As the end of the school year approaches, if you are a parent of teenaged workers you may be asked by your child for advice about how to complete tax documents for a summer job. Her employer will ask her for:

1) Form W-4, Employee’s Withholding Allowance Certificate

2) Form VA-4, Employee’s Virginia Income Tax Withholding Exemption Certificate

3) Form I-9, Employment Eligibility Verification

4) In the case of workers aged 14 or 15, a work permit.

The first two forms are for the employer to use in withholding income taxes on the wages earned. The third form documents that your child is authorized to work in the United States. The fourth form requires written parental consent for an underage child to work. All of these forms should be returned to the employer by the first day of work. This is a great learning opportunity for your child as an employee new to the workforce, so let her read the instructions and familiarize herself with the procedures and requirements. Be available for help if she should ask for assistance as she goes through the process. This is an excellent opportunity to discuss the significance of income taxes to individual taxpayers and to the government, and what is involved in succeeding as an employee. You might consider asking her if you could review the forms for completeness and accuracy before she gives the forms to her employer. Your review may reveal some items that she might not know or understand about the forms, especially if you have been filing tax returns for her for investment income. Your advice to her could avoid a returned form with a consequent delay in hiring, availability for work, and receiving pay for her work.

The following apply in general to teenaged workers with a summer job, but be sure that you and your child read the instructions carefully to know if you have an exception to the typical situation. In that case, enter the appropriate information on the forms. In all cases, your child, as the employee, must sign and date the forms for validation.

For Form W-4, if she will make less than $5,450 a year from employment and has less than $900 in investment income for the year, she may be exempt from paying income taxes. However, note that she cannot be exempt if she can be claimed as a dependent on your (or another’s) tax return and her income exceeds $950 and includes more than $300 of unearned income (for example, interest and dividends.) If your child qualifies for exemption from federal income tax by meeting the requirements of: 1) no tax liability in the prior year, and 2) expectation of no tax liability in the current year, she should complete boxes 1, 2 3, 4, and write “Exempt” in box 7. If your child does not qualify for exemption from federal income tax, use the “Personal Allowances Worksheet” to determine the number to use in box 5. Remember that your child does not take an allowance on Line A if they are treated as a dependent on your (or another’s) income tax return. Should your child wish to have additional income tax withheld from each paycheck, to cover unearned taxable income or self-employment tax, for example, enter this amount in box 6.

Explain to your child that even though she may be exempt from federal income taxes, she will still have Social Security and Medicare deducted from her pay. These funds will be credited to her account and she will begin to have a work history.

For the VA-4, there is the opportunity to be exempt from Virginia income tax under similar circumstances to the federal W-4. In general, your child can claim exemption by checking the box on line 3 for either of the following conditions: 1) no income tax liability for the previous year and no income tax liability expected for the current year, or 2) Virginia adjusted gross income expected to be less than $11,950 for the current year. Again, there are other special circumstances and conditions for Virginia individual income tax liability, so be sure to review the instructions to Virginia Form 760 with your child to see if any of these apply. If exemption does not apply, complete the Personal Exemption Worksheet on the VA-4 and enter the result on line 1. Your child can request that additional income tax be withheld from her pay if the employer agrees; enter this amount on line 2.

For Form I-9, your child enters identifying information in the first part of Section I, checks a box for employment eligibility (generally, as a citizen of the US), and signs a statement indicating awareness of the consequences of false statements or false documentation. Your child must provide identification to establish identity and employment authorization. This is generally either: 1) a passport, or 2) a school ID or driver’s license and a social security card or birth certificate. Other forms of identification may be used; check the list of acceptable documents in the instructions.

And finally, in general, if your child is at least 14 but not yet 16, she must apply for a work permit as a minor. The necessary forms can generally be obtained through your child’s high school. A parent or guardian of your child must sign a “Permission for Employment” form in the presence of the person issuing the permit. Note that there special work restrictions are placed on employers in regard to minor employees.

At the beginning of next year, when your child receives her 2012 Form W-2 Wage and Tax Statement to report her earnings, discuss with her the process of filing income tax returns. Even if she is not required to file because her total taxable income falls beneath the income filing requirements, she will probably wish to file for a refund if she had any federal or state income tax withheld. With all of this practice and guidance, your child will be well on her way to understanding the requirements and responsibilities of being an employee and a responsible income taxpayer. Job well done!

