I recently received this email from someone considering a new position:

“I haven’t worked a job that wasn’t under the table in nearly a decade, so forgive my ignorance on this matter. Basically, I’m thinking about accepting a part-time job that will be a W-2 situation. The hourly rate is $20, but I’m concerned that after taxes, it would only be about $16 per hour. I have an 18-year-old daughter, who will be starting college in the Spring. My question is: Will I still get the Earned Income Credit (EIC) on my tax return? I will only be making approx $15,000 per year or less with this job. Even without EIC, would I get a tax refund because my income will still be so low? I’m just not sure how taxes work. I imagine they’re all taken out as I go with a W-2, and then if I prepare a tax return, I get some or all of the money back? Last year my employer gave me a 1099 & I still got a refund.”

Income and payroll taxes can certainly be confusing, especially if the person is used to being paid “under the table”… I’ll do my best to explain it, though my ability to give personal tax advice is limited by how little I know of the taxpayer’s individual situation, and because there are liability issues if they’re not a client of mine. However, I felt my blog audience might benefit from the exercise.

First: there are two types of ways of being paid that are referred to as “under the table” — and given the small amount of information in the excerpt I received, I’m taking a guess that it’s the second kind.
1) Real “under the table” pay means that none of the money the worker receives is documented to the required federal and state agencies, and neither the employer nor the employee is reporting it and paying taxes.
2) An independent contractor situation is where an employer gives a 1099 to the employee, meaning that the employer did not pay taxes for the employee, and the employee gets stuck with all the taxes.

Neither of these is desirable for the employee/taxpayer. If it’s #1, then that means the neither the employee nor the employer paid into Social Security, Medicare, Unemployment or Workers’ Compensation… which means that when it’s time to claim from any of those programs, they’re out of luck. If it’s #2, then it means the employer isn’t paying their share of Social Security or Medicare — the employee has to pay all of it in the form of self-employment tax. And again, there’s no Unemployment tax or Workers’ Compensation insurance being paid, which is nice for the employer… but awful for the employee if they lose their job or get hurt.

Secondly, the Earned Income Credit has nothing to do with whether a taxpayer is paid as a W-2 employee or 1099 independent contractor. As long as a person is single with one child (which sounds like the situation here), they can make up to $40,320 and still qualify for the credit — the maximum credit is $3,461 in this case, for 2018.

The problem with truly getting paid under the table with the EIC is that some people lie and report less than they actually made, in order to make it look like they qualify under the limit. But remember, that’s #2 above. If the taxpayer is getting a 1099 or a W-2, there’s no difference with the credit either way.

Lastly, I know it seems like a $20/hr job only ends up paying $16/hr, but that’s not accurate. All the taxes that are being withheld are potentially eligible to be refunded at the end of the year when the employee/taxpayer prepares their tax return — if their tax liability ends up being less than they paid in, then they get the balance returned to them — the EIC generally increases that amount, but they may get a refund even if they don’t qualify for the EIC… in which case they may want to adjust their tax withholding for the following year to have less taken out with each paycheck. A tax preparer can help fill out the W-4 form to get this as close as possible when an employee takes on a new job.

The amazing part is that their employer is paying half of the Social Security and Medicare taxes for the employee! This doesn’t happen with a 1099, which is why usually an employer is taking advantage of their employees when they try to do that instead of using a W-2 form. When the taxpayer goes to claim Social Security and Medicare, the reason the system can afford it is all of the employers that pay part of these taxes on behalf of their employees, along with paying the Unemployment tax to the state and springing for Workers’ Compensation insurance. Being an employee is WAY better than being a 1099 contractor. And they’re both better than being truly paid “under the table”, since when those folks go to claim Social Security or Medicare, there’s nothing there for them… because they never paid into the system. It can come as a horribly unfortunate shock.

Here are a few good articles that back up what I just explained:

• https://www.care.com/homepay/being-paid-on-the-books-pays-off-1309131442
• https://www.care.com/homepay/how-to-get-your-employer-to-pay-you-over-the-table-1312161356
• https://www.consumerjungle.org/jungle-talk/under-the-table

I hope this is a helpful lesson on being an employee. It’s really a great way to go, because the employer is taking care of their staff… instead of taking advantage of them.

