As informational tax forms start flowing in, you are reminded to review the forms and determine the correctness of the form. One of the keys is whether your employer (or contractor) sends you the correct form. Getting it wrong could cost you plenty in the way of Social Security, Medicare taxes, and other employment-related taxes. Here is what you need to know.

The basics

As a contractor. If you are the worker and you are not considered an employee you must:

• Pay self-employment taxes (Social Security and Medicare-related taxes)
• Make estimated federal and state tax payments
• Handle your own benefits, insurance, and bookkeeping

As an employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to:

• Payment and penalties related to Social Security and Medicare taxes
• Payment of possible overtime including penalties for a contractor reclassified as an employee
• Legal obligation to pay for benefits

Determining the answer: Things to consider

Usually in determining whether you are an independent contractor or an employee, state and federal authorities look at the business relationship between the employer and you, the worker. The IRS focuses on the degree of control exercised by the business over the work done, and they will assess your level of independence. Here are some tips.

• The more the employer has the right to control your work, when the work is done, how the work is done, and where the work is done, the more likely you are an employee.
• The more the financial relationship is controlled by the employer, the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a business-like manner.
• The more business-like the arrangement, the more likely you have an independent contractor relationship.

Don’t forget your obligations

With so many workers now in the contractor ranks, it is important to stay on top of your tax filing obligations. With 15.3% of your income due for Social Security and Medicare taxes, forgetting to pay this can quickly become a financial nightmare.

While there are no hard set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged by the IRS. But beware, states are trying to constantly move contractors into the ranks of employees, all of which can cause havoc as companies and workers try to understand the changes these initiatives create.

In late December, the IRS announced plans to issue automatic payments to eligible people who did not claim the Recovery Rebate Credit on their 2021 tax returns. The payments should be received in late January. No action is needed for eligible taxpayers to receive the credit with a maximum payment of $1,400.

Background

As part of various COVID-19 relief programs, the federal government issued Economic Impact Payments and a Recovery Rebate Credit. The latter was to be awarded on 2021 income tax returns. Upon reviewing internal data, the IRS determined that approximately one million taxpayers overlooked claiming this refundable credit. The IRS would not typically take proactive actions to pay out this money…instead the agency would normally remind taxpayers to claim any and all refunds before the statute of limitations runs out, which in this case is April 15, 2025. But in a surprise to many, the IRS is deciding to be proactive in this case.

What you need to know

No action is required on your part. If you or a family member is eligible for the credit, the IRS will automatically deposit the money in the direct deposit account noted on your 2023 tax return. If no bank account is noted, you will receive a paper check. Things to note:

• Should you receive a payment, it is legitimate. There should also be a letter from the IRS explaining the payment.
• Most taxpayers already received this credit. So no need to call wondering if you are going to get a payment. While $2.4 billion in payments going out is no small number, it only represents a small percentage of total payments to all taxpayers.
• Double check 2021 non-filers. If you know of someone who did not file a 2021 tax return, it may be worth looking at doing so before April 15, 2025 or the ability to claim this credit goes away.

To learn more: See IRS IR-2024-314

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this web page. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does Willis & Jurasek have any control over, or responsibility for, the content of any such Websites.
All rights reserved.

As a reminder, tax season is also tax scam season for savvy criminals. As you prepare to file your tax return, here are some things to know to reduce your risk of having your valuable personal information stolen. These tips are provided by the IRS and other experts.

• Scam sources are typically over the phone, email and even in person!
• The IRS DOES NOT initiate contact by email or request personal or financial information in this format.
• The IRS typically initiates contact via mail.
• On rare occasion the IRS will call. When this happens, get the IRS agent’s name and badge number. Then hang up and call the IRS independently (not the phone number they give you). Better still, call your tax professional!
• Email phishing. If you receive a suspicious email DO NOT OPEN IT or any links. Do not reply or open attachments. Report it to phishing@irs.gov.
• Phone scams. Do not give personal information to unsolicited phone calls from the IRS. Even if it looks legitimate. Scammers are getting good at spoofing legitimate phone numbers on your caller id. Report the caller ID and call back number to the IRS using phishing@irs.gov. Put IRS phone scam in the subject line.
• Payment. Only pay the US Treasury directly. DO NOT pay anyone else, even if they threaten you. No one is allowed to collect money directly from you.

