Summer Job Tax Information for Students

When summer vacation begins, classroom learning ends for most students. Even so, summer doesn’t have to mean a complete break from learning. Students starting summer jobs have the opportunity to learn some important life lessons. Summer jobs offer students the opportunity to learn about the working world – and taxes.

Here are six things about summer jobs that the IRS wants students to know.

1. As a new employee, you’ll need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to figure how much federal income tax to withhold from workers’ paychecks. It is important to complete your W-4 form correctly so your employer withholds the right amount of taxes. You can use the IRS Withholding Calculator tool at IRS.gov to help you fill out the form.
2. If you’ll receive tips as part of your income, remember that all tips you receive are taxable. Keep a daily log to record your tips. If you receive $20 or more in cash tips in any one month, you must report your tips for that month to your employer.
3. Maybe you’ll earn money doing odd jobs this summer. If so, keep in mind that earnings you receive from self-employment are subject to income tax. Self-employment can include pay you get from jobs like baby-sitting and lawn mowing.
4. You may not earn enough money from your summer job to owe income tax, but you will probably have to pay Social Security and Medicare taxes. Your employer usually must withhold these taxes from your paycheck. Or, if you’re self-employed, you may have to pay self-employment taxes. Your payment of these taxes contributes to your coverage under the Social Security system.
5. If you’re in ROTC, your active duty pay, such as pay received during summer camp, is taxable. However, the food and lodging allowances you receive in advanced training are not.
6. If you’re a newspaper carrier or distributor, special rules apply to your income. Whatever your age, you are treated as self-employed for federal tax purposes if:
   • You are in the business of delivering newspapers.
   • Substantially all your pay for these services directly relates to sales rather than to the number of hours worked.
   • You work under a written contract that states the employer will not treat you as an employee for federal tax purposes.

If you do not meet these conditions and you are under age 18, then you are usually exempt from Social Security and Medicare tax.

Keep the Child Care Credit in Mind for Summer

If you are a working parent or look for work this summer, you may need to pay for the care of your child or children. These expenses may qualify for a tax credit that can reduce your federal income taxes. The Child and Dependent Care Tax Credit is available not only while school’s out for summer, but also throughout the year. Here are eight key points the IRS wants you to know about this credit.

1. You must pay for care so you – and your spouse if filing jointly – can work or actively look for work. Your spouse meets this test during any month they are full-time student, or physically or mentally incapable of self-care.

2. You must have earned income. Earned income includes earnings such as wages and self-employment. If you are married filing jointly, your spouse must also have earned income. There is an exception to this rule for a spouse who is full-time student or who is physically or mentally incapable of self-care.

3. You must pay for the care of one or more qualifying persons. Qualifying children under age 13 who you claim as a dependent meet this test. Your spouse or dependent who lived with you for more than half the year may meet this test if they are physically or mentally incapable of self-care.

4. You may qualify for the credit whether you pay for care at home, at a daycare facility outside the home or at a day camp. If you pay for care in your home, you may be a household employer.

5. The credit is a percentage of the qualified expenses you pay for the care of a qualifying person. It can be up to 35 percent of your expenses, depending on your income.

6. You may use up to $3,000 of the unreimbursed expenses you pay in a year for one qualifying person or $6,000 for two or more qualifying person.

7. Expenses for overnight camps or summer school tutoring do not qualify. You cannot include the cost of care provided by your spouse or a person you can claim as your dependent. If you get dependent care benefits from your employer, special rules apply.

8. Keep your receipts and records to use when you file your 2013 tax return next year. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your return.

Tips to Start Planning Next Year’s Tax Return

For most taxpayers, the tax deadline has passed. But planning for next year can start now. The IRS reminds taxpayers that being organized and planning ahead can save time and money in 2014. Here are six things you can do now to make next April 15 easier.

