The lazy, hazy, crazy, days of summer are almost upon us! While you’re enjoying the great weather, take some time to read this issue of our newsletter and brush up on the tax laws. We’ve had some expected changes fall through, some unexpected changes, and some changes that we were expecting but were hoping wouldn’t make it. Thinking of putting your child to work in your business this summer? Be sure to read the rules for summer hiring…you may be able to save on employment taxes.
I’ll be working regular hours this summer until the first week of September when we’ll be going to Denver for Lauren’s first day of school. During that week, I will be available by phone and email on a limited basis.
Rules for 2011 Summer Hiring
In 2011, you may be eligible for the 6.2% HIRE exemption from employer Social Security tax on the wages for summer help.
Owner’s children, regardless of age, can work any number of hours or time of day if the parent(s) own 100% of the business. Children under 16 can’t do hazardous work such as operating lawn mowers or sewing machines. They also can’t work where food is cooked or work near flammable or hazardous materials.
Obtain a W-4 from all summer employees. No exceptions!
Withhold federal income tax from all employees, even the owner’s spouse and children, unless their W-4 results in no withholding.
Withhold FICA from all workers, even if receiving social security benefits or high school students unless the worker is under 18 and working for sole-owner parents.
Rules for summer hires 21 years of age:
100% owners hiring only immediate family need not pay a minimum wage. However, if they regularly employ others, even family must be paid minimum wage.
Owners’ children under 21 are exempt from FUTA
Owners’ children under 18:
Wages are exempt from FICA only of parents are sole owners or sole partners;
Federal income tax withholding applies and must be reported on W-2s.
Other children under 18: Get an age certificate recognized by the Department of Labor and your state Wage and Hour Division and return it to the workers at termination. Department of Labor generally accepts a state age certificate, but check with the state WHD to be sure. These workers may not do hazardous work.
Children aged 14-15: Can work eight hours a day, 40 hours a week, June 1 – Labor Day, between 7 AM and 9 PM if school is not in session. Exceptions: Limits don’t apply to news carriers or children employes exclusively by a parent/sole proprietor.
Children under age 14: Cannot be hired unless they work for a parent/sole owner.
No New 1099 Reporting
The proposed new 1099 reporting was not enacted into law, so we’re all still using the old rules for 1099 reporting.
Reporting Employee Health Insurance Costs on W-2s The Health Care Reform Act requires employers to report the cost of employer-provided health care coverage on W-2s. However, employers filing less than 250 W-2s can treat the requirement as optional for 2011 Forms W-2 files in 2012 and 2012 Forms W-2s filed in 2013. If you opt to report the information before then, you can obtain guidance on how to determine the amount to put on the W-2s in IRS Notice 2011-28, which has a Q & A format. Go to www.irs.gov and type Notice 2011-28 in the search box. Note: In Texas, “dependent” status for health insurance available to unmarried children up to age 25.
Expect Higher Federal Unemployment Rates During the recession, states with high state unemployment claims borrowed from the federal government to meet their obligations. If the state doesn’t repay the loan within two years, it triggers a FUTA surtax on employers by reducing the FUTA credit for SUI already paid. This effectively increases the employer’s FUTA liability in the first year of default by an added $21 per employee. Any additional 2011 FUTA tax is not due until the 940 is due on January 31, 2012. Generally, each year a state is in default, its employers’ FUTA liability increases.
Although states subject to the FUTA credit reduction in 2011 will be finalized in November 2011 and appear on the 2011 Form 940. At this time, Texas is not expected to be on the list, but be prepared.
The IRS offers a downloadable desktop calendar tool to access :Important Tax Dates for Small Business right from your desktop, even when you’re offline. New events will automatically be updated via the desktop tool. The tool is customizable so that you can specify what types of events you wish to view (general, employer, excise, or all) and how you want them displayed. The tool can be downloaded at: http://www.irs.gov/businesses/small/article/0,,id=176080,00.html
Reimbursements to Employees – Taxable or Nontaxable Reimbursements are nontaxable to employees—excluded from gross income and exempt from FITW, FICA and FUTA—under the following conditions:
A specific business benefit is expected to result from the discussions immediately before, during, or immediately after the meal or event, such as a meal with a business person to discuss the employer’s products/services.
