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Hindustan Times
31-07-2025
- Business
- Hindustan Times
Who Gets ‘No Tax on Overtime'? It's Messy.
WASHINGTON—President Trump's popular 'no tax on overtime' policy will help millions of workers save an estimated $90 billion through 2028, but the law is full of fine print and potential confusion over who is eligible for the new savings. Under the law, the only overtime compensation that qualifies for the new deduction is the extra wages—the 'half' of 'time and a half' pay—required under the federal Fair Labor Standards Act, or FLSA. That definition excludes overtime paid to airline employees, railroad workers and other transportation laborers covered by separate overtime laws. It doesn't include some payments under agreements outside FLSA or workers specifically exempted from FLSA. And it excludes payments required under state laws like California's, where overtime starts after eight hours daily instead of 40 hours weekly. The upshot: The break will cut taxes by thousands of dollars for many overtime workers, but some might not necessarily get the tax break, and figuring out who qualifies could be tricky. 'There's a big gap between that assumption by many hopeful people and what actually we think is going to happen,' said Mary Hevener, an attorney at Morgan Lewis who advises employers. 'A lot of the overtime that people are receiving is not going to be subject to this tax benefit.' Employers, tax lawyers and payroll professionals are wrapping their arms around the deduction, which Trump signed into law July 4 in the 'one big, beautiful bill.' Like new tax breaks for tipped workers and senior citizens, 'no tax on overtime' is retroactive to the beginning of 2025. The overtime-pay deduction is capped at $12,500 for individuals and $25,000 for married couples. That could lower some households' tax bills by $6,000, and it is available whether or not taxpayers itemize deductions. The break starts shrinking once income reaches $150,000 for individuals and $300,000 for married couples. Because it is an income-tax deduction, workers still owe payroll taxes for Social Security and Medicare on overtime pay. Lawmakers tied the tax break to the FLSA overtime definition because that was a known federal standard that could be implemented and because they wanted to limit revenue consequences, according to people familiar with the decision. The Treasury Department expects to issue guidance to help workers and employers report and claim the deduction. For 2025, the government isn't planning to change Form W-2, which reports earnings to workers and the Internal Revenue Service. Instead, as employers update systems, workers will likely rely on separate payroll statements to claim the deduction on tax returns in early 2026. The Treasury Department is considering providing relief from certain penalties during this first year. The government may also issue guidance about overtime definitions and adjusting paycheck withholding. 'Treasury began working with businesses and payroll providers three months ago—well before the bill's passage—to ensure that the president's no-tax-on-overtime commitment is implemented as seamlessly as possible for employers and delivers the full tax relief hardworking Americans were promised,' Deputy Treasury Secretary Michael Faulkender said in a statement. Railroad workers are another group whose overtime pay won't qualify for the tax deduction. Early frustrations The deduction's limits are already frustrating airline and railroad workers, who often get overtime pay under union contracts and are exempt from FLSA because they are covered by the Railway Labor Act. One result is different treatment for similar jobs. An airline jet mechanic wouldn't get the deduction but an airplane mechanic at a separate maintenance company could. 'It's a legislative blunder and a political blunder,' said John Samuelsen, international president of the Transport Workers Union, who said he thought the language was unintentional. 'This will become a huge political issue, particularly for the Republicans, if it's not fixed.' An earlier no-tax-on-overtime bill from Sen. Roger Marshall (R., Kan.) contained a more expansive definition. The American Association of Railroads is urging Congress to change the final language. Chris Comeau, a TWU member in Massachusetts, works 20 to 30 hours of overtime most weeks cleaning commuter trains and was hoping the break could save him thousands of dollars. Comeau said he supported Trump and the no-tax-on-overtime idea but was disappointed that rail workers won't qualify. 'You don't get more middle class than guys that are fixing trains and riding on trains and cleaners,' he said. Employers will ultimately track two different numbers: overtime they pay and overtime qualifying for the deduction, said Curtis Tatum, senior director of legal and compliance at PayrollOrg, an association of payroll professionals. 