BIDaWIZ Blog » EMPLOYMENT TAX

Is Your Mileage Reimbursement Check Lower Than It Should Be?

The BIDaWIZ Team — Fri, 22 Jun 2012 13:00:32 +0000

Employees that travel on business frequently accumulate hundreds, if not thousands of dollars in out of pocket expenses annually. Some employers will reimburse the worker up to IRS standard deduction rate of $0.555 per mile while others may return much less and sometimes nothing at all. Is your employer treating the reimbursement correctly for tax purposes and how should you report it on your own tax return?

What is the standard mileage rate deduction?
This is a deduction that is generally available for those that use their personal car for business, medical, or in support of a charitable organization. For 2012, business travelers can deduct 55.5 cents per mile for business travel. The mileage rate deduction is claimed as an itemized deduction on your tax return if you are itemizing for the year. Remember, you can either itemize deductions or take the standard deduction.

What if my employer reimburses me for my mileage?
You cannot claim a tax deduction because the out of pocket expenses were returned to you by your employer. It is very important to note that this type of reimbursement is considered part of an accountable plan in which the monies received should not be reported on your W-2 form as taxable wages. As such, no withholding taxes should be taken from the reimbursement check. The only instance in which the reimbursement would be reported as taxable wages on your W-2 form, is if the amount returned was in excess of the costs and above the standard mileage rate of $0.555.

What happens if my employer makes a partial reimbursement?
For instance, let’s suppose that you traveled 1000 miles during the year, but, your employer only reimbursed you $250 or $0.25 per mile as opposed to the standard rate of $555 or $0.555 per mile. In that case, you can itemize that out of pocket expense on schedule A of your tax return for the difference or the $305. Please note that if you elect the standard deduction, you cannot itemize. If do intend to itemize this expense, please make sure that you have copious note detailing your travels in case of a future audit.

What if my employer doesn’t reimburse me at all?
You would simply report the expense as an itemized deduction on your Schedule A of your 1040 and keep supporting documentation. You will lose this tax benefit if you elect the standard deduction.

More Questions? Browse answers or ask your withholding tax questions online.

What Do Small Businesses Need to Know About Unemployment Taxes?

Susan Ladika — Thu, 08 Dec 2011 11:30:33 +0000

Sky-high unemployment rates and months of unemployment benefits for many workers have pushed some states into the red with the federal government. A study by the Tax Foundation issued in October found that 34 states had borrowed from the federal government to pay unemployment benefits when the states’ funds dried up. A few states have paid off their debts, but with many states still struggling financially, they owe a combined $37 billion, and began paying interest this fall on the cash they borrowed.

How does this impact the small business?
State unemployment insurance taxes are based on a set schedule. Each state has minimum and maximum rates that are levied on a particular wage base. Employers that historically lay off many workers pay a higher rate than those that seldom have.

Depending on what state you are located in, you may have already seen your taxable wage base increase, or have experienced an increase in the minimum and maximum tax rates.

If your business is based in one of about 20 states that still owe money to the federal government, you’ll see your federal unemployment tax rise, and they’re payable in January 2012. Businesses in a number of major states, including New York, California, Illinois and Florida, will be hit.

How much more will I owe in unemployment taxes?
While the federal unemployment tax rate is 6.0%, the IRS grants businesses a 5.4% credit for paying state unemployment insurance tax. If a state hasn’t paid back the money it has borrowed from the feds, the credit is typically reduced by 0.3%, or $21 per worker, though the reduction in some states is higher. While $21 per employee might not seem like a large amount, it can have a big impact, depending on the number of people you employ, and your profitability. And until a state pays of its debt, the credit will be reduced each subsequent year. If we open up the history books, during the recessions in the late 20th century, it took many states a decade to pay off their debts to the federal government.

About the Writer
Susan Ladika has been a writer and editor for 25 years. Her freelance work has covered everything from business to travel to science to international issues, and have appeared in such publications as Science, Town & Country, HR Magazine, Developer, The Wall Street Journal-Europe, The San Francisco Chronicle, and many others. She has also done extensive editing as a newspaper and wire service editor holding positions such as the Tampa Tribune Bureau Chief.

More Questions? Browse Answers or ask your Tax Questions.

Incorrectly Classified as a 1099 Contractor Instead of a W2 Employee?

The BIDaWIZ Team — Wed, 07 Dec 2011 11:00:39 +0000

Many “employees” are surprised when they receive a 1099 form from their employer instead of a W-2 after the end of the year. Typically these workers begin scrambling to explore ways to rectify the issue and may even consider taking legal action. While this issue could have been completely avoided by having a clear understanding with the employer during the hiring period, let’s look at what we should do if we’ve been incorrectly classified as a 1099 contractor.

