Tips Versus Service Charges: How to Report

IRS news release FS-2015-8, February 2015:

The Internal Revenue Service reminds employers that automatic gratuities are service charges, not tips. Employers should make sure they know the difference and how they report each to the IRS. What are tips?

Tips are discretionary (optional or extra) payments determined by a customer that employees receive from customers.

Tips include:

• Cash tips received directly from customers.

• Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.

• The value of any noncash tips, such as tickets, or other items of value.

• Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangement.

Certain factors are used to determine whether payments constitute tips or service charges. The absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge:

• The payment must be made free from compulsion;

• The customer must have the unrestricted right to determine the amount;

• The payment should not be the subject of negotiations or dictated by employer policy; and

• Generally, the customer has the right to determine who receives the payment.

What are service charges?

An employer or employee’s characterization of a payment as a “tip” is not determinative. Again, the absence of any of the four factors listed earlier creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge. Read more

Your Taxes and the Affordable Care Act

Starting with this year’s filing season, taxpayers must report certain information related to health care coverage on their 2014 tax return when they file this April. In addition, taxpayers must provide proof of health insurance coverage or that they have received an exemption.

With that in mind, let’s take a look at how the Affordable Care Act might affect your tax situation, and based on your type of coverage, which new tax forms you might be receiving.

Tip: For additional information about IRS tax forms related to health care insurance, please see the article, Health Care Law: Changes to IRS Tax Forms, below.

Overview

The biggest change for most taxpayers is found on Line 61 of Form 1040, where individuals must either check a box to show they had health insurance or pay a penalty. In general, the penalty applies to individuals who did not have health insurance for more than three months in 2014.

In 2014, the penalty is the greater of one percent of modified adjusted gross income or $95 per adult ($47.50 per child under age 18, up to a maximum of $285 per family). While the IRS cannot issue a lien against you in order to make you pay the penalty, they are allowed to withhold the money from your refund.

Certain persons may qualify for an exemption from the penalty such as those who do not need to file a tax return ($10,150 for individuals, $13,050 for heads of household, and $20,300 for a married couples filing jointly). Other exceptions (there are eight in total) include being a member of a federally recognized tribe or qualifying for a hardship exemption if you filed for bankruptcy in the last 6 months or had medical expenses you couldn’t pay in the last 24 months that resulted in substantial debt.

Caution: Taxpayers who believe they qualify for an exemption must apply and receive an exemption certificate from the Marketplace.

Read more

Updated Withholding Tables for 2015

Updated income-tax withholding tables for 2015 have been released by the IRS and supersede early release withholding tables issued in December 2014. The newly revised version contains percentage method income-tax withholding tables and related information that employers need to implement these changes.

In addition, employers should continue withholding Social Security tax at the rate of 6.2 percent of wages paid. The Social Security wage base limit increases to $118,500. The Medicare tax rate remains at 1.45 percent each for the employee and employer.

The additional Medicare tax of .09 percent for employees (not employers) remains in effect and should be withheld from employee wages that exceed $200,000 in a calendar year, at the beginning in the pay period in which the employee’s wages exceed $200,000.

In 2015 the amount for one withholding allowance on an annual basis is $4,000. Employers should start using the revised withholding tables and correct the amount of Social Security tax withheld as soon as possible in 2015, but not later than February 15, 2015. For any Social Security tax under-withheld before that date, employers should make the appropriate adjustment in workers’ pay as soon as possible, but not later than March 31, 2015.

Employers and payroll companies handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form. Individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or large refund at the end of the year may want to consider submitting revised W-4 forms.

As always, it’s prudent for workers to review their withholding every year and, if necessary, fill out a new W-4 to give to their employer. For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or large refund at the end of the year may want to consider submitting revised W-4 forms.

Please call the office if you have any questions about income tax withholding in 2015.

Taxpayer Beware: Phishing and Phone Scams

IRS impersonation phone scams, as well as phishing continue to be a serious threat to taxpayers topping the list of the IRS “Dirty Dozen” tax schemes once again.

The IRS impersonation phone scam has claimed nearly 3,000 victims who have collectively paid over $14 million, the Treasury Inspector General for Tax Administration recently warned.

Phishing email scams continue to be pervasive as well. Illegal scams such as these can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Both IRS impersonation phone scams and phishing are on the list of the annual IRS list of “Dirty Dozen” tax schemes. Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or find people to help with their taxes.

IRS Impersonation Phone Scams

Phone scams, which have hit taxpayers in every State in the country top the “Dirty Dozen” list this year because it has been a persistent and pervasive problem for many taxpayers for many months. Here’s how it works: Read more

Missing Your Form W-2?

You should receive a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your federal tax return. Employers must furnish this record of 2014 earnings and withheld taxes no later than February 2, 2015 (if mailed, allow a few days for delivery).

If you do not receive your Form W-2, contact your employer to find out if and when the W-2 was mailed. If it was mailed, it may have been returned to your employer because of an incorrect address. After contacting your employer, allow a reasonable amount of time for your employer to resend or to issue the W-2.

If you still do not receive your W-2 by February 15th, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information handy:

• the employer’s name and complete address, including zip code, and the employer’s telephone number;
• the employer’s identification number (if known);
• your name and address, including zip code, Social Security number, and telephone number; and
• an estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.

If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a “reissued statement.” Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.

You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, but it will delay any refund due while the information is verified.

If you receive a corrected W-2 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.

If you have questions about your Forms W-2 or 1099 or any other tax-related materials, please call or email.