BLR s Human Resources Training Presentations

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BLR’s Human Resources

Training Presentations

Basic Tax Guidelines

For Employees

Background for the Trainer:

• Obtain recent copies of relevant state and federal tax forms, schedules, and instruction booklets to display as samples during the session.

• Bring blank copies of W-4 forms and worksheets as well as W-2 forms to the meeting so that participants can see them as you talk about them.

Speaker’s Notes:

• This training session will focus on basic tax guidelines for emp loyees. • Although you are not in a position to advise employees about the ir taxes,

they are likely to come to you with questions about tax matters relating to their employment, and you may be able to help them make more informed choices.

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Goals

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Understand basic tax guidelines employees

need to follow to comply with tax laws

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Be able to answer questions and explain

simple tax and withholding issues

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Help employees avoid problems at tax time

• This session will help you understand the basic tax guidelines employees need to follow to comply with tax laws.

• You will acquire the knowledge you need to answer employment-related tax questions and explain other simple tax and withholding issues to employees.

• This information will assist you in helping your employees avoid problems at tax time.

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Payroll Deductions for Taxes

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Federal and state income tax

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Social Security

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Medicare

• Payroll deductions are amounts withheld from employees’ gross pay to make tax payments. Once withheld, the company sends the money to the federal and/or state government.

• The major deductions are for federal and state income tax. Federal income taxes are usually the largest portion of payroll deductions.

• A small percentage of employees’ earnings are also deducted for Social Security. The company contributes a matching amount.

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W-4 Form

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What is it?

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Who must fill one out?

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Why is accuracy

important?

• Some states have a withholding form similar to the federal W-4. If your state is one of them, mention that form here as well and discuss any worksheets associated with it in the next section.

• Everyone’s heard of the W-4 form. But let’s define it clearly.

• Form W-4 is a federal form that is used by the company to determine how much income tax to withhold each pay period from employees’ paychecks.

• All employees must fill one out when they are hired, and the company must keep these forms on file for as long as an employee works here. • It is important for employees to fill out their W-4s properly. If too much

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W-4 Worksheets

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Personal Allowance

Worksheet

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Deductions and

Adjustments Worksheet

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Two-Earner/

Two-Job Worksheet

• The W-4 form has three worksheets to help employees determine what their withholding should be for the upcoming year.

• All employees should use the Personal Allowance Worksheet to determine the number of allowances to claim on the W-4 form. • Some employees may wish to further increase or decrease their

withholding based on their personal circumstances. These employe es will need to use the Deductions and Adjustments Worksheet.

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Allowances

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Personal exemptions

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Filing status as

“head of household”

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Child or dependent

care expenses credit

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Child tax credit

• Allowances help determine an employee’s rate of withholding based on his or her individual circumstances. Each allowance reduces the amount of tax withheld. The more allowances employees claim on their W-4, the less income tax they pay. Allowances may be claimed on the basis of several factors.

• Each employee is allowed a personal exemption from gross income. The exact amount of this exemption varies from tax year to tax year. If an employee is married and filing a joint return, two allowances are deducted from gross income. And employees are allowed another allowance for each dependent claimed on the W-4.

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Deductions and Adjustments

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Itemized deductions

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Nonwage income

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Other adjustments

to income

• Some employees may need to further adjust their withholding. • For example, those with itemized deductions will need to take these

deductions into account when filling out their W-4s. Itemized deductions, such as home mortgage interest, state and local taxes, charitable

contributions, medical expenses that exceed 7.5 percent of adjusted gross income, and other miscellaneous deductions, can significantly decrease the amount of taxes owed.

• Employees who have significant nonwage income, such as interest or dividend income from bank savings accounts, bonds, stocks and mutual funds, may need to increase their withholding to account for this extra income.

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Two-Earner Families and

Employees with Two Jobs

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Married with both

spouses working

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Employee with two jobs

• Many employees will come from two-earner families and some may have second jobs. These factors will also affect withholding.

• Employees who are married, have a working spouse, and, together with their spouse, earn more than $35,000 a year should use the

Two-Earner/Two-Job Worksheet to ensure that enough tax is withheld from their gross pay during the year. This is necessary because withholding by each employer is based on the tax bracket for an individual earning only the amount of pay from that one job. The combined income of both spouses puts them in a much higher tax bracket and more tax will most likely need to be withheld.

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Avoiding Penalties

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90 percent of tax

shown on the tax return

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Amount of the

previous year’s tax

• IRS and state tax authorities may penalize taxpayers who have too little tax withheld from their pay during the year.

