The Biggest Withholding Tax Mistake You Could Make This Year
February 4, 2019
It’s a mistake that 21 percent of taxpayers could have made this year. Thanks to the Tax Cuts and Jobs Act that was signed into law in Dec. 2017, some people may owe more to the IRS this year than ever before depending on their tax bracket and filing situation. Why? They may have made a major tax withholding mistake.
While the Treasury Department and the IRS updated their withholding tables to offer a guideline to how much income taxes need to be deducted from your paycheck, some people did not change their tax withholding amounts accordingly. And if you’re one of these people, you’ll have an unfortunate surprise ahead of you come filing time.
Here’s what you need to know about withholding tax:
What is it?
Withholding tax is when your employer takes taxes directly out of your paychecks to send to the IRS and any state tax authorities for you. Employers do this in an attempt to leave you even with any tax collectors by the end of the year. If more tax is withheld than necessary, you’ll end up with a tax refund when you file your taxes.
When it comes to refunds, giving the government what is essentially an interest-free loan isn’t ideal. Still, it’s better than what happens if not enough tax is withheld.
What happens if I didn’t withhold enough taxes?
If you’re part of the 30 million people who didn’t withhold enough taxes in 2018, you may be in for a not-so-pleasant surprise when you go to file. If you didn’t withhold enough taxes, you’ll end up owing a big tax debt when you file your taxes (and potentially getting slammed with an underpayment penalty).
Tax bill too big for you to pay immediately? Don’t worry – there’s always options available to you. You can work with a tax professional to figure out a way to pay that will work for your unique situation.
Is there anything I can do to fix it now?
Unfortunately, you can’t change your withholdings for 2018 now that the year is over and done.
However, this is the perfect opportunity for you to update your withholdings for 2019. Since the withholding table has no foreseeable updates in the near future, you should make time with your tax preparer to review your withholdings. You can also use the IRS’s handy withholding calculator to check your tax withholding. If you need to make changes, update your W-4 form and give this updated version to your employer.
Performing a paycheck checkup now will help you ensure you’re paying the right amount in taxes throughout the year. Take some time to check your tax withholdings now to ensure you’re not left with a hefty tax bill (or an unnecessarily hefty tax refund) come filing time in 2020. If you need help figuring it out, give us a call. Our tax prep experts are always here to help you file timely tax returns to optimize tax breaks and avoid mistakes the first time.
Your Questions About the 20% Pass-Through Deduction Answered
January 25, 2019
If you’re a business owner, you’ve probably heard the buzz about the 20% pass-through deduction, also known as the qualified business income (QBI) deduction. Everyone discussing this deduction has proclaimed it to be a great perk for business owners. Still, it’s been hard to figure out how to claim it.
The IRS released some guidance on the QBI deduction on Jan. 19, 2019 in the form of 274 pages of final regulations. Sounds like it should have cleared things up, right? Actually, it only clarified that this is one of the most complicated changes that came with the recent tax reform. Let’s shed light on the basics of this intricate deduction by responding to some questions we’ve heard a lot since it was signed into law.
Answers to those burning questions about the 20% pass-through deduction:
What is the QBI deduction?
The QBI or 20% pass-through deduction refers to an individual provision (officially named Section 199A) in the Tax Cuts and Jobs Act. The provision is only effective for tax years after Dec. 31, 2017, and before Jan. 1, 2026.
Section 199A allows owners of pass-through entities to deduct 20 percent of the business income that is passed onto their individual return.
Why was it included in the tax reform?
The pass-through deduction was included to offer a tax benefit to businesses that help grow the U.S. economy. This tax break, however, is meant for a specific subset of business owners.
Who is eligible for the 20% pass-through deduction?
Pass-through organizations are eligible for the deduction. These organizations tend to “pass” the business’s profits “through” to owners or shareholders. The owners of pass-through organizations pay tax through individual rather than corporate returns. It’s estimated that about 95% of businesses fall into this category.
These are all pass-through organizations that could be eligible for the deduction:
- Sole proprietorships
- Limited liability companies
- S corporations
But there is a catch. Even if your business is a pass-through organization, it doesn’t mean you’ll qualify for the 20% pass-through deduction. There are some key limitations to this deduction that we’ll discuss in a moment.
What is a specified service trade or business (SSTB) and how does it apply to the deduction?
A specified service trade or business (SSTB) is defined in the legislative text of IRC Section 199A as:
“Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees [or] any trade or business which involves the performance of service that consist of investing and investment management, trading, or dealing in securities.”
Any business that fits that definition only qualifies for the deduction if the owner’s taxable income is less than certain threshold amounts. Here’s a handy visual breakdown of the trades and business fields that fall into the category of SSTBs:
How do I calculate how much I could save with the 20% pass-through deduction?
Unfortunately, it’s not as simple as just multiplying your pass-through income by 20 percent. Even most tax professionals have to run complicated calculations through advanced tax programs. The best way to really find out how much you can save is to find a tax professional who is experienced in running these calculations.
Can I split my company into different entities to lower my tax bill?
No. Originally, some tax professionals believed that they could split firms into different entities to avoid limits on the new tax break (also known as “crack and pack”). However, the IRS swiftly blocked this tactical move.
What is the best business structure for me and will it qualify me for the 20% pass-through deduction?
This is a near-impossible question to answer without knowing the specifics of your business and income. The pass-through deduction will inevitably help some business owners. Meanwhile, others may benefit more by maintaining a C-corporation structure.