Links to forms and instructions:
http://www.irs.gov/pub/irs-pdf/fw4.pdf
http://www.uscis.gov/files/form/i-9.pdf
http://www.tax.virginia.gov/taxforms/Business/Withholding%20Tax/VA-%204.pdf
http://www.doli.virginia.gov/laborlaw/laborlaw_childworkpermits1.html

-Nancy B. Corley, EA

How to Determine Overtime Pay for Non-Exempt Employees

To determine if overtime pay is present the employer must first establish a workweek.  The Fair Labor Standards Act (FLSA) says a “workweek” is seven consecutive 24-hour days beginning when the employer chooses.

According to the FLSA, non-exempt employees must be paid at least the minimum wage and receive overtime pay at the rate of one and a half times their regular rate of pay for all hours worked in excess of 40 hours for the workweek. The key word here is “worked”; time spent on vacation, sick leave and holidays will not be counted as time worked. Such time should be paid as straight-time but not included as time worked when computing overtime pay.

The FLSA uses several remedies to enforce compliance. When Wage and Hour investigators find violations they will recommend ways for the employer to become compliant and to require the payment of any back wages owed. Those employers who willfully violate the minimum wage or overtime pay requirements are subject to civil penalties of up to $1,100 per violation.

-Tracy Wallace

Moving? Want to become a landlord?

Converting a primary residence into rental property?

Maybe one day you’ll sell your home, but for now you’ve decided to rent it out. You might be able to shelter some of the rental income with tax deductions and depreciation write-offs. First you’ll have to navigate the complicated tax issues that come along with such a transition.

When you convert a primary residence into a rental property, many questions arise regarding the property’s depreciable basis. You’ll need to take into account whether the property was placed in service. You’ll also need to decide which depreciation method to use.

The basis for depreciation purposes is the lower of:

• The adjusted basis on the date of conversion (purchase price + capital improvements), or

• The fair market value of the property at the time of the conversion

Residential property is depreciated on a straight-line basis over 27.5 years beginning on the conversion date. The date placed in service as a rental is when the property is first available for rent, not when it is actually rented.

Obtaining an appraisal is often prudent. It helps establish the depreciable basis. The appraisal will also support the gain or loss reported on a subsequent sale.

How to Deal with Form 1099 Tax Planning

There are two new questions on many income tax returns for 2011 that were not on last year’s returns. Both are based around Form 1099 Tax planning.

The questions are:

• “Did your business make any payments in 2011 that would require it to file Form(s) 1099?”

• “If ‘yes’, did the business file or will it file all required Forms 1099?”

Every business – corporations, S corporations, partnerships, LLC’s, Schedule C proprietorships, Schedule F farming operations – must answer “Yes” or “No” to the above questions on their 2011 income tax returns this year.

Business owners should be prepared to answer these questions by reviewing their records and determining if they have complied with current Form 1099 reporting requirements.

If you are not prepared for these questions or do not know if you are required to file Form(s) 1099, please contact us. We can help.

-Edward D. Garris, PhD, CPA

Employee Payroll Tax Holiday

Approximately 160 million workers can jump for joy that the 2 percent reduction of social security tax will be extended and apply to wages paid through February 29, 2012.

The tax benefits are not just for employees, but also independent contractors and other self-employed persons who pay self-employment taxes (SECA tax) on their earnings. The SECA tax is reduced to 13.3% from 15.3% on income up to the social security wage base of $110,100. Note that there may be a recapture of any benefits a taxpayer receives on wages in excess of $18,350 for January and February if the payroll tax cut is not extended beyond February.

Many are anticipating the employee payroll tax holiday to be extended through the end of 2012 since neither political party wants to be responsible for “increasing” taxes on working Americans in an election year.

The employee payroll tax holiday extension should not be a bookkeeping and payroll processing burden for employers. The IRS has instructed employers to implement the new payroll tax rate as soon as possible in 2012.

-John Scaglione

Due to the depletion of state unemployment tax insurance funds, many states have had to borrow from the federal government to cover unemployment benefits. When these loans remain unpaid for over two years, a surtax is triggered and employers must pay additional FUTA taxes. The FUTA surtax for Virginia is 0.3%.

Virginia employers who paid employees more than $7,000 in 2011 will have to pay an additional $21 ($7,000 x 0.3%) in FUTA taxes per employee when filing their annual 2011 Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return).

