Vision Payroll

The Internal Revenue Service recently released an updated version of Publication 15, (Circular E) Employer’s Tax Guide. In addition to providing information on classifying employees, determining which types of payments are considered wages for federal employment tax purposes, and depositing taxes, Circular E also provides updated tables for use in calculating the amount of federal income tax to be withheld using either the percentage method or the wage bracket method. Tables for both the percentage method and the wage bracket method of calculating the amount of any Advance Earned Income Credit Payment are also provided. Vision Payroll has already incorporated the updated tables into its tax calculations for paychecks and will begin using the updated tables for all wages paid during 2009. Contact Vision Payroll if you any questions on Publication 15.

This week’s question comes from Carl, a partner in a partnership. I am an investor in a partnership and own a 25% interest as a partner. I also work for the business that the partnership owns. Can I be paid through payroll, have tax withheld, and receive a Form W-2? Answer: It is long established in tax law that partners in a partnership are not employees of the partnership. In Rev. Rul. 69-184, 1969-1 CB 256, the Internal Revenue Service confirmed this, stating:

Remuneration received by a partner from the partnership is not “wages” with respect to “employment” and therefore is not subject to the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act. Such remuneration also is not subject to Federal income tax withholding.

Partners cannot receive a Form W-2 from the partnership. They may receive a draw from the partnership and must pay quarterly federal estimated tax payments to cover the amount of federal income tax and self-employment tax liability they will have, unless covered by withholding on other income. Vision Payroll can work with you and your CPA to determine an appropriate draw and estimated tax payment schedule. You can then receive the draw as a check or direct deposit with each payroll and schedule appropriate deductions such as retirement plan contributions. Contact Vision Payroll today to get started.

This week’s question comes from Mark, owner of an import company. I receive the same salary every week. All year, my Massachusetts income tax withholding has been the same. Now it’s gone up two weeks in a row. Why did this happen? Answer: In Massachusetts, a deduction of up to $2,000 is allowed on the state income tax return for social security and Medicare tax (also known as FICA). Therefore, in calculating the amount of income tax to be withheld, a deduction is allowed for these taxes. Once the combined social security and Medicare tax equals $2,000, the deduction is no longer allowed. Vision Payroll will automatically make this change for you once the limit is reached. The reason the amount changed twice is that on the first check the deduction may be partially allowed. For example, if the combined social security and Medicare was $1,980 and the current withholding was $50, $20 ($2,000 – $1,980) would be allowed as a deduction and $30 ($50 – $20) would be over the limit and not allowed as a deduction for state purposes. In the next week, the entire $50 would be considered excess and none allowed as a deduction. Since the deduction decreased two weeks in a row, the tax withheld must increase each week. Contact Vision Payroll if you have any questions.