by BHZ

Payroll legal obligations can put companies and managers at great risk in many ways. If you have anything to do with employee payroll and related matters, be aware of the following 11 mistakes and corresponding penalties.

Mistake #1: Failing to deposit withheld income taxes, Social Security and Medicare contributions, and employer matching amounts on time. The government wants its money by strict deadlines. Penalties accrue quickly if your business or organization misses deposit deadlines.

The penalty for not making deposits on time is:

• 1 to 5 days late, 2 percent of amounts due.
• 6 to 15 days late, 5 percent.
• 16 or more days, 10 percent.
• 15 percent if notice from the IRS is ignored, plus interest on the amount not deposited, plus 100 percent of the uncollected amounts if the failure to deposit is willful.

Note this grave, personal danger: These penalties can be levied personally against all responsible individuals in a business or organization. The corporate veil is no shield in these situations. Any individual with a responsibility for getting the money to the government on time faces possible exposure to penalties and fines.

Mistake #2: Under-withholding and failing to match required amounts.

The employer’s obligation is to withhold income tax, Social Security, and Medicare contributions from employees’ pay, as well as match the Social Security and Medicare contributions. Failure to do so subjects the employer to late deposit penalties of up to 15 percent of the under-withheld and under-deposited amounts. If the IRS deems the under-reporting or under-depositing willful, the penalties can be up to 100 percent of the uncollected amounts.

As with failing to make deposits in a timely manner, under-withholding and failing to match amounts creates a personal risk to individuals with a responsibility for getting the correct sums of money to the government on time.

Mistake #3: Failing to pay — or under-paying — state and federal unemployment taxes. The greatest portion of unemployment insurance (UI) taxes is levied by the state. And state-levied penalties vary. Since state UI funds are being exhausted in this period of high unemployment, states are aggressive in collection efforts.

Mistake #4: Failing to process wage garnishments correctly. Federal and state laws obligate employers to accurately withhold from employee pay, and remit, court-ordered garnishments, levies, and child support.

Violating these laws can result in penalties, depending on state laws. Also, federal law limits the amount of earnings that can be garnished, and protects employees from being terminated from their jobs because of a first-time garnishment. A violation can mean reinstatement of a discharged employee, payment of back wages, and restoration of improperly garnished amounts. Employers who willfully violate the discharge provisions of the law can be prosecuted criminally and fined up to $1,000, imprisoned for not more than one year – or both.

Mistake #5: Making unauthorized deductions from an employee’s pay. Employers can legally deduct from an employee’s pay only amounts authorized or required by law (such as tax withholding), by court order (such as garnishments), and amounts authorized by the employee (such as the employee’s share of health insurance).

What are unauthorized deductions? State laws vary and it can be tricky. In addition, federal wage and hour law requires payment of agreed upon and earned wages (with the allowed deductions listed above.)

Do you ever feel compelled to dock an employee’s pay if he or she breaks or damages company products or equipment? Check first with your attorney to see if this is permitted by your state law — even with the employee’s permission

Mistake #6: Treating some workers as independent contractors when they’re not. Misclassifying employees as independent contractors exposes employers to substantial legal costs and penalties.

In an effort to increase collections, the IRS and state agencies have ramped up investigations of misclassified employees. When a misclassification is discovered, the employer becomes obligated for unreported and undeposited withholding taxes, Social Security and Medicare contributions, penalties, and possible liability for employee benefits. When the IRS deems the misclassification to be negligent, the penalties can be up to 100 percent of the uncollected taxes.

And the payment of unreported taxes and contributions isn’t just for the past year. When the IRS and state agencies discover the misclassification of just one or two employees, this can trigger audits of the employer’s employment for prior years.

Mistake #7: Failing to include the value of awards, bonuses, and fringe benefits (when required) in employees’ taxable incomes. This action then results in the failure to withhold sufficient amounts from the total reportable income and not reporting the total reportable income to the IRS. The risk: The employer is subject to under-reporting penalties of up to 15 percent of the under-withheld and under-deposited taxes. If the failure is willful, the penalties can be up to 100 percent. And the employer could also be subject to information return penalties for incorrect W-2 forms (up to $50 penalty for each incorrect W-2).

Mistake #8: Using bogus or incorrect Social Security numbers for employees on their W-2 Forms and failing to accurately complete I-9 Forms. The risk: The employer can be subject to information return penalties for incorrect W-2 Forms, of up to $50 for each incorrect W-2. This mistake or failure by the employer also creates issues for the employees involved because they aren’t receiving proper earnings credits through the Social Security Administration.

