withholding

Service charge reporting deadline postponed

Tuesday, December 18th, 2012 | consulting, tax | No Comments

The Internal Revenue Service has given businesses an extra year to comply with new rules on how to treat service charges, until January 1, 2014. The new rules had been scheduled to take effect January 1, 2013, but the deadline was extended in response to public comments to allow companies time to make their accounting systems compliant.

If you operate a restaurant or other business where the receipt of tips is a part of the operation, this ruling is important to you. Last summer, Rev. Rul. 2012-18 defined the differences between tips and service charges, including illustrative questions and answers. Answer 1 contains the meat of the rules for determining whether a payment is a tip or a service charge. To be considered a tip to the employee:

  1. the payment must be made free from compulsion;
  2. the customer must have the unrestricted right to determine the amount;
  3. the payment should not be the subject of negotiation or dictated by employer policy; and
  4. generally, the customer has the right to determine who receives the payment.

Otherwise, the payment may be considered a service charge, even if it is called a tip or gratuity and distributed to employees. The amount is added to each employee’s wages, rather than tips.

Here’s an example: If your restaurant adds a gratuity of a specified amount, such as 18%, to a check for large parties, that gratuity is actually a service charge, not a tip. The amount is specified, compulsory, and dictated by policy.

Why is this important? A credit is available for employers who overpay their share of FICA taxes based on employees’ unreported tip income. A reclassification of payments as service charges rather than tips changes this calculation, because service charges are reported as wages and not tips.

Contact us for help to make sure your bookkeeping properly distinguishes between tips and service charges before the new year begins. This rule change will be much easier to manage if any needed adjustments are in place before your first payroll of 2013.

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Employee or independent contractor stakes rise

Thursday, November 29th, 2012 | consulting, tax | No Comments

Employee or independent contractor? Sure, we understand that treating workers as independent contractors is easier in so many ways. If you are struggling with the question of which classification your workers fall under, it is more important than ever to consider the consequences if the government disagrees with your stance.

This article in Forbes magazine concisely lays out the issue, with some real-world questions for you to carefully consider.

Government agencies at all levels are getting better at communicating across their statutory boundaries. So a seemingly small issue with only a single agency can mushroom into a crippling mess involving the IRS, Social Security, Departments of Labor, workers compensation, insurance, and benefit plans.

The IRS has opened a voluntary disclosure program that limits exposure to the potentially substantial liability of back payroll taxes, interest and penalty that can arise if contractors are reclassified as employees.

If you are concerned about your company’s potential exposure because of the worker classification crackdown, we can help you put a number on the risk and evaluate your options. When you know where you stand with the government regarding your employees and independent contractors, you can make sure you are fully compliant and confidently get back to running your business.

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Court allows employer tax refunds on layoffs

Tuesday, October 30th, 2012 | litigation, tax | No Comments

The Sixth District Court of Appeals, which includes Tennessee, has upheld lower court rulings that severance pay is not subject to FICA tax. Companies that had mass layoffs and offered severance pay packages should consider filing claims to refund those taxes before the statute of limitations runs and limits the opportunity.

In March 2008, the Federal Circuit Court ruled in the CSX Corp. case that the tax is owed. However, of the five federal trial and appellate courts that have looked at the issue, four have ruled in favor of taxpayers. The latest case in the Sixth Circuit, Quality Stores (a brief history), keeps the question unsettled, and it is likely to work its way to the Supreme Court in the next few years. The IRS issued a Revenue Ruling in 1990 clarifying its position for payment of the tax, and it is not likely to capitulate with several billion dollars at stake.

Employers with large numbers of layoffs may consider litigation to recover FICA tax paid on severance pay. Others may consider filing protective claims for refund using IRS procedures. Either way, deadlines for doing so are rolling by every quarter, generally three years after the filing deadline for reporting the tax.

Employees also have a stake in this decision, because they too pay FICA tax through withholding. Quality Stores, with the consent of many of its laid-off employees, filed on their behalf to recover those payments.

This is a complex matter with potentially large financial implications, so consult your tax adviser and attorney to weigh your options.

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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.

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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.

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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.

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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?

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Most-overlooked tax deductions

Wednesday, March 23rd, 2011 | tax | No Comments

Here is a list of some of the most-overlooked tax deductions each year. Overlooking these deductions may cost you money by raising your tax bill, and the IRS seldom complains when you overpay your taxes. Check this list, and then call us to see how you might claim these deductions.