'It's going to be a big learning curve,' he said. Employers responsible for implementing the deduction don't get direct benefits, said Steven Johnson of Morgan Lewis. They may have to explain to employees the differences between overtime amounts on pay stubs and tax forms. Workers who do benefit and don't try to adjust paycheck withholding now will likely see the deduction increase tax refunds in early 2026. Campaign promise now reality Trump pitched 'no tax on overtime' during his campaign with other tax-cut promises. Republicans layered them atop extensions of expiring tax cuts. Trump's new policies are more popular with voters than the law as a whole. In a recent Wall Street Journal poll, 72% of respondents favored the overtime deduction; support was higher among people making between $20,000 and $80,000. At a recent House Ways and Means Committee hearing in Las Vegas, paint foreman Eric Byington praised the idea. 'When you want to hustle, work overtime, that money goes straight into your pocket,' he said. 'These tax breaks are immense for the regular working people.' The benefit could spur disputes between employees and employers. The new advantage for employees covered by FLSA puts more pressure on distinctions between independent contractors and employees, and between workers who qualify for FLSA overtime and those who are exempt. 'There's massive, constant litigation over this issue, whether a person should be exempt or not,' said Thomas Cryan, an attorney at Saul Ewing. 'There's going to be lots of gray areas.' Write to Richard Rubin at
CNBC
18-07-2025
- Business
- CNBC
Trump's ‘no tax on tips' sparks questions for workers: ‘We're looking at a crystal ball,' expert says
President Donald Trump's "big beautiful bill" includes a section called "no tax on tips" — an idea that both Republicans and Democrats floated during the 2024 that the provision has been enacted, questions remain about how the tax break works and who qualifies. Despite its name, "no tax on tips" doesn't eliminate tax on tips, which are still subject to payroll and state taxes. Instead, it's a deduction worth up to $25,000. The tax break is available from 2025 through 2028. It phases out, or gets reduced, once modified adjusted gross income exceeds $150,000. However, the IRS needs to clarify which occupations qualify, which is expected to come in early October, according to the agency. Meanwhile, "we're looking at a crystal ball" for guidance, said Larry Gray, a Missouri-based certified public accountant who serves as IRS liaison for the National Association of Tax Professionals. More from Personal Finance:Trump's 'big beautiful bill' caps student loans. What it means for youWhy 22 million people may see a 'sharp' increase in health premiums in 2026Trump's 'big beautiful bill' cuts SNAP for millions of families: Report In 2023, there were roughly 4 million U.S. workers in tipped occupations, representing 2.5% of all employment, according to estimates from The Budget Lab at Yale University. The cohort of workers who qualify for the tax break is even smaller — actors, musicians and singers, directors and playwrights — are included among the professions that are already prohibited under the legislation's text. Here's a breakdown of what to know about Trump's tip deduction. As written, "qualified tips" are cash tips an employee earns. This includes tips a customer offers in cash or added to a credit card charge, as well as payouts under a tip-sharing arrangement. Yet, the law also says that the tip must be paid voluntarily and determined by the customer or payor, which can put other forms of gratuities or mandatory service charges in question. "It's an entirely voluntary transaction," said Alex Muresianu, a senior policy analyst at the Tax Foundation. For example, the definition may exclude mandatory service fees, such as an automatic gratuity a restaurant might tack on for a large dining party. "Based on the plain text of the law, it's hard to argue that that's something that's given voluntarily," said certified financial planner and enrolled agent Ben Henry-Moreland, a certified financial planner with advisor platform who analyzed the legislation. To qualify for the deduction, tips must be "properly reported," according to Melanie Lauridsen, AICPA's vice president of tax policy & advocacy. That means employers must report the worker's tips on so-called information returns — such as Form W-2 or 1099 — with a copy going to the employee and the IRS. However, Trump's legislation also increased the income thresholds for certain information returns. That could raise eligibility questions for tipped workers who don't get a form. For example, Form 1099-K reports business transactions from apps, such as PayPal or Venmo, along with gig economy platforms like Uber or Lyft. For 2025, the 1099-K reporting threshold returns to $20,000 and200 transactions. Previously, the threshold was $2,500 for 2025. Starting in 2026, the threshold for 1099-NEC, which reports contract income, jumps from $600 to $2,000. However, there is also uncertainty about whether workers fully disclose cash tips to their employer and the IRS. "The elephant in the room around this whole 'no tax on tips' provision is, so many tips go unreported to begin with," said Henry-Moreland.