Mistake #9: Failing to pay at least the higher of the federal or state minimum wage to non-exempt employees… as well as overtime in any seven-day workweek in which they work more than 40 hours. The risk: If this error is discovered, the employer is required to compensate the employee for back pay, plus fines and penalties. In addition to the fines and penalties imposed by the Department of Labor, the employer likely will be subject to federal and state wage and hour audits and owe additional amounts

Mistake #10: Not preparing and filing W-2 forms, and failing to send them to employees. The risk: The employer can be subject to information return penalties for incorrect W-2 forms, penalties of up to $100 for each incorrect or unreported W-2. For intentional failure, the penalties can go up to $200 for each incorrect statement.

Mistake #11: Failing to abide by state laws. It’s not just the federal wage and hour rules that employers must comply with. Employers need to be aware of, and comply with, the laws in the states where they have employees.

PEOs can help prevent these mistakes

To help avoid these costly blunders, more companies are turning to a professional employer organization (PEO), like Staff One.  A PEO serves as a human resources department for small and medium-sized businesses.  By entering into a co-employment relationship with a PEO, companies have access to experienced specialists who can help with many time-consuming activities in areas such as Human Resources Management, Payroll Management (including 940 and 941 filings), Employer Liability Management, Risk and Safety Management and Benefits Management.

From AJG

The Patient Protection and Affordable Care Act (“PPACA”), as amended by the Health Care &
Education Reconciliation Act of 2010, introduced several changes to employer payroll practices.
One important change impacts employee W-2s and takes effect next year.

W-2 Reporting Must Include Value of Health Care Coverage for Tax Years Beginning
After December 31, 2010.

Beginning with the 2011 tax year, employers must report the value of employer-sponsored health
care coverage on employee Form W-2s. Employers will not be required to provide a specific
breakdown of the various types of coverage, but must only report an aggregate cost. For
example, if an employee enrolls in medical, dental, and prescription drug coverage, the employer
only has to report one lump sum value, not a value for each individual benefit.

Note: This is only a reporting requirement. The employee’s gross income is not increased by the
value of the employer-sponsored health care coverage. In other words, the employee is not taxed
on the value of this coverage as part of his or her regular earnings.

This new reporting requirement from Healthcare Reform includes the value of both the employer
and employee contributions as calculated under the COBRA cost of coverage rules contained in
Section 4980B of the Internal Revenue Code.

How is the Value Calculated?

For fully insured plans, the COBRA cost of coverage is generally the premium paid to the
insurer. For self-funded plans, the COBRA cost of coverage is usually based upon a reasonable
actuarial estimate of future costs. Either way, the cost of coverage includes both the employee
and the employer portions, regardless of how that cost may be divided between the employee and
the employer (e.g., employee pays 20% of the cost of coverage, and the employer pays 80% for
active employees).

What’s included?

Employers should include the value, based upon the COBRA cost of coverage rules, of the
following:

• Medical coverage (including health reimbursement arrangements)
• Executive physical benefits
• Prescription drug coverage
• On-site clinics
• Medicare supplemental policies
• EAPs (except for referral only programs)
• Health Care FSA – employer contributions only (e.g., “seed” or match)
• Dental and vision, unless stand-alone plans (i.e., employee may elect only dental or only vision and is not required to also enroll in medical coverage)

What’s Not Included?

Employers should not include the value of the following:

• Long Term Care, accident, or disability income benefits
• Specific disease, indemnity, etc. coverage if not excludable from employee’s gross income
• Specified illness or disease policies such as cancer policies where the full premium is paid by the employee on an after-tax basis
• Hospital (or other) Indemnity insurance policies where the full premium is paid by the employee on an after-tax basis
• Archer MSA or HSA contributions of the employee or the employee’s spouse
• Salary reduction contributions to a Health FSA

Employer Action Steps

• Alert payroll as soon as possible
• Discuss changes with outside payroll vendor, if applicable
• Implement necessary changes to payroll system
• Consider implementing a monthly report on employee paystubs to reflect both cumulative and monthly health care coverage values in case employee terminates midyear and requests a W-2

Included in the federal health care overhaul passed earlier this year, the small business health care tax credit can offset up to 35% of the insurance premiums that a small company pays to cover its employees this year, according to the federal Small Business Administration. The rate will increase to 50% in 2014. The U.S. Department of the Treasury recently released detailed guidance as to how a small business could take advantage of the credits.

