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Daily Archives: March 27, 2025

Payroll Tax

Posted on March 27, 2025 - 1:55 pm by

What Is Payroll Tax? 

Payroll tax is a tax that employees and employers pay for their salaries, wages, or tips. For employees, employers withhold taxes from employees’ paychecks and pay to the government. State, federal, and local income taxes are included under these taxes. Additionally, the employee’s share of Social Security and Medicare taxes, which is known as the FICA (Federal Insurance Contributions Act) tax, also consists of and must be paid to the federal government. 

Employers pay their share of payroll tax directly. They pay not only state unemployment taxes but also their part of FICA. The general fund of the US Treasury receives the federal income tax. Generally, federal authorities and some state governments collect the payroll taxes. So, some state governments impose income taxes as well.  

By using payroll tax, the government spends some dedicated programs, such as compensation for workers, social work, or healthcare. Local government also utilizes this payroll tax by improving the road condition or infrastructure. 

 

How much is payroll tax? 

In the US, both employees and employers have to pay 7.65% each as a portion of their Medicare and Social Security. Employees need to pay 1.45% for Medicare and 6.2% for Social Security out of their share of 7.65%. While the total Medicare tax is 2.9%, the Social Security tax amount is 12.4%, which is paid by employees and employers combined. There is no particular rate of unemployment tax. The self-employment tax rate (15.3%) is equal to Medicare and Social Security. 

 

Who Needs to Pay Payroll Tax? 

Employees, as well as employers, pay payroll tax. While payroll tax is deducted from the salaries or wages of the employees, employers pay directly to the federal government. 

 

Limits of wages for payroll tax: 

There is no wage limit for payroll tax except the Social Security tax. In 2025, the base limit is $176,100. 

 

Certified Public Accountants (CPA) 

Posted on March 27, 2025 - 1:53 pm by

What Is a Certified Public Accountant (CPA)? 

A CPA, or certified public accountant, is a licensed accounting professional who has cleared the examination organized or administered by the state’s Board of Accountancy. The CPA license is only granted when the professionals meet certain education, experience, and other requirements. The state CPA exam is created according to the guidelines of the AICPA (the American Institute of Certified Public Accountants).  

Accountants who not only hold a bachelor’s degree but also have professional experience in the field can take the Uniform CPA Exam. CPAs must have essential technical skills and can provide several services like financial reporting, financial accounting, business environments, and business concepts.  

CPA candidates must complete at least 150 hours of education and have a minimum of two years of public accounting experience. CPAs have multiple skills like critical thinking, written communication, leadership, and technical soundness. 

 

Roles and Responsibilities of a CPA 

It is essential to remember that not all accountants are CPAs. Only those accountants who have received CPA licenses are called CPAs. A Certified Public Accountant has several responsibilities. Generally, they work in diverse industries, such as NGOS (nonprofit organizations), public accounting firms, corporate finance, and government agencies. 

Anyone who becomes a CPA can help clients prepare the financial statements. According to the SEC, you must be a CPA to prepare a financial report. The IRS allows CPAs to solve tax problems on behalf of clients. Being a certified public accountant, you can also work in a wide range of sectors, such as health, forensic services, or accounting services.  

As a CPA, you can choose your role in the following areas as well: 

  • In preparing tax returns of businesses and individuals 
  • Detecting the company’s internal financial discrepancies and solving those 
  • Provide consultation on financial matters 
  • Give advice about the financial risk to an organization 
  • Keeping the financial record 

Medicare Tax

Posted on March 27, 2025 - 6:29 am by

What is Medicare Tax?

The Medicare tax is a mandatory payroll deduction that helps fund the Medicare program. A federal program that provides health insurance coverage to people who are 65 years and older, as well as those with disabilities.

This tax is part of the Federal Insurance Contributions Act (FICA), which also includes Social Security tax. The revenue collected here directly funds Medicare Part A, which covers hospital-related care, including skilled nursing, hospice, and home healthcare services.

Keep in mind that paying Medicare tax doesn’t automatically qualify an individual for Medicare benefits. Instead, it ensures that the program remains financially stable so that those eligible can access essential healthcare when they need it.

 

Who Pays Medicare Tax?

Most workers in the U.S. pay Medicare tax, including:

  • Full-time employee and employer (including non-citizens working in the U.S.)
  • Self-employed
  • High-income earners (pays an additional surtax)

 

How Does Medicare Tax Work?

For an employee, the Medicare tax is automatically deducted from their gross income which includes wages, salary, bonuses, and tips. The employer, on the other hand, will handle the withholding and send both their share and the employees to the IRS.

