About Complete Payroll, Inc. Complete Payroll is a Crystal Lake, IL based payroll procesing company offering a full line of payroll services. Besides traditional check writing services, we offer direct deposit, quarterly payroll reporting, pay-as-you-go workers compensation insurance, timeclocks, 401(k) and exceptional customer service.
|
On December 19, 2009, the 65% COBRA premium subsidy that was due to expire December 31, 2009 for newly terminated employees was extended. The extension adds another six months to the maximum period that the COBRA subsidy can run, and also extends the up-to-15 month COBRA premium subsidy to workers who lose their jobs during the first two months of 2010. Under the prior law, the subsidy wasn’t available for those who lost their jobs after 2009.
The law previously applied to workers who were terminated between Sept. 1, 2008 and Dec. 31, 2009 and were eligible for COBRA continuation coverage and elected COBRA coverage. Normally, the workers would have been responsible for 100% of the cost of the insurance premiums. A COBRA premium subsidy of 65% of the cost of the COBRA coverage has been provided to the employee which reduces the cost of the insurance to 35% of the normal cost. Under the new, law employees terminated in Jan. or Feb. 2010 can now also qualify for the COBRA premium subsidy.
Another very important change was the length of time the employee is eligible for the subsidy. Previously the premium subsidy would have expired nine months after the subsidy began. This was extended to a total of 15 months by the recent legislation.
The law and the recent changes are important for employers to be aware of. Not only are there certain notification requirements that must be given to the employee, but the way the 65% subsidy is paid by the government can be complex. Essentially, the employer continues to pay 100% of the insurance premium. The employee reimburses the employer 35% of the cost, and the remaining 65% is recouped by the employer in the form of payroll tax credits on the employer’s Form 941 and related payroll tax deposits.
Steve Trojan, CPA is owner of Complete Payroll, Inc., a Crystal Lake IL based payroll processing firm, and SMT & Associates, Inc., (www.smt-associates.com) a tax and accounting firm specializing in small business.
Complete Payroll, Inc. announces a year-end special for new clients. The program called Payback 2010 is designed to offer savings to new clients, and offer a contribution by Complete Payroll to local charities.
For new clients signing up for payroll service before December 31, 2009, Complete Payroll is offering a 20% discount. In addition, we will make a monthly donation of 10% of payroll fees to a local charity of your choice.
For more information, visit our website.
As year-end approaches, taxpayers generally are faced with a number of choices that can save taxes this year, next year or both years. Employees too are faced with these choices. However, employees have some special considerations to take into account that retirees and other nonworking individuals don’t face. To help our clients who are employees take advantage of these special tax saving opportunities, we have put together a list of items to consider.
Please review the list and contact us if you need additional information on one or more of the items.
Health flexible spending accounts. Many employees take advantage of the annual opportunity to save taxes by placing funds in their employer’s health flexible spending account (health FSA). You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible. They would not be deductible if you don’t itemize. Even if you do itemize, some medical expenses would not be deductible because of the 7.5% adjusted gross income floor beneath medical expense deductions. Also, a health FSA can be used to get tax-free reimbursement for over-the-counter medications and other items even though they would not be deductible as medical expenses if you paid for them outside of a health FSA.
If you have set aside funds in your employer’s health FSA, check your balance so that you have sufficient time to incur additional reimbursable expenditures to prevent loss of any unused amount under the use-it-lose-it feature of these plans. Don’t forget you can get tax-free reimbursements for aspirin, antacids and other over-the-counter items. Your plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for any such items.
To avoid the lose-it-use it rule, you must incur qualifying expenditures by the last day of the plan year (Dec. 31, 2009 in the case of a calendar year plan) unless the plan allows an optional grace period. Any grace period cannot extend beyond the 15th day of the third month following the close of the plan year (e.g., March 15 for a calendar year plan). An exception to the use-it-or lose-it rule allows FSAs to make distributions of all or part of unused health FSA benefits to military reservists who are called to active duty for a period exceeding 179 days (or an indefinite period ).
Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don’t forget to reflect any changed circumstances in making your calculation.
Dependent care FSAs. Some employers also allow employees to set aside funds in dependent care FSAs. They allow employees to use pre-tax dollars to pay for dependent care. In particular cases, participating in a dependent care FSA can yield greater tax savings than foregoing participation and claiming a dependent care credit. Taxpayers who are eligible to participate in a dependent care FSA and are (a) in a high tax bracket and/or (b) have only one dependent and more than $3,000 of employment-related expenses, should use the FSA to pay for child care expenses. For these taxpayers, the FSA almost always provides greater federal tax savings than does the credit. Additionally, participating in a dependent care FSA can also save on FICA taxes.
