal workflows and processes of your business, are you able to pinpoint why you do things a certain way? If the answer is “because we’ve always done it that way,” it might be time to make some changes. 

In fact, with all of the new developments in the financial and accounting realm, sticking to those traditional methods may actually be costing your business in terms of efficiency and cash flow alike. 

Here are five ways to keep your accounting processes and systems up-to-date. 

1. Streamline the payables process

When it comes to managing your accounts payable, using traditional paper processes could be costing you valuable time (and money). With automated technology solutions, you can streamline the process to improve efficiency, reduce costs, enhance security, and even obtain early payment discounts. 

Automatic payables systems can scan invoices and post them automatically based on the purchase or invoice number. Then, the payables clerk—or whoever is responsible for reviewing the invoice—can cross-reference the invoice and approve it for electronic payment based on terms negotiated with the vendor. 

2. Implement daily reconciliation

Many accounting firms wait until the end of the month to reconcile their bank accounts—but it doesn’t have to be this way. By reconciling accounts on a daily basis using automation software, you can catch in-transit payments that have been cashed but not recorded. And by eliminating that crunch at the end of the month, you can speed up other monthly closings. 

This also keeps you from having to wait for standard monthly entries that remain the same—depreciation, prepaid expenses, and property tax or insurance accruals, for example. By starting your end-of-month closing process sooner, you can improve the accuracy and timeliness of your financial statements while also taking some of the pressure off of your accounting staff. 

3. Use p-cards

Consider issuing corporate purchase cards, or p-cards, to at least one employee in each department to cover travel and entertainment expenses, or small items under $100 or so. This way, your accounting department can make a single payment for multiple purchases, rather than processing multiple small-dollar checks. 

As an added perk, most p-cards offer points and cash-back rewards that your team can take advantage of when paying back expenses. 

4. Digitize your processes

When you go paperless, you can lower expenses, increase efficiency, and maintain compliance—all in a way that’s more environmentally friendly. And when you use an electronic document management system, you can save significant amounts of physical storage space and reduce the time it takes to create and modify documents. 

While you may not be able to go completely paperless, there are plenty of documents and processes that can be digitized: contracts, invoices, payables, payroll documents, and employee records, for example. 

Consider implementing document management software solutions to help you convert your processes from paper to digital. 

5. Make the most of your accounting software

With ever-changing policies and practices, it’s more important than ever to use your accounting software to help you stay compliant and financially sound. This could involve making better use of your current account system or switching over to new software. Keep in mind that, as your firm grows, you will likely need more advanced functionality. 

To optimize your accounting software, start by making a list of your requirements, from types of activities to reporting. Then, cross-reference those needs with your software features to ensure that they’re all being met. You’ll also want to prioritize remote access so that your team can securely access real-time project information from anywhere. 

Look for integrations with other software and platforms, too, such as timecard entry and project management software, or third-party payroll software that can be used with minimal manual data entry.

Ready to upgrade your accounting practices? 

If your accounting firm’s processes and systems have been the same for years, it’s likely time for an upgrade—and our knowledgeable accounting advisers can help. Contact us to learn more.

iras-and-rmds-answering-your-faqs

IRAs and RMDs: Answering Your FAQs
IRAs and RMDs: Answering Your FAQs 1600 941 smolinlupinco

You may be aware of the fact that you can’t let funds sit in your traditional IRA indefinitely. Once you reach age 72, you’re required to start taking withdrawals. 

You may also be aware that the rules for taking required minimum distributions, or RMDs, are complex. Here are some answers to frequently asked questions about taking withdrawals from a traditional IRA (including SIMPLE IRA or SEP IRA). 

Can I withdraw money before retirement?

The simple answer: yes. 

That said, if you want to take money out of a traditional IRA before the age of 59.5, those distributions are taxable and you may be subject to a 10% penalty tax. 

That 10% penalty tax—but not regular income tax—can be avoided if you pay: 

  • Qualified higher education expenses
  • Up to $10,000 of expenses if you’re a first-time homebuyer
  • Health insurance premiums if you’re unemployed 

When can I take my first RMD for an IRA?

You must take your first RMD by April 1 of the year after the year in which you turn 72. Note that this rule applies whether or not you’re still employed. 

How do I determine my RMD? 

When calculating your RMD, take the account balance from the end of the preceding calendar year and divide it by the distribution period from the IRS’s Uniform Lifetime Table. 

If the sole beneficiary is a spouse who is 10 or more years younger than the owner, a separate table will be used. 

What if I have multiple accounts? 

For those with more than one IRA, the RMD for each must be calculated separately each year. 

However, you don’t have to take a separate RMD from each IRA—you may combine the RMD amounts for all IRAs, and either withdraw the total from one IRA or a portion from each. 

Can I withdraw amounts exceeding my RMD? 

