Archive for May, 2011|Monthly archive page

Are Tax Rates on the Rise?

Originally published in the Pacific Grove Hometown Bulletin

May 18, 2011

Earlier this week, I pulled out my crystal ball and posed a few questions about future personal federal income tax rates – strangely, it became suddenly murky.  So I pulled out my history books instead and drew some conclusions.  Let me set the stage and give you some history.  Keep in mind since 2003 our bottom tax bracket has been 10 percent and our top tax bracket has been 35 percent.

Wars have historically been fantastic reasons to raise taxes.  In fact, our first national income tax was created to raise money for the Civil War.  After the Civil War the tax was abolished.  Although income taxes were permanently revived in 1913 (some people still questioning its legitimacy from their prison cells) a logical pattern seemed to develop– when our country needed money, tax rates went up; when it did not need money, tax rates went down.

In 1913 the bottom bracket was at 1 percent and the top bracket was at 7 percent – perhaps a special introductory rate. During World War I the bottom bracket moved as high as 6 percent and the top bracket shot up to 77 percent!  Then brackets fell dramatically until the depression in the 1930s.  The government needed money so brackets shot back up flowing right into World War II where they peaked in 1944 and 1945 with the bottom bracket at 23 percent and the top bracket (income over $200K) at 94 percent!  Rates dropped after World War II, but stayed relatively high with the bottom bracket not dipping below 14 percent and the top bracket not dipping below 70 percent until after 1980.

During the Reagan and H. W. Bush years dramatic changes took place (Reaganomics).  The bottom bracket dropped as low as 11 percent and the top bracket dropped as low as 28 percent.  The brackets rose a little during the Clinton years and then dropped again when W. Bush took the reigns.

Tax brackets are not everything, but to the extent they are an indicator, it is difficult to say we are overtaxed.  With the exception of a three year period in the late 1980s, the tax rates on our bottom and top tax brackets are both at their lowest levels since before World War II.  We have maintained this course during our worst economic decline since the 1930s while simultaneously fighting a war and spending at all-time highs.  Our logical pattern seems to have been broken.  Our national debt has been rising substantially to pay for our record-low tax brackets and our loose wallet.  The longer we as Americans continue to cast our vote beyond our means the more painful it will be.

So from my perspective, tax rates only have one direction to go – up.  Next issue, I will discuss the national debt.

Travis H. Long, CPA is located at 706-B Forest Avenue, Pacific Grove, CA, 93950.  He can be reached at 831-333-1041.

Do I have to withhold taxes for my babysitter, maid, or gardener?

Originally Published in the Pacific Grove Hometown Bulletin

May 4, 2011

 

Do I have to withhold taxes for my babysitter, maid, or gardener?

Well…it depends.  If you ever plan on running for office you should really consider it, as the seeds for many embarrassing political moments found root in avoiding the so-called “Nanny Tax!”  Even if you do not have your heart set on politics there are good reasons you should take the time to consider if you are complying with the law.

General rules: If you pay household employees (defined later) a total between $750 and $999 during a quarter, you are required to withhold California State Disability Insurance (SDI).  If the amount is $1,000 or more you also must pay California Unemployment Insurance (UI), California Employment Training Tax (ETT), and Federal Unemployment Tax (FUTA).   If you pay over $1,700 during the year to a single employee, you are also required to withhold Social Security and Medicare taxes including your share as the employer.   You would have to file payroll tax returns and possibly Schedule H with your personal tax returns, and have the employee fill out a Form I-9 Employment Eligibility Verification.  These are all manageable tasks you can perform, but most people would rather spend their free time doing something else, and hiring a payroll service instead.

So what is a household employee?  This means you have a high degree of control over what, when, and how they do their job.  Examples: If your gardeners provide their own supplies, tools, set their own schedules and hold themselves out to the public as providing gardening services, they are not likely to be considered your employees.  If you hire a gardener from 8-10 on Tuesdays and Thursdays, tell him what you want him to focus on and he uses your tools, you likely have an employee.  A babysitter in your home is likely your employee, but if at their home maybe not.  The cleaning person using your supplies and equipment at a time you control is likely your employee whereas the person that shows with window cleaner in-hand, a vacuum, and a business card “sometime on Wednesday” – probably not.  If your household employee is under 18 and a student you are generally exempt.  If you call a company and they send their employee to babysit, clean, garden, etc. then the service provider is the employer and not you.  It is a gray area, and you may want to contact a tax professional to discuss.

So I have an employee, but who reports this anyway?  It may be true that many people do not report this correctly and not a lot of resources are devoted to enforcement, but that does not help you if you become that example of enforcement.  You have to ask yourself is it worth the potential trouble?  You would likely be held liable for all taxes including the employee’s share with interest and penalties.  If the individual files an unemployment claim or gets hurt at your home, you could be held liable for unemployment or disability payments.  And what if the worker is illegal – that has its own potential civil and criminal penalties.   Following the law does serve as a protection to you.

For more information, you can reference the guidance in IRS Publication 926-Household Employer’s Tax Guide and CA EDD-Household Employer’s Guide – both available online.

Travis H. Long, CPA is located at 706-B Forest Avenue, Pacific Grove, CA.  Travis can be reached at 831-333-1041.