Payroll Tax Cut Extended Through the End of 2012

Posted by admin on April 2, 2012  |   No Comments »

Employees will continue to receive larger paychecks for the rest of this year based on a lower Social Security tax withholding rate of 4.2%. This reduced rate (from 6.2% to 4.2%), originally in effect for all of 2011, was previously extended through February 2012. A recently enacted law, the Middle Class Tax Relief and Job Creation Act of 2012, further extends the payroll tax reduction to the end of 2012.

A rate reduction in the Social Security portion of the self-employment tax, from 12.4% to 10.4%, applies for self-employed individuals. For 2012, the Social Security tax applies to the first $110,100 of wages and net self-employment income received by an individual.

The new law also repeals the recapture provision included in the previous extension that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut. As a result, the now repealed recapture provision does not apply.

Revised Payroll Tax Form Available for Employers
Revised Form 941, Employer’s Quarterly Federal Tax Return, is now available for employers to properly report the newly-extended payroll tax cut.

No action is required by employees to continue receiving the payroll tax cut. As before, the lower rate will have no effect on employees’ future Social Security benefits.

Additional Information
The Internal Revenue Service will issue additional guidance, as needed, to implement the newly-extended payroll tax cut, and any further updates will be posted on IRS.gov. To read more about the Social Security and Medicare payroll taxes, please visit our section on the Federal Insurance Contributions Act (FICA).

IRS Extends Deadline to File 2011 Tax Returns

Posted by admin on March 6, 2012  |   No Comments »

The Internal Revenue Service (IRS) has announced that taxpayers have until April 17 to file their 2011 tax returns. The IRS encourages taxpayers to e-file as it is the best way to ensure accurate tax returns and get faster refunds.

Taxpayers will have until Tuesday, April 17, to file their 2011 tax returns and pay any tax due because April 15 falls on a Sunday, and Emancipation Day, a holiday observed in the District of Columbia, falls this year on Monday, April 16. According to federal law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have two extra days to file this year. Taxpayers requesting an extension will have until Oct. 15 to file their 2011 tax returns.

The IRS began accepting e-file and Free File returns in mid-January.

Taxpayer Assistance from the IRS
The IRS also announced a number of improvements to help make this tax season easier for taxpayers. This includes new navigation features and helpful information onIRS.gov, and a new pilot to allow taxpayers to use interactive video to get help with tax issues (the IRS is conducting a limited roll out of this new video conferencing technology at 10 IRS offices and two other sites, and may expand to further sites in the future).

Taxpayers with questions should check the IRS website at www.IRS.gov, call the toll-free number or visit a taxpayer assistance center.

IRS Announces 2012 Standard Mileage Rates

Posted by admin on January 26, 2012  |   No Comments »

The Internal Revenue Service has issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
2012 Standard Mileage Rates
Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 55.5 cents per mile for business miles driven;
  • 23 cents per mile driven for medical or moving purposes; and
  • 14 cents per mile driven in service of charitable organizations.

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Limitations on Use of Standard Mileage Rates
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.

For Additional Information
Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan. For more on employer-provided transportation benefits, please see our section on Fringe Benefits.

Payroll Tax Cut Temporarily Extended into 2012

Posted by admin on January 25, 2012  |   No Comments »

Employees will continue to see a reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. The two percentage point payroll tax cut, in effect for 2011, was temporarily extended by the Temporary Payroll Tax Cut Continuation Act of 2011. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

According to the Internal Revenue Service (IRS), employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Additional Income Tax May Apply to Certain Higher Income Employees
Employers should note that the law includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month extension period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount).

  • This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).
  • This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year.
  • With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012, is due April 30, 2012.

To read more about the Social Security and Medicare payroll taxes, please visit our section on the Federal Insurance Contributions Act (FICA).

New Enforcement Efforts Aimed at Employee Misclassification; Employers May Avoid Payroll Tax Penalties with Voluntary Reclassification

Posted by admin on November 7, 2011  |   No Comments »

The U.S. Department of Labor (DOL) has entered into a series of agreementswith the Internal Revenue Service (IRS), as well as several state labor commissioners and other department leaders, which will enable those agencies to share information and coordinate law enforcement to end the business practice of misclassifying employees in order to avoid providing employment protections.