Yes—you can always withdraw more than your RMD. Note, however, that you cannot put excess withdrawals toward RMDs in future years. 

When planning for RMDs, weigh your income needs against the ability to maintain the IRA tax shelter for as long as possible. 

Can I withdraw more than once a year? 

Yes. As long as you withdraw the total annual minimum amount by December 31 (or, if it’s your first RMD, April 1), you may withdraw your yearly RMD in any number of distributions throughout the year.

What if I don’t take an RMD? 

If your distributions for any given year are less than your RMD, you’ll be subject to an additional tax. This tax is equal to 50% of the amount that was not paid out but should have been. 

Plan ahead with us

Questions about your retirement planning? Our knowledgeable tax advisors can help. Contact us to learn more. 

pros-and-cons-of-c-corporations-for-business-entities

Pros and Cons of C Corporations for Business Entities
Pros and Cons of C Corporations for Business Entities 1275 750 smolinlupinco

If you’re launching a new business venture, you may find yourself wondering which type of company to create—and more specifically, whether a C corporation is the right option for you given your unique situation and goals. There are many advantages and disadvantages of doing business as a C corporation that are important to consider. 

What is a C corporation?

As a C corporation, your business is treated and taxed separately from you as its principal owner (unlike with an LLC). This protects you from the debts of business while also allowing you to control day-to-day operations and corporate acts like redemptions, acquisitions, and liquidations. 

As an added perk, the corporate tax rate is currently 21%—lower than the highest non-corporate tax rate. 

How to ensure your corporation is treated as a separate entity

For your business to be treated and taxed separately from you as an individual, you must follow the legal requirements of your state. For example: 

  • Filing articles of incorporation
  • Adopting bylaws
  • Electing a board of directors
  • Holding organizational meetings
  • Keeping meeting minutes

Compliance with these requirements, along with the maintenance of an adequate capital structure, will keep you from risking personal liability for business debts.

Pros and cons of C corporations 

If you’re unsure whether a C corporation is the right legal structure for your business, it’s important to explore both sides of this model. 

Advantages

On a tax-favored basis, a C corporation can be used to provide fringe benefits and fund qualified pension plans. While subject to certain limitations, the corporation can deduct various benefit costs (such as health insurance and group life insurance) without negative tax consequences. 

When it comes to raising capital from outside investors, a C corporation also offers significant flexibility—it can have multiple classes of stock, each with different rights and preferences that can be tailored to the needs of an individual along with potential investors. For those who decide to raise capital through debt, interest paid by the corporation is deductible. 

Disadvantages

Since it’s taxed as a separate entity, all of the corporation’s items of income, credit, loss, and deduction are calculated at the entity level, arriving at taxable corporate profit or loss. This means that, for new businesses, one potential disadvantage of a C-corp is that losses can be trapped at the entity level and not deducted by owners (unless they expect to generate profits in the first year). 

Another potential disadvantage is that C corporation earnings can be subject to double taxation: once at the corporate level, and again when distributed to you. That said, this risk is minimal, since most corporate earnings will be attributed to your efforts as an employee and the corporation can deduct all reasonable salary paid to you. 

Not sure if a C corporation is the right choice? Contact us.

While a C corporation might be the appropriate choice at this time, you may be able to apply to become an S corporation in the future if it’s more appropriate for your business. 

If you have any questions or would like assistance exploring the best type of legal structure for your business, our knowledgeable advisors can help. Contact us to learn more. 

5-tips-to-prepare-for-year-end-inventory-counts

5 Tips to Prepare for Year-End Inventory Counts
5 Tips to Prepare for Year-End Inventory Counts 1600 941 smolinlupinco

The end of the year is approaching fast. For many, this means time for a physical year-end inventory count—the best way to ensure an accurate amount reported in your company’s perpetual inventory system.

Physical counts may seem tedious and time-consuming, but they can offer valuable insight into your company’s operational efficiency. Fortunately, there are some ways to streamline the process. 

Preparing for your inventory count

Follow the five tips listed below to increase the efficacy of your year-end inventory count. 

1. Use numbered inventory tags

Many companies use two-part tags to count their inventory: one to stay with the item on the shelf, and the other to be returned to the manager following the count. To ensure that the manager can account for every tag issued, use a tagging system to avoid double-counting or omitting items. 

The best way to do this is to number your tags sequentially—whether you order pre-numbered tags or create them yourself is up to you. Either way, you’ll want the tags to be numbered and ready to go well before the count is scheduled to begin. 

2. Preview your inventory

For an efficient inventory count, many companies do a test run a few days before the actual count. This helps to identify and correct any foreseeable problems (such as missing part numbers, unbagged supplies, and insufficient inventory tags). It also helps you determine how many workers to schedule for the project. 