Small businesses face unique challenges to providing health insurance for their employees, such as higher costs and fewer choices than those available to larger companies. Nationally, an estimated four million small companies might qualify for the tax credit, which is designed to help subsidize insurance coverage by about $40 billion over the next 10 years, according to the federal government. The tax credit can also be used to cover add-on dental, vision, and other limited insurance coverage. In Ohio, for example, an estimated 118,000 businesses that cover at least half of their employees’ health care costs would be eligible for the tax credit, according to the Ohio Department of Insurance.

According to the federal Small Business Administration, the health care bill would also benefit small companies by blocking dramatic premium increases when one employee gets sick.

The U.S. Department of the Treasury issued guidance designed to simplify eligibility information and allow companies to choose the most favorable method of determining worker hours in order to maximize the tax credit, which is available to companies with fewer than 25 employees.

Below are key elements of the program:

• Detailed Guidance. To help small businesses make employee benefit decisions with full knowledge and to provide a clear incentive to offer health insurance coverage, the new IRS Notice 2010-44 lays out detailed guidance on how a business can determine whether it is eligible and how large a credit it will receive.
• No Reduction Due to State Credits. Responding to a number of taxpayer questions about the interaction of the credit with state-level health care tax credits and subsidies, the guidance announces that the new tax credit will not be reduced by a state health care tax credit or subsidy (except in limited circumstances to prevent abuse of the credit). In particular, an employer that receives such a state tax credit or subsidy will also receive the full federal credit based on its entire contribution so long as the federal credit does not exceed the employer’s net contribution. According to lists compiled by the National Conference of State Legislatures, about 20 states offer these benefits.
• Dental and Vision Coverage Qualify. The guidance clarifies that small businesses can receive the credit not only for traditional health insurance coverage but also for add-on dental, vision, and other limited-scope coverage. The employer must meet the requirements for limited-scope coverage that are similar to those that apply for single coverage: the employer must offer to pay at least 50% of the premium.
• Employers Can Choose Most Favorable Method of Determining Hours Worked. Because the tax credit’s matching rate is highest for employers with 10 or fewer full-time equivalent employees (FTEs), the number of hours worked is an important factor in calculating the credit. The new guidance allows employers to choose among 3 different methods of determining hours to minimize their bookkeeping duties while receiving the maximum tax credit for which they are eligible. Employers can look at actual hours of service, or can use simple rules of convenience to estimate hours based on total days or weeks of service.
• Transition Relief for 2010 Formalized. Because the tax credit is effective for 2010 but was not enacted until March 23, 2010, some small businesses that are providing health insurance in 2010 may not meet all the requirements for a qualifying health insurance offer. To ensure that these businesses benefit from the credit, the Administration is providing special transition relief for tax year 2010. The transition rules simplify the requirements for what constitutes a qualifying health insurance offer while maintaining the core requirement that an employer make a significant contribution to the employee’s coverage. The transition relief was first mentioned in FAQs released on the IRS website on April 1, 2010, and has now been formalized in the new notice.

The federal Internal Revenue Service, on May 18, released a revised Form 941, “Employer’s Quarterly Federal Tax Return” that employers can use to take advantage of a Social Security payroll tax exemption under the federal Hiring Incentives to Restore Employment Act. The HIRE Act provides employers the exemption and a tax credit for certain new hires who begin employment between Feb. 4 and Dec. 31, 2010. Employers can use the new form to claim the exemption for wages paid beginning with the second calendar quarter of 2010; a credit for wages paid in the first quarter (from March 19 through March 31, 2010) can be claimed on the second quarter return.

Additional Information:

• IRS notice of revised Form 941
• Form 941, “Employer’s Quarterly Federal Tax Return”
• Instructions for Form 941

President Obama on March 18 signed the Hiring Incentives to Restore Employment Act (H.R. 2847), which includes a tax credit for certain new hires retained by employers and a Social Security payroll tax exemption for such new hires. Under the HIRE Act, employers generally can take a tax credit of up to $1,000 for each new hire who begins employment between Feb. 4 and Dec. 31, 2010, and attests to being unemployed for at least 60 days prior to such employment (or having worked less than a total of 40 hours during the 60-day period). These employees must be employed for at least 52 consecutive weeks and earn wages during the last 26 weeks of such period equal to at least 80 percent of wages paid during the first 26 weeks. Employers cannot replace employees with these new hires unless the employees have left employment voluntarily or for cause. In addition, employers can exempt their share of Social Security payroll taxes in 2010 for these new hires.

