Tax Questions Answered by Your San Francisco Tax accountant

November 2017

|Zero Wage Payroll Tax Returns | Tax Consequence of Rental Property | Roth Contribution for Higher Income Earners

Zero Wage Payroll Filing Requirement

Question: We do not have any payroll this year. Should we still file payroll tax returns?

 

Answer:

 

You must file Form 941 each quarter( unless you are eligible to file Form 944 instead). You also need to file Form 940 to report Federal Unemployment FUTA tax annually. If you close your business, you must file a final 941 return for the last quarter and final F940 for the last year. For late or non-filing, there is a failure-to-file (FTF) penalty of 5% of the unpaid tax due with that return. 

 

Even for the periods there are no wages, you must continue filing all above forms as they call it"Zero wage return."

 

Some employers only pay employee seasonally, so they don't have payroll every month. You should check "Seasonal employer” box on Form 941, line 18 to let IRS know that you won't have to file returns each quarter. Generally, as long as you file one return each year, IRS won't inquire about the unfiled quarterly returns in this case.

 

For more information on federal payroll tax requirement, read IRS Publication 15( Circular E) Employer's Tax Guide

 

 In California, Employers need to file Quarterly Contribution Return and Report of Wages (DE 9) and the Quarterly Contribution Return and Report of Wages (Continuation)(DE 9C) each quarter. Same as federal, even you do not have any payroll during that quarter, you are still required to file DE9C. You need to enter “0” (zero) in each box Item A. Check Box “C."  California Development Department(EDD) states there will be penalty and interest on late filing even there are no wages. For California payroll requirement, read California Employer Guide.

 

I am not sure how IRS and EDD will calculate the penalty and interest since there is no tax liability for zero wage returns. In practice, I have seemed IRS and EDD  continue sending notices to you for non-filing, and I also have encountered EDD automatically assess tax liability, penalty, interest based on your previous returns. To avoid further trouble, file zero wage payroll returns on time. 

 

 

 

Tax Consequence of Rental Property

Question: We do not have any payroll this year. Should we still file payroll tax returns?

 

Answer:

 

You must file Form 941 each quarter( unless you are eligible to file Form 944 instead). You also need to file Form 940 to report Federal Unemployment FUTA tax annually. If you close your business, you must file a final 941 return for the last quarter and final F940 for the last year. For late or non-filing, there is a failure-to-file (FTF) penalty of 5% of the unpaid tax due with that return. 

 

Even for the periods there are no wages, you must continue filing all above forms as they call it"Zero wage return."

 

Some employers only pay employee seasonally, so they don't have payroll every month. You should check "Seasonal employer” box on Form 941, line 18 to let IRS know that you won't have to file returns each quarter. Generally, as long as you file one return each year, IRS won't inquire about the unfiled quarterly returns in this case.

 

For more information on federal payroll tax requirement, read IRS Publication 15( Circular E) Employer's Tax Guide

 

 In California, Employers need to file Quarterly Contribution Return and Report of Wages (DE 9) and the Quarterly Contribution Return and Report of Wages (Continuation)(DE 9C) each quarter. Same as federal, even you do not have any payroll during that quarter, you are still required to file DE9C. You need to enter “0” (zero) in each box Item A. Check Box “C."  California Development Department(EDD) states there will be penalty and interest on late filing even there are no wages. For California payroll requirement, read California Employer Guide.

 

I am not sure how IRS and EDD will calculate the penalty and interest since there is no tax liability for zero wage returns. In practice, I have seemed IRS and EDD  continue sending notices to you for non-filing, and I also have encountered EDD automatically assess tax liability, penalty, interest based on your previous returns. To avoid further trouble, file zero wage payroll returns on time. 

 

 

 

Roth Contribution for High Income Earner

Question: Our income is too high to qualify Roth contribution.  I heard that you could contribute to a nondeductible traditional IRA  and then later convert to Roth. Since you had not deducted the contribution, there'll be no "penalty" for any types. Is this too good to be true?

 

 

Answer:  Usually when it's too good to be true, it's not true! In this case, it's not entirely accurate.  Before the year 2010, there was an income limitation for Roth Conversion so what you described was not possible. Since the income limitation was eliminated in 2010, you are allowed to convert from IRA to Roth IRA, and you are also allowed to contribute to non-deductible IRA regardless of your income. Therefore, it is possible to contribute to a  nondeductible IRA and then later convert to Roth.

 

However, is it tax-free transaction?  Under IRC section 408(d) (2), when you have multiple IRAs, they are all treated as one account when determining the tax consequence of the distribution/conversion). Therefore, if you have other existing IRA accounts, you must combine all IRA and the nontax portion becomes very very small. For example, John has $5,000 in nondeductible IRA and $95,000 in other IRA. When John decides to convert $5000 of IRA to Roth, only 5,000/100,000=5%, $5000x5%=$250 is considered tax free conversion.  This is called IRA aggregation rule.

 

Simple IRA, SEP IRA are all part of the IRA family. Only 401K plan are excluded from the aggregation rule. So if you have is a 401k account, the conversion will work.

 

 

 

 

What's your question?

Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.

CPA San Jose, CPA San Francisco  

T: 888-388-1422

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