Forbes
24-04-2025
- Business
- Forbes
Avoid Overpaying In Taxes: Smart Tax Strategies For Small Businesses
The April 15 tax deadline has now come and gone, and most small business owners have no plans to think about taxes again until this same time next year. Those taxpayers contribute to the hard truth that 93% of small businesses overpay in taxes. This statistic was reported nearly a decade ago by a Forbes analyst who supported small business owners. Serving in that same capacity, I'm disappointed to report that the statistic remains true today. The fact is, the IRS and state tax authorities are bill collectors. They are actively working to collect the maximum amount of tax revenue. Taxpayers tend to take a more passive role in tax matters, resulting in overpayment of taxes that are often avoidable. While federal income taxes garner the most attention, the IRS and state tax authorities collect billions of dollars in other tax types that are often overlooked. Learn more about three lesser-known ways you're paying more taxes than you should. There are nearly 31 million small businesses that filed taxes as a sole proprietorship in the US, according to the most recent data published by the IRS. This filing classification means that the business reports its income and expenses on its personal tax return, specifically on Schedule C. This filing status makes the business's profits subject to self-employment taxes at a rate of 15.3%. Self-employment tax is the payment that self-employed people and small business owners owe the federal government to fund Medicare and Social Security. They represent the FICA or payroll taxes that employees and employers pay when their compensation is reported on Form W-2. Sole proprietorships account for over 70% of all businesses in the U.S., according to a report from the Small Business Administration (SBA). Each of these are paying self-employment taxes. In short, these businesses granted the IRS a 15.3% profit share in their business. The IRS reports these businesses earned total net income of $544M, resulting in self-employment taxes of over $83 million in the most recent tax year. Again, this represents millions of dollars in overpaid taxes that are completely avoidable. You can establish an LLC and elect to have your LLC taxed as an S Corporation with the IRS, and your small business can completely avoid self-employment taxes and reduce their tax bill by 15.3%. It doesn't eliminate your exposure to all employment taxes, but it reduces them significantly. The IRS requires that owners of businesses taxed as S Corporations draw reasonable compensation that is reported on Form W-2. In short, you must become an employee of your own company and pay yourself a fair salary. This approach will result in you paying employment taxes. However, you will only pay tax on the amount you're paid as compensation. In contrast, self-employment taxes are paid on all your profits. For example, the table below shows a small business that elects to be taxed as a sole proprietorship vs an S Corporation. The small business that files taxes as a sole proprietorship pays self-employment taxes on its net income, resulting in a $76.5K tax due. In contrast, the business owner who elects to file taxes as an S corporation only pays payroll taxes of $15.3K on their compensation. This tax classification change reduces the S corporation's owners' tax liability for FICA taxes by over $60K. Connect with your CPA or tax professional to help you assess if electing to be taxed as an S corporation is optimal for your business to avoid self-employment taxes. Most business owners and tax professionals focus all their attention on their federal income tax bill. While this represents the biggest portion of your income taxes, you cannot overlook opportunities to reduce your state tax bill. According to statistics published by the Tax Foundation, state tax rates span from a low of 1.95% in North Dakota to a top rate of 13.3% in California. Additionally, nine states do not have a state income tax. The Tax Policy Center reports that total state tax revenue from income taxes totaled $545 billion in 2021, the most recent year for which complete statistics are available. This represents billions of dollars remitted by taxpayers, and at least some of it is avoidable. Considering the varying state income tax rates, the state in which you choose to operate your business will play a big role in your state tax bill. For example, a business with a $500K profit operating in California will have a $66.5K tax bill, while the same business operating in Texas will pay $0 in state taxes. Given this difference, it's important for business owners to consider where their operations should be located. Keep in mind, income is taxed based on the location where it is earned. If your operations are based in Texas, even if the business is registered in California, the tax on that company's earnings will be based on the location