The meal or entertainment is in active pursuit of business. You don’t have to prove that a sale or other business benefit resulted from the meal or entertainment, or even that more time was devoted to business than to entertainment. But you must be able to prove that business was the primary purpose of the event, not incidental to it.
The setting is conducive to business. The IRS often (but not always) deems as pure entertainment and not business events, business meals and entertainment events conducted at night clubs, country clubs, golf courses or resorts. Safety net: Hold a business meeting immediately before or after these outings and make sure you can prove that a business meeting was the primary purpose of the event and that the location was conducive to the business purpose.
Expense reimbursements: Employers have 3 options:
Reimbursements to employees for business-related overnight lodging and meals can be handled in one of 3 ways:
1. Accountable plans. To be nontaxable to the employee under an accountable plan and not reported on the W-2, the advance or reimbursement must meet 3 IRS conditions: there must be a business purpose (that is, the expense would be deductible if claimed on the employee’s personal tax return); the amount, time, use, and business purpose of the advance or reimbursement must be substantiated within a “reasonable” time; and the employee must return the unsubstantiated amount within a reasonable period of time. If these 3 conditions are not met, apply FITW, FICA and FUTA only to portions unsubstantiated or unreturned.
2. Nonaccountable plans do not have the 3 requirements for an accountable plan, so 100% of advances and reimbursements are subject to FITW, FICA and FUTA and appear on the employee’s W-2. In other words, the employee will have to take any possible business expense deductions on his or her tax return.
3. Per diem reimbursement. There are federal per diem rates for lodging only, meals and incidental expenses (M&IE) only and for lodging and M&IE. There is one set of per diems for high-cost areas, another for all other areas and separate M&IE per diems for:
– localities in the continental United States (CONUS);
– nonforeign localities outside the U.S. (OCONUS) including Alaska, Hawaii, Puerto Rico, Northern Mariana Islands and U.S. possessions;
Per diem reimbursements are nontaxable even if they exceed actual expenses, and employees need account only for time, place and business purpose of travel. But reimbursements that exceed the federal per diem rate, unsubstantiated per diems and unreturned per diems that exceed days traveled are taxable wages.
Employers may pay an M&IE per diem only if the employer pays for lodging directly, provides lodging-in-kind or reimburses actual lodging expenses, or if there will be no lodging expenses.
Prorate M&IE quarterly. Pay one-quarter per diem for midnight to 6 a.m.; 6 a.m. to noon; noon to 6 p.m. and 6 p.m. to midnight when traveling or away from home.
Employers who use per diems must use them for the entire calendar year, but may reimburse actual expenses or use M&IE for specific locales. High-low substantiation may not be used for travel outside the continental U.S.
Dove Bookkeeping Service
Annual Tax Update for Employers and Self-Employed
Our lawmakers have been busy this year! We’ve got lots of changes in laws and proposed laws. Please remember, this is general information, please consult your tax professional for detailed information, and how this information applies to your business.Detailed W-2 Health Care Reporting. The IRS has postponed detailed reporting of employee health care benefits that was originally scheduled for 2011 W-2s filed in 2012. The major problem has been in determining which employer contributions in include or exclude from gross income on the W-2.
New Flexible Spending Account rules in 2011. The Affordable Care Act of 2010 states that Flexible Spending Accounts and other health reimbursement arrangements cannot reimburse the cost of over the counter drugs and medications purchased after January 1, 2011 unless the patient has a prescription. If you plan allowed the purchase of over the counter medications in 2010, those purchases can be reimbursed in 2011 using 2010 funds, but only if your plan allows.
Credit for Small Employer Health Insurance Premiums Form 8941. A draft of the new form is available on the IRS website, and the final version is expected to be available by the end of the year. Employers will file the new form with their tax returns to claim the credit as part of their general business tax credit. For 2010, small businesses who contributed at least half the cost of an employee’s coverage (it does not have to be family coverage) can claim the credit.
