2011 Paycheck Changes

By now, most employees in the United States have received their first paycheck of 2011.  About the same time the first check is received, payroll departments across the country were deluged with questions about the changes on employee checks.  This edition of the blog should help to clear up some of the confusion regarding a couple of these changes.

The Making Work Pay Credit is gone!  The implementation of this tax cut was sloppy anyway.  Single folks received up to $400 of tax cuts per year factored into their withholding.  Married folks received twice this amount or up to $800.  There was an upper limit to allowable income.  The credit itself was described in detail in a blog post almost two years ago.  In the tax cut bill that Congress finally passed in mid December, the Making Work Pay credit was happily missing.  That means however, that employees of nearly every income level will see their Federal Income Tax withholding increase for 2011.  It’s quite a shock in the amount of increase.  However, there are no more funny games to play when preparing your tax return or figuring out your W-4 values.  In summary, most employees will see their Federal Income Tax Withholding line increase.

Part two of the changes to employee checks this year has to do with the Social Security component of FICA withholding.  Normally, Social Security withholding is 6.2% of taxable wages up to a base.  That base is $106,800 per year as it has been for 3 years now.  Employers must match the 6.2% value meaning total Social Security taxes are actually 12.4% of taxable wages up to the base or up to $13243.20 per year per employee.  Self employed individuals paid the entire 12.4%.  This is a lot of money!  The above referenced tax cut bill cut the employee portion of Social Security by 2 percentage points.  Now the total is 4.2% up to the base.  Employers still are required to pay their portion at 6.2%.  Self-employed individuals now pay only 10.4% as well.

PaycheckCity, a site run by Symmetry Software (my day job employer), had implemented these changes and placed them on the site in late December.  To my surprise, the help desk team at PaycheckCity reported that CPAs and payroll staff members were writing with questions on why the Social Security rate was different.  Some even adamantly (and ignorantly) proclaimed that we were wrong and they would never use the site again.  The details of the tax plan have been all over the media in the last month.  Social media has trumpeted the changes as well through the many different outlets.  How anyone can still be unaware of this change just baffles me.  Hopefully,  I have provided some knowledge to those who hadn’t heard yet, while clearing up the confusion for those who had and were surprised at the change on their check.

HHS Wants Us Fit—IRS Wants the Tax

It’s been in the news a lot lately—how unfit Americans have become. The First Lady is advocating programs to fight childhood obesity while AARP started an online movement to get its members fit over this summer. Everyone is being asked to join in and help. But for employers and especially for payroll helping fight obesity is a two-edged sword. If the employer takes office space and puts in a gym on site for employees to use under IRS regulations it is tax free. According to Publication 15-B:

Athletic Facilities
You can exclude the value of an employee’s use of an on-premises gym or other athletic facility you operate from an employee’s wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee’s dependent child is a child or stepchild who is the employee’s dependent or who, if both parents are deceased, has not attained the age of 25.
On-premises facility. The athletic facility must be located on premises you own or lease. It does not have to be located on your business premises. However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort.

The added bonus of offering an on-site gym is the employee good will it creates. But for the employer to use valuable and sometimes nonexistent “extra” office space to put in a gym can cause a lot of “bad will” among workers who are crammed into cubicles. And let’s face it not too many companies have an extra 500 square feet just laying empty. Plus I really have to ask how many of us overweight and out of shape payroll professionals want to huff, puff, and sweat in front of our staff and fellow co-workers. I know I never did. Plus with no shower facilities it could make the small and cramped payroll office somewhat—shall we say, unpleasant. And if the employer does put in a shower, I really don’t want to strip and shower in front of my staff!

But the employer really wants to offer a healthier lifestyle to its employees. And they also want to help other local businesses by buying services. So they buy a gym membership for all their employees. It might be a one-off benefit or even part of a larger and more complex wellness program that includes quitting smoking and diet tips. Either way it doesn’t matter. If the employer buys the gym membership everyone is paying taxes on it. FIT, FICA, FUTA, SIT, SDI (where required), SUI, Local Taxes–all of them. In essence the employer is made to pay more simply because they don’t want a gym next to their conference room.

My point is if the government wants Americans to get fit why make it harder and more expensive to buy a gym membership rather than gym equipment. Why should employers and their employees have to pay more for basically the same thing? Putting in a gym or buying a membership should be the same thing if it is for the employee’s health and for the health of America.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Social Security Started Over

Q. I have a unique variation of your “Social Security Tax on Everything” post… My wife’s small company decided to change their paycheck provider in July. The provider “reset” all employees yearly total earnings to zero and are therefore collecting the Social security tax from scratch. The provider claims they have to do this by IRS law. My wife had already paid the maximum of $6621.60. Will we be able to get the overpayment for the rest of the year back on our taxes? The instructions for line 69 of 1040, and form 843, seem to indicate that if your employer overwitholds then you are ineligible for a refund. She has not changed employers, just paycheck providers.