1. Adjust your withholding.  Each year, millions of American workers have far more taxes withheld from their pay than is required. Now is a good time to review your withholding to make the taxes withheld from your pay closer to the taxes you’ll owe for this year. This is especially true if you normally get a large refund and you would like more money in your paycheck. If you owed tax when you filed, you may need to increase the federal income tax withheld from your wages. Use the IRS Withholding Calculator at IRS.gov to complete a new Form W-4, Employee’s Withholding Allowance Certificate.
2. Store your return in a safe place.  Put your 2012 tax return and supporting documents somewhere safe. If you need to refer to your return in the future, you’ll know where to find it. For example, you may need a copy of your return when applying for a home loan or financial aid. You can also use it as a helpful guide for next year’s return.
3. Organize your records.  Establish one location where everyone in your household can put tax-related records during the year. This will avoid a scramble for misplaced mileage logs or charity receipts come tax time.
4. Shop for a tax professional.  If you use a tax professional to help you with tax planning, start your search now. You’ll have more time when you’re not up against a deadline or anxious to receive your tax refund. Choose a tax professional wisely. You’re ultimately responsible for the accuracy of your own return regardless of who prepares it. Find tips for choosing a preparer at IRS.gov.
5. Consider itemizing deductions.  If you usually claim a standard deduction, you may be able to reduce your taxes if you itemize deductions instead. If your itemized deductions typically fall just below your standard deduction, you can ‘bundle’ your deductions. For example, an early or extra mortgage payment or property tax payment, or a planned donation to charity could equal some tax savings. See the Schedule A, Itemized Deductions, instructions for the list of items you can deduct. Planning an approach now that works best for you can pay off at tax time next year.
6. Keep up with changes.  Find out about tax law changes, helpful tips and IRS announcements all year by subscribing to IRS Tax Tips through IRS.gov or IRS2Go, the mobile app from the IRS. The IRS issues tips regularly during the summer and tax filing season.

You can find forms and publications at IRS.gov or order them by calling 800-TAX-FORM (800-829-3676).

Where’s my refund?

The IRS provides some tips for people that filed their taxes and are wondering where their refund is. Your refund status is available to check with the IRS within 24 hours of submitting your e-filed return or 4 weeks after mailing in a paper return. The IRS does not recommend calling them but rather using this website to check on the status. You will need your social security number, filing status, and refund amount in order to check the status of your refund. The status of your refund only updates once a day so there’s no reason to check it more than once.

Tax Court Decision on Construction Worker Classification

The Tax Court has recently concluded that workers hired by a construction company to work on various residential projects were employees. Despite the fact that the workers were hired on a project-by-project basis, the overall facts of the case, including that the workers were controlled by the company’s sole proprietor and that they were an integral part of the business, indicated an employer-employee relationship. Accordingly, the company was liable for employment taxes for the year in dispute.

The case involved Mieczyslaw Kurek who was the sole proprietor of KMA Construction, a home improvement company that engaged in installing tile, sheetrock, doors, and windows, as well as painting and carpentry. Each of these factors were important during the court decision:

1. Kurek had control over the workers.  The Court characterized the right of the principal to exercise control over the agent, regardless of whether the principal in fact does so, as the “crucial test” in analyzing for an employer-employee relationship. In this case, Kurek set the deadlines, monitored the work done, visited the worksites, instructed the workers on the work they were to do and had the right to approve its quality, paid them weekly, and was ultimately responsible for the success of the project. Overall, these facts heavily favored employee status.
2. Kurek supplied heavy tools and materials.  The workers used their own small tools to perform most of their work, but Kurek supplied all heavy tools and purchased all materials used by the workers. This factor slightly favored employee status.
3. Only Kurek had opportunity for profit and risk of loss.  The workers were paid a negotiated flat fee, and were thus insulated from suffering a loss or realizing a profit, and were also prevented from increasing their earnings through their efforts. This factor favored employee status.
4. Workers could be discharged.  Although the workers were hired on a project-to-project basis, Kurek could replace any workers that failed to meet a deadline or perform to Kurek’s satisfaction. This favored employee status.
5. Workers were integral to the business.  Without the workers, Kurek wouldn’t have been able to finish 20-30 projects, while at the same time finding new projects and working with the homeowners. This favored employee status.
6. Work relationship was largely transitory.  The workers were hired for one project at a time, they were free to work on other projects or with other groups, and only seven of the workers actually worked for Kurek during all four quarters of 2005. This slightly favored independent contractor status.
7. Parties believed they created independent contractor relationship.  Kurek and one of the workers credibly testified that they believed they created an independent contractor relationship, which favored independent contractor status.

Thus, overall, the Tax Court agreed with IRS that the workers listed in the notice of determination were employees.

Note: The IRS has in place a Voluntary Classification Settlement Program (VCSP) for employees that have been misclassified as independent contractors (or as other nonemployees). This was talked about in this blog post.

IRS says that their payments are more important than tithing….

The IRS says that payments to them come before tithing to your church, and the Tax Court agreed.

So, what happened is that a taxpayer had quite a bit of liabilities against him, and entered into an Installment Agreement with the IRS.  Typically, when you enter into an installment agreement, you let the IRS know your total monthly income and your necessary expenses.  This taxpayer reported that and included his 10% tithe in his monthly expenses.  The taxpayer worked at the church he tithed to.  The IRS and the Tax Court said that they “did not accept taxpayer’s argument that he was required to tithe as a condition of his voluntary employment or that tithing uplifted his spiritual health since he provided no evidence of specific spiritual benefits that would be affected if he ceased tithing.”  They disallowed the tithe as a part of his monthly expenses.