Self-employed individuals, since they’re both the employee and employer, pay the full amount as part of their self-employment tax.

For example, a full-time employee earning $60,000 annually would have 1.45% deducted from their paycheck, which is roughly $72.50 per month. Their employer would also contribute $72.50, totaling $145 going towards Medicare. However, for self-employed individuals they would need to pay the full 2.9%.

 

Medicare Tax Rates For 2025

The applicable Medicare tax rates are:

  • Employees & Employers: Both parties will contribute 1.45%, totaling 2.9%.
  • Self-Employed Individuals: They are responsible for the full 2.9% rate.
  • High-Income Earners: Earnings that exceed $200,000 (individual filers) or $250,000 (married couples filing jointly) will pay an additional 0.9% Medicare surtax.

IRS Form 8889 (HSA)

Posted on March 27, 2025 - 6:19 am by

What is IRS Form 8889?

IRS Form 8889 is used to report contributions to and distributions from a Health Savings Account (HSA). It is attached to Form 1040, 1040-SR, or 1040-NR and is required for taxpayers who made or received HSA contributions (including employer contributions) or took distributions from an HSA. It allows taxpayers to claim a deduction for HSA contributions, report withdrawals, and determine any taxable amounts or penalties owed.

Health Savings Accounts (HSA) are tax-advantaged accounts that help individuals save for qualified medical expenses. It acts like an emergency fund specifically for healthcare costs while offering tax benefits.

 

Who Needs to File Form 8889?

A taxpayer must file Form 8889 if any of the following applies:

  • Made contributions to an HSA for the tax year.
  • Received HSA distributions during the tax year.
  • Included certain amounts in income due to failing to meet HSA eligibility requirements during the testing period.
  • Acquired an interest in an HSA because of the death of the account beneficiary.

For spouses who are receiving HSA distributions in a tax year, Form 8889 must be filed along with Form 1040, Form 1040-SR, or Form 1040-NR.

 

How to fill out Form 8889

Step 1: Enter Personal Information

Enter taxpayer’s name and Social Security Number (SSN) as shown on the tax return. If filing jointly, both spouses should have separate Form 8889s.

 

Step 2: Part I – HSA Contributions & Deductions

In this section, you will calculate:

  • HSA deduction
  • Excess contributions outside of payroll deductions (yours or those made on your behalf)
  • Excess employer contributions

 

Step 3: Part II – HSA Distributions

This section reports HSA withdrawals and whether they were used for qualified medical expenses including Total Distributions (Line 14a), Rollovers and Excess Contributions (Line 14b), Qualified Medical Expenses (Line 15), etc.

 

Step 4: Part III – Additional Taxes for Loss of Eligibility

Use this section to determine additional income or taxes owed due to failing to maintain High Deductible Health Plan (HDHP) coverage under the last-month rule or an HSA funding distribution. Add adjustments for last-month rule (line 18), Qualified HSA Funding Distributions (Line 19), etc.

 

Step 5: Filing & Recordkeeping

Once completed, attach Form 8889 to the federal tax return. While it is not required to submit receipts for your medical expenses, you should keep them for at least three years in case of an audit.

 

HSA Contribution Limits for 2025

Self-only coverage: $4,300

Family coverage: $8,550

Catch-up contribution (age 55+): Additional $1,000

If the contribution is more than these limits, withdraw the excess before the tax deadline (April 15) to avoid a 6% penalty.

Qualified ABLE Program

Posted on March 27, 2025 - 6:11 am by

What is a Qualified ABLE Program?

A Qualified ABLE Program is a state-established initiative designed to support individuals who became blind or disabled before age 26. The program must meet strict criteria under Section 529A to maintain its “qualified” status:

  • Eligibility: An ABLE account may be opened for an individual who is blind or disabled, with the condition onset occurring before age 26. This individual is both the account owner and the designated beneficiary.
  • Purpose: Contributions support Qualified Disability Expenses, or QDEs, which include, but are not limited to, expenses for education, housing, transportation, training for employment, health care, assistive technology, and other costs related to enhancing health, independence, or quality of life.
  • Contribution Limits: One ABLE account for each beneficiary (other than a rollover case) is allowed, and contributions within each calendar year must be limited. For 2025, the total contribution limit allowed by all sources is aligned with that of the federal gift tax exclusion (currently $18,000, subject to inflation adjustments), adding up an allowance for employing beneficiaries of either their compensation or for a household of one to a poverty line (for example, in 2024, $14,580 adjusted for 2025).
  • Program Requirements: The program must limit contributions that exceed those amounts (other than rollovers and program-to-program transfers) and comply with other requirements of Section 529A, such as separate accounting for each account.