  • State sales taxes. If you itemize deductions, you have a choice of deducting state income tax or sales tax, whichever is greater. Unless you have quite a bit of investment income taxable in Tennessee, you’ll want to claim sales taxes. In addition to the amount the IRS calculates for you, you can add sales tax for a vehicle and construction materials you bought yourself.
  • Reinvested dividends. If your mutual fund or stock dividends are used to buy additional shares, each reinvestment increases your basis in the investment. This can make a big difference when you sell it in a taxable account because it reduces the taxable gain or increases the tax-saving loss.
  • Out-of-pocket charitable contributions. Keep those receipts if you buy supplies for your favorite charity. If you drive your vehicle for charity, keep a mileage log so you can deduct 14 cents per mile.
  • Student-loan interest. A child who is not claimed as a dependent can qualify to deduct interest paid by the parents on his or her return. The IRS deems the payments to have been given to the student, and the student to have paid the interest.
  • Job-hunting costs. If you are looking for a new job in the same line of work, you may deduct away-from-home travel costs, ground transportation, employment agency fees, costs of printing resumes and business cards, postage, and other expenses related to the job search. But if it is your first job or the new position is in an unrelated field, the hunt is not deductible. This is an itemized deduction.
  • Moving expenses. If your new job is at least 50 miles from home, costs of moving yourself and your household are deductible, including mileage if you drive your vehicle. Unlike the job-hunting deduction, you can claim this one for your first job, and even if you do not itemize.
  • Overnight travel for military reservists. If you travel more than 100 miles and stay overnight for drills or meetings, you may deduct travel costs even if you do not itemize.
  • Health insurance deduction. If you are self-employed, your health insurance premiums reduce self-employment tax for 2010 only, in addition to income tax.
  • Child-care credit. If you take a payroll deduction for dependent care, that part is not available for the credit. But if you pay more than your payroll deduction, the excess may generate a tax credit, which reduces your tax dollar-for-dollar.
  • Estate tax on income in respect of a decedent. If you inherited an asset such as an IRA from an estate that paid federal estate tax, you can reduce the tax you owe by the amount of estate tax that was paid on that asset.
  • Refinancing points. Points you pay when buying a house are deductible in the year you pay them. When you refinance a mortgage, though, you may only deduct a proportional amount based on the life of the loan. It’s not much each year, but it counts. The remaining amount can be deducted in the year you pay off the loan.
  • Jury pay turned over to your employer. If your employer continues paying your salary while you serve jury duty, you may be asked to turn over your jury pay to the company. You still must report jury fees as taxable income, so by deducting the amount paid to your employer, the tax hit is a wash.
  • American Opportunity Credit. This modified version of the Hope credit covers all four years of college, is partially refundable, and is phased out at higher income levels than the old credit. The Lifetime Learning credit is also still available.
  • Making Work Pay credit. Although this credit reduced your withholding throughout 2010, you must claim it on your tax return.
  • Credit for energy-saving home improvements. The cost of certain energy-saving items installed in 2009 and 2010 is subject to a 30% credit up to $1500 for both years combined. Another credit is available for devices that use alternative energy sources.
  • Sale of demutualized stock. If you received stock from an insurance company that switched from being policyholder-owned to stockholder-owned, a recent court decision affects you. When you sell that stock, you may reduce the tax you pay on the gain by reporting your basis in the stock.
  • Home-buyer credit. This credit was expanded to long-time homeowners before it ended. If you closed on, or entered a binding contract on, a home before April 30 2010, you may qualify.

Remember to talk with your tax adviser to learn how these deductions may apply to your unique situation. It often pays to have an experienced professional like us to prepare your tax return. If you offer full disclosure of events over the past year to your tax preparer, you may trigger questions that can lead to tax savings. As we prepare your return, we also watch out for items that may be more likely to trigger questions from the IRS,  and we’ll discuss them with you. You’ll rest better knowing that your tax return was prepared by an experienced team of experts.

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Payroll Tax Audits Target Businesses

Friday, September 3rd, 2010 | tax | No Comments

Earlier this year, the IRS began its program of auditing businesses for compliance with payroll tax reporting and payment. As part of its National Research Program to gather statistics about payroll tax compliance, the IRS is examining 6,000 businesses large and small, 2,000 each year starting earlier this year. This study is part of their push to step up collection of unpaid payroll taxes. The second round of selection will take place at the end of 2010, and marks a continued increase in business audit frequency.

Even compliant employers face the possibility of being selected for these audits, incurring the extra time and expense of proving compliance. At a time when many businesses are struggling, the added burden could be disastrous.

The IRS is very aggressive in collecting past-due employment taxes because they are considered to be the government’s money that the employer is resonsible for collecting and remitting. Employers who fall behind on their payroll taxes face the highest penalty rates the IRS can impose, adding huge amounts of debt in a matter of months. Additionally, the IRS is empowered to file liens against property, seize funds in bank accounts, and divert payments by the company’s customers to collect payroll taxes. If the business cannot pay, the IRS will collect from the owner or other person responsible for payroll taxes, in some cases imposing civil or criminal penalties. In short, delinquent payroll taxes can shut down your business.

If you are thinking of going up against the IRS on your own, think again. You need experienced representation to keep the IRS from crippling your business. Depending on your situation, it may be possible to reduce the penalty amount, although the tax liability is rarely reduced. If you are behind on your payroll taxes, call for help before the IRS contacts you. If you receive a notice or call from the IRS, a timely and appropriate response is required. Help is available, and it can make a difference in the resolution of the problem.

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Payroll tax credit

Wednesday, July 7th, 2010 | tax | No Comments

It is time to prepare your second quarter payroll tax returns, due August 2, 2010 (July 31 falls on Saturday). If your company or tax-exempt organization has hired employees this year, you may be eligible for the HIRE Act new hire tax credit. You should check before filing Form 941. We previously posted about this and other tax credits in the spring.

Here is a checklist (but consult your tax adviser for specifics related to your situation):

  • Was the new worker hired to fill a new position, or to replace someone who quit voluntarily or who was terminated for cause? The new worker may not be related to you or to another owner of the business.
  • Was he/she hired after February 3, 2010, and before January 1, 2011?
  • Did he/she work less than 40 hours during the 60 days ending on the hire date?
  • Did he/she sign and give you the required Form W-11 certifying these facts? (Do not send this form to the IRS.)

If all of the above conditions are met, you qualify for an exemption of 6.2% (the employer share of Social Security tax) of wages paid between March 19 and December 31, 2010. This reduces the amount of your tax deposits for this year. It does not affect amounts withheld from the employee’s pay.

Form 941 has been modified to report wages to qualified employees starting with the second quarter. The IRS has provided more information in the instructions to the forms, and in a question-and-answer format at their website.

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Van Elkins & Associates, CPAs

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