More information can be found at http://thomas.loc.gov/cgi-bin/bdquery/z?d111:H.R.2847:

adapted from the IRS

Getting ready to file your tax return?  Make sure you have all your documents before you start. You should receive a Form W-2, Wage and Tax Statement from each of your employers.  Employers have until February 1, 2010 to send you a 2009 Form W-2 earnings statement. For employers who are clients of Staff One, W-2 were sent out during the first week in January.

If you haven’t received your W-2, follow these four steps:

1. Contact your employer (if your employer is a client of Staff One, contact us) If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed.  If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address.  After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

2. Contact the IRS If you do not receive your W-2 by February 16th, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, city and state, including zip code, Social Security number, phone number and have the following information:

• Employer’s name, address, city and state, including zip code and phone   number
• Dates of employment
• An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2009. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return You still must file your tax return or request an extension to file by April 15, even if you do not receive your Form W-2. If you have not received your Form W-2 by April 15th, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  There may be a delay in any refund due while the information is verified.

4. File a Form 1040X On occasion, you may receive your missing W-2 after you filed your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Form 4852, Form 1040X, and instructions are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

The Internal Revenue Service, in Revenue Procedure 2010-10, set the maximum vehicle values below which the ‘‘vehicle cents-per-mile’’ valuation rule and the ‘‘fleet-average’’ valuation rule may be employed in valuing the personal use of vehicles provided in 2010 by an employer to an employee.

The maximum value of employer provided vehicles first made available to employees for personal use in calendar year 2010 for which the vehicle cents-per-mile valuation rule (Treas. Reg. § 1.61-21(e)) may be applicable is $15,300 for a passenger automobile and $16,000 for a truck or van, IRS said.

The maximum value of employer provided vehicles first made available to employees for personal use in calendar year 2010 for which the fleet average valuation rule pertaining to 20 or more automobiles (Treas. Reg. § 1.61-21(d)) may be applicable is $20,300 for a passenger automobile and $21,000 for a truck or van.

According to the IRS, if an employer provides an employee with a vehicle that is available
to the employee for personal use, the value of the personal use must generally be included in the employee’s income and wages pursuant to Internal Revenue Code § 61.

While the tax filing deadline is more than three months away, it always seems to be here before you know it. Here are the Internal Revenue Service’s top 10 tips that will help your tax filing process run smoother than ever this year.

1.     Start gathering your records Round up any documents or forms you’ll need when filing your taxes: receipts, canceled checks and other documents that support an item of income or a deduction you’re taking on your return.

2.     Be on the lookout W-2s and 1099s will be coming soon from your employer; you’ll need these to file your tax return.

3.     Try e-file When you file electronically, the software will handle the math calculations for you. If you use direct deposit, you will get your refund in about half the time it takes when you file a paper return. E-file is now the way the majority of returns are filed. In fact, last year, 2 out of 3 taxpayers used e-file.

4.     Check out Free File If your income is $57,000 or less you may be eligible for free tax preparation software and free electronic filing. The IRS partners with 20 tax software companies to create this free service. Free File is for the cost conscious taxpayer who wants reliable question-and-answer software to help them prepare a return. Visit IRS.gov to learn more.

5.     Consider other filing options There are many different options for filing your tax return. You can prepare it yourself or go to a tax preparer. You may be eligible for free face-to-face help at an IRS office or volunteer site. Give yourself time to weigh all the different options and find the one that best suits your needs.

6.     Consider Direct Deposit If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check.

7.     Visit IRS.gov again and again The official IRS Web site is a great place to find everything you’ll need to file your tax return: forms, tips, answers to frequently asked questions and updates on tax law changes.

8.     Remember this number: 17 Check out Publication 17, Your Federal Income Tax on IRS.gov. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.

9.     Review! Review! Review! Don’t rush. We all make mistakes when we rush. Mistakes will slow down the processing of your return. Be sure to double-check all the Social Security Numbers and math calculations on your return as these are the most common errors made by taxpayers.

10.   Don’t panic! If you run into a problem, remember the IRS is here to help. Try IRS.gov or call our customer service number at 800-829-1040.