Voluntary Classification Settlement Program
At the same time, the IRS has launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers. The Voluntary Classification Settlement Program (VCSP) will allow employers the opportunity to come into compliance by making a minimal payment covering past federal payroll tax obligations rather than waiting for an IRS audit.

Who is eligible to participate in the program?
The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an applicant must:

  • Consistently have treated the workers in the past as nonemployees.
  • Have filed all required Forms 1099 for the workers for the previous 3 years.
  • Not currently be under audit by the IRS, the DOL or a state agency concerning the classification of these workers.

How does the program work?
Employers accepted into the program will pay an amount effectively equaling just over 1% of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first 3 years under the program, be subject to a special 6-year statute of limitations, rather than the usual 3 years that generally applies to payroll taxes.

How can employers apply for the program?
Interested employers can apply for the program by filing Form 8952,Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Where can I find more information?
Full details on the Voluntary Classification Settlement Program, includingFAQs, are available on IRS.gov by clicking here, and in Announcement 2011-64. To read more about the latest enforcement efforts by DOL and the IRS, please click here. Our section on Independent Contractors – How to Classifyfeatures important information and tips on how to properly classify your workers.

2012 Health Savings Account Limits Released

Posted by admin on July 13, 2011  |   No Comments »

The Internal Revenue Service (IRS) has released the 2012 inflation adjusted amounts forHealth Savings Accounts(HSAs) as determined under the Internal Revenue Code.

Background on HSAs
An HSA is a health savings account (a tax-exempt trust or custodial account) set up exclusively for paying qualified medical expenses. To be eligible to have contributions made to an HSA, an individual must be covered under a high deductible health plan (HDHP) and meet certain other eligibility requirements.

An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual’s return whether or not the individual itemizes deductions. Employer contributions are not included in income. Distributions from an HSA that are used to pay qualified medical expenses are not taxed.*

Annual Contribution Limitation
For calendar year 2012, the annual limitation on HSA deductions for an individual with self-only coverage under a high deductible health plan is $3,100. The annual limitation on HSA deductions for an individual with family coverage under a high deductible health plan is $6,250for calendar year 2012.

High Deductible Health Plan
For calendar year 2012, a “high deductible health plan” is defined as a health plan with an annual deductible that is not less than $1,200 (no change from calendar year 2011) for self-only coverage or $2,400 (no change from calendar year 2011) for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,050 for self-only coverage or $12,100 for family coverage.

To view Revenue Procedure 2011-32, please click here. You can learn more about HSAs in the HR360 section on Health Savings Accounts.

*Note that, under the new Affordable Care Act requirements, only medicines or drugs that are prescribed (including over-the-counter medicines or drugs obtained with a prescription) or insulin are considered qualified medical expenses for HSA purposes for amounts paid after 2010. Additionally, for HSA distributions after 2010, the additional tax on distributions not used for qualified medical expenses is increased to 20%.

New Health Care Reform Definition of Dependent Child Creates Tax Issues

Posted by admin on April 8, 2011  |   No Comments »

While employees are pleased they can now enroll their older children under their employer’s health plan pursuant to Health Care Reform, some employers must confront challenging tax issues in connection with this new requirement.  Specifically, one issue relates to the fact that new federal tax rules for dependent coverage do not apply to health savings accounts (HSAs); another arises because some state tax laws do not follow the new federal rules.

Pre-Health Care Reform Definition of Dependent

Employer health coverage may be provided on a tax-free basis (from a federal tax perspective) to an employee’s spouse or “dependent.”  Prior to Health Care Reform, “dependent” meant an employee’s qualifying child or qualifying relative.

An employee’s qualifying child generally includes the employee’s child or other relative younger than the employee, who has not attained age 19 (or age 24 if a full-time student), who lives with the employee, and who does not provide more than one-half of his or her own financial support.  The age limitations are waived for a qualifying child who is totally disabled.

