payroll
Employees paid as independent contractors
Friday, January 13th, 2012 | consulting, tax | No Comments
A Knoxville company was paying its workers as independent contractors. It was forced to pay back wages to its workers by the Department of Labor, who determined that they were actually employees subject to minimum wage and overtime laws. The news hit the local paper, no doubt as a warning to other businesses who may be trying similar tactics.
Unfortunately, this may be only the beginning of this company’s troubles. The DOL is likely to share this information with the IRS, the Social Security Administration, and the Tennessee Department of Labor. All of these agencies will dun the company for back payroll taxes and withholdings, charging hefty penalties in the process.
Setting up payroll, tax deposits, and quarterly reporting may be more burdensome to a company than simple annual 1099 forms, but this appears to be one case in which that decision came back to haunt the company in a terrible way. Maybe it’s not too late for them to apply for the IRS voluntary reclassification program.
Contact us if you have concerns about the status of your workers.
New 1099 trap
Tuesday, January 10th, 2012 | consulting, tax | 2 Comments
Business tax returns for 2011 contain new questions about Form 1099 that may trap you if you overlook issuing 1099s this January. The questions appear on Form 1040 Schedules C (sole proprietorships), E (rental), and F (farms). They also appear on partnership (1065) and corporate (1120 and 1120S) returns.
The questions:
- Did you make any payments in 2011 that would require you to file Form(s) 1099?
- If “Yes,” did you or will you file all required Forms 1099?
Like the rest of the tax form, you must answer the questions truthfully under penalty of perjury (read the signature area). So take the time now to determine if you must issue any 1099s and get the process started. The deadline for issuing 1099s is January 31. More info from IRS.gov here.
These tax return questions are part of a larger IRS effort to crack down on the issue of employees vs. independent contractors, which they say costs the government billions of dollars in uncollected taxes. We’ve developed a white paper that helps you learn how to protect your company from this latest compliance push. Just click the email address or fill in the contact form and mention that you would like to receive the white paper, and we’ll send it to you without delay.
Payroll tax cut extension with a lump of coal
Thursday, January 5th, 2012 | tax | No Comments
Congress extended the payroll tax cut for sixty days after weeks of posturing. The 2% reduction in Social Security tax withholding will continue to put a little extra money in employees’ pockets through the end of February 2012, but Congress threw in a lump of coal with its Christmas gift. If you earn too much in January and February, you will be required to pay back part of that 2% tax cut when you file your tax return next year.
Here’s how it works. Everyone pays Social Security tax on earned income up to a yearly maximum ($110,100 in 2012). If you earned that amount equally over the course of the year, in two months you would earn $18,350. This law says that if you earn more than $18,350 in the first two months of 2012, you must pay back the 2% tax cut you received on the excess. You will report that on your tax return for 2012 when you file in 2013.
In other words, if you try to maximize your tax cut by accelerating your earned income for the year into January and February, it’s only temporary. Linda Dyer, our firm’s tax guru, has calculated that the most you will have to pay back is $1,835 if you get paid the maximum $110,100 in January and February [($110,100-$18,350)x2%].
Not even Santa Claus knows what good or bad will come out of the next round of negotiations aimed at extending the payroll tax cut for the entire year. We can hope that this lump of coal disappears in the hot air sure to circulate in the halls of the Capitol this winter.
Worker classification crackdown coming
Wednesday, October 26th, 2011 | consulting, litigation, tax | 2 Comments
The IRS recently announced a voluntary worker classification program that provides amnesty from back payroll taxes and penalties for companies who reclassify their independent contractors into employees. While there may be advantages on the federal tax side of this issue, you must consider other factors before deciding on a course of action. Worker classification has been a tricky, murky issue for many years. We will explore several aspects of this issue in future posts, including:
- Deciding whether your workers truly are independent contractors or employees;
- Protection from reclassification under Internal Revenue Code Section 530 or other precedents;
- Consequences at the state level of voluntary disclosure to the IRS;
- Related legal issues such as worker response to reclassification (e.g., retroactive reclassification to apply labor laws and collect overtime pay);
- Potential consequences from other government agencies such as the Department of Labor.
As we have seen before, a voluntary disclosure program is a harbinger of increased enforcement action in this long-contested area of business law. This makes it more important than ever for you to seek consultation from a knowledgeable professional. It is not an overstatement to say that this issue could bring your company to its knees. Unfortunately, we have seen it happen to smart, well-meaning business owners. Contact us today for a detailed analysis of your company’s exposure to the coming worker classification crackdown.