of its operations. Selecting a tax-savvy operations base could make a big difference in your state tax bill. Additionally, several U.S. states offer tax incentives to businesses operating within their borders to reduce or eliminate their state tax liability. For example, New York has an Innovation Hot Spot (IHS) program that provides tax benefits to early-stage companies in certified incubators. Eligible businesses can receive exemptions from state corporate income and sales taxes for up to five years. Additionally, partners in these businesses may deduct income earned from the incubator company. To qualify, companies must be in their first five years of operation (or seven for life sciences ventures), have less than $2 million in annual revenue, and be in the formative stages of development. This program could save eligible business owners 9.65% in state income taxes over a five-year period. Similarly, the State of Oklahoma offers a 10-year state tax exemption for small business incubator tenants. This means small business owners in Oklahoma who lease office space in a facility that houses a certified incubator are exempt from state taxes for a decade. This exemption remains in effect even after the tenant is no longer an occupant of an incubator facility. In short, if you secure a short-term lease in a co-working space that houses a certified incubator, you will qualify for the exemption for a full 10-year period. Other states offer their own state tax incentives to small business owners, resulting in millions of dollars in state tax avoidance for up to 10 years. Connect with your CPA or tax professional to help you assess the benefits of making your business operations in a state and office location that offers state tax incentives. The IRS treats income taxes as a pay-as-you-go requirement. You cannot wait until you file your tax return to meet your obligation; rather, you must pay your tax bill throughout the year. Those payments are typically made per pay period when you receive a W-2, or by making estimated payments throughout the year when you operate a business. If your payments throughout the year still result in over a $1,000 balance due when you file your tax return, you will be assessed an underpayment penalty. Adding insult to injury, the IRS will also charge interest on the penalty it assesses. The 2025 IRS interest rates for underpayment penalties are 7%. This is down from the 2024 rate of 8%. Adding to the impact of this penalty is that interest is compounded daily by the IRS. To calculate the penalty, the IRS multiplies the unpaid tax by the applicable interest rate for the full period during which the underpayment exists. For example, suppose an individual owes $10,000 as of April 15, 2025. The IRS expected the taxpayer to begin meeting the obligation for that balance as early as April 15, 2024, the due date of the first estimated tax payment. This timing aligns with the pay-as-you-go requirement. Therefore, the taxpayer would incur an annual penalty of $800 (8% of $10,000). Additionally, interest would be applied dating back 12 months to when the underpayment originated. With a 7% interest rate for all four quarters of 2024, compounded daily, $58 in interest will be added, resulting in an underpayment penalty of $858 with interest. The amounts are relatively small, in this example, but while the IRS treats this as an underpayment, it represents an overpayment in your obligation to the IRS, and it is completely avoidable. The most recently published statistics from the IRS disclosed the number of penalties and the amount of revenue collected for fiscal year 2023. They assessed 14.2 million penalties, totaling $7 million in underreported tax penalties. That's millions of dollars remitted by taxpayers that are completely avoidable. You can complete Form 1040ES to calculate what your tax burden will be for the year, and determine the appropriate W-2 withholdings or the amount of estimated quarterly payments due for each period. If you use a CPA or tax professional, they can prepare this form for you and help you plan to ensure you meet the IRS requirements to avoid underpayment penalties. If your income changed dramatically from the prior year, you may be able to avoid the underpayment penalty if you met at least 100% of your previous year's tax for individual taxpayers earning less than $75K in the prior year. If your individual income was over $75K, the IRS requires you to meet 110% of your previous year's tax to avoid penalties. Connect with your CPA or tax professional to help you ensure you're not subjected to this penalty and you are adhering to the pay-as-you-go requirement of the IRS. Complete a thorough review of your most recently filed tax return to assess if you overpaid in taxes in any of these three ways. Then, make plans to file the right tax elections, select the optimal location, and perform the necessary calculations to avoid overpaying in taxes this year.