An employee’s qualifying relative generally includes the employee’s child, other relative or member of the employee’s household, for whom the employee provides over half of the individual’s financial support and who is not the qualifying child of the employee or any other person.

For purposes of these two definitions, “child” includes the employee’s natural child, adopted child, child placed with the employee for adoption, step-child or foster child.

Expanded Definition of Dependent Under Health Care Reform

Health Care Reform expanded the group of individuals to whom employer health coverage may be provided on a tax-free basis (from a federal tax perspective) by amending the applicable definition of “dependent.”  Under the new rule, “dependent” also includes an employee’s child through the end of the year the child attains age 26 (regardless of whether he or she is the employee’s qualifying child or qualifying relative).  Again, for this purpose, “child” means the employee’s natural child, adopted child, child placed with the employee for adoption, step-child or foster child.  This change to the federal tax law was adopted to facilitate the Health Care Reform mandate to provide medical coverage to an employee’s child until at least age 26.

New Rule Does Not Apply to HSAs

While the new definition of dependent applies to most employer health coverage (including medical, prescription drug, dental and vision benefits, health reimbursement arrangements (HRAs) and medical flexible spending accounts (FSAs)), it does not extend to HSAs.  An employee can only obtain tax-free reimbursement from an HSA for his or her child’s uninsured expenses where the child is the employee’s qualifying child or qualifying relative under the pre-Health Care Reform rules.

This wrinkle in the federal tax law can be illustrated by the following example.  Assume an employee enrolls her 25 year old son in her employer’s high deductible health plan (HDHP) which is coupled with an HSA.  Based on the son’s age, he can be covered under the employer’s HDHP on a tax-free basis under Health Care Reform.  However, the employee cannot submit her son’s uninsured expenses for tax-free reimbursement from the related HSA unless the son is the employee’s qualifying child or qualifying relative.  The son is too old to be the employee’s qualifying child.  Further assume the son does not rely on the employee for the majority of his financial support.  As a result, he also is not the employee’s qualifying relative.  Thus, if the employee takes an HSA distribution for reimbursement of her son’s uninsured medical expenses, the distribution is taxable and may be subject to the 20 percent HSA penalty tax on early withdrawals.

New Rule May Not Apply Under State Law

While most state tax laws (including Michigan’s) automatically conform with the current federal tax law, a minority do not.  States that do not conform to current federal rules generally still apply the pre-Health Care Reform tax rules for dependent health coverage.  As a result, some children who are now eligible for tax-free coverage under federal law as a result of Health Care Reform may not be eligible for tax-free coverage under state law.

Some non-conforming states, such as Indiana, Georgia, and California are expected to amend their laws to align with federal law regarding this issue.  In other non-conforming states, it is unclear if or when the law will be amended to conform with the new federal rule.  A few non-conforming states, including Wisconsin, Minnesota, and Kentucky, have issued guidance instructing employers how to deal with this issue in the interim period (until the state legislature decides whether or not to amend the state law to conform with the new federal rule).

Employers should determine whether they have employees in any non-conforming states and, if so, monitor developments in those states closely.  In non-conforming states, you may need to identify any enrolled children who are not an employee’s qualifying child or qualifying relative and include the value of that coverage in the employee’s income for state tax purposes.

New Year Brings New Payroll, Tax Rules

Posted by admin on February 7, 2011  |   No Comments »

In addition to extending the Bush era tax cuts, a bill passed on Dec. 17, 2010, requires payroll changes and extends certain tax credits. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 includes the following provisions:

Continue Reading…

2011 Compliance Flash

Posted by admin on January 20, 2011  |   No Comments »

CONEXIS

In this edition: Pre-tax transit benefits, the Child Care Tax Credit, the Small Business Health Care Tax Credit, and 2011 IRS plan limits.