However, like health FSAs, dependent care FSAs are subject to the use-it-or lose it rule. Thus, now is a good time to review expenditures to date and to project amounts to be set aside for next year.
Adoption assistance FSAs. Under an adoption assistance FSA, adoption reimbursement accounts are established for participating employees. Typically, these accounts are funded with employee pre-tax contributions uniformly withheld from each paycheck throughout the year. The balances in these accounts are used to reimburse qualified adoption expenses incurred during the year, subject to a reimbursement maximum. Like their health and dependent care FSA siblings, these accounts are subject to the use-it-or-lose-it rule. However, predicting the amount and timing of adoption expenses may be far more difficult than projecting medical and dependent care assistance expenses. As a result, the use-it-or-lose-it rule could pose a greater risk of loss with this type of FSA. This should be borne in mind in choosing the extent to which to participate in an adoption FSA.
Adjustments to state withholding. If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2009.
Adjustments to federal withholding. If you face a penalty for underpayment of federal estimated tax, you may be able to eliminate or reduce it by increasing your withholding. In this connection, it should be stressed that the Making Work Pay Credit, which was enacted earlier this year, automatically lowered tax withholding rates for employees. However, you should especially review your withholding to ensure that enough tax is withheld if you hold multiple jobs, you and your spouse both work, or you can be claimed as dependent by another person.
401(k) contributions. Review and make appropriate adjustments to your contributions to you employer’s 401(k) retirement plan for the remainder of this year. Figure your contribution rate for next year as well.
One of the steps we recommend to clients who use independent contractors, and who therefore face a heightened risk of a costly IRS payroll tax or benefits audit, is a quick review of some of the key things the IRS tells its agents to look at in determining whether a worker is really an employee.
Caution: In an effort to close the tax gap, which is the difference between the amount of money that should be reported and collected and the amount of money that the IRS is actually receiving, the IRS is targeting worker classification practices. IRS officials had indicated that worker classification cases will be a major area of emphasis in 2008, and auditors are expected to take a tougher stance if a business has too much control over workers to justify independent contractor status. The IRS will use leads from workers who, beginning with the filing of their 2007 individual returns, can attach a special form (Form 8919 - Uncollected Social Security and Medicare Tax on Wages) to their Form 1040 if the workers think they have been misclassified. The IRS will also use information from data-sharing agreements that it has entered into with 29 state workforce agencies to share the results of employment tax examinations in an effort to deter misclassification of workers.
The primary inquiries fall into three categories. Who has financial control of the job? Who can exercise control over how the worker performs the specific task? And how do the parties themselves view the relationship? When reviewing the checklist, keep in mind that the IRS will make its decision based on the whole picture, not just a single factor.
Workers are more likely to be classified as independent contractors if they:
- Make a significant investment in business property (a home computer is not significant)
- Pay their own business expenses
- Receive a flat fee that is not based on an hourly or similar rate
- Are not prohibited from doing work for other companies
- Can pay subcontractors to get the job done
- Are not performing services as an integral part of your regular business
- Have a contract with an enforceable liquidated damages provision
- Can make a profit
- Can suffer a loss
Workers are more likely to be classified as employees if they:
- Are given specific instructions and on-going training in how to get the work done
- Cannot work for others
- Have expenses paid by your company
- Are paid with a salary or hourly wage
- Do not have a significant investment in their trade or business
- Are an integral part of your regular business
- Receive direct reimbursement for all, or almost all, expenses
Less important is:
- Whether or not the work is performed on the business’s premises
- Whether the worker has flexibility in setting hours
- Whether the relationship is temporary or short-term
- Whether the work is full- or part-time
- Whether the worker performs services for one or more businesses
If you suspect you may have an issue, we would be happy to help you evaluate your hiring practices and suggest effective solutions, if necessary.
Employers may qualify for a tax credit known as the work opportunity tax credit that is worth as much as $2,400 for each eligible employee ($4,800 for certain veterans and $9,000 for employees who are “long-term family assistance recipients”). The credit is generally limited to eligible employees who begin work for the employer before Sept. 1, 2011. The credit is available on an elective basis for employers hiring individuals from one or more of ten targeted groups. The amount of the credit available to an employer is determined by the amount of qualified wages paid by the employer. Generally, qualified wages consist of wages attributable to service rendered by a member of a targeted group during the one-year period beginning with the day the individual begins work for the employer (two years in the case of an individual in the long-term family assistance recipient category).
An employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are: (1) qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program, (2) qualified veterans, (3) qualified ex-felons, (4) designated community residents, (5) vocational rehabilitation referrals, (6) qualified summer youth employees, (7) qualified members of families receiving Food Stamp assistance, (8) qualified Supplemental Security Income recipients, (9) long-term family assistance recipients, and (10) certain unemployed veterans or disconnected youth who begin work for the employer during 2009 or 2010.
