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Frequently Asked Tax Questions And Answers
Keyword: Employment Taxes
1.1 IRS Procedures: General Procedural Questions
How long do I need to keep certain records?
Records such as receipts, canceled checks, and other documents that prove
an item of income or a deduction appearing on your return should be kept at
least until the statute of limitations expires for that return. Usually this
is three years from the date the return was due or filed, or two years from
the date the tax was paid, whichever is later. There is no period of limitations
when a return is false or fraudulent or when no return is filed. You should
keep some records indefinitely, such as property records, since you may need
them to determine the basis of the property if it to prove the amount of gain
or loss if the property is sold. For more details, refer to Publication 552 Recordkeeping
for Individuals, or Tax Topic 305 on Recordkeeping.
If you are an employer, you must keep all your employment tax records for
at least four years after the tax is due or paid, whichever is later. For
additional information, refer to Publication 583, Starting a Business
and Keeping Records. People in business often have expenses for travel,
entertainment, and gifts. The documentation you should keep for each of these
expenses can be found in Publication 463, Travel, Entertainment, Gift
and Car Expenses.
References:
1.8 IRS Procedures: Forms & Publications
1.11 IRS Procedures: Notices & Letters
I received an IRS Notice titled, "We Corrected Your Return - Amount
Due IRS." It appears I did not get credit for one of my federal tax deposits.
What should I do?
If your account has not been credited with all of your deposits, call the
toll-free number on your notice to discuss the matter. Please have the notice
and a list of your deposits when you call.
1.16 IRS Procedures: W–4 - Allowances, Excess FICA, Students, Withholding
What can be done if an employer will not withhold income taxes,
social security, and Medicare from my pay?
Generally, in situations such as this, the employer is not considering
you to be an employee. Rather, you are being treated as an independent contractor
(self-employed person). If you cannot resolve this matter with your employer,
and if you feel that an employer-employee relationship exists, you should
submit a Form SS-8 (PDF), Determination of
Employee Work Status for Purposes of Federal Employment Taxes and Income Tax
Withholding. The factors used to determine if an employer-employee relationship
exists are covered in Chapter 2 of Publication 15-A (PDF), Employer's Supplemental Tax Guide.
If your status as an employee is not at issue, it may be that you are in
a category of employment whose earnings are not defined as wages under U.S.
social security law. Find out from your employer the reason that social security
and Medicare taxes are not being withheld from your pay. If you have further
questions, contact the IRS at 800-829-1040 or visit an IRS walk-in office
for assistance.
References:
- Form SS-8 (PDF) , Determination
of Employee Work Status for Purposes of Federal Employment Taxes and Income
Tax Withholding
- Publication 15-A (PDF) , Employer's
Supplemental Tax Guide
- Publication 1779 (PDF) , Independent
Contractor or Employee
Can an employer take out taxes if a W-4 was never filed?
Yes, an employer can. Employers should ask all employees to submit a signed Form W-4 (PDF), Employee's Withholding Allowance Certificate,
when they start work. It should be effective the first pay period. If the
employee does not submit a Form W-4, the employer should withhold as if the
employee were single claiming no allowances.
An employee may submit a Form W-4 at any time. The employer should base
the employee's income tax withholding on the most recently submitted Form
W-4, unless the IRS has notified the employer to withhold based on a different
number of allowances, or unless the W-4 is invalid. If an employee submits
a new Form W-4, the employer should start withholding based on that W-4 no
later than the start of the first payroll period ending on or after the 30th
day from the day the new W-4 is submitted.
References:
12.1 Small Business/Self-Employed/Other Business : Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation
Are partners considered employees of a partnership or are they self-employed?
Partners are considered to be self-employed. If you are a member of a partnership
that carries on a trade or business, your distributive share of its income or loss
from that trade or business is net earnings from self-employment. Limited partners
are subject to self-employment tax only on guaranteed payments, such as salary and
professional fees for services rendered.
References:
12.3 Small Business/Self-Employed/Other Business : Form W–2, FICA, Medicare, Tips, Employee Benefits
If my part-time employees receive less than $20 a month in tips, are they
required to report them to me?
Employees who receive less than $20 per month in tips are not required to report
the tips to the employer, but they must include them in gross income on their tax
return. For additional information on tip withholding and reporting requirements,
refer to Tax Topic 761 , Tips - withholding and reporting and/or Publication 15, Circular E, Employer's Tax Guide.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Publication 1872 (PDF), Tips on Tips - A Guide to Tip
Income Reporting for Employees in the Food and Beverage Industry
- Tax Topic 761, Tips - withholding and reporting
As an employer, do I have any liability if my employees receive tips but
don't report them to me?