3. Assemble counting teams

To avoid fraudulent counts, it’s helpful to assemble and assign teams to specific areas of the warehouse. (A map often helps workers identify count zones.) Additionally, avoid giving workers inventory listings to reference—encourage them to bring any possible discrepancies to attention rather than duplicating the amount from the listing. 

4. Write off unsaleable items 

If you already know that certain items are going to be written off, such as defective or obsolete items, be sure to dispose of them properly before the inventory count begins. 

5. Pre-count select items

If possible, take some time to pre-count items that aren’t expected to be used before year-end, complete with tagging and storing. If you notice a broken seal on the day of the actual count, those items should be recounted.

Value of inventory

Under the U.S. Generally Accepted Accounting Principles (GAAP), inventory is recorded at cost or market value—whichever is lower. That said, estimating the market value of inventory may require subjective judgment calls. It can be especially difficult to objectively assess the value of work-in-progress inventory, especially when it includes overhead allocations and percentage of completion assessments. 

Because the value of inventory is constantly fluctuating as work is performed and items are shipped and delivered, the best way to capture a static value is to “freeze” operations while the count takes place. This could involve counting inventory during off hours or breaking down counts by physical location. 

External auditors

If your company issues audited financial statements, at least one member of your external audit team will observe the physical inventory count. 

The auditor’s roles include: 

  • Observing procedures, including statistical sampling methods
  • Reviewing written inventory processes
  • Evaluating internal controls over inventory
  • Performing independent counts for comparison
  • Looking for obsolete, broken, or slow-moving items that should be written off

Be prepared to provide your auditors with invoices and shipping/receiving reports, which will be used to evaluate cutoff procedures and confirm reported values. 

Work with an advisor

If you’re concerned about your physical inventory counting procedures, our advisors can help you get it right, including investigating any discrepancies between your inventory count listing and the amount reported in your perpetual inventory system.

Contact us to get started. 

No Nanny? You May Still Be Liable for “Nanny Tax”
No Nanny? You May Still Be Liable for “Nanny Tax” 1600 941 smolinlupinco

If you’ve hired a house cleaner, gardener, or other household employee that isn’t an independent contractor, you may be liable for what’s called the “nanny tax”—even if you haven’t technically employed a nanny. 

You aren’t required to withhold federal income taxes when you hire a household worker, but you can choose to do so if requested by the worker (in which case, they must fill out a W-4 form). You may, however, be required to withhold Social Security and Medicare (FICA) taxes, along with paying federal unemployment (FUTA) tax.

In addition to federal income and other taxes, you may also be obligated to pay state taxes. 

Tax thresholds for 2022 and 2023

FICA taxes

If your household worker earns $2,400 or more in 2022 (not including food and lodging), you must withhold and pay FICA taxes. In 2023, this amount will increase to $2,600. Once you reach that threshold, note that all wages will be subject to FICA taxes—not just the excess. 

Note that you do not have to withhold these taxes for workers under the age of 18 whose primary occupation does not involve childcare, such as a part-time student babysitter.

Employers and household workers may each have FICA tax obligations—but as an employer, you are held responsible for withholding your worker’s FICA share while also paying a matching amount. 

FICA tax is divided between Social Security and Medicare, with the Social Security and Medicare tax rates being 6.2% and 1.45%, respectively, for both employers and workers. As an employer, you have the option to pay your worker’s share of wages for these tax purposes. That said, your payments will be treated as additional income for your worker’s federal taxes, so they will need to be included as wages on the W-2 form. 

FUCA taxes

If your household worker earns $1,000 or more in any calendar quarter (not including food and lodging), you must also pay FUTA tax. This tax applies to the first $7,000 of paid wages and is only to be paid by the employer. 

Paying your household worker taxes

To pay these household worker obligations, you will need to increase your quarterly estimated tax payments or increase withholdings from wages—as opposed to making an annual lump-sum payment. 

Unless you own your own business, you won’t have to file employment tax returns as the employer of a household worker, even if you’re required to withhold or pay tax. This is because employment taxes are reported on your tax return on Schedule H (Form 1040). 

In your tax return, include your employer identification number (EIN). If you don’t have one, you must file a Form SS-4 to get one. (Note that this is not the same as your Social Security number.)

If you own your business as a sole proprietor, however, you will include household worker taxes on the FUTA and FICA forms filed for your business using your sole proprietorship EIN.

Keep detailed records

Once you pay your taxes, be sure to keep all related records for at least four years following the due date of the return or the date the tax was paid—whichever is later. 

In your records, include the following:

  • Worker’s name
  • Address
  • Social Security number
  • Employment dates
  • Amount of wages paid
  • Amount of taxes withheld
  • Copies of any forms filed

If you need assistance understanding and applying tax rules to your situation, contact us to work with a knowledgeable tax advisor. 

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