Month: October 2018

If you’re thinking of starting a nonprofit organization, there are a few things you should know before you get started. First, is understanding how nonprofits work under state and federal law. For example, two things you should understand is that state law governs nonprofit status. Nonprofit status is determined by an organization’s articles of incorporation or trust documents while federal law governs tax-exempt status (i.e., exemption from federal income tax). Whether you’re starting a charity, a social organization, or an association here are the steps you need to take before you can apply for tax-exempt status.

1. Determine the type of organization.

Before a charitable organization can apply for tax-exempt status, it must determine whether it is a trust, corporation or association. Here is how each one is generally defined:

• A trust is defined as a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another. It is formed under state law.
• A corporation is formed under state law by the filing of articles of incorporation with the state. The state must generally date-stamp the articles before they are effective.
• An association is a group of persons banded together for a specific purpose. To qualify under section 501(a) of the Code, the association must have a written document, such as articles of association, showing its creation. At least two persons must sign the document, which must be dated. The definition of an association can vary under state law.

2. Gather organization documents.

Each application for exemption – except Form 1023-EZ – must be accompanied by an exact copy of the organization’s organizing document, which is generally one of the following:

• Articles of incorporation for a corporation
• Articles of organization for a limited liability company
• Articles of association or constitution for an association
• Trust agreement or declaration of trust for a trust

Organizations that do not have an organizing document will not qualify for exempt status. If the organization’s name has been legally changed by an amendment to its organizing documents, they should also attach an exact copy of that amendment to the application. State law generally determines whether an organization is properly created and establishes the requirements for organizing documents.

3. Understand state registration requirements

Next, you will need to take a look at your state’s registration requirements for nonprofits. State government websites have useful information for tax-exempt organizations such as tax information, registration requirements for charities, and information for employers.

4. Obtain Employer ID numbers.

Finally, once your organization is legally formed you will need to obtain employer id numbers (EINs) for your new organization. Organizations can apply for an EIN online, by fax, or by mail using Form SS-4, Application for Employer I.D. Number. International applicants may apply by phone.

Third parties can also receive an EIN on a client’s behalf by completing the Third Party Designee section. Don’t forget to have the client sign the form to avoid having to file a Form 2848, Power of Attorney, or Form 8821, Tax Information Authorization.

One final thing to note, is that nearly all organizations are subject to automatic revocation of their tax-exempt status if they fail to file a required return or notice for three consecutive years. Once an organization applies for an EIN, the IRS presumes the organization is legally formed and the clock starts running on this three-year period.

Questions about starting a nonprofit? Help is just a phone call away.

• By Leon Clinton
• October 16, 2018

With health care, housing, food, and transportation costs increasing every year, many retirees on fixed incomes wonder how they can stretch their dollars even further. One solution is to move to another state where income taxes are lower than the one they currently reside in.

But some retirees may be in for a surprise. While federal tax rates are the same in every state, retirees may find that even if they move to a state with no income tax, there may be additional taxes they’re liable for including sales taxes, excise taxes, inheritance and estate taxes, income taxes, intangible taxes, and property taxes.

In addition, states tax different retirement benefits differently. Retirees may have several types of retirements benefits such as pensions, social security, retirement plan distributions (which may or not be taxed by a particular state), and additional income from a job if they continue to work in order to supplement their retirement income.

If you’re thinking about moving to a different state when you retire, here are six things to consider before you make that move.

1. Income Tax Rates

Retirees planning to work part-time in addition to receiving retirement benefits should keep in mind that those earnings may be subject to state tax in certain states, as well as federal income tax if your combined income (individual) is more than $25,000. Combined income is defined as your adjusted gross income + nontaxable interest plus 1/2 of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you see this scenario in your future, it may be in your best interest to consider a state with low income tax rates (Pennsylvania, Arizona, or New Mexico for instance) or no income tax such as Florida, Nevada, Alaska, Washington state, or Wyoming.

2. Income Tax on Retirement Income

Income tax on pension income varies for each state. Some states do not tax it at all. In other states, a portion of pension income is exempt, and still other states tax pension income in its entirety. Remember, however, that state tax laws, like federal tax laws, are always changing. Call if you have any questions about tax law changes in your state.

3. Tax on Social Security

In 2018, thirteen states tax social security income in addition to taxing social security income at the federal level. Among them are Colorado, Connecticut, Montana, New Mexico, Vermont, and West Virginia.

4. State and Local Property Taxes

Despite a decline in property values, property taxes have not decreased for most homeowners. Some states, however, offer property tax exemptions to retirees who are homeowners and renters. Again, this varies by individual state. Please call if you have any questions about your state or the state you are planning to move to.

5. State and Local Sales Taxes

State and local sales taxes may or may not be a factor in the overall decision about where you decide to retire, but keep in mind that only five states, Alaska, Delaware, Montana, New Hampshire, and Oregon, do not impose any sales or use tax.