Finally, the IRS and Federal Trade Commission have tons of material regarding these thieves and their techniques. Become familiar with them and reach out for help, as a tax professional may be able to help read through the scam.

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FinCEN BOI reporting requirement on hold once again

Required filing of beneficial owner information (BOI) on FinCEN.gov continues its roller coaster judicial journey. On December 26th, the requirement to file is (for now) officially on hold once again pending further judicial review. Last week the injunction to halt the filing requirement was overturned leaving your business until January 13, 2025 to file your report. Now that ruling is suspended. Go to FinCEN.gov to learn more.

The beginning of each year is a great time to start next year’s tax planning. One area to help reduce your tax obligation, that benefits from an early in the year start, is leveraging your kids to the fullest using the kiddie tax rules.

Background

The term kiddie tax was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child’s lower tax rate. In 2025 the law requires a child’s unearned income (generally dividends, interest, and capital gains) above $2,700 be taxed at their parent’s tax rate.

Applies to

• Children under the age of 19
• Full-time students under the age of 24 and providing less than half of their own financial support
• Children with unearned incomes above $2,700

Who/What it does NOT apply to

• Earned income (wages and self-employed income from things like babysitting or paper routes)
• Children that are over age 18 and have earnings providing more than half of their support
• Children over age 19 that are not full-time students
• Gifts received by your child during the year

How it works

• The first $1,350 of unearned income is generally tax-free
• The next $1,350 of unearned income is taxed at the child’s (usually lower) tax rate

The excess over $2,700 is taxed at the parent’s rate either on the parent’s tax return

Planning thoughts

So while your child’s unearned income above $2,700 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas:

Create accounts in your child’s name. Establish a Uniform Transfers to Minor Act (UTMA) account at your favorite bank and/or investment institution. This will allow you to manage assets in the name of a minor child. Then gift cash or investments into the account. Gains and interest in the UTMA account will now create unearned income in the name of the child. Be aware of annual gift limits to keep reporting simple (currently $19,000 per individual per year in 2025). Build these accounts to provide up to $2,700 in unearned income each year.

Maximize your lower tax investment options. Look for gains in your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.

Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by reducing your tax benefits in other programs like the American Opportunity Credit.

Leverage gift giving. Each year, if your children are not maximizing tax-free investment income consider gifting additional funds to allow for unearned income up to the kiddie tax thresholds.

Properly managed, the kiddie tax rules can be used to your advantage. But be careful as your child reaches their legal adult age, this part of the tax code can create an unwelcome surprise if not handled properly.

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Small Business ALERT:

Department of Justice FinCEN Judicial order is overturned.

What this means. All firms must register their beneficial owners (BOI) through the FinCEN application as originally dictated by the law. The law was ruled an overreach by a judicial order earlier this month, but in an emergency ruling the Justice Department got the order overturned. The original filing deadline of 12/31/24 is now extended to 1/13/25. If you are a small business and have not registered your owners you will need to ensure you comply. Go to www.FinCEN.gov and review the information.

The Child & Dependent Care Credit provides a reduction in taxes to offset the cost of daycare when you are employed. The maximum amount of the credit is $3,000 for one dependent or $6,000 for two or more qualifying persons.*

To take advantage of the credit here is what you need to know.

1. Qualified dependent(s). Your dependent must be under the age of 13. A spouse or older dependent who is physically or mentally unable to care for themselves can also qualify.

2. Earned Income. You must have earned income to support the credit.

3. Qualified daycare expenses. You must actually incur the care expense for the qualified dependent.

4. Financial support requirement. You must maintain the home and financial support for the qualified dependent (more than half the cost and more than half the year).