IRS abates penalties
Monday, April 4th, 2011 | tax | No Comments
In a payroll tax case we have been working on for over a year, the IRS has agreed to abate penalties, saving the taxpayer over $200,000. This is a very unusual decision for the IRS, which considers non-payment of payroll taxes to be an unauthorized loan of government funds.
Employers are required to withhold income tax, Social Security tax, and Medicare tax from their workers’ wages and deposit these funds regularly. At the same time, employers pay their share of Social Security and Medicare taxes. Penalties mount rapidly if an employer falls behind on these deposits.
The circumstances of this taxpayer’s case were unique. Their office manager/bookkeeper had let the company get behind on their payroll tax deposits, but she had told the owners that everything was fine. She had gained unauthorized access to the company’s post office box so she could intercept the IRS notices before the owners saw them. Her ruse unraveled when she was absent one day. The owners received one of the notices in the mail and called us.
Our investigation revealed how serious the situation was, with a delinquent tax liability in the mid-six figures, plus penalties and interest. The owners amassed enough funds to get the back taxes paid. We organized the documentation, interviewed the owners, and fashioned a compelling narrative describing the course of events that led to the late deposits. Through a series of letters, conversations, and meetings, we were able to persuade the IRS to abate the penalties. If the decision had gone the other way, the burden of paying the penalties on top of the back taxes probably would have put the company out of business.
We consider this a big win against the odds for our client. Not all of our engagements with the tax authorities end this well, but this is one example in which our willingness to stand toe-to-toe with the IRS on behalf of the taxpayer turned a potentially catastrophic situation into a more manageable one. As a result, the owners can now turn their focus back to managing their company through the recession.
Do you have an IRS story you’d like to share? How can we advocate for you?
Business tax form update
Monday, March 14th, 2011 | tax | No Comments
Due to extender provisions in the Tax Relief Act enacted on December 17, 2010, the IRS delayed accepting some business tax forms, as we posted previously. The IRS has recently announced updated information for these tax forms on irs.gov.
Form 941 for first quarter 2011 now may be filed. The due date is May 2, but early filing is necessary in some cases. Form 1120-PC and Form 8849 (Schedule 3) may also be filed. A date of April 16 was also announced for accepting Forms 706, 706-NA, and 709.
Update your Quickbooks
Thursday, January 20th, 2011 | consulting | No Comments
Intuit has announced that support for Quickbooks 2008 and earlier will end in May 2010. Consider upgrading to Quickbooks 2011 this spring. The older editions will still work minimally, but you will lose some functions such as Payroll Subscription Service, online functions, and technical support.
According to Intuit, the 2011 version allows for faster processing of your data, plus continued QuickBooks support. Some of the other new features include:
- Batch invoicing
- Customer snapshots
- Collections Center that allows for better management of receivables
- Improved search features
- Webmail integration that allows users to send invoices and estimates from Yahoo, Gmail, and Hotmail accounts
- The ability to run reports and backup data while other users continue to work in the file
- ‘Paid’ Stamps that appear directly on invoices.
This might be an opportunity for you to re-evaluate which edition you should be using for maximum effectiveness, and whether Quickbooks is the right accounting software for you. We’ll be happy to help you sort out your options.
Electronic federal tax deposits required
Thursday, January 6th, 2011 | tax | No Comments
Those tax deposit coupons are history. Beginning January 1, 2011, most businesses must make federal tax deposits electronically. If you have not yet set up your electronic deposit account, you should start the process right away, because the enrollment process can take a couple of weeks. Penalties for improper or late deposits can add up fast.
The Electronic Federal Tax Payment System (EFTPS) processes electronic funds transfers from your bank account to the U.S. Treasury. Although payroll taxes are most commonly deposited electronically, all types of taxes can be paid through the system. You can initiate a payment online or by phone. Transfers can be immediate or scheduled for a future date. Just remember to schedule the transfer at least one business day before the actual due date to ensure that the deposit is timely.
To start the enrollment process, go to www.eftps.gov or call 1-800-555-4477.
By the way, Publication 15, (Circular E) Employer’s Tax Guide is now fully updated and available. Have you updated your payroll processing for the reduction in employees’ Social Security tax? For 2011, employees pay only 4.2% instead of 6.2%, increasing their take-home pay. Employers still pay the normal 6.2% though.