Employees who customarily receive tips are required to report their cash tips to
their employers at least monthly, if they receive $20 or more in the month. Cash tips
are tips received directly in cash or by check, and charged tips. You have a liability
to withhold and pay Social Security and Medicare tax on your employees' reported tips,
to the extent that wages or other employee funds are available. If the employee does
not report tips to you, it places you at risk of possible assessment of the employer's
share of the Social Security and Medicare taxes on the unreported tips. If you are
a large food or beverage establishment (more than 10 employees on a typical day and
food or beverages consumed on the premises), you are required to allocate tips if
the total tips reported to you are less than 8% of gross sales. Report the allocated
amount on the employee's w-2 at the end of the year.
References:
If the reported tips from employees are more than 8% of sales, must an employer
still allocate tips to the employees?
No. Tip allocation is required when the amount of tips reported by employees of
a large food or beverage establishment is less than 8% (or an approved lower rate)
of the gross receipts, other than nonallocable receipts, for the given period. If
the employees are reporting more than the 8%, there would be no allocated tip amount.
However, the employer must still file Form 8027 (PDF), Employer's
Annual Information Return of Tip Income and Allocated Tips.
References:
Can the 8% - normally used for allocated tips - be a matter agreed upon
as reported tips between the employer and employees, so that the employees do not
have to report the exact amount of their tips?
No. The law requires that the employee who receives tips must report the actual
tip amount to his or her employer if the amount is $20 or more for that calendar month.
The 8% figure is not a simplified reporting method.
The employee should keep a record of his or her daily tips. A daily tip record
can relieve the employee from having to include allocated tips in income by documenting
that the amount of tips the employee reported was the actual amount received.
References:
-
Instructions for Form 8027, Employer's Annual
Information Return of Tip Income and Allocated Tips
- Publication 3148 (PDF), Tips on Tips, A Guide to Tip Income
Reporting (Employees)
- Publication 3144 (PDF), Tips on Tips, A Guide to Tip Income
Reporting (Employers)
- Publication 1244 (PDF), Employee's Daily Record of Tips
and Report to Employer
- Publication 1872 (PDF), Tips on Tips - A Guide to Tip
Income Reporting for Employees in the Food and Beverage Industry
Can an employer add the reported tips to just one payroll a month, even
a special payment separate from the regular wage payment, and pay only the wage amount
on the other payroll dates?
An employer can report an employee's tip income and withhold taxes once a month
or more often than once a month. The two items of practical consideration, besides
the sophistication of your payroll system, are the employees' tip reports and the
charged tips.
The employees are required by law to report their cash tips only once a month,
by the 10th day of the month following the month for which they are reporting. The
employer may require the employees to report their tips more often. This would facilitate
withholding on tips and the reporting of the tips as income on the employees' pay
stubs.
When an employer makes the charged tips available to the employee may depend on
the employer's policy. The employee monthly tip report should include information
about charged tips that the employer has paid to the employee during the reporting
period, as well as tips paid directly to the employee.
It would be most practical for withholding purposes for the employer to report
the tip income for each employee when all the tip information is available and the
payments for charged items are available. If, when the employee is paid, there is
not enough money available to withhold all taxes owed on wages and tips, the employer
can withhold the remaining amount from the next paycheck or the employee can give
money to the employer to cover the withholding.
For more information, refer to Publication 15, Circular E, Employer's
Tax Guide and Publication 1872 (PDF), Tips on Tips - A Guide to
Tip Income Reporting for Employees in the Food and Beverage Industry.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Publication 1872 (PDF), Tips on Tips - A Guide to Tip
Income Reporting for Employees in the Food and Beverage Industry
Does a household employer have to pay social security and Medicare for all
household employees if only one employee makes more than $1,400 in the year?
No. The employer only has to pay social security and Medicare tax for the employee(s)
who receive $1,400 or more in wages for the year. If the amount paid to any employee
in a calendar year is less than $1,400, no social security or Medicare tax is owed
for that employee. If social security and Medicare tax must be paid, the employee's
portion of the social security and Medicare tax should be withheld also, unless the
employer chooses to pay both the employer's share and the employee's share.
References:
- Publication 926, Household Employer's Tax Guide; Do You Need
to Pay Employment Taxes?
- Tax Topic 756, Employment Taxes for Household Employees
If we give an employee a monthly car allowance, must it be included in the
employee's taxable wages on their Form W-2?
Generally yes, unless paid under an accountable plan.