• To avoid penalties an employee’s tax withholding plus any estimated tax payments made during the year should add up to more than 90 percent of the tax shown on the employee’s tax return.

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Reviewing the W-4

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Annually

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Changes in

personal finances

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Changes in personal

circumstances

• Employees should review their W-4 form regularly to make sure that the information is still valid.

• It is a good idea for all employees to review their W-4 withholding rate every year and consider if there are any upcoming changes that could affect withholding.

• For example, changes in personal finances, such as increased nonwage income or refinancing a mortgage at a lower rate, may require changes on the W-4.

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W-2 Form

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Federal and state

income tax

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Social Security tax

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Medicare tax

• Check the current tax rate and maximum wage base for Social Security tax. Also check the current Medicare tax rate.

• Another important tax form is the W-2 form. Most employees will already be familiar with the W-2, since it is used for filing income taxes each year. Many employees, however, may not be familiar with how the figures on the form are calculated.

• The amount of federal and state income tax shown on the W-2 is based on an employee’s W-4. The information on the W-4, as we’ve seen, is just an estimate of what employees believe they owe the government in tax for the calendar year. The actual tax owed might be more or less and is determined when the tax return is filed.

• Social Security tax is a set percentage of an employee’s pay up to a maximum wage base. What this means is that employees who earn over the maximum wage base don’t get taxed on the extra amount. The Social Security tax rate and maximum wage base change over the years. Currently, the rate is a little over 6 percent of income and the maximum wage base is close to $90,000.

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Choosing the

Right Tax Forms

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1040EZ

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1040A

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1040

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Form 8812

• Discuss relevant state and local tax forms at this time.

• When it comes time to do their federal taxes, employees must make sure they use the right tax forms.

• Employees with no dependents and an income of less than $50,000 a year who are single or married and filing jointly, who earn less than $400 in interest or dividends, and who do not itemize deductions can use Form 1040EZ.

• Employees with an income of less than $50,000 a year who do not itemize deductions but do not qualify for using the 1040EZ form may be able to use Form 1040A.

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Choosing the

Right Tax Schedules

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Schedule A

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Schedule B

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Schedule C

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Schedule D

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Schedule EIC

• Discuss any relevant state and local tax schedules at this time.

• Employees must also make sure they use the right federal tax schedules when filing their returns.

• Schedule A must be used by employees who itemize deductions. • Schedule B must be used by employees who earn more than $400 in

interest from savings accounts, certificates of deposit, money markets, and other bank accounts. Employees who earn more than $400 in dividends from stock, bonds, and mutual funds must also complete Schedule B.

• Some employees may have a business of their own on the side. Nonemployee income of this kind must be reported on Schedule C. • Any capital gains or losses, such as from the sale of stock, must be

reported on Schedule D.

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Gathering the Necessary

Information and Documentation

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W-2 forms

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1099 forms

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Annual mortgage interest

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Real estate tax statements and receipts

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Last year’s state taxes

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Other receipts

• Once employees have the right forms, they need to gather all the information and documentation they will need to complete their returns accurately. Ideally, employees will have established a system for organizing and filing this information as it comes in during the year so that they will have it all at their fingertips come filing time.

• First of all, they will need their W-2 forms, copies of which they will need to attach to their federal and state tax returns.

• Banks, mutual funds, and other financial institutions issue a Form 1099 each year to employees who have interest income from savings or dividends from securities. If the total amount shown on the 1099s is more than $400, employees must report the income on Schedule B.

• Banks and mortgage companies provide their clients with a statement of mortgage interest for the year. Banks also provide statements for interest on home equity loans, some or all of which may be tax deductible. Employees with mortgages and home equity loans need this information if they itemize deductions.

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Preparing a Tax Return

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Read and follow

instructions carefully

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Write legibly

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Round off

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Sign and date your return

• You can share the following basic guidelines for preparing a tax return with your employees.

• Read and follow all instructions carefully. If there’s something you don’t understand, call IRS or the state tax office. Don’t guess.

• Write legibly if you fill out your tax form by hand. If you file electronically, type carefully and accurately.

• Round figures off to the nearest dollar.

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Preparing a Tax Return

(cont.)

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Complete all required forms and schedules

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Make sure your name and address are

correct on the peel-off label

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Include a check and payment voucher if

you owe taxes

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Keep a copy of your return

• Be sure to complete all required forms and schedules.

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Avoiding Common Errors

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Qualifying dependents

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Calculations

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Method for figuring taxes

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Social Security number

• IRS advises taxpayers to avoid these common errors.

