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The “nanny tax” must be paid for more than just nannies

You may have heard of the “nanny tax.” But even if you don’t employ a nanny, it may apply to you. Hiring a housekeeper, gardener or other household employee (who isn’t an independent contractor) may make you liable for federal income and other taxes. You may also have state tax obligations.

If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you may choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.

FICA and FUTA tax

In 2019, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,100 or more (excluding the value of food and lodging). If you reach the threshold, all the wages (not just the excess) are subject to FICA.

However, if a nanny is under age 18 and child care isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time babysitter who is a student, there’s no FICA tax liability.

Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for both the employer and the worker (2.9% total).

If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.

You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

Reporting and paying

You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.

As a household worker employer, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.

When you report the taxes on your return, you include your employer identification number (not the same as your Social Security number). You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) that you file for your business. And you use your sole proprietorship EIN to report the taxes.

Keep careful records

Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, dates and amount of wages paid and taxes withheld, and copies of forms filed.

Contact us for assistance or questions about how to comply with these employment tax requirements.

© 2019

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Roth versus Traditional. IRAs or 401ks.

Watch the video here.
Let’s talk about Roth versus Traditional. IRAs or 401ks. An IRA is an individual retirement account not associated with your employer. A 401k is a retirement account maintained by your employer. 
A question we get all the time is: should I invest in a Tradition or Roth retirement account? A primary difference between a Roth and Traditional retirement account is the timing of the tax benefit. With a Roth, you receive the tax benefit at the end when you retire. With a Traditional, you receive the tax benefit at the beginning when you make the contribution. 
There are numerous resources on the internet to give you all of the details you could ever want on this topic, including the IRS website. In my forty years of experience, my opinion is generally Roth retirement accounts are best suited for young people. Because they have a long working life before they retire and that gives their investments time to increase substantially and that increase will not be taxable to them when they draw it out at retirement. 
Traditional IRAs and 401ks are best suited to those who are in a higher tax bracket. They will save significant tax dollars immediately and will likely be in a lower tax bracket when they retire because their income will be reduced. This usually describes mature individuals. They are in their later years of working and usually have higher incomes. Therefore, the tax savings currently are greater and the time for investments to increase in value is shorter. 
When you decide to put money in a retirement account, that is for retirement. That is not college savings, savings for a car, etc. The penalty for early withdrawal is 10% plus you pay income tax on the amount you withdraw.. As an example for a traditional IRA or 401k: if you withdraw $10,000 and you are in the 22% tax bracket, you will pay $3,200 of the $10,000 to the government. Not a good deal. 
With Traditional IRAs, you must be at least 59 and a half to avoid any early distribution penalties. However, once you reach the age of 70 and a half, you must start taking required minimum distributions. These distributions are generally 100% taxable. With a Roth IRA or 401k, there are no Required Minimum Distributions and distributions at retirement are 100% tax free. 
Since no one has a crystal ball, we don’t know what tax rates will be and both plans have some great benefits. If your tax rates are higher now, use the Traditional, however, if your tax rates are expected to be higher when you retire, choose the Roth. 
One suggestion is the hedge, use a Roth IRA or 401k when you are younger. When you mature and income has increased, you can always change to traditional to get the immediate tax savings. But talk to your CPA and investment advisor to get the best solution for you. 
As a rule of thumb, contribute more than you think you can afford to your retirement plan. Your retirement self will thank you later. 
Press Releases

Alexander Thompson Arnold PLLC Announces New Partner

July 10, 2019


Alexander Thompson Arnold PLLC Announces New Female Partner


Alexander Thompson Arnold PLLC (ATA) is excited to announce that Marcie Williams has been promoted to partner. Marcie is a certified public accountant and has been with the firm for the past 12 years in the Jackson office.  She is an assurance partner specializing in internal school funds, school districts, single audits, contractors and other for-profit engagements.
“This is a goal I have been working toward for some time,” said Williams. “I have always enjoyed the people I work with and the niches I have developed throughout my career. Becoming a partner in these areas of practice and continuing relationships with my coworkers and clients is not only a privilege but an honor. I look forward to pursuing this role at ATA and furthering my career doing what I enjoy.”
While employed at ATA, Williams has gained extensive experience in several divisions of ATA, including technical review, which has made her a valuable resource for the firm. Additionally, she leads regular internal training sessions and offers guidance to staff and newly acquired firms to maintain our high standards of quality control.
“Marcie has shown exceptional leadership over the past 12 years,” said managing partner, John Whybrew. “She takes initiative and is always a team player. ATA is proud to name her partner and looks forward to the continued value that she’ll bring to the firm.”
Marcie graduated from Arkansas State University in December 2006 with an undergraduate degree in accounting. She has been married to her husband Michael for the past twelve years and together they have two active boys, nine-year-old Easton and seven-year-old Landon. Marcie is a Jackson native, attends Englewood Baptist Church, and is a graduate of Leadership Jackson. Currently, Marcie serves as President of the TSCPA West Tennessee Chapter. She is also on the Jackson State Community College Foundation Board of Trustees and the Leadership University Board.
ATA has 16 office locations in Tennessee, Indiana, Kentucky and Mississippi. ATA is an IPA Top 200 regional accounting firm that provides a wide array of accounting, auditing, tax and consulting services for clients ranging from small family-owned businesses to publicly traded companies, and international corporations.  ATA is also an alliance member of BDO USA LLP, which allows it to utilize the resources and expertise for its clients of a top five global accounting firm.
For more information, contact:
Alexis Long, Marketing Director
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If your kids are off to day camp, you may be eligible for a tax break

Now that most schools are out for the summer, you might be sending your children to day camp. It’s often a significant expense. The good news: You might be eligible for a tax break for the cost.

The value of a credit

Day camp is a qualified expense under the child and dependent care credit, which is worth 20% to 35% of qualifying expenses, subject to a cap. Note: Sleep-away camp does not qualify.

For 2019, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more. Other expenses eligible for the credit include payments to a daycare center, nanny, or nursery school.

Keep in mind that tax credits are especially valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax.

For example, if you’re in the 32% tax bracket, $1 of deduction saves you only $0.32 of taxes. So it’s important to take maximum advantage of all tax credits available to you.

Work-related expenses

For an expense to qualify for the credit, it must be related to employment. In other words, it must enable you to work — or look for work if you’re unemployed. It must also be for the care of your child, stepchild, foster child, or other qualifying relative who is under age 13, lives in your home for more than half the year and meets other requirements.

There’s no age limit if the dependent child is physically or mentally unable to care for him- or herself. Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Credit vs. FSA

If you participate in an employer-sponsored child and dependent care Flexible Spending Account (FSA), you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

If your employer offers a child and dependent care FSA, you may wish to consider participating in the FSA instead of taking the credit. With an FSA for child and dependent care, you can contribute up to $5,000 on a pretax basis. If your marginal tax rate is more than 15%, participating in the FSA is more beneficial than taking the credit. That’s because the exclusion from income under the FSA gives a tax benefit at your highest tax rate, while the credit rate for taxpayers with adjusted gross income over $43,000 is limited to 20%.

Proving your eligibility

On your tax return, you must include the Social Security number of each child who attended the camp or received care. There’s no credit without it. You must also identify the organizations or persons that provided care for your child. So make sure to obtain the name, address and taxpayer identification number of the camp.

Additional rules apply to the child and dependent care credit. Contact us if you have questions. We can help determine your eligibility for the credit and other tax breaks for parents.

© 2019