If you have questions about these issues, we would be happy to help. Use the contact form, or call (865) 523-8700.
Health care tax credit starts this year
Monday, December 6th, 2010 | tax | No Comments
If your company or tax-exempt organization provides group health insurance coverage to your employees, it may be eligible for a tax credit on its 2010 return. The criteria for taxable entities:
- Employ fewer than 25 “full-time equivalent” employees (FTE, explained later);
- Pay average annual wages less than $50,000 per FTE;
- Maintain a “qualifying arrangement” for which the employer pays at least 50% of the premium cost.
The IRS has released Form 8941 to claim the credit. In the instructions to the form, they provide a worksheet to help you determine your eligibility for the credit, which phases out as the number of FTEs and average wages increase. The rules are slightly different for tax-exempt entities, but all employers use Form 8941 to claim the credit.
You should consult your tax advisor to ensure you don’t get tripped up by details in the law and regulations, but here are some highlights:
- Owners and their family members are not included in the calculations (check with your tax advisor for details).
- Full-time equivalent employees (FTEs) include part-time employees. Add every employee’s total hours, then divide by 2,080 (40 x 52 weeks), then round down to calculate the number of FTEs.
- Divide the total wages by the number of FTEs to calculate the average annual wages. All wages, including overtime and those for hours worked over the 2,080 full-time hours, must be taken into account.
- A self-insured plan, Health Reimbursement Arrangement (HRA), Health Flexible Spending Arrangement (FSA), or Health Savings Account (HSA) does not constitute a qualifying arrangement. The plan must be issued by a licensed insurer.
- Plans covering leased employees and multi-employer plans may be qualifying arrangements.
- Eligible premiums are only those paid for the employees, not their spouses or dependents.
The maximum credit is 35% of the qualifying premiums (25% for tax-exempt entities). It is reduced as the number of FTEs exceeds 10 and the average annual wages exceed $25,000.
Eligibility for the credit may affect your tax planning. Project your taxable income for the year to determine if there is an income tax liability that can be offset by the credit. Its value is lost to the extent that the tax bill is less than the credit.
This credit remains in place under current law until 2014, when health care reform takes full effect.
Take action now to reduce taxes
Tuesday, November 23rd, 2010 | consulting, tax | No Comments
Year-end is the best time to take actions that have an impact on next spring’s tax bill. There’s not much you can do after the year is over. Take time to do financial projections through year-end and calculate your tax bill. Working with your accountant, you can identify actions to take that may reduce your tax or improve your financial position.
Although we are still waiting for Congress to act on several important tax issues, laws were passed earlier this year that change the calculations for many business owners. You still have time to arrange things to take advantage of these new provisions.
The Affordable Care Act introduced a tax credit that takes effect this year for smaller employers who pay at least part of their workers’ health insurance premiums. After determining whether your company is eligible and the amount of the credit, you can calculate how much net income (and taxes) will be offset by the credit.
The HIRE Act offers a payroll tax reduction for hiring new workers, starting with the second quarter of 2010. If you have not been taking advantage of this reduction, amend the prior returns and reduce the amount of your deposits in this final quarter for a holiday cash windfall. Beware, though, that the reduction may also reduce your payroll tax expense deduction and increase your income tax bill. If you keep those new hires on the payroll for a year, you get an income tax credit in 2011.
The Small Business Jobs Act, enacted in September, contains about a dozen and a half provisions that may affect your business’s tax situation this year and next. They include:
- Several adjustments to depreciation deduction limits for first-year write-offs and bonus depreciation for various types of property and vehicles.
- An increase in the up-front deduction for business start-up expenses if the business starts operation in 2010 only.
- An option to carry back business credits five years and recover taxes previously paid.
- Relaxation of the record-keeping rules for deducting cell phones. (Did you know you had to log every business call?)
- A reduction in self-employment tax for self-employed persons who buy health insurance for themselves and their families.
These provisions may affect you starting in 2011:
- Many rental income recipients must begin issuing Forms 1099 to service providers (e.g., plumbers, painters, etc.) to whom they pay $600 or more. (Some exceptions apply.)
- Penalties for failure to file information returns such as Forms 1099 have been increased substantially.
If you work through the projections and consult with your tax professional before year-end, you can make decisions that may save your company taxes and improve your financial position.