The maximum tax credit for tax years 2010 – 2013 is 35% of premiums paid by eligible employers. Employers with 10 or fewer full-time employees earning average wages of $25,000 or less will get the maximum credit. The credit is reduced for employers with more employees, and it phases out as the number of full-time employees or wages increases. Employers with 25 or more full-time employees or an average annual wage of $50,000 or more will not receive the credit. Since the credit is based on the number of full-time employees, companies with part-time employees may still qualify even if they have more than 25 employees.
Self-employed Health Deductions. Self-employed persons can deduct the cost of health insurance for themselves and their family members when calculating self-employment tax for tax year 2010. The benefit is expected to carry into 2011, but it isn’t finalized yet.
Cell phones. For 2010, cell phones are no longer listed as property, eliminating the need for detailed recordkeeping of business use. Before users of cell phones provided by employers had either to substantiate the business purpose of each call for the employee to depreciate the cost or deduct it from gross income. There is talk of making cell phones a non-taxable fringe benefit, but for now it is uncertain.
Receipts. A recent court case concerning a taxpayer who only had credit card statements to substantiate business expenses found in favor of the IRS because the taxpayer could not produce detailed information of the expenses.
Bonuses, Prizes and Awards. Generally, prizes and awards for production, attendance, efficiency, and other job-related achievements are included in wages unless specifically exempt. This includes cash and cash equivalent bonuses. When giving a non-cash prize or award, you must use the fair market value of the item, not the cost. Here are the exceptions:
To be nontaxable, the award must be given as “part of a meaningful presentation” for length of service or safety, not be “disguised compensation: and…
…be given under a written qualified plan or program that doesn’t favor highly compensated employees;
…doesn’t exceed $400;
…is not tangible personal property—it can’t be cash or cash equivalents such as stocks, bonds, meals, lodging, or event tickets given in some kind of ceremony;
…not exceed an average of $400 per employee or a total of $1,600 to an individual employee for the year under a nonqualified plan.
Noncash Prizes. Certain noncash gifts are not taxable. These include…
…fruit baskets, hams, turkeys, wine, flowers, or entertainment tickets if they have a nominal value are are given infrequently.
…the occasional party or picnic if given infrequently and for the purpose of promoting employee health, goodwill, contentment, or efficiency.
Taxable gifts. Cash in any amount is taxable. Signing bonuses are taxable and subject to all taxes. Gift certificates are considered ‘cash in kind’ and are taxable. You can give a turkey to an employee and it is not taxable; however, if you give an employee a gift certificate for a turkey, even if the certificate specifically states it is only for the purchase of a turkey, it is taxable. To save the taxes for the employer and the employee, you must physically give them the turkey.
Under the rules of constructive receipt, paychecks dated 2011 are taxable in 2011 even if the wages were earned in 2010.
Many times when I prepare payroll in advance an employer will ask me to date the checks for that day instead of the scheduled pay date. Before you change the date on payroll checks, keep in mind that under the rules of constructive receipt, the taxes will be due using the check date, not the actual scheduled payroll date. Please keep this in mind to avoid IRS penalties.
New 1099 Reporting. All businesses must report in 2012 all 2011 payments for goods and services totaling $600 or more to a payee.
- A 1099-MISC must be sent to both the payee and the IRS. Congress wants to eliminate this rule, but for now, assume that it will remain in effect.
- In order to sent out the 1099s, you must have a system that captures the Taxpayer Identification Number, reporting name, and mailing address. Please, please, please get this information before you give the check to the payee. Many payees mistakenly believe that if they don’t receive a 1099, they aren’t required to report the income, so they are reluctant to provide the information. If you’ve already paid them, you have no leverage to get the information. The IRS will match 1099 data to its records. Failure to match may result in penalties and require you to provide the backup withholding on future payments to independent contractors.
