The Internal Revenue Service has issued a few reminders to small business owners to go along with this week’s observance of National Small Business Week.
The occasion has been used for some 50 years to recognize the contributions of America’s entrepreneurs and small business owners.
The IRS reminds small businesses that recent changes in the tax code have lowered the backup withholding tax rate four points to 24 percent, and the withholding rate usually applied to bonuses and other supplemental wages to 22 percent.
Under a key change made by the Tax Cuts and Jobs Act (TCJA) enacted in December 2017, the backup withholding tax rate dropped from 28 percent to 24 percent, effective Jan. 1, 2018. Backup withholding applies in various situations, including when a taxpayer fails to supply their correct taxpayer identification number (TIN) to a payer. Usually, a TIN is a Social Security number (SSN), but in some instances, it can be an employer identification number (EIN), individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN). Backup withholding also applies, following notification by the IRS, where a taxpayer under-reported interest or dividend income on their federal income tax return.
For more information on Backup Withholding, IRS Publication 1281, Backup Withholding for Missing and Incorrect Name/TINS, is available on the IRS website. It’s designed help any employer who’s required to impose backup withholding on their payees. Among other things, the publication features answers to more than 30 frequently asked questions.
Payees may be subject to backup withholding if they:
- Fail to give a TIN,
- Give an incorrect TIN,
- Supply a TIN in an improper manner,
- Under-report interest or dividends on their income tax return, or
- Fail to certify that they’re not subject to backup withholding for under-reporting of interest and dividends.
In order to stop backup withholding, the employee has to correct any issues that caused the action in the first place. This could include giving the correct TIN to the employer, resolving under-reported income and paying the amount owed, or filing a missing return.
Three resources are available: Publication 505, Tax Withholding and Estimated Tax, Publication 1335, Backup Withholding Questions and Answers, and the IRS’ Backup Withholding page online.
Bonuses and Supplemental Wages
The new tax legislation also lowered withholding rates applicable to bonuses, back wages, payments for accumulated leave and other supplemental wages. While most of these will be withheld at 22 percent now, payments exceeding $1 million will continue to be withheld at 37 percent.
Publication 15, Employer’s Tax Guide, has details.
Time for a Paycheck Checkup?
The IRS recommends employees do a paycheck checkup, using the Withholding Calculator on IRS.gov. That’s also prudent for someone who has a sideline business but still gets wages from another employer – or a business owner, such as a corporate officer, who gets wages from their business.
The easiest way to do a Paycheck Checkup is to use the online Withholding Calculator. Then, based on its recommendations, fill out and submit a new Form W-4. In many instances, this means claiming fewer withholding allowances or having an extra flat-dollar amount withheld from an employee’s pay.
Taxpayers who itemized in the past who now choose to take advantage of the increased standard deduction, as well as two-wage-earner households, employees with non-wage sources of income and those with complex tax situations, are at most risk of having too little tax withheld from their pay. Boosting tax withholding as early as possible in 2019 is the best way to head off another tax-time surprise next year. Anyone who had an important life change, such as getting married, getting divorced, buying a home or having a baby should also consider a Paycheck Checkup.