To be an accountable plan, your reimbursement or expense allowance arrangement
must meet the qualifying requirements, explained later. A reimbursement or expense
allowance arrangement is a system by which you substantiate and pay the advances,
reimbursements, and charges for your employees' business expenses. If you make a single
payment to your employees and it includes both wages and an expense reimbursement,
you must specify the amount of the reimbursement.
Qualifying requirements. To qualify as an accountable plan,
your reimbursement or expense allowance arrangement must require your employees to
meet all of the following rules:
They must have paid or incurred deductible expenses while performing services
as your employees,
They must adequately account to you for these expenses within a reasonable period
of time, and
They must return any excess reimbursement or allowance within a reasonable period
of time.
Please refer to Publication 535, Business Expenses, for additional
information about accountable and nonaccountable plans.
References:
If our business pays for an employee's airfare on a business trip, but the
employee does not submit an expense form relating to the travel, do we need to issue
a Form 1099-MISC?
No, you should report the amounts as wages on Form W-2. Generally, Form 1099-MISC
is not issued to employees. Payments to your employee for travel and other necessary
expenses of your business under a nonaccountable plan are wages and subject to income
tax withholding and payment of social security, Medicare, and FUTA taxes. Your payments
are treated as paid under a nonaccountable plan if:
Your employee is not required to or does not substantiate timely those expenses
to you with receipts or other documentation, or
You advance an amount to your employee for business expenses and your employee
is not required to or does not return timely any amount he or she does not use for
business expenses.
The amount of the airfare should be included on the employee's Form W-2.
References:
How should a tuition reimbursement program for employees be reported as
income to an employee? Should the employee be taxed at the 27%, 25% rate for payments
made after May 28, 2003, rate for supplemental payments on the next pay check after
successful completion of the course or is this something that we just include on the
W-2?
If the tuition reimbursements do not qualify as a tax free fringe benefit under
the rules for Educational Assistance Programs or as a Working Condition Fringe Benefit,
the tuition reimbursement is wages for Federal Income Tax, Social Security, and Medicare
Tax purposes.
For employment tax and withholding purposes, you can treat fringe benefits as paid
on a pay period, a quarter, a semiannual, annual, or other basis as long as the benefits
are treated as paid no less frequently than annually. You do not have to choose the
same period for all employees.
You can change the period as often as you like as long as you treat all the benefits
provided in a calendar year as paid no later than December 31. You can also treat
the value of a single fringe benefit as paid on one or more dates in the same calendar
year, even if the employee receives the entire benefit at one time.
You can add the value of fringe benefits to regular wages for a payroll period
and figure income tax withholding on the total, or you can withhold Federal income
tax on the value of fringe benefits at the flat 27% (25% rate for payments made after
May 28, 2003) applicable to supplemental wages. You must withhold the applicable income,
social security, and Medicare taxes on the date or dates you chose to treat the benefits
as paid. Deposit the amounts withheld as discussed in section 11 of Publication 15, Circular
E, Employer's Tax Guide .
References:
How do I figure the amount of advance earned income credit to include in
an employee's pay?
To figure the amount of the advance EIC payment to include with the employee's
pay, you must consider:
Wages, including reported tips, for the same period. Generally, figure advance
EIC payments using the amount of wages subject to income tax withholding. If an employee's
wages are not subject to income tax withholding, use the amount of wages subject to
withholding for social security and Medicare taxes.
Whether the employee is married or single.
Whether a married employee's spouse has a Form W-5 in effect with an employer.
To figure the advance EIC payment, you may use either the Wage Bracket Method or
the Percentage Method explained in Publication 15, Circular E, Employer's
Tax Guide . You may use other methods for figuring advance EIC payments if the
amount of the payment is about the same as it would be using tables in Publication
15. See the tolerance allowed in the chart in section 9 of Publication 15-A (PDF) , Supplemental Employer's Tax Guide. See section
10 in Publication 15 for an explanation of the advance payment of the EIC.
Add the advance earned income credit payments to the employee's net pay for the
pay period. Since this amount isn't wages, you do not withhold any income, social
security, or Medicare taxes from the payment.
References:
12.4 Small Business/Self-Employed/Other Business : Form W–4 & Wage Withholding
Can an employer take out taxes if a Form W-4 was never filed?
Yes, the employer is required to withhold income taxes. Publication 15, Circular
E, Employer's Tax Guide, states that if an employee does not give you a completed Form W-4 (PDF), Employee's Withholding Allowance Certificate, withhold
tax as if he or she is single, with no withholding allowances.
