2011 payroll tax holiday
Until 2011, the Old-Age, Survivors and Disability Insurance (OASDI) tax rate for employees was 6.2 percent (12.4 percent for self-employed individuals who pay both the employee-share and the employer-share). These taxes help to fund Social Security.

In 2011, a payroll tax holiday took effect. The payroll tax holiday reduced the employee-share of OASDI taxes by two percentage points from 6.2 percent to 4.2 percent for calendar year 2011 up to the Social Security wage base of $106,800. The payroll tax holiday also gave a similar percentage reduction to self-employed individuals for calendar year 2011.

Two-month extension
The 2011 payroll tax holiday was originally enacted as a one-year tax break. It was scheduled to expire after December 31, 2011.

In December 2011, Congress approved a two-month extension of the payroll tax holiday for January and February 2012. The two-month extension provided for a 4.2 percent OASDI tax rate for individuals receiving wages and a comparable benefit for self-employed individuals through the end of February 2012.

Tough negotiations
In early 2012, lawmakers began negotiations over extending the two-month payroll tax holiday for the remainder of the year. The 2011 payroll tax holiday had not been offset; that is, the lost revenue had not been made up elsewhere. The two-month extension had been offset by higher fees on certain government-backed mortgages. Some lawmakers wanted any full-year extension of the payroll tax cut to be offset.

Several offsets were proposed and rejected, including a surtax on individuals with incomes over $1 million and repeal of certain business tax preferences. In the end, lawmakers could not agree on any offsets and decided to extend the payroll tax holiday without paying for it. They did agree to pay for extended unemployment benefits and the so-called Medicare “doc fix” with offsets.

The House passed the Middle Class Tax Relief and Job Creation Act of February 17 as did the Senate. President Obama signed the bill on February 22.

2012 payroll tax holiday
The 2012 payroll tax holiday is essentially an extension of the 2011 payroll tax holiday. This means that wage earners pay OASDI taxes at a rate of 4.2 percent for calendar year 2012 up to the Social Security wage base ($110,100 for 2012). Self-employed individuals also benefit from a two-percentage point reduction in OASDI taxes for calendar year 2012. The OASDI tax rate for employers, however, is not reduced and remains at 6.2 percent for calendar year 2012.

According to the White House, an “average” taxpayer should expect to see about $1,000 in savings in 2012. An individual who makes at or above the Social Security wage base for 2012 ($110,100) will see a $2,202 benefit.

No recapture rule
In good news for some taxpayers, the Middle Class Tax Relief and Job Creation Act repeals a recapture rule Congress had imposed on the two-month extension. The recapture rule was intended to prevent higher income individuals from enjoying too great a benefit from the payroll tax cut if it was not extended for all of 2012. Because the payroll tax cut has been extended through the end of 2012, the recapture rule is expressly removed in the new law.

Employers and payroll processors
Because the 2012 payroll tax cut holiday is essentially an extension of the 2011 payroll tax cut holiday, employers and payroll processors should expect few glitches. The IRS has reported it anticipates no problems in administering the extension through the end of 2012. It has already issued a revised 2012 Form 941, Employer’s Quarterly Federal Tax Return, for use by employers to cover their revised reporting responsibilities.

If you have any questions about the 2012 payroll tax holiday, please contact our office.

Employees will pay only 4.2% Social Security tax on wages up to $110,100 (wage base for 2012) and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $110,100. The maximum savings for 2012 will be $2,202 per taxpayer. If both spouses earn at least as much as the wage base, the maximum savings will be $4,404. The Internal Revenue Service has released an updated Form 941 for employers to use that reflects the extension of the lower rate.

The Joint Committee on Taxation has estimated that approximately 170 million wage earners and self-employed individuals will benefit from the payroll tax deduction in 2012. The White House figures that taxpayers on average will see a $1,000 increase in take home pay in 2012. The extension benefits both employees and those self employed.