What do you think?  Should the IRS decide what is a necessary expense for you?  Or do you think that this would make too big of a loophole for people to jump through?

Timeline of 2013 – 2018 Tax Changes in Health Care Reform Bill

Close to three years ago, Congress enacted legislation that overhauls the U.S. health care system and affects nearly all taxpayers, many employers, and many elements of the health care industry (The Patient Protection and Affordable Care Act (PPACA)), and the Health Care and Education Reconciliation Act of 2010 (HCERA). The legislation contains a host of tax changes, many of which are both complex and novel. Some already have gone into effect, some go into effect this year, and still others will be in place in 2014 and 2018.

Tax Changes Taking Effect in 2013

Increased HI tax for high-earning workers and self-employed taxpayers. For tax years beginning after Dec. 31, 2012, an additional 0.9% hospital insurance (HI) tax appliesto wages received with respect to employment in excess of: $250,000 for joint returns; $125,000 for married taxpayers filing a separate return; and $200,000 in all other cases.

Surtax on unearned income of higher-income individuals. For tax years beginning after Dec. 31, 2012, an unearned income Medicare contribution tax is imposed on individuals, estates, and trusts.  For an individual, the surtax is 3.8% of the lesser of either (1) net investment income or (2) the excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others). For surtax purposes, gross income doesn’t include excluded items, such as interest on tax-exempt bonds, veterans’ benefits, and excluded gain from the sale of a principal residence.

Higher threshold for deducting medical expenses. For tax years beginning after Dec. 31, 2012, unreimbursed medical expenses are deductible by taxpayers under age 65 only to the extent they exceed 10% of adjusted gross income (AGI) for the tax year. If the taxpayer or his or her spouse has reached age 65 before the close of the tax year, a 7.5% floor applies through 2016 and a 10% floor applies for tax years ending after Dec. 31, 2016.

Dollar cap on contributions to health FSAs. For tax years beginning after Dec. 31, 2012, for a health FSA (flexible spending account) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) under the health FSA for a plan year (or other 12-month coverage period) can’t exceed $2,500.

Deduction eliminated for retiree drug coverage. Sponsors of qualified retiree prescription drug plans are eligible for subsidy payments from the Secretary of Health and Human Services (HHS) for a portion of each qualified covered retiree’s gross covered prescription drug costs (“qualified retiree prescription drug plan subsidy”). These qualified retiree prescription drug plan subsidies are excludable from the taxpayer’s (plan sponsor’s) gross income for regular income tax and alternative minimum tax (AMT) purposes. For tax years beginning before 2013, a taxpayer may claim a business deduction for covered retiree prescription drug expenses, even though it excludes qualified retiree prescription drug plan subsidies allocable to those expenses. But for tax years beginning after Dec. 31, 2012, the amount otherwise allowable as a deduction for retiree prescription drug expenses is reduced by the amount of the excludable subsidy payments received.

Fee on health plans. For each policy year ending after Sept. 30, 2012, each specified health insurance policy and each applicable self-insured health plan will have to pay a fee equal to the product of $2 ($1 for policy years ending during 2013) multiplied by the average number of lives covered under the policy. The issuer of the health insurance policy or the self-insured health plan sponsor is liable for and must pay the fee.

$500,000 compensation deduction limit for health insurance issuers. For tax years beginning after Dec. 31, 2012, for services performed during that year, a covered health insurance provider isn’t allowed a compensation deduction for an “applicable individual” (officers, employees, directors, and other workers or service providers such as consultants) in excess of $500,000. A health insurance provider is covered if at least 25% of its gross premium income from health business derives from health insurance plans that meet certain minimum requirements.

The are no exceptions for performance-based compensation, commissions, or remuneration under existing binding contracts. Also, in the case of remuneration that relates to services that an applicable individual performs during a tax year but that is not deductible until a later year, such as nonqualified deferred compensation, the unused portion (if any) of the $500,000 limit for the year is carried forward until the year in which the compensation is otherwise deductible, and the remaining unused limit is then applied to the compensation.

Information reporting of health insurance coverage. Employers filing 250 or more Forms W-2 for 2011, were required to report the aggregate cost of the applicable employer-sponsored health insurance coverage (provided to employees during 2012 on the Form W-2, Wage and Tax Statement, filed before the end of January, 2013, and then filed with the Social Security Administration (SSA). The reporting to employees is for their information only. It is intended to inform them of the cost of their health care coverage, and doesn’t cause excludable employer-provided health care coverage to become taxable.

Excise tax on medical device manufacturers. For sales after Dec. 31, 2012, a 2.3% excise tax applies under to sales of taxable medical devices intended for humans. The excise tax, paid by the manufacturer, producer, or importer of the device, doesn’t apply to eyeglasses, contact lenses, hearing aids, and any other medical device determined by IRS to be of a type that is generally purchased by the general public at retail for individual use.

