Overfund Your Social Security Taxes?

We recently were asked:

What happens when taxpayers overfund social security taxes that are withheld from pay from multiple employers in the same calendar year?

Our answer:

Every employer is required to withhold social security taxes from an employee’s pay until that employee’s wages reach a max limit ($147,000 for 2022).  Withheld social security taxes are 6.2% of employee pay.  The employee’s withheld amount is submitted to the IRS each pay period.  The company matches that withheld amount as well, known as company payroll taxes, and submits their matching portion to the IRS each pay period.

Once an employee’s wages hit the max limit for the year, no additional social security taxes are withheld from pay and the company no longer has a payroll tax obligation pertaining to matching social security taxes for the employee for the remainder of the calendar year.  The social security max withholding per employee for 2022 is $9,114 ($147,000 X 6.2%).   Each employer is required to assume that they are an employee’s only employer and therefore each employer withholds the social security taxes from each employee’s pay to the max limit ($9,114).

An employee cannot ask his/her employer to stop social security taxes from being withheld from pay because that employee already reached the annual max withheld at a different employer within the year.  If a taxpayer has multiple employers and has withheld more than $9,114 in total for social security taxes from all employers over the span of the calendar year, the amount in excess of $9,114 for the taxpayer for 2022 will count as additional federal taxes withheld from their pay when the taxpayer prepares their personal income tax return.  However, the employer(s) matching portion that is submitted to the IRS as payroll taxes over the course of the year (from all employers) is not refunded back to any of the employers when an employee exceeds the annual withheld cap.

 

2023 New Year’s Resolution

At the start of the year, it’s a great time to make a resolution to take care of your financial health.  A good start?  Review your paystub, employer provided benefits and overall financial plan:

  • Will you turn age 50 in 2023? Include the $7,500 annual catch-up contribution in your 401k and 403b salary deferral.
  • Will you turn age 55 this year? Include the $1,000 annual catch-up contribution in your Health Savings Account (HSA) contribution.
  • Be sure to max your 401k salary deferral throughout the year, $22,500 ($30,000 with catch-up contribution).
    • If your salary is paid monthly, then set the deferral to $1,875 ($2,500 with catch-up) per monthly paycheck.
    • if your salary is paid bi-weekly, then set the deferral to $865 ($1,154 with catch-up) per bi-weekly paycheck.
  • Do you fund the max amount to your IRA each year? For 2023 the contribution limit has increased to $6,500 ($7,500 with catch-up contribution).
    • Budget $542 ($625) per month when funding your IRA monthly.
  • Have there been any life changing events this past year or expected in the next year – such as a change in marital status or the birth of a child.
    • Review your designated beneficiaries listed on your 401k/403b plan and IRA’s and adjust accordingly.
    • If you plan to enroll your newborn in a childcare facility, sign up for your company’s pre-tax Dependent Care Flexible Spending Account. The max amount you can fund annually to this employer sponsored plan is $5,000 per family.
    • Review if changes need to be made to your company sponsored health insurance plan or other employer benefits offered.
  • Do you typically owe significant taxes or receive a significant tax refund each year? You may want to consider adjusting your Form W-4 with your company’s HR.  Please contact your tax preparer if you need assistance making changes to your withheld taxes from pay.
  • Are you continually putting off funding your child’s 529 plan each year? Set up an amount to fund into your child’s 529 plan via monthly auto withdrawals from your bank account.
  • Make a plan to update or create your estate plan (will, healthcare proxy, beneficiary designations, etc.) with an estate attorney.
  • Will you be retiring this coming year or turning age 65?
    • If retiring this coming year, discuss with your financial planner when it would be best to begin taking Required Minimum Distributions (RMDs) from your retirement accounts and at what age to begin collecting social security benefits.
    • When turning age 65 you are eligible to sign up for Medicare. Your “Initial Enrollment Period” lasts for 7 months and begins 3 months before your 65th birthday and ends 3 months after the month your turn 65.

Reminder – 4th Q Estimated Taxes Due Jan. 17.2023

If you pay estimated tax payments, don’t forget that the 2022 4th quarter’s payment is due on Tuesday, January 17, 2023.

If you’re self-employed or have other income without any tax withholding, and you make quarterly estimated tax payments, this is the due date for your final quarterly payment for the 2022 tax year.

Want to pay online?  You can pay your Federal Estimates on the IRS’ website at https://www.irs.gov/payments

Work Opportunity Tax Credit Can Be Valuable To Practice Owners With Staff

We recently received this question from a client:  My newer dental assistant told me that she is a disabled veteran.  I knew she was a veteran, but I did not realize that she was considered “disabled.”  She also mentioned that this might be advantageous to me. What are the rules?

Sounds like this practice may be eligible for the Work Opportunity Tax Credit. More info is available at: https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit.

According to the rules, a “qualified veteran” is a veteran who meets any of the following conditions:

  • A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least a 3-month period during the 15-month period ending on the hiring date
  • Unemployed for periods of time totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date
  • Unemployed for periods of time totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date
  • Entitled to compensation for a service-connected disability and hired not more than 1 year after being discharged or released from active duty in the U.S. Armed Forces or
  • Entitled to compensation for a service-connected disability and unemployed for periods of time totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date

See IRS Notice 2012-13 for more detailed information.

And please note that there is a pre-screening requirement to be eligible for this tax credit as follows:

Pre-screening and Certification

An employer must pre-screen and obtain certification from the appropriate Designated Local Agency (referred to as a State Workforce Agency or SWA) that an employee is a member of a targeted group to claim the credit. To satisfy the requirement to pre-screen a job applicant, on or before the day that a job offer is made, a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by the job applicant and the employer. The Targeted Jobs Tax Credit (TJTC), which preceded WOTC, did not contain a pre-screening requirement. In enacting WOTC to replace the TJTC in 1996, Congress included the requirement that employers pre-screen job applicants before or on the same day the job offer is made. In doing so, Congress emphasized that the WOTC is a subsidy designed to incentivize the hiring and employment of individuals who are members of targeted groups.

On page two of Form 8850, there are four dates that must be provided before Form 8850 can be submitted to a SWA. They are the dates that the job applicant Gave informationWas offered jobWas hired, and Started the job.

To confirm that the employer pre-screens the job applicant, and obtains information provided by the job applicant on the basis of which the employer believes that the job applicant is a member of a targeted group, the date the applicant Gave information about being a targeted group member must be a date that is the same as, or before the date the applicant Was offered job. The dates that the job applicant Was hired and Started the job must be on or after the dates the applicant Gave information and Was offered job. Form 8850 including the dates entered on page two of Form 8850, must be signed under penalties of perjury and must be submitted to the SWA (or postmarked, if mailed) no later than 28 days after the date that the job applicant Started the job.

IRS announces Higher Standard Mileage Rates For 2023

From the IRS News Article – IR-2022-234, December 29, 2022:

The Internal Revenue Service today issued the 2023 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2023, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 5 cents per mile driven for business use, up 3 cents from the midyear increase setting the rate for the second half of 2022.
  • 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, consistent with the increased midyear rate set for the second half of 2022.
  • 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2022.

These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.

The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

It is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station. For more details see Moving Expenses for Members of the Armed Forces.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Taxpayers can use the standard mileage rate but generally must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.