For complete details about the Middle Class Tax Relief and Job Creation Act of 2012, click on the article below. Special Report: Middle Class Tax Relief and Job Creation Act of 2012

Please contact us if you have any questions.

Businesses that pay vendors for services via credit or debit card
For 2011, businesses that pay for services via a credit or debit card and in prior years prepared a Form 1099-MISC for those vendors, the reporting requirement has changed. As normal, you will be preparing 1099-MISC forms for anyone you paid $600 or more to for services rendered, rent paid, etc. There is no change in that requirement EXCEPT – do NOT include any payments made to the vendor by credit card or debit card. The credit card processors will now be reporting these payments on the new 1099-K form and will be responsible to submit to the IRS.

Businesses will only report amounts on Form 1099-MISC that are paid via check or cash. Credit card payments are to be excluded. This may require additional accounting time to segregate these payments for 1099 reporting.

Businesses that receive credit or debit card payments
Businesses that accepted credit and debit card payments for 2011 will receive a Form 1099-K from their merchant card providers. The form will report credit card payments received by your business for the year from your customers. This form will also be submitted to the Internal Revenue Service. All 2011 business income tax returns have been modified to now reflect a line item showing merchant/credit card receipts. The eventual goal for the IRS will be to match the Form 1099-K to your business tax return line item for merchant/credit cards receipts to assure businesses are not underreporting income.

The IRS will not start matching receipts to the business tax returns until the 2012 tax year and will use the Form 1099-K as an audit tool to match income. Businesses that receive 1099-MISC for 2011 should closely review the amounts to assure the form has been submitted correctly and excludes credit card payments. If the 1099 MISC and 1099-K both include credit card payments, the receipts reported to the IRS will be duplicated. In the future, this could create income matching issues with the IRS.

If you have any questions regarding this new reporting issue, please contact us today.

President Obama has challenged Congress to immediately pass the American Jobs Act of 2011 — a $447 billion jobs package, including payroll tax cuts and tax credits to encourage hiring, along with extended 100 percent bonus depreciation, which would be paid for by limiting deductions for higher income taxpayers and changing the taxation of carried interest.

The offsets, however, would not take effect if the Joint Select Committee on Deficit Reduction achieves additional savings. President Obama described his jobs package during a speech to a Joint Session of Congress on September 8 and unveiled the legislative text on September 12.

Click here to read the rest of the American Jobs Act of 2011, Special Report.

On August 2nd, President Obama quickly signed the Budget Control Act after passed by the Senate 74 to 26. The House had passed the Budget Control Act on August 1st by a vote of 269 to 161. The new law raises the debt limit to avoid a projected August 2nd default and creates a bipartisan joint select committee on deficit reduction.

At press time, it is unclear what changes to the Tax Code may be addressed by the joint select committee on deficit reduction. The joint committee’s mandate under the new law requires it to draft additional deficit reduction legislation in time to be voted on by Congress before year end.

In recent months, tax proposals from both side of the aisle raised as part of the debate leading up to the passage of the new law have included bold, sweeping tax proposals, as well as more limited loop-hole-closing recommendations. All these proposals remain on the table for consideration by the joint committee as it begins work shortly.

The attached report will also discuss the following highlights:

• Tax reform linked to deficit reduction
• Fate of Bush-era tax cuts unclear
• AMT proposed to be abolished
• Corporate tax preferences under fire
• Lower corporate tax rate possible

 Click here to read the Budget Control Act of 2011, Special Report.

Due to the increase in fuel costs, the IRS has increased the optional standard mileage rates for business, medical or moving expenses. Effective July 1, 2011, the rate for business use of an automobile will be increased from 51 cents to 55.5 cents per mile. The rate for medical or moving expense will be increased from 19 cents to 23.5 cents per mile.

For income tax purposes, it will be necessary to break down your mileage between January 1 – June 30 and July 1 – December 31, so please keep records of your monthly mileage.

The rate for charitable use remains unchanged at 14 cents per mile. Please contact us if you have any questions about the increased mileage rate.