Forbes
31-03-2025
- Business
- Forbes
How The IRS Decides To Audit You: A Tax Expert Explains
How does the IRS decide which tax returns to audit? In this Q&A series, a former IRS lawyer and ... More current law-school professor explains. This is the second part of my two-part Q&A with a tax-law expert, professor, and former IRS lawyer. The first part is How The IRS Picks Tax Returns To Audit: A Tax-Law Expert Explains. 'April is the cruelest month' wrote the poet T.S. Eliot—and for taxpayers in the US, that may often be true. The filing deadline for federal tax returns is coming up on April 15. While nobody really likes doing tax-return homework for the IRS, it's safe to say that IRS audits and other forms of unwanted IRS attention are even more unpleasant, making diligence with your tax return a wise course. For expert insights into how the IRS decides which tax returns to audit and how to prepare for an audit if it happens, I turned to tax expert Professor Bryan Camp. He is a professor at Texas Tech School of Law, a former staff member of the IRS Office of Chief Counsel, and a longtime tax attorney. Between teaching, doing academic research, and playing the fiddle at bluegrass jams, he kindly took time amid his busy schedule to answer my questions with his inside knowledge and personal flair. In the first part of this Q&A, Professor Camp explained how the IRS selects which tax returns to audit, different types of audits, and how to handle IRS requests. In the second part, presented below, he explains more about how to avoid getting audited by the IRS, what to do if you are audited, tax-return areas that are likely to trigger an audit, and whether someone at the IRS can intentionally select you for an audit or release your tax information. The biggest way to reduce the chance of any unpleasant interaction with the IRS is to be sure your tax return is consistent with any information returns submitted to the IRS about you, such as a Form 1099 or Form W-2. When those returns are incorrect, you basically have three choices: (a) suck it up and report consistently with the incorrect information return; (b) attach to your return an explanation for why the information return is incorrect, or (c) make the correct return and then keep all your records because if the discrepancy is large enough you will indeed get a 'love letter' from the IRS asking about it, and you will generally only have a very short timeframe to respond. Let me give you an example from my own experience. When my grandma died, she left her house to her three grandkids: my two sisters and me. We sold the house. The Title Company then sent the IRS a 1099 reporting that it had paid the ENTIRE sales proceeds to me. That 1099 was wrong for two reasons. First, I split the proceeds with my sisters. More importantly, the proceeds were excluded from gross income by Internal Revenue Code Section 102 (which allows inheritances to be excluded from income). Pissed, I (properly) did not report any of that money. But you see how the IRS computers thought I had underreported income when they compared the 1099s with my tax return. But I did not get audited. Instead I received what the IRS calls a 'compliance check.' About two years later I got a love letter (called a CP2000 notice) from the IRS telling me it believed I had overlooked some income I should have reported, and it gave me 30 days to explain why I should have not reported it. Since I was expecting that, I was prepared to respond and so that got cleared up. Notice two points: (1) it took the IRS systems about two years to catch the discrepancy and ask me about it; (2) I had only 30 days to respond. If I had missed that deadline, then the IRS would have assessed a deficiency, and I would have had a much more difficult time working it out. First, low incomes. You can look at the IRS Data books for details. Basically, Congress is very concerned that low-income taxpayers are cheating by improperly claiming tax credits such as the Earned Income Tax Credit. Second, very high incomes. They get reviewed more because their errors cost the government a lot more lost revenue. For example, some large corporations are under continuous examination. In addition, very-high-income taxpayers are more likely to participate in the type of tax-shelter transactions that the IRS targets. Third, self-employed taxpayers who report income on Schedule C may be more likely to be selected for audit. That is because while the IRS computer matching programs do a great job at spotting potential unreported income, they cannot spot erroneous deductions. So, again, if you report a very large loss on Schedule C and you use that loss to offset your decent wage income, that may trigger a higher DIF score (see the first part of this Q&A). Yes. But that does not mean the IRS computer systems are shut down and, as I explained earlier, everyone's return is 'looked at' by the IRS computers. The IRS computers will attempt to correct perceived errors in returns by sending out notices like the CP2000 and then propose assessments if the taxpayer does not respond in a timely manner. Those actions are not audits. But they are still unpleasant experiences, even when you are correct. The IRS almost never does a tip-to-toe audit. Almost always the IRS is looking into a particular