• Make sure you correctly enter the name and Social Security number of each dependent claimed on the form.

• Double-check your math.

• Be sure to use the correct method for figuring taxes. Check the

instructions. Many taxpayers can use the tax tables, but others may need to use alternate methods.

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Avoiding Common Errors

(cont.)

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Current address

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Sign and date form

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W-2 forms

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Tax payments

• Make sure your current address is on your form. If you use the peel-off label and the address is incorrect, draw a line through the incorrect information and write in the correct address. If you move during the year, let federal and state tax authorities know your new address.

• Be sure to sign and date the form and enter your occupation. If you are married and filing jointly, your spouse must also sign and date the form and enter his or her occupation.

• Don’t forget to attach W-2 forms.

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Electronic Tax Returns

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Tax preparation software

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Free filing options

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Authorized e-filer providers

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State/federal e-file

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Direct deposit

• To find out if your state participates in the joint federal/state e- filing program, check the IRS website at www. irs.gov.

• Many of your employees may be able to take advantage of new electronic filing options for state and federal tax returns. E- filing has the advantage of being quick, easy, secure, and paperless. It can also cut the amount of time it takes to get a refund in half.

• Various tax preparation software packages are available on the market at a reasonable cost. • Some taxpayers may be able to take advantage of free tax preparation software available

through the IRS. To find out if they qualify for these free e- filing services, employees can log on to www. irs.gov or www. firstgov.gov.

• Employees can also e-file through authorized e- filer providers, including most professional tax preparation services.

• Many states are now participating in a joint federal/state e- filing program, making it possible to file federal and state tax returns together using e- file. The tax preparation software

automatically transfers relevant data from the federal income tax return to the state income tax return as the information is entered.

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Recordkeeping

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Tax forms and schedules

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W-2 forms

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W-4 worksheets

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Documentation

• Employees should keep all tax records for at least three years. This includes …

• Copies of all completed tax forms and schedules … • Taxpayer copies of W-2 forms …

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Free Tax Assistance

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Telephone

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Online

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Mail and e-mail

• Free tax assistance is available all year around from state and federal tax offices.

• IRS and state tax authorities provide toll- free numbers to help taxpayers with any questions they may have about their taxes. Employees can get the right phone number by checking the blue pages in their phone book. • Much tax information is also available online at the IRS website and

through the state’s website.

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Filing Extensions

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Four-month extension

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Form 4868

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Tax payments

• Explain your state’s rules and form for filing extensions.

• Employees who are unable to file their taxes by the April deadline for any reason may request a filing extension.

• Any taxpayer can get an automatic four- month filing extension on their taxes—for any reason—simply by asking for it before the April filing deadline.

• Employees who need a filing extension can fill out and mail in a Form 4868, or they can file for an extension by phone, online, or through a professional tax preparation service.

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Tips for Avoiding

Problems at Tax Time

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Make sure your W-4 is current and accurate

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Organize your tax records

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Make sure you use the right forms and

schedules

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Don’t procrastinate

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Take advantage of free tax assistance

• Now let’s review briefly by taking a look at some tips you can pass along to your employees for avoiding problems at tax time.

• To avoid having too much tax withheld, or too little and facing penalties, make sure the information on your W-4 form is up to date and accurate. • Time spent on tax preparation can be significantly reduced and you stand

less chance of making errors if you develop and maintain a system for organizing all the records and receipts you need to complete your return. • Make sure you use the right tax forms and schedules. If you’re not sure

which forms to use, call or go online and check with IRS or the state tax office.

• Don’t procrastinate. Resist the temptation to put off doing your taxes until the last minute. Your haste to meet the filing deadline may caus e you to overlook potential sources of tax savings and will likely increase your risk of making an error.

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Tips for Avoiding

Problems at Tax Time

(cont.)

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Double-check your math and data entries

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File your return electronically

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Have your refund deposited directly to

your bank account

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Request an extension if you need more

time to file

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Don’t panic if you can’t pay

• Before you mail your return, double-check your math and make sure you’ve entered all the required information.

• About 50 million Americans are now filing their returns electronically. Aside from ease of filing, IRS says e-file is the fastest and most accurate way to file a tax return. If you’re due a refund, the wait time for e- filers is half that of paper filers.

• Have your refund deposited directly to your bank account. This will speed up your refund and reduce the chance of theft. Just make sure the routing and account numbers you enter on your tax return are correct.

• If the clock runs out, request a filing extension to give you more time to prepare your return.