More and more attention is being paid to taxpayers hiding assets offshore to purposely evade taxation.  At the same time, many people don’t realize that U.S. citizens and permanent U.S. residents are taxed on their worldwide income.  These people inadvertently avoid paying tax on their foreign income.

Taxpayers must now comply with two separate reporting requirements for offshore assets.  The first requirement is the Foreign Bank and Financial Account Report (FBAR).  The second is the Foreign Account Tax Compliance Act (FATCA).  This post will focus on the FBAR requirements.

The Foreign Bank and Financial Accounts Report (FBAR)

If you have:

• a financial interest in OR
• signatory authority over

a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account to the IRS annually by filing Form TD F 90-22.1.

When you have a domestic financial account, the domestic financial institution holding the funds will report interest, dividend, capital gain, and other taxable income to the IRS.  Because foreign financial institutions may not be subject to the same reporting requirements, the IRS requires taxpayers with foreign accounts to report their holdings of foreign financial accounts.

The FBAR is also a tool to help the U.S. Government identify people who may be using foreign financial accounts to circumvent U.S. law.  Investigators use FBARs to help identify or trace funds used for illegal purposes or to identify unreported income held or earned offshore.

YOU MUST FILE A FBAR IF YOU ARE A U.S. CITIZEN OR PERMANENT RESIDENT AND:

• YOU HAD A FINANCIAL INTEREST IN OR SIGNATORY AUTHORITY OVER AT LEAST ONE FINANCIAL ACCOUNT LOCATED OUTSIDE OF THE U.S.; AND
• THE TOTAL VALUE OF ALL FOREIGN ACCOUNTS EXCEEDED $10,000 AT ANY TIME DURING THE CALENDER YEAR TO BE REPORTED

The foreign account must be reported even if the account produces no taxable income.

The FBAR must be received by IRS on or before June 30 of each year.

Penalties for Not Filing FBAR:

A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation.  If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Willful violations may also be subject to criminal penalties

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

The Affordable Care Act requires certain employers to provide affordable health insurance coverage to their full time employees.  The Act defines full time as 30 hours per week.  The 30 hours per week standard is more complex than you would think because several different types of employees work varying hours per week.

The IRS has written 80 pages of regulations to “help” employers determine which of their employees are full time.  There are separate rules for existing employees and for newly hired employees.  This post will address the rules for determining the full time status of newly hired employees.

Newly Hired Employee Reasonably Expected to Work Full Time

If a new employee is reasonably expected to work at least 30 hours per week, the employer must provide that employee with health insurance coverage by the end of the employee’s initial three full calendar months of employment.  The employer will not be subject to a penalty for not providing health insurance coverage during the initial three months of employment.  However, if the employer does not provide health insurance coverage after the initial three months of employment, the employer will be subject to a penalty not only for subsequent months, but also for the initial three month period.

Newly Hired Employees Working Varying Hours per Week

If an employer cannot determine if a newly hired employee will work at least 30 hours per week at the hire date, the employer must examine the employee’s total hours worked during an initial measurement period.  The initial measurement period must begin on any date between the employee’s start date and the first day of the first calendar month following the employee’s start date.

The initial measurement period must last at least three months.  The employer determines the employee’s average hours worked per week during this measurement period.

Employee is Full Time

If the employee averages at least 30 hours per week, the employer must provide the employee health insurance coverage for a subsequent stability period.  The stability period must be at least six months long, must at least be as long as the initial measurement period, and must be as long as the stability period offered to existing employees

In addition to the initial measurement period (where the employer examines the average hours per week of the employee) and the stability period (where the employer provides health insurance coverage to the employee), the employer can have an administrative period in which the employer actually examines the hours worked during the measurement period, notifies employees of their eligibility, and enrolls employees in coverage.  The administrative period cannot exceed 90 days.

Employee is Not Full Time

If the employee does not average at least 30 hours per week during the initial measurement period, the employer does not have to provide health insurance coverage to the employee during the stability period.  The stability period for a non-full time employee can be no more than one month longer than the initial measurement period, and cannot exceed the remainder of the standard measurement period used for existing employees.

Examples

The following examples have the following facts:  ABC Corp has a measurement period of November 1 to October 31 each year to test existing employees.  It has an administrative period of November 1 to December 31 to conduct testing and enroll eligible employees.  The stability period during which it provides health insurance coverage is January 1 to December 31.