States or other designated entities administer these programs, overseeing such compliance. Each distribution or termination of an account becomes the subject grant of Form 1099-QA reporting requirements from the IRS for tax implications.

 

Tax Benefits of ABLE Accounts

ABLE accounts offer some unique tax advantages similar to those of qualified tuition programs (QTPs) under Section 529, but designed for disability-related benefits:

  • Tax-Free Withdrawals: Amounts withdrawn from an ABLE account, including earnings, are excluded from taxable income if spent on QDEs. This is similar to tax-free treatment for qualified education expenses under a 529 plan.
  • Tax-Deferred Growth: The earnings in the account-interest, dividend and investment gains-are allowed to accumulate free of tax liability to enhance the growth potential of the account.
  • No Federal Deduction for Contributions: Contributions to ABLE accounts do not qualify for a federal income tax deduction, like contributions to some retirement accounts. However, some states may offer state tax incentives.

If an expenditure is a non-qualified expense, the earnings portion is taxable and possibly subject to a 10% additional tax, much like penalties for non-qualified 529 plan distributions. Therefore, it is critical that funds are used correctly to maintain tax benefits.

 

Form 1099-QA: Reporting Distributions

The IRS mandates detailed reporting for ABLE accounts through Form 1099-QA, which tracks distributions and terminations. This form ensures transparency and compliance with tax rules. Here’s how it functions:

  • Who Files: Any state, agency, or instrumentality maintaining a Qualified ABLE Program must file Form 1099-QA for each account with a distribution or termination in the calendar year. An officer, employee, or their designer overseeing the program handles the filing.
  • Filing Deadline: The form must be submitted to the IRS by February 28 (or the next business day if it falls on a weekend or holiday) of the following year. For 2025 distributions, this means February 28, 2026. In leap years, the deadline remains February 28, not February 29.
  • Recipient Statements: A copy or substitute statement must also be furnished to the designated beneficiary and any contributor receiving a returned contribution (plus earnings) by March 15 of the following year (e.g., March 15, 2026, for 2025 distributions).

 

What’s Reported:

  • Box 1: Gross Distribution: Total amount distributed, including both basis (contributions) and earnings, whether for qualified or non-qualified purposes.
  • Box 2: Earnings: The taxable portion of the distribution, calculated as the difference between the gross distribution and the basis, if not used for QDEs.
  • Box 3: Basis: The non-taxable portion representing original contributions.
  • Box 4: Program-to-Program Transfer: Checked if funds were rolled over to another ABLE account or transferred between state programs, typically non-taxable if completed within 60 days.
  • Box 5: Reserved for future use.
  • Box 6: Recipient Not Designated Beneficiary: Checked if the distribution went to someone other than the account’s designated beneficiary (e.g., a contributor receiving excess funds).

 

Special Cases: If the designated beneficiary changes to an ineligible individual or non-family member, the fair market value (FMV) of the account on the change date is reported as a distribution in Box 1. Family members (siblings, including step- or half-siblings) qualify for tax-free beneficiary changes, and no Form 1099-QA is filed in such cases.

Due to low paper filing volumes, Form 1099-QA is available as an online fillable PDF at IRS.gov/Form1099QA. Entities filing fewer than 10 forms may submit paper copies with Form 1096, while those filing 10 or more must e-file via the IRS FIRE System.

 

Key Rules and Restrictions

To maintain its qualified status and tax benefits, an ABLE Program enforces specific rules:

  • One Account Limit: Each eligible individual is restricted to one ABLE account nationwide, barring rollovers or transfers. Excess accounts may lose tax advantages.
  • Contribution Caps: Beyond the annual limit, employed beneficiaries may contribute additional amounts from their compensation, up to the poverty line threshold, provided they do not participate in certain employer retirement plans.
  • Rollover Rules: Funds can be rolled over from one ABLE account to another for the same beneficiary or a family member within 60 days without tax consequences. Program-to-program transfers between states follow similar guidelines.
  • Excess Contributions: Programs must reject contributions exceeding limits unless part of a rollover. Returned contributions, including earnings, trigger a Form 1099-QA filing for the contributor.

 

Tax Implications for Beneficiaries and Contributors

Beneficiaries: When distributions cover QDEs, no income tax or penalty applies. Non-qualified distributions tax the earnings portion at the beneficiary’s ordinary income tax rate, plus a 10% additional tax, reported on Form 1040 or 1040-SR. Records of expenses should be retained to substantiate qualified use.

Contributors: Contributions are made with after-tax dollars and returned contributions (e.g., excess amounts) are non-taxable up to the basis. Earnings on returned contributions may be taxable if not rolled over or used for QDEs.