For each employee, there is also a minimum requirement that the employee has completed at least 120 hours of service for the employer.
Also, the credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (e.g., working as a maid in the employer’s home).
Additionally, the credit generally isn’t available for employees who have previously worked for the employer.
For employees other than summer youth employees, the credit amount is determined under the following rules. The employer can take into account up to $6,000 ($10,000 for each employee who is a “long-term family assistance recipient”; $12,000 for certain veterans) of first year wages per employee. If the employee has completed at least 120 hours but less than 400 hours of service for the employer, the wages taken into account are multiplied by 25%. If the employee has completed 400 or more hours, all of the wages taken into account are multiplied by 40%. Thus, under the above rules, the maximum credit available is $2,400 ($6,000 × 40%) per employee ($4,800 for certain veterans; $4,000 for a “long-term family assistance recipient,” for whom a 50% credit for up to $10,000 of second-year wages is also available). The “first year” referred to above is the year-long period which begins with the employee’s first day of work.
For summer youth employees, the rules in the preceding paragraph apply, except that the employer can only take into account up to $3,000 of wages, and the wages must be paid for services performed during any 90-day period between May 1 and Sept. 15. Thus, for summer youth employees, the maximum credit available is $1,200 ($3,000 × 40%) per employee.
You should be aware that (1) no deduction is allowed for the portion of wages equal to the amount of the work opportunity credit determined for the tax year, (2) wages taken into account for the work opportunity credit can’t be taken into account for (and reduce the limit on the amount of wages that can be taken into account for) the empowerment zone employment credit or the renewal community employment credit and (3) the credit is subject to the overall limitations on the amount of business credits that can be taken in any tax year, but a 1-year carryback and 20-year carryforward of unused business credits is allowed. Because of these three rules, there may be circumstances in which the employer might, under an available election, elect not to have the work opportunity credit apply.
There are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of the credit. We suggest contacting your tax advisor for the application of these rules in your specific circumstances.
The new “Making Work Pay” tax credit is being paid to taxpayers in advance through reduced payroll withholding. The reduction was accomplished by tweaking the payroll withholding tables, which does not consider all specific tax circumstances. You may not have even noticed the difference, especially when spread over weekly, bi-weekly, or semi-monthly payroll checks. However, the amounts add up over time and could cause you to owe more federal income tax when your 2009 tax return is filed. This could be especially troubling for married individuals who both work and have their withholding adjusted.
Since the adjustment is based upon each individual’s earned income from a particular employer, it does not make allowances for multiple job incomes, spousal income, or other forms of income.
The result could cause a taxpayer’s withholding to be reduced inappropriately, which may substantially reduce his or her refund at the end of the year or, worse yet, cause an unexpected tax due. You are cautioned to check your federal tax withholding on your paystub before and after the change. Determine the amount of the withholding reduction for each paycheck, and then based on the number of paychecks for the year with the reduced withholding amount, determine the amount of the reduction for the year.
A larger unintended consequence are those with more than one employer. If you hold multiple jobs or have a spouse who also works, determine the total reduction for all of the paychecks. It is feasible that if you held two or more part time jobs throughout the year, you could have too little withheld and owe the IRS when you complete next year’s tax return.
Another problem area is the fact the credit phases out for higher-income taxpayers, so you may not even be entitled to the maximum credit. The phase-out is 2% of the taxpayer’s modified adjusted gross income in excess of $75,000 ($150,000 for joint filers) and is totally phased out at $95,000 ($190,000 for joint filers). So, if your withholding adjustment exceeds the credit, that excess will reduce the refund amount or add to the tax due when the 2009 tax return is prepared.
If you feel the withholding adjustment is excessive for your circumstances and would like to run an analysis or obtain help on whether you should make an adjustment, you should contact your tax preparer for further information.
Under the American Recovery and Reinvestment Act of 2009, certain individuals who are eligible for COBRA continuation health coverage, or a similar coverage under state law, may receive a subsidy for 65% of the premium paid. These individuals are required to pay only 35% of the premium, while the employer pays the remaining 65% and is then “reimbursed” by taking a credit on its quarterly payroll tax form.
If you have employees in this situation, it is important for you to maintain proper supporting documentation for the credit claimed. Such documentation includes, but is not limited to:
- Information on the receipt, including dates and amounts, of the assistance eligible individuals’ 35 percent share of the premium.
- In the case of an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA.
- In the case of a self-insured plan, proof of the premium amount and proof of the coverage provided to the assistance eligible individuals.
- Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from Sept. 1, 2008, to Dec. 31, 2009), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.
- Proof of each assistance eligible individual’s eligibility for COBRA coverage at any time during the period from Sept. 1, 2008, to Dec. 31, 2009, and election of COBRA coverage.
- A record of the SSN’s of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for one individual or two or more individuals.
- Other documents necessary to verify the correct amount of reimbursement.
This documentation must be maintained, but will not be required to be submitted to the IRS with Form 941.
In another example of the intention by Congress and the IRS to crackdown on misclassification of workers as independent contractors, Rep. James McDermott (D-Wa) introduced legislation that would make it more difficult for employers to receive protection from a potentially large employment tax assessment after incorrectly classifying a worker as an independent contractor. The legislation would also increase information reporting penalties [H.R. 3408, 7/30/09].
The legislation primarily focuses on Section 530 of the Revenue Act of 1978. Under Section 530, employers that meet the following three requirements are protected from potentially large employment tax assessments, even though they incorrectly categorized a worker as an independent contractor: (1) reasonable basis, (2) substantive consistency, and (3) reporting consistency. An employer can meet the “reasonable basis” requirement if judicial precedent, IRS rulings, a past IRS audit, or industry practice supports the classification of a worker as an independent contractor. An employer meets the substantive consistency requirement if it (and any predecessor business) consistently treated the workers in question as independent contractors. The reporting consistency requirement is met if the employer has not classified the workers as employees on any required federal tax returns, including information returns.
New Rules. The new legislation would repeal Section 530 and replace it with a new Code section, IRC §3511, that would make it more difficult for employers to avoid employment tax liability if they misclassified a worker as an independent contractor. IRC §3511 would generally require employers to have a “reasonable basis” for classifying a worker as an independent contractor. The “reasonable basis” standard is met only if:
(1) The employer classified the worker as an independent contractor based on: (i) a written determination that addresses the employment status of either the worker in question, or another individual holding a substantially similar position with the employer; or (ii) a concluded employment tax examination of the worker, or another individual holding a substantially similar position with the employer, that did not conclude that the worker should be treated as an employee; and
(2) The employer (or a predecessor) has not treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after Dec. 31, 1977.
The new legislation would not allow an employer to rely on an examination commenced, or a written determination issued, if: (a) the controlling facts and circumstances that formed the basis of a determination of employment status have changed or were misrepresented by the taxpayer, or (b) the IRS subsequently issues contrary guidance related to the determination of employment status that has a bearing on the facts and circumstances that formed the basis of the determination of employment status.
The IRS would issue its determination of worker status no later than 90 days after the filing of a petition with respect to employment status in any industry where employment is transient, casual, or seasonal (e.g., construction).
The new statute would apply to services rendered more than one year after the date that the legislation is enacted. Section 530 would not apply to services rendered more than one year after the date that the legislation is enacted.
Increase in Information Reporting Penalties. Under current law, a taxpayer that doesn’t file a correct information return may be subject to the following penalties:
- a $15 per return penalty if corrected within 30 days after the due date, up to a maximum total penalty of $75,000 a year ($25,000 for small businesses);
- a $30 per return penalty if corrected later than 30 days after the due date but before August 1, up to a maximum penalty of $150,000 a year ($50,000 for small businesses);
- a $50 per return penalty if not corrected by August 1 (or if a return is not filed at all), up to a maximum penalty of $250,000 a year ($100,000 for small businesses).
A “small business” is defined as a concern whose average annual gross receipts for the three most recent tax years ending before the calendar year in which the returns are due (or for the entire period of its existence, if less than three years) are $5 million or less.
Increase in penalties. Under the new law, a taxpayer that doesn’t file a correct information return would be subject to the following penalties:
-
a $50 per return penalty if corrected within 30 days after the due date, up to a maximum total penalty of $500,000 a year ($175,000 for small businesses);
-
a $100 per return penalty if corrected later than 30 days after the due date but before August 1, up to a maximum penalty of $1,500,000 a year ($500,000 for small businesses);
-
a $250 per return penalty if not corrected by August 1 (or if a return is not filed at all), up to a maximum penalty of $3,000,000 a year ($1,000,000 for small businesses).
The new law would also increase the penalties for failure to furnish a correct payee statement, intentional disregard of the rules, and failure to comply with other information reporting requirements (see IRC §6723).
The legislation has been referred to the House Ways and Means Committee. Congressman McDermott introduced similar legislation in 2008.
Steve Trojan, CPA is owner of SMT & Associates, Inc, a Crystal Lake IL based tax and accounting firm, and Complete Payroll Inc, (www.completepayrollinc.com) a payroll processing firm.
|
|