Employer responsibility
The health care reform package does not mandate employer-provided coverage but it imposes “play or pay rules” after 2013 on plans that fail to satisfy minimum essential coverage requirements. Under the regulations, a health plan in existence on March 23, 2010 (the date that the PPACA was enacted) is deemed “grandfathered” and generally exempt from many of the requirements in the health care reform package.

Grandfathered status
The regulations explain when changes to the terms of a plan or health insurance coverage will cause the plan to cease being a grandfathered health plan. To retain grandfathered status, a plan generally must not:

• Eliminate all or substantially all benefits to treat a particular condition
• Raise co-insurance charges
• Raise fixed cost-sharing requirements other than a co-payment by more than the rate of medical inflation plus 15 percentage points
• Raise a co-payment by more than the greater of an amount equal to $5 increased by medical inflation or medical inflation plus 15 percentage points
• Lower employer contributions by more than five percent
• Add or tighten an annual limit on what the insurer pays
• If the plan is bought by or merges with another plan to circumvent compliance with the PPACA
• Force participants to switch to another grandfathered plan that has less benefits or higher cost-sharing as a means of avoiding the requirements of the PPACA.

Grandfathered plans may raise premiums at reasonable rates to keep pace with inflation. Additionally, grandfathered plans may also continue to enroll new members.

Transitional relief
The IRS’s guidance also provides that certain plan changes that became effective after March 23, 2010 will not cause a plan to lose its grandfathered status. These include changes under:

• A contract entered into on or before March 23, 2010
• A filing on or before March 23, 2010 with a state insurance department
• Written amendments to a plan adopted on or before March 23, 2010

Notice
A plan must notify participants and beneficiaries of its grandfathered status. The IRS had included model language in its guidance for notifying participants and beneficiaries.

Passage of the Health Care and Education Reconciliation Act of 2010 (H.R. 4872) Reconciliation Act) by Congress, followed by its signing by President Obama on March 30, 2010, completes a massive overhaul of the nation’s health insurance and health delivery systems. The Reconciliation Act amends the Patient Protection and Affordable Care Act of 2010 (P.L. 111-148), which President Obama signed on March 23. Combined, the two
new laws include more than $400 billion in revenue raisers and new taxes on employers
and individuals.

Immediate Changes
Many of the key provisions in the health care package take effect in 2010:

To read more from this CCH Special Report, please click here to view the PDF file.

Highway Robbery?
In response to their empty coffers, state taxing authorities are actively targeting both in-state and out-of-state companies for income and sales tax compliance.

Revenue agencies are aggressively employing random audits and blanketing entire industries with business activity and nexus questionnaires. Thanks to improved data sharing capabilities, agencies are cooperating across multi-state areas, leaving no leaf unturned.

In an almost unbelievable case, New Jersey State Police, aided by state revenue agents, stopped trucks with out-of-state markings on the New Jersey Turnpike. Drivers were queried about the business activity of the company for whom they were delivering and, if it was deemed that the company was indeed conducting business in the state, the trucks were seized and held until a “jeopardy tax” was paid.

Tightening the Nexus Noose
But it’s not just aggressive tax auditors. There is also the very real threat of punishing tax legislation from state legislatures.

For example, Massachusetts has made the move to unitary filing, requiring companies to consolidate all of their business units or affiliated companies and report combined income in the state if any single unit conducts business there. By considering companies as a single entity, taxing authorities feel they can prevent businesses from shifting income into low- or no-tax states. Vermont, New York, West Virginia and Wisconsin also recently made the move, while other states are scrambling to institute new taxation schemes based on gross receipts.

To top it all off, states are tightening the noose on the definition of nexus — the legal term for a taxable presence in a jurisdiction.

Michigan’s two-prong business tax (both a business income and modified gross receipts tax) utilizes an extremely aggressive nexus standard. Companies are subject to the tax if they have a physical presence in the state for more than one day during the tax year or “actively solicit” sales in Michigan. The state has very broadly defined “solicitation” to include use of the Internet, mail or telephone; use of print, radio, television or other advertising; or by maintaining an Internet site over or through which sales transactions occur with residents.