The Red Flags for Incorrect Classification as a 1099 Contractor
There are certain activities that may or may not have taken place which maybe an indicator of whether you were incorrectly classified as a 1099 contractor. Specifically, did or does your employer pay you in cash only? Did your employer ask you not to complete a Form W-4 when you began your employment? Did your employer not withhold any taxes from your pay? If any of the answers to these questions are true then it is possible that you were misclassified.

Let’s just make sure that you are being misclassified. Ask yourself these questions:
1) Do you determine how the job is done?
2) Are you paid by the job or project rather than an hourly wage or salary?
3) Do you offer your services to the public and not just to one particular person, boss or business?
4) Do you use your own tools and equipment?
5) Do you determine the number of hours you work?
6) Is there a contract between you and your boss that you will be paid as an independent contractor?

If you answered “YES” to most of these questions, you should probably be classified as an Independent Contractor. If you answered “NO” to most of the questions above, then ask yourself these questions:

1) Do you have set hours of work?
2) Are you paid in regular amounts at set intervals, such as an hourly wage, and weekly salary?
3) Do you work at your boss’s workplace or home?
4) Can you be fired?
5) Do you receive training from the boss?
6) Do you have to follow specific instructions about how the work is to be done?

If you answered “YES” to most of this set of questions, you should probably be classified as an Employee.

What Should I do if I determine that I’ve been Misclassified?
You can take your dispute to the IRS. You will need to file Form SS-8, which you can find at this address: http://www.irs.gov/pub/irs-pdf/fss8.pdf. If the IRS determines that you are an employee, then you are responsible for filing an amended return for any corrections related to this decision. A determination that a worker is an employee is not guaranteed to reduce any current or prior tax liability. If you decide to go this route and pursue a case against your former boss with the IRS, it is a decision that should be made with a lot of deliberation. It is very time consuming, and you might need to hire an accountant in order to amend all of your tax returns. It should also be noted that the IRS will not provide you with an immediate tax refund for the additional taxes assessed on prior year tax returns. Rather, they will require that you file the tax returns again. In addition, generally you only have 3 years to amend a return to file for a refund, so this means that the first 7 years of your employment with your boss isn’t something that will result in a gain for you, should your claim succeed. You may still wish to pursue this to satisfy your sense of moral responsibility, even if you don’t gain at all. But it will cost you time and money since your matter will likely require the services of a tax attorney.

More Questions? Browse Answers or ask your 1099 Tax Questions.

US Citizens Earning Income While Living and Working Aboard

The BIDaWIZ Team — Fri, 27 May 2011 09:53:33 +0000

US citizens working abroad and earning income from a foreign country are technically still subject to US income taxes. However, citizens that are considered, “qualified individuals” may exclude up to $92,900 ($195,800 if married and filing jointly) of their foreign earned income in 2011. In addition, they may be able to deduct their housing expenses.

The IRS defines a qualified individual as a US citizen whose home is in a foreign country and is a resident of that country for an uninterrupted period of the entire tax year. The same holds true if they are present in a foreign country for any 12 month period or essentially at least 330 full days.

How does the IRS know where I am?
The IRS has international agents and treaties with other countries that allow them to have access to your bank transactions as well as your whereabouts. In addition, they have access to your credit card transactions which can help them determine how long you’ve been in a country.

What about home expenses?
If you meet the qualified individual test previously mentioned, you may also qualify for excluding employer provided income that you use for your home expenses (rent, repairs, utilities, and insurance). Separately, a deduction may be allowed for those who use self-employment earnings to pay their home expenses. The deduction amount depends on their location and income. Specifically, the IRS provides a calculation based on what would have been the self employed citizen’s US housing expense (i.e. base amount) as 16% of the foreign income exclusion or $92,900 for 2011 which is $14,864. Any amount of expenses above that $14,864 would be treated as deduction on their tax return but there are limits on how much the citizen can deduct. For instance, a citizen cannot deduct more than 30% of your income exclusion or $27,870.

What about the foreign tax credit?
US citizens working abroad and earning income can claim a tax credit for any foreign taxes paid by filing Form 1116 with their 1040 form.

