As the spirit of generosity is in the air, companies and employees need to know that holiday bonuses are considered supplemental wages and subject to taxes. Holiday bonuses are viewed by the IRS as compensation, just like paychecks, so taxes need to be withheld from your holiday bonus.
How Much are Holiday Bonuses Taxed?
Some of the taxes you will need to pay on your holiday bonus include:
Social security tax:
You pay social security tax on all compensation up to $132,900 in 2019. If you haven’t passed this threshold, then you can expect your employer to deduct 6.20% from your bonus for social security.
Medicare tax:
You can expect another 1.45% to be deducted from your holiday bonus for Medicare tax.
Federal income tax:
The IRS requires a set percentage of your bonus to be withheld when you receive it. This is because your holiday bonus is considered a supplemental income. Under tax reform, the federal tax rate for withholding on a bonus was lowered to 22%. This is lower than the federal income tax rate of 25%.
State income tax:
depending on which state you live in, state income tax will be withheld at the rate the state requires by law.
Retirement Plans (401k):
If you have requested that your employer contribute a portion of your wages to your retirement plan, then the rate at which you have set will be the same rate that will be taken out of your holiday bonus.
Ultimately, you should check with your employer about your holiday bonus and taxes. Your employer has the option to combine your regular paycheck and holiday bonus and withhold taxes on the whole amount. If your employer does this, it may result in a higher withholding than 22%.
If this is the case, don’t worry as you will eventually get some of the money back as part of your federal tax refund when you file your taxes.
How to Avoid Holiday Bonus Tax
Are there any ways to avoid paying tax on the bonus? No. And failing to report and pay taxes could lead to problems down the road. But there are ways to minimize or delay the impact. Here are three options:
Give a little more:
Employers can estimate the taxes an employee would have to pay on the bonus and add that to the total amount. That way, after taxes, the employee would get to keep the intended bonus amount. Obviously, this requires the employer to be more generous, which is not always possible.
Invest in the future:
Another option – that would avoid both payroll and income taxes – is to put the bonus into the employee’s 401K retirement plan. While employees would not actually receive a check during the holidays, they would also not have to pay taxes on that money until they withdraw it. In the meantime, that bonus could continue to grow.
Kick Off a Healthy New Year:
Employers can decide to award holiday bonuses in January and offer the option of placing the money in a Flexible Spending Account for healthcare. None of that money would be taxed, but the employee would have to use it on qualifying health or dependent care expenses.
If you’re an employee and your company will not offer any of the options above, then do your best to plan ahead and factor the taxes into your holiday budget. And if it makes you feel any better, giving is always better than receiving.
Looking for assistance with tax relief? Optima Tax Relief’s licensed professionals offer a range of tax services to help you. Reach out for a consultation today.
Many Americans show their support for their preferred political candidate by voting for or donating to the candidate’s political party. If you’re wondering if your financial contribution to a political campaign affects your taxes in any way, you’re not alone. Here’s everything you need to know about tax deductible contributions for political campaigns.
Are Political Contributions Tax Deductible for Businesses?
In short, yes. However, businesses are cautioned against deducting political contributions, donations, or payments on their tax returns.
Can I Deduct My Expenses If I Volunteer for a Political Campaign?
For those who volunteer for a political candidate, campaign, or political action committee, the time you volunteer will not be considered a tax deductible donation when filing your taxes.
Is it Considered a Tax Deduction When Supporting a Presidential Campaign?
When filing your taxes, you have the option to set aside $3 of your taxes to go towards the Presidential Election Campaign Fund when you complete your 1040 federal income tax return form. You can check the box to donate the funds and it will not affect your taxes or deductions.
Are There Limits to Political Contributions?
Taxpayers wanting to support a political candidate or party can contribute the following amounts:
Up to $2,800 per candidate and election.
Up to $10,000 to state, district, and local parties combined each year.
Up to $106,500 to a national political party, per account, and per year.
Are there any Political Donations that are Tax Deductible?
To qualify, you must be a registered non-profit organization that operates as a true charity to take a tax deduction for the donation.
If you volunteer, give cash or non-cash items to a 501(c)(3) organization, your donation may be a qualified tax-deductible charitable contribution. To confirm if the organization you gave a donation to is a 501(c)(3) organization, you can use the Tax-Exempt Organization Search Tool from the IRS.
Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.
The ongoing pandemic has caused many Americans to suffer financially due to a loss of jobs and businesses shutting down. Proposals for another coronavirus relief package are currently ongoing and should include another stimulus check distributed out to taxpayers as well as providing assistance to businesses that are finding it difficult to stay open.
Many taxpayers have switched from working in the office to working at home because of COVID. Most people don’t realize that there could be tax implications when working from home and could end up with a tax-time surprise if they’re not up to date on current tax laws.
Economic Impact Payment Extended for Non-Filers to November 21st
Taxpayers who don’t typically file their taxes and have yet to receive a stimulus check should register online on the IRS website in order to receive their economic impact payment. The IRS is allowing Americans to register online until November 21, 2020.
Taxpayers in Financial Hardship could Qualify for Stimulus Check
Many Americans are facing homelessness or financial hardship during the ongoing pandemic could qualify for a $1,200 Economic Impact payment. If your income threshold is below $12,200 or $24,000 if you’re married, you will need to register with the IRS by November 21st in order to receive your money.
Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.
For taxpayers who have been working with the IRS, it is important for them to know that they have a right to finality. Specifically those who have had their tax return(s) audited by the IRS should know that there is a Taxpayer Bill of Rights in place to protect them.
For taxpayers currently in the audit process, here is what you need to know about your right to finality:
Taxpayers have the right to know
The maximum amount of time they have to challenge the IRS’s position.
The maximum amount of time the IRS has to audit a tax year or collect a tax debt.
When the IRS has finished an audit.
The IRS typically has three years from the date that a taxpayer files their return to review for an additional tax for the year in question.
There are very few exceptions when it comes to the three-year rule. An exception would be considered if a taxpayer fails to file a return or files a fraudulent return. In either case, the IRS would have an unlimited amount of time to assess tax for the tax years in question.
The IRS generally has 10 years from the date of assessment to collect unpaid taxes. It is important for a taxpayer to know that the 10-year period cannot be extended unless a taxpayer enters into a payment plan or the IRS obtains court judgments.
A 10-year collection period may be suspended when the IRS cannot collect money because a taxpayer has an ongoing bankruptcy or there’s a collection due process proceeding involving the taxpayer.
A taxpayer will only be subject to one audit per tax year. The IRS has the ability to reopen an audit for a previous tax year if the IRS deems it necessary.
If you need tax help, contact us for a free consultation.
You may live or work abroad, but if you’re an American citizen or legal permanent resident, Uncle Sam still wants his rightful share of your income. Even if you reside outside the United States and receive earnings from a source located outside the country, you must report that income.
Depending on your circumstances, you may have to pay taxes both to the government where the company from which you earned your income is located and to the IRS. However, in some cases you may receive a foreign tax credit or tax exclusion for some or all of your foreign income.
The details of reporting foreign income vary according to individual circumstances. Nonetheless, there are general guidelines for nearly everyone who receives foreign income.
What is a Foreign Income Tax Credit?
If you are taxed by the country from which your income is earned and that country has established a tax treaty with the U.S., you may be able to claim the Foreign Income Tax Credit. This credit was designed to help you avoid double taxation and allows you to claim a credit for income tax that you have paid to a foreign government. The intended net result of the foreign tax credit is to ensure that the total amount you pay is no more than the highest result that you would have paid to a single government.
If you hire an accountant or a tax attorney to do your taxes, they will undoubtedly apply the Foreign Income Tax Credit on your income tax return. Some tax preparation software programs also include provisions to calculate the Foreign Income Tax Credit if it applies to you. If not, it would be advisable to choose a different tax preparation program.
What is the Foreign Earned Income Exclusion?
Do not confuse the Foreign Earned Income Exclusion with the Foreign Income Tax Credit. The Foreign Earned Income Exclusion is designed to allow American citizens and legal residents who reside outside the country to exclude most or all of the income earned from foreign sources from their federal income tax liability. The amount of the exclusion varies each year. For 2013, the maximum exclusion was $97,600 per individual taxpayer. Married couples could conceivably claim a larger exclusion.
The IRS has established strict guidelines for taxpayers who wish to claim the Foreign Earned Income Exclusion for a given tax year. Taxpayers must meet all the guidelines listed below to qualify for the exclusion.
Must have foreign earned income
Must have established a tax home in a foreign country
Must pass either the bona fide residence test or the physical presence test
The bona fide residence test requires that you are a bona fide resident in a foreign country for a period that includes at least a full tax year. The physical presence test requires you to be physically present in that foreign country for at least 330 days during a single 12-month period. You need not be present for 330 consecutive days, however.
What to do as a U.S. Government Employees Living Overseas
Income earned by employees of the U.S. government, including military personnel on active duty, does not qualify for the Foreign Income Credit or for the Foreign Earned Income Tax Exclusion – even if the income was earned overseas. However, spouses of government employees who earn income from foreign sources may be eligible for either the foreign tax credit or the foreign income exclusion. It is necessary to consult with an attorney or accountant who specializes in this subject with specific questions about your particular circumstances.
Foreign Income Earned While Living in the U.S.
If you reside within the U.S. full time, in most instances, you must report income earned from foreign sources on your federal income tax return, even if you are taxed on that income by the foreign government. This requirement pertains to earned and unearned income. Self-employed workers who earn income from foreign clients must also report their foreign earnings on their federal income tax returns.
How to Report Income with a W2 or 1099
The requirement to report foreign income applies even if you do not receive a W2 Form, Form 1099 or equivalent form from the foreign income source. It is your responsibility to provide an accurate calculation of your income by calculating payments from pay stubs, wire transfer records, dividend reports, bank statements, or PayPal monthly statements.
Once you calculate your foreign income, you must combine it with any domestic income you have earned in order to calculate the adjusted gross income to be included on your federal income tax return. Failure to report foreign income is considered tax evasion, and if you are caught, the consequences could be dire. You could be hit with hefty fines or even face jail time.
Need to speak with a licensed tax professional? Optima Tax Relief offers a comprehensive range of tax relief services. Schedule a consultation with one of our professionals today.