- Use the IRS Taxpayer Identification Number matching service. Its free, and it lets you verify TINs online. Visit the IRS website for more information on the TIN matching service.
- Consider making all or most payments by credit card. The credit card companies have their own reporting requirements, so the IRS will exempt credit card payments from the new 1099 reporting.
Rental Payment Reporting. Unless you are renting your principal residence, most taxpayers who receive rental income from real property in 2011 must file information returns in 2012 with both the IRS and vendors to whom they make aggregate payments for $600 or more for the year.
Information Returns. For 2011, returns that are late or inaccurate will be subject to higher penalties.
Please visit the website, www.DoveBookkeepingService.com for a handy checklist for end-of-year activities.
A Special Christmas Present for One Lucky Winner
I’m so excited about these new features in QuickBooks 2011, that I’m going to give away one fully licensed copy of 2011 Pro Accountant’s Copy edition (retail value $399.95). Beginning on December 1, 2010, you will be able to enter to win on the website ( www.DoveBookkeepingService.com ). Simply go to the website and click on Great 2011 Giveaway tab for your chance to win and instructions on how to enter. Also, everyone who enters will receive a free copy of Laura Madeira’s booklet QuickBooks 2011 – What’s New and Improved just for entering!
Announcing the Intuit IRS Calendar
Intuit has created an online IRS tax calendar to help you remember important tax deadlines. The online calendar downloads into your Outlook calendar, or other calendar, including online calendars. Tax deadlines show up as events in a unique calendar that sits next to your online appointment calendar.
Subscribe Here: The Intuit IRS Tax Calendar
If you haven’t been to Tom Post’s website and downloaded your free Tax Organizer, you can find it at http://www.texastaxman.com/ I promise it will ease the pain of gathering your information for your CPA will need to file your taxes. Thanks, Tom!
Texas Unemployment Tax Rate to Triple
Due to higher unemployment benefits paid last year, two-thirds of Texas business owners can expect to see unemployment cost triple. The maximum rate will jump from $563.40 per employee to $774 per employee. I also expect to see federal unemployment rates rise. In order to help clients understand the TWC regulations and help clear up some of the myths about Texas unemployment, we’ve added a page to our site featuring the frequently asked questions from Texas Business Today. If you would like to subscribe to Texas Business Today, please visit http://www.twc.state.tx.us/news/tbt/tbt.html
After much consideration, we’ve decided to stop selling QuickBooks products on our website. I have been directing clients to buy the program at Sam’s Club since Sam’s offers the same product for $50-$100 less than I can sell it for. I wouldn’t feel right selling the product when I know my clients can buy it cheaper. For those clients who are not members of a Sam’s Club, I will still be providing the purchase of QuickBooks using the ProAdvisor discount.
Taking a Second Look at W-4s
Employees with earned income are entitled to a refundable tax credit of up to $400 for individuals and up to $800 for marrieds filing joint returns. For employees who are wage earners, the credit will typically be reflected in their paychecks in the form of reduced withholding as a result of new automatic withholding changes that took effect on April 1. However, some employees may need to file a new Form W-4 to avoid under-withholding. For example:
- If an employee has two jobs, each employer’s withholding may reflect the maximum credit. Thus, the employee’s combined withholding will be reduced by twice the maximum credit allowed—and he or she will be under-withheld.
- Under the new withholding changes, an employee’s withholding will be reduced by roughly $600 during the remainder of the year if he or she files jointly. But if the employee’s spouse also is employed, the spouse’s withholding will be reduced by $600 as well. So the withholding changes will cut their withholding by a total of $1,200–$400 more than the maximum credit allowed.
- The Making Work Pay credit phases out for employees with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly. So working spouses who each earn $100,000 are generally not entitled to one dime of the credit, yet their withholding may be reduced by as much as $1,200 (see #2).
An employee’s working child may also be under-withheld. An individual who can be claimed as a dependent on someone else’s return is not entitled to the Making Work Pay credit. However, the child’s employer does not take this into account and the child may be under-withheld by $400.