The employer is also required to withhold social security and Medicare taxes.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Form W-4 (PDF), Employee's Withholding
Allowance Certificate
- Tax Topic 753, Form W-4 - employee's withholding allowance
certificate
If an employee claims more than 10 exemptions on their Form W-4, does the
employer have to report this to the IRS?
Yes, if you receive a Form W-4 (PDF), Employee's Withholding
Allowance Certificate, on which the employee claims more than 10 withholding
allowances, you must send a copy of that Form W-4 to the IRS service center with your
next employment tax return.
Also, if an employee claims exemption from withholding and his or her wages would
normally be expected to exceed $200 or more a week, you must also send a copy of that
Form W-4 to the service center with your next employment tax return.
If you want to submit the Form W-4 earlier, you can send a copy of the Form W-4
to the IRS with a cover letter, including your name, address, employer identification
number, and the number of forms included. The service center will send you further
instructions if it determines that you should not honor the Form W-4.
References:
- Form W-4 (PDF), Employee's Withholding Allowance Certificate
- Tax Topic 753, Form W-4 - employee's withholding allowance certificate
One of my employees gave me a W-4 form claiming exemption from withholding.
Do I have to send the W-4 to the IRS?
If you receive a Form W-4 (PDF) on which an employee claims:
exemption from withholding and his or her wages would normally be expected to
exceed $200 or more a week, or
more than 10 withholding allowances,
you must send a copy of that W-4 to the IRS service center with your next Form 941 (PDF) return or with a cover letter that includes yours
name, address, EIN, and number of forms included. The IRS will send you further instructions
if it is determined that you should not honor the Form W-4. For additional information
on Form W-4, refer to Tax Topic 753 and/or Publication 15, Circular E,
Employer's Tax Guide.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Form W-4 (PDF), Employee's Withholding
Allowance Certificate
- Form 941 (PDF), Employer's Quarterly
Federal Tax Return
- Tax Topic 753, Form W-4 - employee's withholding allowance
certificate
If we received a Form W-4 with a blank in the number of withholding exemptions.
How should we handle this?
This should be treated as claiming zero withholding allowances. If the employee
has completed the remainder of and signed the Form W-4 (PDF), Employee's
Withholding Allowance Certificate, and indicated that he or she is single or
married, withhold from the single or married table as indicated on the employee's
form with zero withholding allowances. If the employee has not indicated that he or
she is single or married, or if the employee has not signed the Form W-4 and otherwise
completed the Form W-4, withhold as if he or she is single with zero withholding allowances.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Form W-4 (PDF), Employee's Withholding
Allowance Certificate
- Tax Topic 753, Form W-4 - employee's withholding allowance
certificate
I hired a babysitter to care for my children in my home. Do I need to withhold
taxes on her wages?
Household employees include housekeepers, maids, baby-sitters, gardeners, and others
who work in or around your private residence as your employees. If you pay a household
employee cash wages of $1,400 or more in 2003, you generally must withhold social
security and Medicare taxes from all cash wages you pay to that employee. For specific
information, refer to Tax Topic 756, Employment Taxes for Household Employees ,
or Publication 926, Household Employer's Tax Guide .
References:
12.6 Small Business/Self-Employed/Other Business : Forms 941, 940, Employment Taxes
If you do not have any employees for a particular quarter, do you have to
file an Employer's Quarterly Federal Tax Return Form 941?
Seasonal employers are not required to file for quarters when they regularly have
no tax liability because they have paid no wages. To alert the IRS that you will not
have to file a return for one or more quarters during the year, check the seasonal
employer box above line 1 on Form 941. The IRS will mail two Forms 941 to you once
a year after March 1. The preprinted name and address information will not include
the date the quarter ended. You must enter the date the quarter ended when you file
the return. The IRS generally will not inquire about unfiled returns if at least one
return showing tax due is filed each year. However, you must check the seasonal employer
box on each quarterly return you file. Otherwise, the IRS will expect a return to
be filed for each quarter.
For any employer, who no longer has employees, a final return should be filed for
the last quarter during which you had employees.
References:
All of the Forms 941 that I can find ask for the number of employees on
record as of March 12th. Is there a similar form for the second quarter?
The Form 941 is the same for all 4 quarters. Only on the January-March calendar
quarter Form 941 should you enter the number of employees on your payroll during the
pay period that includes March 12. You do not need to answer this question on the
Forms 941 for the other 3 quarters.
References:
We are about to hire employees and need to know how much tax to take out
and where to send this money?