Here are some tips;

• Partial expense coverage. The credit only covers a percentage of your qualified care expenses. The amount depends on your income with a high of 35% of qualified expense down to a low of 20% of the daycare expense.
• Obtain proper ID. Most daycare organizations will provide you with an expense summary at the end of each tax year. This form will tell you how much you spent in care and will provide you with the proper tax id for their organization. If you have someone else caring for your dependent, make sure you receive their tax information. It will be needed when you file for the credit on your tax return.
• Not equal. If you have two or more qualified dependents, the daycare expenses do not have to be equal for each of them. For example, you could use $5,000 for one dependent and $1,000 for the rest of them.
• Education expenses. Pre-school, nursery and other educational programs can qualify if levels are lower than kindergarten. Full-day kindergarten fees DO NOT qualify.
• Leverage summer. Summer day camps and similar activities can qualify for the credit. So too can hiring a nanny to care for the kids while you are at work and the kids are out of school.

Other details apply. Please ask for help if you wish to review your situation.

*Note: If your employer provides daycare reimbursement as a benefit on your W-2, the employer benefit is limited to $5,000 or $2,500 if married filing separate or single. You can still use excess daycare expenses to maximize your credit to the full $3,000/$6,000 amount.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this web page. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does Willis & Jurasek have any control over, or responsibility for, the content of any such Websites.
All rights reserved.

The Social Security Administration announced a 2.5% boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2025, another rate drop versus last year’s increase of 3.2%. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2024.

For those contributing to Social Security through wages, the potential maximum income subject to Social Security taxes is increasing to $176,100. This represents a 4.4% increase in your Social Security taxes! What’s of interest here is the percent increase in income subject to tax is much higher than the benefit increase. Here’s a recap of the key dollar amounts:

2025 Social Security Benefits – Key Information

What it means for you

• Up to $176,100 in wages will be subject to Social Security taxes, an increase of $7,500 from 2024. This amounts to $10,918.20 in maximum annual employee Social Security payments (an increase of $465!), so plan accordingly. Any excess Social Security taxes paid because of having multiple employers can be returned to you as a credit on your tax return.
• For all retired workers receiving Social Security retirement benefits, the estimated average monthly benefit will be $1,976 per month in 2025, an average increase of $49 per month.
• SSI is the standard payment for people in need. To qualify for this payment, you must have little income and few resources ($2,000 if single, $3,000 if married).
• A full-time student who is blind or disabled can still receive SSI benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2024 to 2025. The rates are 6.20 percent for Social Security and 1.45 percent for Medicare. There is also a 0.9 percent Medicare wages surtax for single taxpayers with wages above $200,000 ($250,000 for joint filers) that is not reflected in these figures. Please note that your employer also pays a 6.2 percent Social Security tax and a 1.45 percent Medicare tax on your behalf. These amounts are reflected in the self-employment tax rate of 15.3%, as self-employed individuals pay both halves of the tax rate.

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The third quarter due date is now here.

Due date: Monday, Sept. 16, 2024

You are required to withhold at least 90 percent of your 2024 tax obligation or 100 percent of your 2023 obligation.* A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment is necessary. Here are some other things to consider:

• Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. A quick payment at the end of the year may not help avoid the underpayment penalty.
• W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough funds to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.
• Self-employed. Remember to pay your Social Security and Medicare taxes in addition to your income taxes. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter when you pay your estimated taxes.
• Don’t forget state obligations. You are also normally required to make estimated state tax payments if you’re required to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you meet these quarterly estimated tax payments as well.

*If your income is more than $150,000 ($75,000 if married filing separately), you must pay 110 percent of your 2023 tax obligation to be safe from an underpayment penalty.

One of the best audit tips available can be summed up in one simple word – Match.

Spend a minute or two pretending you work for the IRS. What would you do to identify tax returns worth auditing? If you suggest matching information on filed tax returns with the information provided about that taxpayer from other sources, you would be right on the mark. The IRS runs an automated matching program that kicks out mismatches and helps identify audit targets without much effort on their part. Knowing this:

If you receive a notice from the IRS that something does not match what was submitted by you, consider requesting a copy of the information reported to them to determine where the mismatch occurred.