6. Estate Taxes

Estate tax may or may not matter, depending on your estate and whether you care about what happens to your estate after you die. Like other state taxes, estate tax varies depending on which state you reside in. In fourteen states, there is a tax on estates below the federal threshold amount ($11.18 million in 2018). Hawaii uses the same threshold amount as the IRS when figuring federal estate tax, and New York will do so starting in 2019. Many states have no estate tax whatsoever including North Carolina, Delaware (repealed in 2018), Kansas, Oklahoma, and Arizona.

The bottom line

When it comes to retirees, relocating, and taxes there are a number of factors to consider– including the overall tax burden. And, as you’ve read here, not all states are created equal. If you’re thinking about retiring to another state, please contact the office and make an appointment with a tax professional who will help you figure out which state fits your particular circumstances.

• By Leon Clinton
• October 14, 2018

If you employ someone to work for you around your house, it is important to consider the tax implications of this type of arrangement. While many people disregard the need to pay taxes on household employees, they do so at the risk of paying stiff tax penalties down the road.

Who Is a Household Employee?

If a worker is your employee, it does not matter whether the work is full-time or part-time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily or weekly basis or by the job.

If the worker controls how the work is done, the worker is not your employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business.

Also, if an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.

Example: You pay Jane to babysit your child and do light housework four days a week in your home. Jane follows your specific instructions about household and childcare duties. You provide the household equipment and supplies that Jane needs to do her work. Jane is your household employee.

Example: You pay Roger to care for your lawn. Roger also offers lawn care services to other homeowners in your neighborhood. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither Roger nor his helpers are your household employees.

Can your Employee Legally Work in the United States?

When you hire a household employee to work for you on a regular basis, he or she must complete USCIS Form I-9 Employment Eligibility Verification. It is your responsibility to verify that the employee is either a U.S. citizen or an alien who can legally work and then complete the employer part of the form. It is unlawful for you to knowingly hire or continue to employ a person who cannot legally work in the United States. Keep the completed form for your records. Do not return the form to the U.S. Citizenship and Immigration Services (USCIS).

Do You Need to Pay Employment Taxes?

If you have a household employee, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax or both. If you pay cash wages of $2,100 or more in 2018 to any one household employee, then you will need to withhold and pay Social Security and Medicare taxes. Also, if you pay total cash wages of $1,000 or more in any calendar quarter of 2017 or 2018 to household employees, you are also required to pay federal unemployment tax.

If neither of these two contingencies applies, you do not need to pay any federal unemployment taxes; however, you may still need to pay state unemployment taxes. Please contact the office if you’re not sure whether you need to pay state unemployment tax for your household employee. A tax professional will help you figure out whether you need to pay or collect other state employment taxes or carry workers’ compensation insurance.

Note: If you do not need to pay Social Security, Medicare, or federal unemployment tax and do not choose to withhold federal income tax, the rest of this article does not apply to you.

Social Security and Medicare Taxes

Social Security taxes pays for old-age, survivor, and disability benefits for workers and their families. The Medicare tax pays for hospital insurance. Both you and your household employee may owe Social Security and Medicare taxes. Your share is 7.65 percent (6.2 percent for Social Security tax and 1.45 percent for Medicare tax) of the employee’s Social Security and Medicare wages. Your employee’s share is 6.2 percent for Social Security tax and 1.45 percent for Medicare tax.

You are responsible for payment of your employee’s share of the taxes as well as your own. You can either withhold your employee’s share from the employee’s wages or pay it from your own funds.

Do not count wages you pay to any of the following individuals as Social Security and Medicare wages:

1. 1. Your spouse.
   2. Your child who is under age 21.
   3. Your parent.

Note: However, you should count wages to your parent if they are caring for your child and both of the following apply:

(a) your child lives with you and is either under age 18 or has a physical or mental condition that requires the personal care of an adult for at least four continuous weeks in a calendar quarter; and

(b) you are divorced and have not remarried, or you are a widow or widower, or you are married to and living with a person whose physical or mental condition prevents him or her from caring for your child for at least four continuous weeks in a calendar quarter.

1. 1. An employee who is under age 18 at any time during the year.

Note: However, you should count these wages to an employee under 18 if providing household services is the employee’s principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.

Also, if your employee’s Social Security and Medicare wages reach $128,400 in 2018, then do not count any wages you pay that employee during the rest of the year as Social Security wages to figure Social Security tax. You should, however, continue to count the employee’s cash wages as Medicare wages to figure Medicare tax. Meals provided at your home for your convenience and lodging provided at your home for your convenience and as a condition of employment are not counted as wages

As you can see, tax rules for hiring household employees are complex; therefore, professional tax guidance is highly recommended. This is definitely an area where it’s better to be safe than sorry. If you have any questions at all, please contact the office to set up a consultation.

• By Leon Clinton
• October 11, 2018