A Mistaken Sense of Safety
The longstanding view is that only companies that maintain a physical presence in a state have nexus there. Many companies have mistakenly clung to protections afforded by Public Law 86272, a 1950s-era federal statute that prohibits states from taxing the income of an out-of-state business that is soliciting sales there.

Unfortunately, the law only applies to sales of tangible personal property and doesn’t apply to sales tax. Nor does it offer protection from the gross receipts tax used by states such as Ohio, Texas, Washington and Michigan in lieu of a corporate income tax.

Recent state supreme courts rulings have even held that catalog sales in another state can constitute economic nexus and trigger taxation. Ditto for companies who solicit out-of-state credit-card holders. Once nexus is established, a tax can be levied — typically based on the proportion of a company’s sales, property and personnel in the state.

Are You a Target?
State taxing authorities are increasingly aggressive in identifying potential taxpayers. Their tactics range from surprise visits to the more-common business activity or nexus questionnaire. Here, taxing authorities may cast a wide net, querying every registered business in a given industry.

Small and midsize businesses are typical targets, as authorities know that smaller businesses often don’t have a tax department (and can’t or don’t want to pay a professional to review all of the different states they do business in).

Depending on the state (Washington is particularly broad in its application of nexus), you could be considered to be doing business there (and subject to taxation) based on any number of seemingly innocent activities.

Even the wording on an employment agreement or contract could trigger taxes. The person your company considers to be in a support or marketing role could be deemed a “salesperson” in the eyes of the state, thus triggering nexus issues.

Much more common is the routine business activity questionnaire that winds up in your company mail and is ignored (or, worse, the wrong person within the company responds and provides inappropriate answers

Because You Need Answers
Business owners are well advised to seek competent tax and accounting counsel before responding to a state’s request for nexus or business activity information — even if they feel they have no tax liability in that state.

Our experienced accounting professionals can provide invaluable guidance and help formulate an appropriate response to state revenue authorities. This typically includes a thorough risk analysis, including a pro-forma calculation of potential tax exposure.

In addition, we can advise you on planning techniques that can help avoid or mitigate sales tax issues.

Through our membership in PKF North America, we are in touch with CPA firms across the country to stay abreast of emerging issues in other states so we can advise our clients.

If you would like additional information or if you would like to discuss this in more detail, please contact us today.

With the economic conditions beginning to move in a positive direction many employers may find themselves needing to hire additional workers. The hiring of these new employees may qualify you for the Work Opportunity Tax Credit.

The Work Opportunity Tax Credit is a credit that employers can take against their federal income tax liability. The credit is designed to encourage the employment of certain disadvantaged groups.

The groups are as follows:

- A member of a family that is a recipient of Temporary Assistance to Needy Families (TANF). Each state has a different name for this program.
- A qualified veteran.
- A qualified ex-felon.
- A designated community resident.
- A vocational rehabilitation referral.
- A qualified summer youth employee
- A qualified food stamp recipient.
- A recipient of Supplemental Security Income (SSI) benefits.
- Hurricane Katrina employee.
- A qualified unemployed veteran.
- A qualified disconnected youth.

The maximum amount of credit available is dependent upon the group the employee is a member of. A new summer youth hire has a maximum credit of $1,200, while a new long-term family assistance recipient hired over a two year period has a maximum credit of $9,000. The two groups in between have a maximum credit of $2,400 for each new adult hire, and $4,800 for each new disabled veteran hire.

The credit is claimed using IRS Form 8850 and ETA Form 9061. The Forms 9061 are submitted to your state workforce agency PRIOR to hiring someone who may qualify. Click here to view this on the WOTC State Directory website.

Please contact us for more information on the Work Opportunity Tax Credit.

By Jay Logal, CPA, The Whitlock Company