For newly hired employees, ABC Corp uses an eight month initial measurement period, 60 day administrative period, and a one year stability period.

Example 1:  ABC Corp hires Joan on May 1, 2013.  Joan’s initial measurement period runs from May 1, 2013 to December 31, 2013.  During the administrative period from January 1, 2014 to February 28, 2014, it is determined that Joan averaged less than 30 hours per week during the initial measurement period and ABC Corp does not have to provide her with health coverage during the stability period.  Here, the initial stability period must end before the earlier of:

• November 30, 2014 (the stability period for non-full time employees cannot exceed the length of the initial measurement period plus one month.  Here the initial measurement period is eight months, so the stability period cannot exceed nine months.  The stability period begins after the sixty day administrative period ends on February 28, 2014
• October 31, 2014 (the end of the standard measurement period for existing employees). 

Example 2:  Same facts as example 1 except that Joan averages more than 30 hours per week during the initial measurement period.  ABC Corp must offer health insurance coverage to Joan for the one year stability period beginning March 1, 2014 and ending February 28, 2015.

Transitioning from a New Employee to an Existing Employee

A new employee generally starts working after a standard measurement period begins.  This is why an initial measurement period that begins on the employee’s start date applies for new employees.  After a new employee has been working for a while, they will be employed at the beginning of a standard measurement period and will be tested under the rules for existing employees.  However, if the employee qualified as a full time employee during the initial measurement period, her health insurance coverage cannot be terminated before the end of the initial stability period.

Example:  Same facts as Example 2 above—Joan is a full time employee during the initial measurement period.  ABC Corp must provide Joan with health insurance during a one year stability period beginning March 1, 2014 and ending February 28, 2015.

Joan is now employed during the standard measurement period beginning November 1, 2013 and ending October 31, 2014.  If Joan does not average 30 hours per week during this standard measurement period, ABC Corp would not have to provide her with health insurance coverage for the one year stability period beginning January 1, 2015.  However, because Joan average at least 30 hours per week during her initial measurement period, ABC Corp must continue to offer health insurance coverage to Joan during her one year initial stability period ending February 28, 2015.   ABC Corp may discontinue her health insurance coverage on March 1, 2015.

If Joan averaged at least 30 hours per week during the standard measurement period, she would qualify for health insurance coverage during the one year standard stability period beginning January 1, 2015 and December 31, 2015.  Here, her coverage would be extended from February 28, 2015 through December 31, 2015.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

The penalty for employers with 50 or more full time employers who don’t offer affordable health insurance to their full time employees takes effect in 2014.  30 hours per week is full time.  On a monthly basis, employers will have to determine if they have 50 or more full time employees.  For this purpose, full time employees are determined on a full time equivalent basis.

Example:  ABC Corp has 45 employees who work 30 hours per week.  It also has 10 part time employees who work 15 hours per week.    To determine the number of full time equivalents:  multiply 10 employees by 15 hours per week and divided by 30.  This equals 5 full time equivalents, which is added to the 45 actual full time employees.  Since this employer has 50 full time employees, it is subject to the penalty.

However, the employer only has to provide health insurance for employees who actually work 30 hours per week.  It does not have to provide health insurance for part time employees.

Figuring out which employees work 30 hours per week is more difficult that you would think since employees’ working hours may change from week to week.  Additionally, some employees may leave for a period of time and then come back.  The IRS has provided procedures that employers can use to determine if an employee is a full time employee.  There are different tests for existing employees and for new employees.  This post will cover the test for existing employees.

The procedures involve three main time periods:

1. Measurement Period:  Employees who average 30 or more hours per week during a measurement period are full time employees who must be offered health insurance during the subsequent stability period.
2. Stability Period:  This is the period of time during which the employee must be offered health insurance.
3. Administrative Period:  This period of time exists between the measurement period and the stability period.  Employers will need time after the end of a measurement period to determine which employees are full time employees, to notify these employees of eligibility, and to complete necessary administrative tasks such as enrolling the employees in health coverage.

Measurement Period

The measurement period must last between 3 and 12 months.  The employer determines when the measurement period begins and ends.  Additionally, the employer may change its stability period length and period from year to year, but generally cannot change a measurement period once it begins.

Example:  XYZ Corp uses a five month stability period of April 1 to August 31 of 2013.  In 2014, it may use a six month period between April 1 and September 30.  However, it would have to change the measurement period before April 1, 2014 because it cannot change a measurement period once it begins.