issue or set of issues. So you want to be sure you know what the IRS is concerned about. You want to be sure to ask the IRS Revenue Agent what information they need and then give them that information—but ONLY that information. If the IRS needs more, let them ask for it. You want to avoid letting them come to your home or business, so being cooperative and offering to bring the information to them is generally the best way to respond. However, if you are worried about being criminally prosecuted, then you want to take the opposite approach and not volunteer information you think could help convict you of a crime. We call these 'eggshell' audits because while it starts out civil, you are walking on eggshells trying to avoid criminal investigation. Don't walk alone. There are many law firms that specialize in these kinds of audits. Oh yes! If the auditor comes to believe that the taxpayer engaged in fraudulent behavior, the auditor must stop the audit and refer the matter to Criminal Investigation (CI). If CI decides not to work the case, the auditor can resume the audit. Meanwhile, the auditor is prohibited from contacting the taxpayer during the time CI does its investigation. So if you are being audited and, suddenly, you are totally unable to communicate with your auditor, that's a baaaaaad sign. The eggshells are breaking. As many years as are necessary to resolve the audit issues. For example, if the audit is about whether you properly reported income from the sale of property, the Revenue Agent is entitled to ask for all your property records back to the time you bought it to establish the proper basis. For a recent Tax Court case where the taxpayer was unable to establish basis on his rental property and therefore was not allowed a depreciation deduction, see Smith v. Commissioner, T.C. Memo. 2025-24 (March 24, 2025). Another example is if you are claiming tax benefits in the audit year from stuff you did in a prior year; the Revenue Agent is entitled to look at that prior year to see if you did that right. Even though that prior year is not under audit, understanding what happened there may be necessary to resolve the year that is under audit. As a practical matter, however, IRS employees rarely go beyond the year they are examining. Training and structure. Informally this is called 'UNAX' for 'Unauthorized Access.' Training: Employees learn that Congress wrote a statute that makes this behavior a crime. They learn they can go to prison. They also learn that they can be fired. Structure: Employees have no ability to select a taxpayer for audit. As explained in Part 1 of this Q&A interview, all audit decisions must be made through the proper channels of authority. And employees who identify a taxpayer for audit are not permitted to conduct the audit. So if a Revenue Agent auditing my tax return comes to believe that I am in cahoots with Joe and recommends opening an examination on Joe, then that recommendation must be approved by a series of IRS supervisors. If approved, Joe's audit must be done by another Revenue Agent. And my Revenue Agent cannot access that information because doing so would be UNAX. IRS employees are incredibly cautious about accessing information not directly relevant to their jobs. That sometimes interferes with their ability to conduct a thorough audit, because in their mind the risks of UNAX outweigh the benefit to their examination. IRS employees are not evaluated on how many lost tax dollars they uncover. They are instead evaluated on how well they process their workload. That is one reason for cooperating. You help them 'git-er-done.' Training and consequences. All IRS employees are trained not only that they must keep information confidential but also that they are not even allowed to look at any taxpayer's information unless they are working on that taxpayer's case (either in examination or in collections at the IRS). To enforce these prohibitions, Congress wrote a statute in 1998 that creates what we call the '10 Deadly Sins.' Professor Keith Fogg wrote an excellent article about that statute, which provides that any IRS employee who improperly discloses taxpayer information may (and sometimes must) be fired. Congress also wrote another statute on the unauthorized inspection or disclosure of tax returns or return information. That permits the taxpayer to sue the government and recover, at a minimum, $1,000 per improper disclosure Thus, if the improper disclosure goes out on a social media post that receives 1,000 hits, that's 1,000 improper disclosures.
Wall Street Journal
29-03-2025
- Business
- Wall Street Journal
‘No Tax on Tips' Plan Excludes Uber, DoorDash Drivers
WASHINGTON—Uber and DoorDash are pressing Republican lawmakers to expand President Trump's no-tax-on-tips promise beyond employees to include independent contractors who drive ride-share vehicles and deliver food. The leading tax-free tips proposal, from Sen. Ted Cruz (R., Texas) and Rep. Vern Buchanan (R., Fla.), would let many restaurant and casino workers claim the deduction. But Uber and other ride-share drivers are typically independent contractors, not employees, and they receive Form 1099, not Form W-2, to detail their income and then report that money—minus expenses—as business profits. They wouldn't be eligible under the bill.