Transit Benefit

The American Recovery and Reinvestment Act of 2009 (ARRA) included a provision that increased the maximum pre-tax benefit under a Section 132 transportation plan from $120 to $230 monthly. Unless Congress acts to extend this provision, the provision will expire at the end of the 2010 calendar year and the benefit will once again be capped at $120 monthly.

Many Section 132 plans require that participants purchase their transit passes or other media in advance. For these plans, it is critical that this information is communicated to the plan participants in advance of the ordering period for January passes.

Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit (CDCTC) provides a credit of between 20 and 35 percent of up to $3,000 (or $6,000 for two or more children) of work-related dependent care expenses. The amount of credit available to a taxpayer is determined by the taxpayer’s adjusted gross income. Information regarding this credit is available on the IRS Web site at http://www.irs.gov/taxtopics/tc602.html

The amount of the credit available under the CDCTC was increased by The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which is set to expire at the end of 2010. Unless Congress acts to extend EGTRRA, the provisions of the CDCTC will revert to their previous levels of between 20 and 30 percent of up to $2,400 for one qualifying individual and $4,800 for two or more qualifying individuals.

Small Business Health Care Tax Credit

The Patient Protection and Affordable Care Act of 2010 (PPACA – enacted March 23, 2010) created a credit to help small businesses and small tax-exempt organizations afford the cost of providing health care coverage to their employees.

The credit is worth up to 35 percent of a small business’ premium costs in 2010 (25 percent for eligible tax-exempt employers) and increases to 50 percent beginning January 1, 2014 (35 percent for eligible tax-exempt employers). To qualify for the credit, a qualifying employer must meet the following criteria:

• Must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.

• Must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).

• Must pay average annual wages below $50,000.

More information about the credit, including a guide to claiming the credit, is available on the IRS Web site at http://www.irs.gov/newsroom/article/0,,id=223666,00.html.

2011 IRS Plan Limits

The following table reflects the 2011 IRS plan limits for various benefit plans:

2011 IRS Plan Limits
Plan Year 2011 2010 2009
Transit and Vanpooling (combined) $120 $230 $120/230
Parking $230 $230 $230
Highly Compensated Employee – Section 414(g) $110,000 $110,000 $110,000
Key Employee – Section 416(i) $160,000 $160,000 $160,000
HSA Maximum Annual Contribution Limit (Self only) $3,050 $3,050 $3,000
HSA Maximum Annual Contribution Limit (Family) $6,150 $6,150 $5,950
HSA Catch-up Contribution Limit $1,000 $1,000 $1,000
HSA Minimum Annual Deductible (Self only) $1,200 $1,200 $1,150
HSA Minimum Annual Deductible (Family) $2,400 $2,400 $2,300
HSA Maximum Out-of-pocket (Self only) $5,950 $5,950 $5,800
HSA Maximum Out-of-pocket (Family) $11,900 $11,900 $11,600
Maximum Exclusion for Employer-provided Adoption Assistance $13,360 $13,170 $12,150
[1] $120 per month for January and February 2009; $230 per month for the remainder of 2009. The American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5 (Feb. 17, 2009) amended Code 132(f)(2) to make the monthly limit for transit passes and vanpooling temporarily the same as the monthly limit for parking. This change is effective only through December 2010.

[2] An employee is treated as being eligible for the entire calendar year as long as he or she is eligible during the last month of the calendar year. However, failure to maintain eligibility during the “testing period” will result in adverse tax consequences (including an additional excise tax). The testing period begins in December of the year in which the employee becomes eligible and ends the last day of December of the following year.

[3] The amount excludable from an employee’s gross income begins to phase out for taxpayers with modified adjusted gross income in excess of $182,180 and is completely phased out for taxpayers with a modified adjusted gross income of $222,180 or more.

[4] The amount excludable from an employee’s gross income begins to phase out for taxpayers with modified adjusted gross income in excess of $182,520 and is completely phased out for taxpayers with a modified adjusted gross income of $222,520 or more.

[5] The amount excludable from an employee’s gross income begins to phase out for taxpayers with modified adjusted gross income in excess of $185,210 and is completely phased out for taxpayers with a modified adjusted gross income of $225,210 or more.