Your best bet is to find a qualified tax professional who can evaluate your business and then give you personalized guidance on business structure and the best tax breaks available to you.
If I do qualify for the QBI deduction, what are the limitations?
Here are the main limitations of the 20% pass-through deduction:
- The deduction cannot exceed 20 percent of your taxable income in excess of capital gains.
- You cannot deduct more than the lesser of QBI or the greater of:
- 50 percent of your allocable share of the wages paid by the business with respect to QBI, or
- 25 percent of your allocable share of wages plus 2.5 percent of the unadjusted basis of qualified property owned by the business.
- This limitation begins getting phased in at taxable incomes of $157,500 for single taxpayers and $315,000 for married taxpayers filing jointly.
- As mentioned before, the deduction is temporary and may not exist past 2026.
- The complicated nature of the 20% pass-through deduction makes it difficult to navigate for the average taxpayer.
If I don’t qualify for the deduction, are there other ways I can save on my taxes?
Don’t worry. The QBI deduction is not the only way to save on your business taxes. The tax reform also brought along a lower tax rate for C-corporations and repealed the corporate alternative minimum tax.
In sum, the 20% pass-through deduction could bring you a great tax break. But it’s also a complex and headache-inducing change. The good news is that there are tax experts like ours ready to help you decipher what Section 199A means for you and your business taxes.
Will the Ominous New Tax Bill Make You Owe the IRS Next Year?
September 14, 2018
With the biggest tax changes in over 30 years, the Tax Cuts and Jobs Act of 2017 (TCJA) brings a terrifying prospect for millions of Americas. The Government Accountability Office (GAO) recently issued a report warning that this new tax bill will make millions of taxpayers owe on their 2018 tax returns. Many of these taxpayers have never owed before, so it’s bound to be an unpleasant surprise.
Under the TCJA, many taxpayers will either under-withhold on their paychecks or underpay on their estimated tax payments. Across the country, CPAs are working hard to make sure that their clients will not owe on their tax returns next year. But the truth is, most employees currently lack correct withholding or have assumed that the W-4 they filed 5 years ago is still correct.
So, if you haven’t updated your W4 or reviewed your withholding, you may have an unwanted tax surprise coming in the new year.
What has the new tax bill changed?
The new tax bill has changed quite a bit since going into effect on Jan. 1, 2018. It has:
- Increased the standard deduction
- Removed personal exemptions
- Increased the child tax credit
- Limited or discontinued certain deductions
- Changed the tax rates and brackets
- Introduced a new 20 percent deduction for qualified business income
- Reduced the corporate tax rate from 35 to 21 percent
- Increased the interest rate on underpayment of taxes from 3 to 5 percent
And with all these changes, you need to know where you stand before it’s too late to make changes.
Who will be most affected by these changes?
If you fall into one or more of the following categories, you’ll want to make sure you get a paycheck checkup:
- Are a two-income family
- Work two or more jobs at the same time
- Only work for part of the year
- Have children and claim credits such as child tax credit
- Have older dependents, including children who are 17 or older
- Have changed personal circumstances (e.g., got married, moved, etc.)
- Itemized deductions on your 2017 return
- Received large tax refunds or had large tax bills for 2017
- Earn high incomes and have a complex tax return
If any of these categories above apply to you, you’ll want to take immediate action to ensure you’re not negatively affected by the new tax bill.
And if you own a business, you’ll want to have an expert review your business structure to ensure you are enjoying the new positive, business-specific changes from the tax reform.
What can I do to make sure I don’t owe?
Don’t wait! You’ll want to make sure you get a paycheck checkup, especially if you fall into any of the categories above. You still have time to adjust your withholdings or increase your estimated tax payments to make sure you’re covered in 2019.
The longer you wait to make these adjustments, the more likely it is that you’ll owe next year. If you owe this year, you may owe even more than you ever have before, especially with the increased interest rate on underpayment of taxes. So, contact a tax professional today to avoid any unpleasant surprises from the new tax bill come filing time.
How Pass-through Businesses Win at Taxes
July 16, 2018
Across the country, CPAs are crunching (and crunching, and crunching) numbers to assess how their clients can benefit from the new tax reform law. And for business owners, owning pass-through businesses is even more enticing than ever.
What Are Pass-through Businesses?
Nearly 95 percent of businesses in the U.S. are pass-through organizations and for a good reason. The structure is designed to reduce double taxation, or taxing a business both at a corporate level and at the owners’ level.
Instead of a twofold hit, company profits and losses are sent straight to owners/shareholders without a corporate pit stop. Business owners then file and pay taxes through their individual returns (not corporate returns). Sole proprietorships, partnerships, and S corporations all enjoy this no-double-taxation life. Most pass-through businesses are small, but a limited number of large businesses account for most of the profits and economic activity from pass-through entities.
Tax Reform Wins: How Business Owners Can Save Money
2018 is looking up for business owners all over the board thanks to the new bill. Pass-through entities can now deduct 20 percent of the business income that is passed to their individual return. This makes it a great option for low- to mid-income businesses. The single-filing threshold is $157,500 and the joint-filing threshold is $315,000.
Pass-through structure not in your cards? C Corporations will catch a break with the new tax bill, with a cutting the corporate tax rate cut from 35 percent to 21 percent.
Are you above the 20-percent deduction threshold? Is your business under a different tax classification? A tax professional can help calculate your breaks.
Not every situation has a cookie-cutter solution when it comes to business taxes. If you’re a business owner, a tax professional can also help you decide on the most cost-efficient business entity and what tax reform means for you.