An employer can use measurement periods that differ in length or that differ in start/end dates for the following categories of employees:

• Salaried employees and hourly employees
• Employees whose primary places of employment are in different states
• Collectively bargained employees and noncollectively bargained employees
• Each group of collectively bargained employees covered by separate collective bargaining agreements

Stability Period

Each employee who is determined to be a full time employee during the measurement period must be offered health insurance coverage during the stability period.  A stability period must last at least 6 months, but cannot be shorter than the measurement period.  The employer can change a stability period from one year to the next, but it cannot change a stability period once it has begun.

An employer can use stability periods that differ in length or that differ in start/end dates for the following categories of employees:

• Salaried employees and hourly employees
• Employees whose primary places of employment are in different states
• Collectively bargained employees and noncollectively bargained employees
• Each group of collectively bargained employees covered by separate collective bargaining agreements

An employee who is a full time employee during the measurement period must be offered health insurance throughout the stability period regardless of the number of hours the employee works during the stability period.

Example:  ABC Corp has a measurement period of April 1, 2013 to October 1, 2013.  It then has a ninety day administrative period.  It has a one year stability period of January 1 to December 31.  Timmy averages 30 hours per week during April 1, 2013 to October 31, 2013, and is therefore a full time employee during the measurement period.  During the 90 day administrative period from October 2, 2013 to December 31, 2013, ABC Corp tests which employees average 30 hours or more, and enrolls eligible employees in health coverage which lasts during the one year stability period from January 1, 2014 to December 31, 2014.

Beginning February 1, 2014, Timmy starts working 20 hours per week consistently.  Even though Timmy is now a part time employee, his health coverage must last throughout the entire one year stability period from January 1, 2014 to December 31, 2014. 

However, during the 2014 measurement period, Timmy will only average 20 hours per week.  He will not have to be offered coverage during the 2015 stability period.

Employees Who Leave & Come Back

When employees leave for a period of time and then resume employment, it is questionable whether they should be treated as an existing employee (rules discussed in this blog) or a new employee (rules discussed in a future blog).

If an employee does not work for at least 26 consecutive weeks and then returns to work, the employer can treat the employee as a new employee.  Any hours the employee worked during the measurement period prior to the leave do not count (i.e., the hours are reset when the employee resumes employment).

If an employee is on leave (or quits) and resumes employment within 26 weeks, the employer treats the employee as an existing employee and hours worked within the measurement period before the leave are counted.  Since the employee will have zero hours during the period of absence, the period of absence will lower the employee’s average hours worked per week. If the absence is long enough, the employee’s average hours per week will likely fall below 30, and the employee will be ineligible for health coverage.

However, for special unpaid leave, the employer excludes the absence period from the average hour calculation so that the average hours may not fall below 30.  Special unpaid leave is unpaid time from work subject to the Family Medical Leave Act, jury duty, or under the Uniformed Services Employment and Reemployment Rights Act (USERRA).

 
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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Household employees include caretakers, housekeepers, maids, babysitters, gardeners, and others who work in or around your private residence as your employee.

Social Security and Medicare Taxes (Federal Insurance Contributions Act – FICA)

If you pay a household employee cash wages of more than the amount specified by law in a tax year ($1,800 for 2012 and 2013), you generally must withhold Social Security and Medicare taxes from all cash wages you pay to that employee. You should withhold 7.65% of the gross wages paid to the employee to cover Social Security and Medicare taxes.  If you decide to pay the employee’s Social Security and Medicare taxes, this amount will be additional income to the employee.

HOWEVER, DO NOT withhold or pay Social Security and Medicare taxes from wages you pay to:

• Your spouse,
• Your child who is under age 21,
• Your parent, unless an exception is met; or
• An employee who is under age 18 at any time during the year, unless performing household work is the employee’s principal occupation. If the employee is a student, providing household work is not considered to be his or her principal occupation.

If you do withhold Social Security & Medicare taxes, pay the amount you withhold to the IRS with an additional 7.65 percent for your share of the taxes. If you pay your employee’s share of social security and Medicare taxes from your own funds, the amounts you pay on your employee’s behalf count as additional wages for purposes of the employees’ income tax. However, they are not counted as Social Security and Medicare wages or as wages for federal unemployment tax.