Tax Changes Taking Effect in 2014

Larger employers not offering affordable health insurance coverage must pay penalty. For months beginning after Dec. 31, 2013, an applicable large employer is liable for an annual assessable payment if any full-time employee is certified to the employer as having bought health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee, and either the employer:

(1) fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan; or

(2) offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan that, for a full-time employee who has been certified for the advance payment of an applicable premium tax credit or cost-sharing reduction, either is unaffordable or does not provide minimum value.

The payment under Code Sec. 4980H(a) is based on all (excluding the first 30) full-time employees, while the payment under Code Sec. 4980H(b) is based on the number of full-time employees who are certified to receive an advance payment of an applicable premium tax credit or cost-sharing reduction. A full-time employee for any month is an employee who is employed on average at least 30 hours of service per week.

An applicable large employer for a calendar year is an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year. For determining whether an employer is an applicable large employer, full-time equivalent employees (FTEs), which are determined based on the hours of service of employees who are not full-time, are taken into account.

Individuals not carrying health insurance face a penalty. For tax years beginning after Dec. 31, 2013, nonexempt U.S. citizens and legal residents must pay a penalty if they do not maintain minimum essential coverage, which includes government sponsored programs (e.g., Medicare, Medicaid, Children’s Health Insurance Program), eligible employer-sponsored plans, plans in the individual market, certain grandfathered group health plans and other coverage as recognized by HHS in coordination with IRS.

Refundable tax credit for low- or moderate-income families buying certain health insurance. For tax years ending after Dec. 31, 2013, a new refundable tax credit (the “premium assistance credit”) applies to qualifying taxpayers who get health insurance coverage by enrolling in a qualified health plan through a State-established American Health Benefit Exchange.

“Qualified health plans” may be offered through cafeteria plans by “qualified employers.” For tax years beginning after Dec. 31, 2013, a reimbursement (or direct payment) for the premiums for coverage under any “qualified health plan” through a health insurance Exchange is a qualified benefit under a cafeteria plan if the employer is a qualified employer (generally, smaller businesses). In very broad terms, a qualified health plan is one that meets certain certification requirements, provides “an essential health benefits package,” and is offered by an insurer meeting detailed requirements. And a health insurance “Exchange” is a federally supervised marketplace for health insurance policies meeting specific eligibility and benefit criteria, to be made available not later than Jan. 1, 2014, to qualifying individuals and employer groups of graduated sizes.

New information reporting of employer-provided health coverage. For periods beginning after Dec. 31, 2013, new information reporting and related statement obligations apply  for (1) certain applicable large employers required to offer their full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and (2) offering employers (those offering minimum essential coverage to employees and paying any portion of the such coverage, but only if the required employer contribution of any employee exceeds 8% of the employee’s wages).

Excise tax on health insurance providers. For calendar years beginning after Dec. 31, 2013, an annual fee applies to health insurance providers. The aggregate annual flat fee for the industry (e.g., $8 billion for 2014) will be allocated based on a health provider’s market share of net premiums written for a U.S. health risk for calendar years beginning after Dec. 31, 2012. The fee will not apply to companies whose net premiums written are $25 million or less. For purposes of the fee, health insurance does not include: coverage only for a specified disease or illness; hospital indemnity or other fixed indemnity insurance; insurance for long-term care; or any Medicare supplemental health insurance. (PPACA Sec. 9010, as amended by HCERA Sec. 10905, as further amended by HCERA Sec. 1406)

Tax Change Taking Effect in 2018

Excise tax applies to high-cost employer provided health insurance coverage. For tax years beginning after Dec. 31, 2017, a 40% nondeductible excise tax will be levied on insurance companies and plan administrators for employer-sponsored health coverage to the extent that annual premiums exceed $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions.

Track Mileage in QuickBooks

QuickBooks makes it really easy to track mileage for your vehicles.

Once the company file is open, go to Company -> Entire Vehicle Mileage.

The vehicle menu allows you to choose or add a new vehicle. The trip start and end dates choose when the job is starting and finishing. Typically, this will be on the same day. The total miles are automatically calculated by the difference between the odometer start and end values. The customer job, item, and class associates the total miles with a customer, job, or class. The billable button allows you to decide if you want to bill the client for those miles.

A report can be created to show the total miles during a certain period by going to Reports -> Jobs, Time & Mileage -> Mileage by Vehicle Detail.

The current mileage rates selected in this picture are the 2013 standard mileage rates but you can bill your customers at a higher rate if you desire. Since the IRS and customers like to have a record of miles, QuickBooks makes it easy to keep track of this documentation.