Filing deadline is June 15th but taxes are due on April 15th
The IRS gives US citizens working abroad a break when it comes to filing their taxes. They get an automatic two month extension and thus their tax returns are due on June 15th. BUT, their tax liability is still due on April 15th. So, you might be asking why wouldn’t you just file your return the same day your tax liability is due? The answer is that you may need extra time to get your supporting documentation inline. In addition, you could estimate your tax liability on April 15th, pay it, and pay additional taxes should it be necessary when you file on June 15th.

More International Tax Questions? Browse Answers or get International Tax Help.

I Haven’t Received A Raise, So Why Is My Paycheck Bigger?

Susan Ladika — Thu, 24 Feb 2011 17:44:53 +0000

You may have missed it, but when Congress approved the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 in December, which is commonly called the extension of the Bush tax cuts, it mandated a major cut in the Social Security tax you pay. Instead of forking out 6.2%, you now pay 4.2% for all wages earned up to $106,800.

Because the law was passed late in 2010, employers had until Jan. 31 to reduce the amount of Social Security tax withheld. If any tax was withheld in January, they need to make an adjustment to workers’ paychecks by March 31. The tax change only applies to this calendar year.

How does the change impact me as an employee?
According to the U.S. Census Bureau, the median household income in the United States was nearly $50,000 in 2009. So if you earn $50,000 per year, the cut in Social Security tax cut means an extra $1,000 in your paycheck for the year.

To make sure the proper amount of tax is being withheld, you can divide the Social Security amount withheld from your paycheck by your total gross income for the pay period. If it’s not 4.2%, notify your employer immediately. There should be no need for you to update your W-4 form.

What does this mean for my employer?
Other than adjusting your paycheck, the change does not impact your employer, who will continue to have to pay your Social Security payroll tax at a rate of 6.2%.

What if I’m self-employed? Do I benefit at all from the tax cut?
Yes! With the Social Security tax reduction, your self-employment tax falls from 15.3% to 13.3%. And you’re still able to deduct 50% of your self-employment tax when calculating your adjusted gross income on your tax return.

About the Writer
Susan Ladika has been a writer and editor for 25 years. Her freelance work has covered everything from business to travel to science to international issues, and have appeared in such publications as Science, Town & Country, HR Magazine, Developer, The Wall Street Journal-Europe, The San Francisco Chronicle, and many others. She has also done extensive editing as a newspaper and wire service editor holding positions such as the Tampa Tribune Bureau Chief.

More Tax Questions?

Are Part-Time Workers Employees or Independent Contractors?

The BIDaWIZ Team — Wed, 02 Feb 2011 21:36:50 +0000

This can be a very complicated issue as many factors must be considered to determine whether a part-time worker is an employee or an independent contractor. This complexity is the main reason why the IRS offers taxpayers a form to file (SS-8) to request an official determination of their employment status.

Employee vs. Independent Contractor
The most important factor to consider is the degree of control the company has over how the part-time worker handles their responsibilities. For instance, a temporary administrative assistant that has very little control over their work would be considered an employee. An independent contractor on the other hand, such as a freelance writer, has control over their work, financial relationship, and behavior.

If you are still unsure, request an official determination by filing Form SS-8 (Determination of Worker Status) with the IRS. This form contains a series of questions designed to analyze all of the relevant factors to your situation.

Tax Forms For Part-time Employees
Part-time workers that are considered employees should receive a W-4 Form from their employer when their employment commences. It does not matter whether or not the employee is part-time, full-time or employed for a short period of time. They are all subject to federal income tax withholding and social security, Medicare, and federal unemployment (FUTA). After the end of the year, employees should receive a W-2 form detailing your income earned for the year.

Tax Forms For Independent Contractors
When contractors start working for a particular client, they should have received a W-9, or Request for Taxpayer Identification Number and Certification, in which they provided their name, address, and Social Security number or Employer Identification number.

That information is then used by each client to issue the contractor a 1099-MISC, or Miscellaneous Income form, which states the amount of nonemployee compensation the contractor received from the client last year. Unlike a W-2, no taxes are withheld from the money the contractor received from their client.

Contractors need to total up all the income reported on their 1099s and include that information on their tax returns. If a contractor earned less than $600 from a client and didn’t receive a 1099, they still must report that income to the IRS.

What If I Work For a Non-Profit Organization?
The filing requirements are the same. Independent contractors that earn $600 or more for the tax year should receive a 1099 from their client and employees should receive a W-2 form at the end of the year.

Tax Form Summary
To summarize, if you are an employee, you should have received a W-4 when you began work and a W-2 at the end of the year. If you are an independent contractor, the client should have requested a W-9 form when you began work and they have to issue you a 1099 by Jan 31 of the following year if you earn $600 or more for the tax year.

More Tax Questions?