I’ve been meeting with clients lately who are extremely concerned about many of the confusing elements of the new tax law. And it is confusing — many CPAs are holding off on issuing any recommendations that aren’t reversible, waiting for a technical corrections bill and IRS guidance.

But one less confusing provision of the new tax law is clear — entertainment expenses are no longer deductible. Period.

The old law allowed a 50% deduction for entertainment expenses if business was discussed before, during, or afterwards. Starting January 1, 2018, unless the event has a direct business purpose, it cannot be deducted at all.

A few practical takeaways here:

1. If entertaining a client or sales connection, take them out to dinner instead of an event — and be careful that there is no entertainment component, like live music or theater.
2. Promotional events are still 100% deductible as marketing and advertising, so make sure your company has branding, signage, program recognition and advertising, etc. as a part of the gig.
3. There are rare situations where entertainment isn’t “Entertainment”, because a direct business purpose exists. For example, a luthier might take a potential client to hear a performance played on her instrument for the express purpose of illustrating the sound in a concert hall. The IRS might accept situations such as these as having a “direct business purpose” — but proper documentation will be essential.
4. This doesn’t mean you can no longer make business deals on the golf course or at the ball game — just make sure not to write them off on your tax return. There are other non-deductible expenses that are still a cost of doing business (such as parking tickets or other penalties), and Entertainment expenses should be tracked accordingly.

Source: The party’s over! Businesses can’t write off entertainment expenses under new tax law – MarketWatch

The IRS sent an “outreach” email to professional organizations today asking us to share this information with taxpayers.

The tax filing deadline has come and gone. If you didn’t file a tax return or an extension, but should have, you need to take action now. Here are some tips to help you:
• There is no penalty for filing a late return after the tax deadline if a refund is due.
• If you didn’t file and owe tax, file a return as soon as you can and pay as much as possible to reduce penalties and interest.
• For those who qualify, IRS Free File is still available on IRS.gov through October 15 to prepare and file returns electronically.
• If you don’t qualify for IRS Free File, you can use Free File Fillable Forms to e-file. This option uses electronic versions of IRS paper forms. It does some of the math, and works best for those who are comfortable doing their own taxes.
• You can get fast answers about your refund by using the Where’s My Refund? tool available on IRS.gov and through the IRS2Go mobile app. All you need is your Social Security number, tax filing status and the exact amount of your refund. Where’s My Refund? is updated no more than once every 24 hours, usually overnight, so you don’t need to check the status more often.
• If you owe taxes, you can view your balance, pay with IRS Direct Pay, by debit or credit card or apply online for a payment plan, including an installment agreement. Before accessing your tax account online, you must authenticate your identity through the Secure Access process. Several other electronic payment options are available on IRS.gov/payments. They are secure and easy to use. If you pay electronically, you’ll receive immediate confirmation when you submit your payment. Also, with Direct Pay and EFTPS, you can opt in to receive email notifications about their payments.
• If you need more time to pay your taxes, you can apply for an installment agreement with the IRS. The best way to apply is to use the IRS Online Payment Agreement tool. Once you complete the online process, you’ll receive immediate notification of whether your agreement is approved.
• No matter how or when you file, you should keep a copy of your tax return and all supporting documents.

The IRS E-file and Direct Pay systems are both down today, April 17th, Tax Day. It is an unhappy (and slightly grim) reminder to accountants to establish a policy — which I have held for the past 10 years or so — requiring all clients to submit signed e-file signature authorization forms by 6 pm on the day immediately prior to Tax Day. Personally, I insist on submitting all e-files before I go to bed that night (let’s be honest: by 2 or 3 am). I encourage you to do the same… next year!

In the meantime, this advice is being offered by CPA Practice Advisor. They will be posting updates throughout the day.

The credit card payment systems available through the IRS website appear to be functioning, however there is a fee associated with making those payments.

If the website stays down, taxpayers are still responsible for making payment by midnight tonight. An obvious alternative is to head to the Post Office.

The IRS has asked that efilers continue to proceed with their efiling, even if returns aren’t being accepted in short order.

Source: IRS Direct Pay is Down, Efile System also Down | CPA Practice Advisor