In addition, employers must prepare and attach Schedule A (Form 940) to calculate the additional FUTA. Employers in twenty states, including Virginia, plus the Virgin Islands, are subject to the FUTA surtax.

-John Scaglione

Payroll Updates

After ringing in 2012 and packing up holiday decorations, it is time to get back to business and update files to reflect payroll updates for the new year. Below are a few of the changes to look for.

While the Social Security wage limit had remained at $106,800 for the last three years, this year the maximum amount of income subject to Social Security taxes will increase to $110,100. The reduction in the employee portion of Social Security tax rate to 4.2% we saw in 2011 will expire December 31, 2011 and the rate will revert back to 6.2% for employees and 12.4% for self-employed individuals. Employees will notice a reduction in net pay on their first paycheck in January. It may be necessary for anyone self-employed to adjust their estimated tax payments in 2012 as a result of the tax increase. Keep a close eye on this one as congress is currently battling it out over new legislation to extend and maybe even expand the payroll tax holiday.

For 2012, the taxable wage base for state unemployment tax for Virginia remains at $8,000.00. On the first of December the Virginia Employment Commission (VEC) mailed Tax Rate Notices for Calendar Year 2012. QuickBooks users must be sure to edit the payroll item for state unemployment tax with their new rate before processing their first payroll in January. If the notice has not been received the rate can be found on your VA ifile VEC link where you would submit your Quarterly Tax Report to the VEC after January 1 or via phone at 800-897-5630.

A business must determine annually which deposit schedule (semi-weekly, monthly, or quarterly) it is required to use for submitting federal and state tax deposits. The Internal Revenue Service (IRS) and Virginia Department of Taxation (VDOT) send notices at year end notifying a business of a change in deposit frequency. However, it is the responsibility of the business to determine its filing frequency and to ensure they are depositing taxes timely. Your deposit schedule for a calendar year is determined by calculating your tax liability during the “Lookback Period”. This period is defined in Circular E, Employer’s Tax Guide issued by the IRS for the federal lookback and in the Commonwealth of Virginia Withholding Tax Guide issued by VDOT for the Virginia lookback.

Distribute Forms W-4 and VA-4 to employees so they may make changes in address, marital status and withholding allowances in the new year. It is helpful to remind employees to review paycheck information and have them advise you of any changes that may affect W-2 forms before year end. If an employee claimed exemption from income tax withholding last year on Form W-4, a new form must be completed by February 15th in order to continue the exemption another year.

Hopefully some of these reminders will help get your New Year off to a good start. Best wishes for a happy and healthy 2012!

– Dana Kirschnick

There are two types of year-end tax planning moves: those that should be considered every year and those that apply only to the 2011 year-end. Before the inevitable year-end approaches, some good tax planning can save you some of your hard-earned money. Absent new congressional legislation, below are several tax provisions that will expire or be modified at 12/31/11.

The expiring tax provisions applicable to businesses actually have the greatest potential for saving taxes. The current provision to allow businesses to expense (Section 179) up to $500,000 of business machinery, equipment and furniture will be reduced next year to $139,000.

The current provision to allow businesses to expense (Section 179) up to $250,000 of certain real property additions, leasehold or restaurant improvements in the year of acquisition will expire after 2011. As usual, there are both caps and phaseouts for the Section 179 expensing options. Additionally, the provision allowing businesses to use 100% bonus depreciation on certain new assets will decrease to 50% next year. Another of the major expiring provisions is the Work Opportunity Tax Credit (WOTC), which currently gives employers a tax credit for certain workers hired before the end of 2011. However, as part of a new law signed by the President on November 21, 2011, the WOTC was extended by one year for hiring certain qualified veterans.

Individuals wishing to take advantage of expiring tax provisions should consider some of the following tax savings ideas. Individuals age 70½ or over are allowed to make a qualified tax-free charitable distribution of up to $100,000 from an IRA to a qualified charity before the end of the year. Although the deduction for higher education expenses expires at the end of 2011, the American Opportunity Credit for some of these same expenses extends through the end of 2012. The energy credit for homeowners who make energy efficient improvements to their main home will also expire on 12/31/11.

Tax planning strategies that apply to any year-end should also be considered. In the interest of keeping this blog to a manageable size, these will be included in the year-end company e-newsletter which will be available for download.

–Barb Franko, CPA