Small business owners are reminded that tax reform legislation lowered the backup withholding tax rate to 24 percent. In addition, the withholding rate that usually applies to bonuses and other supplemental wages was also lowered to 22 percent. As such, employers should have their employees check their withholding.

Backup withholding. Under the Tax Cuts and Jobs Act (TCJA) of 2017, the backup withholding tax rate dropped from 28 percent to 24 percent. This new rate was effective on January 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. When backup withholding applies, payers must backup withhold tax from payments not otherwise subject to withholding. This includes most payments reported on IRS Form 1099, such as interest, dividends, payments to independent contractors and payment card and third-party network transactions.

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.

To stop backup withholding, the payee must correct any issues that caused it. They may need to give the correct TIN to the payer, resolve the under-reported income and pay the amount owed, or file a missing return. Please call if you need more information about backup withholding.

Payers report any backup withholding on Form 945, Annual Return of Withheld Federal Income Tax. Forms 945 are generally due to the IRS by January 31. Payers also show any backup withholding on information returns, such as Forms 1099, that they furnish to their payees and file with the IRS.

Bonuses and other supplemental wages. The TCJA also lowered the tax withholding rates to 22 percent. This rate normally applies to bonuses, back wages, payments for accumulated leave and other supplemental wages. In most cases, the new rate was effective on January 1, 2018. Please note that for payments exceeding $1 million, the rate is 37 percent.

If you have any questions about tax withholding rates, please don’t hesitate to contact the office today.

Be sure to tell the IRA trustee that the contribution is for 2018. Otherwise, the trustee may report the contribution as being for 2019 when they get your funds.

Generally, you can contribute up to $5,500 of your earnings for tax year 2018 (up to $6,500 if you are age 50 or older in 2018). You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.

Traditional IRA: You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer’s pension plan.

Roth IRA: You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Saving for retirement should be part of everyone’s financial plan and it’s important to review your retirement goals every year in order to maximize savings. If you need help figuring out which retirement strategies are best for your situation, give the office a call.

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