Links:

• Forms and Publications
• E-filing
• 1040 Central
  

by National Association of State Workforce Agencies

NASWA has released a survey of the state unemployment trust fund solvency and tax rates. The survey’s findings underscores the significant impact that the current economic recession is having on Unemployment Insurance (UI) costs for all employers.

A total of 24 states will increase their taxable wage base in 2010. Of these 24 states, seven states (AR, FL, IN, NH, TN, VT and WV) have enacted legislation to increase the state’s “taxable wage base,” the level of wages subject to a payroll tax on employers. The remaining 17 state programs (AK, HI, ID, IA, MN, MT, NV, NJ, NM, NC, ND, OK, OR, UT, VI, WA and WY) index their taxable wage bases to the state’s average wages and will automatically increase their taxable wage bases for 2010.

Of the 51 state programs surveyed, 28 states (AK, AL, AZ, CO, GA, HI, IA, ID, IL, KS, MA, MD, ME, MN, MT, ND, NE, NH, NJ, NY, OH, OR, PA, PR, VA, VT, WI and WY) indicated the tax schedule in their state will see an increase in 2010 compared to 2009. The majority of these increases will be automatic; adjustments often triggered by low levels of reserve funds in the state accounts used to finance unemployment benefits. While it is normal for states to recalculate tax rates each year, the magnitude of these rate increases for most states is unusual.

In addition, ten states (CA, CT, DE, KY, MI, MO, NC, RI, SC and TN) indicated their tax rate schedules were already at the highest tier, which would prevent them from automatically increasing in 2010. Consequently, the state legislatures would need to enact changes in state laws – either increasing the tax rates by changing tax rate schedules or increasing the state taxable wage bases.

Six of the 51 state programs surveyed (AR, CA, CT, FL, HI and MA) indicated they will automatically increase their tax rates due to a solvency tax already in state law. The majority of these solvency taxes also activate when states’ trust fund balances fall below specified levels.

Of the 51 state programs surveyed, 35 states estimated the level of UI tax revenue collected in 2010 would surpass the level collected in 2009; with a median projected increase of 27.5%. The range of these projected increases was 2.5% to 600%.

More information can be found at www.workforceatm.org

On Friday, November 6, 2009, President Obama signed the “Worker, Homeownership, and Business Assistance Act of 2009″ which gives tax breaks to large corporations and extends the homebuyer’s credit.

The American Recovery and Reinvestment Act of 2009 extended the first-time homebuyer credit for purchases before December 1, 2009 and increased the credit to $8,000. The new law extends the date to close on a credit eligible purchase to before May 1, 2010. And for purchases subject to a written binding contract by April 30, 2010, the closing would have to be before July 1, 2010.

The credit is no longer restricted to first-time homebuyers. Taxpayers are able to claim the credit on the purchase of a new home if they have owned and used a prior residence as their principal residences for any 5 consecutive-year period during the 8-year period ending on the date of the purchase of the new principal residence. However, the homebuyer credit for these “long-time residents” cannot exceed $6,500.

The credit is phased-out based upon modified Adjusted Gross Income (AGI). The credit begins to be phase-out for joint filers with modified AGI above $225,000 ($125,000 for other filers). Prior to the new law the phase-out began at $150,000 and $75,000 respectively.

The credit is only available for homes with a purchase price of $800,000 or less. Previously there was no price ceiling.

A taxpayer is allowed to elect to treat the purchase as occurring on December 31 of the calendar year preceding the year of purchase in order to accelerate the refund.

The new rules take effect on November 6, 2009.

Net Operating Loss carryback period extended to five years.

The new law permits any business to elect up to a 5-year carryback for net operating losses (NOLs) incurred in either 2008 or 2009, but not both. Businesses are able to offset 50% of the available income from the fifth year and 100% of all income in the remaining four carryback years. Eligible small businesses already had the ability to elect to carryback their 2008 NOLs either 3, 4, or 5 years under the American Recovery and Reinvestment Act. These small businesses are able to elect to carryback losses from 2009 up to 5 years. Additionally, the 90% limitation on the use of any alternative tax NOL deduction is suspended for these NOL carryback deductions. The NOL provision is not available to a taxpayer if the federal government acquired an equity interest (or right to acquire such an interest) in the taxpayer under the Emergency Economic Stabilization Act of 2008.

Click here for more information