You will need to secure a completed Form W-4 (PDF), Employee's
Withholding Allowance Certificate, from each employee. You will need Publication 15, Circular E, Employer's Tax Guide, and Publication 15-A (PDF), Employer's Supplemental Tax Guide, to determine
the amount of withholding and for directions on depositing the withholding amounts
and other employment taxes. Publication 15T, New Withholding Tables contains
the revised withholding tables. The change is a result of the Jobs and Growth Tax
Relief Reconciliation Act of 2003. This publication is a supplement to Publication
15.
Generally, employers will quarterly file Form 941 (PDF), Employer's
Quarterly Federal Tax Return, and annually file Form 940 (PDF), Employer's Annual Federal Unemployment Tax Return (FUTA), and Form W-2 (PDF), Wage and Tax Statement, with Form W-3 (PDF), Transmittal of Income and Tax Statements.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Publication 15-A (PDF), Employer's
Supplemental Tax Guide
- Form 940 (PDF), Employer's Annual Federal
Unemployment Tax Return
- Form 941 (PDF), Employer's Quarterly
Federal Tax Return
- Form W-2 (PDF), Wage and Tax Statement
- Form W-3 (PDF), Transmittal of Income
and Tax Statements
- Form W-4 (PDF), Employee's Withholding
Allowance Certificate
- Publication 15-T (PDF) , New Withholding
Tables (For wages Paid Through December 2004)
What is the federal unemployment tax rate for 2003?
The federal unemployment tax rate for 2003 remains at 6.2% and is still figured
on the first $7,000 of wages you paid each employee in 2003. However, if you have
timely paid state unemployment contributions on the same wages, you can be eligible
for a credit. For specific information, refer to Tax Topic 760, Form 940 (PDF) or Form 940EZ (PDF) - Employer's Annual
Federal Unemployment Tax Returns , or Publication 15, Circular
E, Employer's Tax Guide .
References:
- Form 940 (PDF), Employer's Annual Federal
Unemployment Tax Return
- Form 940EZ (PDF), Employer's Annual
Federal Unemployment Tax Return
- Tax Topic 760, Form 940/940-EZ - Employer's annual federal
unemployment tax return
- Publication 15, Circular E, Employer's Tax Guide
We have an employee who has reached the limit for social security tax. We
understand that this limits withholding requirements on the employee's portion of
social security tax. However, is the employer still required to contribute their portion
of the social security tax for this employee?
The employer is subject to the same social security tax rate and wage base limits
as the employee. When the employee reaches their limitation, the employer also reaches
the limitation and no longer has to pay social security taxes for that employee.
References:
If an employee is collecting social security benefits, is the employer required
to take out social security and medicare taxes?
Yes, the employer is required to follow the withholding requirements for social
security and medicare taxes even if an employee is collecting social security benefits.
Per Chapter 9 of Publication 15, Circular E, Employer's Tax Guide, employee
wages are subject to social security and Medicare taxes regardless of the employee's
age or whether he or she is receiving social security benefits.
References:
What are the maximum wages subject to social security and the maximum social
security tax to be withheld for 2003?
The maximum wages subject to social security is $87,000 for 2003 resulting in a
maximum for the employee portion of social security tax of $5,394.00 (of course, there
is no limit on wages subject to medicare tax). Additional information can be found
at the Social Security Administration web site.
References:
Are housing allowances for ministers subject to social security and Medicare
taxes?
Yes, housing allowances for ministers are subject to social security and Medicare
taxes, under the Self-Employment Contributions Act. However, if you are a duly ordained,
commissioned, or licensed minister of a church, a member of a religious order not
under a vow of poverty, or a Christian Science practitioner who elected and was approved
for exemption from social security coverage and self-employment tax, your housing
allowance would not be subject to social security or Medicare taxes. Refer to Publication 517, Social Security and Other Information for Members of the Clergy and
Religious Workers, for additional information.
References:
- Publication 517, Social Security and Other Information for
Members of the Clergy and Religious Workers
- Form 4361 (PDF), Application for Exemption
from Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian
Science Practitioners
We hired a nanny to look after our baby while we work. We would like to
make it all legal, i.e. pay her social security taxes and so forth. How do we do this?
A nanny is considered a household employee. A household employer only has to pay
social security and Medicare tax for the employee(s) that receive $1,400 or more in
cash wages for the year 2003. If the amount paid is less than $1,400, no social security
or Medicare tax is owed. The taxes are 15.3% of cash wages. Your share is 7.65% and
the employee's share is 7.65%. You can choose to pay the employee's share yourself
and not withhold it. You may also be responsible for paying federal unemployment taxes.
For directions on household employees, refer to Publication 926, Household
Employer's Tax Guide.
References:
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