Federal Income Tax Withholding

You are not required to withhold federal income tax from wages you pay to a household employee. However, if your employee asks you to withhold federal income tax and you agree, you will need a completed Form W-4, Employee’s Withholding Allowance Certificate from your employee.

Form W-2, Wage and Tax Statement

If you must withhold and pay social security and Medicare taxes, or if you withhold federal income tax, you will need to complete Form W-2, Wage and Tax Statement, for each employee. You will also need a Form W-3, Transmittal of Wage and Tax Statement.  To complete Form W-2 you will need to apply for an employer identification number (EIN) and report your employees’ social security numbers.

Federal Unemployment Tax Act (FUTA)

If you paid cash wages to household employees totaling more than $1,000 in any calendar quarter during the calendar year or the prior year, you generally must pay federal unemployment tax (FUTA) tax on the first $7,000 of cash wages you pay to each household employee. However, do not count wages paid to your spouse, your child who is under the age of 21, or your parent. The amounts you pay to these individuals are also not considered wages subject to FUTA tax.

Michigan Unemployment Tax

Household employment in a private home is subject to Michigan unemployment tax if the employee is paid $1,000 or more in any calendar quarter of the current or proceeding calendar year for such service.  You will have to register as an employer with the Michigan Unemployment Insurance Agency.

Schedule H, Household Employment Taxes

If you pay wages subject to FICA tax, FUTA tax, or if you withhold federal income tax from your employee’s wages, you will need to file Schedule H, Household Employment Taxes. Attach Schedule H to your individual income tax return. If you are not required to file an income tax return, you must still file Schedule H to report household employment taxes.

Estimated Tax Payments

If you file Schedule H along with your Form 1040, you can avoid owing taxes with your return if you pay enough tax before you file your return to cover both the employment taxes for your household employee and your income tax. If you are employed, you can ask your employer to withhold more federal income tax from your wages during the year. You can also make estimated tax payments to the IRS during the year using Form 1040-ES.

You may have to pay an estimated tax underpayment penalty if you do not pay your household employment taxes during the year.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional be

Background

Beginning in 2013, there is a 3.8% Medicare tax that applies to net investment income of individuals, estates, and trusts.  Net investment income includes interest, dividends, annuities, royalties, rents, and certain business income.  The tax applies to business income (including gain on the sale of these businesses) when the owner does not materially participate in the business (i.e., the business is a passive activity and the owner’s involvement is more similar to an investor rather than to an active business owner).   The tax also applies to businesses dealing in financial instruments or commodities.

The tax applies to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a threshold amount ($250,000 for joint files, $125,000 for married filing separately, and $200,000 for other filers).

The Tax Does NOT Apply to Retirement Income

Investment income does not include distributions from tax-favored retirement plans including:

• qualified pension, stock bonus, or profit-sharing plans
• IRAs
• Roth IRAs
• qualified annuities under Section 403(a)
• tax sheltered annuities under Section 403(b)
• Deferred compensation plan of a State or local government or of certain tax-exempt organizations

The exemption from the 3.8% Medicare tax applies to both actual and deemed distributions.  Actual distributions are amounts “actually distributed” from a qualified plan or arrangement.

Deemed distributions are not actual distributions, but are treated as distributions for tax purposes.  Examples include:

• 401(k) loans treated as distributions
• Conversions of IRAs to Roth IRAs
• Assignments or pledges of retirement plans that are treated as distributions

It is important to note that while retirement income is not subject to the 3.8% Medicare tax, it is taken into account for purposes of determining whether the taxpayer’s modified adjusted gross income is high enough so that the taxpayer’s other investment income becomes subject to the tax.

Example:  John, age 65, is single, has wages of $150,000, takes an IRA distribution of $60,000, and has interest and dividend income of $20,000.

The threshold amount for a single person is $200,000.  Even though John will not pay the 3.8% Medicare tax on his $60,000 IRA distribution, it is still taken into account to determine if John’s modified adjusted gross income meets the threshold income amount.

John’s modified adjusted gross income equals the sum of all his income–$230,000. 

The tax applies to the lesser of

(1)    net investment income ($20,000 dividend and interest income) OR

(2)    the excess of modified adjusted gross income over the $200,000 threshold amount for a single filer ($30,000)

John will therefore pay the 3.8% Medicare tax on $20,000.  The tax will be $760.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.