A.  This is a very good question.  Unfortunately, there is not enough information to answer your question.  It sounds like this employer may have switched to a PEO also known as a Professional Employer Organization.  Sometimes these are referred to as Employee Leasing Companies.  When an employer joins a PEO, the employer of record changes from the employee perspective and all Social Security and unemployment taxes start over for each employee.  PEOs can be a big cost savings for an employer by allowing a bunch of smaller employers to pool together for health insurance purposes to become one big client.  In your case, it would restart SS withholding however because technically, there is a different employer.  If this is not the case, I have no idea why SS would have started over.  Simply switching payroll providers would not cause this problem because the employer would be the same.  The employer would also feed in all Year-To-Date information from the old payroll provider to keep this kind of problem from surfacing.

Your second comment however is incorrect.  You can still obtain a refund of excess Social Security withholding from a single employer.  However, you must first ask the employer to refund the tax.  This quote is taken directly from the instructions from IRS Form 843 which is needed to request this kind of repayment, “A refund of excess social security or railroad retirement (RRTA) tax withheld by any one employer, but only if the employer will not adjust the overcollection.”  Refunds are available if your employer simply will not work with you.

—–
Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

Social Security Tax on Everything?

Q.  I have a full-time and a part-time job with different companies.  My employers are both taking out Social Security tax.  Is this correct?

A. Good Question! There are several common misconceptions about Social Security withholding from a paycheck. This is probably one of the biggest. The answer is….a resounding YES!!! Each employer of record is required to withholding 6.2% of your taxable wage for Social Security purposes up to the annual limit.  That is $106,800 for 2010. Even if you have 5 jobs at once, each employer is required to withhold this amount. Even if you are retired and collecting Social Security and have a job somewhere just for fun, the employer is still required to withhold Social Security tax.

You may ask, “What happens if the income from all my jobs add up to more than that limit?  Can I get all my employers to stop withholding Social Security?”  The answer is no.  You do have the ability to get a refund on your tax return if the total Social Security tax paid during the year was more than the maximum required.  That is $6621.60 for 2010.  You’ll see this on line 69 of the 1040 form.  The biggest drawback to this is that the multiple employers are not permitted to recover the overpaid Social Security.  They will match 6.2% up to the limit for everyone regardless whether that employee will be refunded overpaid tax later in the year.

A Job Hunting Secret

At my day job at Symmetry Software, we have been searching for some new employees to fill some open positions.  We are outsourcing the candidate search to a local employment agency.  In this economy, with almost 10% of  those looking for a job unemployed, there is a huge pool of well qualified labor just waiting to be had.  We have interviewed several folks over the last few weeks.  Throughout these interviews, I see one common problem that keeps us from hiring candidates that are good people and very well qualified.

When you are shopping for a new car, do you go in to a dealership without researching and determining which car you are looking for?   Do you accept the words of the salesman to understand what you are buying?

What if you were trying to figure out which college or university to attend?  Would you determine the best schools based on your interests, or would you simply find the closest one to your home?

There are two sides to a job interview; the employer and the applicant.  The employer tries to find out everything possible about the prospective employee before offering a job.  This could include searches of Facebook posts, Google searches for a name, background and credit checks and finally, the actual interview.  That is where the secret lies.

If you make it to an interview, preparation is absolutely the most important thing you can do.  That includes rehearsing answers to potential questions, dressing up, planning to arrive early and preparing extra copies of resumes to distribute.  The employer however, wants to know if you know what you are getting into.  Did you research the company first?  What do they do?  What product lines do they offer?  Do these interrelate?  If you have no idea what the company does, then you will stumble when asked questions about your prospective employer.  That sends a signal that you don’t take things seriously.   Stumbling around trying to make a cohesive answer about something that is so dear to the heart of this prospective employer will win no points.  In fact, it will likely cost you the position.

At least having some familiarity with the structure and product lines of a company will allow you to ask clarifying questions.  This gives the employer the notion that you actually care about the company and that you are not a “fly by the seat of your pants” kind of person.  I think you’ll find that prospective employers will take more notice of what you bring to the table with this trick.

——-
Samuel Kerch, CPA

Hey Senator! Stop Taxing My Company Cell Phone!

There are a lot of fringe benefits making the news these days. But none with as much confusion as cell phones and the taxation thereof. If you follow IRS regulations closely you know there is an entity known as the property list. Items on this list are subject to taxation if used by employees for personal use. For example, company cars are on the list. And so are cell phones. They came on the list when they were first introduced way back when they were big clunky things with battery packs. Over time they have gotten smaller, smarter and cheaper. But they are still on the property list. Therefore even though they are common place at work and every second employee gets one, the personal use is still taxable wages to the employee.

Now the reason why I say they are in the news is because last year the IRS was asked to come up with a way to make the taxation easier to track and maintain. At that time the only way to do it is to take each cell phone bill for each phone for each employee and total up the personal calls. This could require an army of accounts payable clerks, so companies weren’t doing it. So the IRS came up with three ways to account for the usage without having to actually review each bill. Unfortunately CNN and the other news outlets got a hold of the IRS Notice announcing the new methods and asking for comments as they are required to do. Next thing you know CNN and the Wall Street Journal are announcing that cell phone are NOW taxable! Well the blogosphere went nuts with everyone up in arms and attacking the IRS for daring to tax our cell phones. They called for the IRS to cease this taxation attempt immediately. But what was not explained was the property list and how the IRS has no control over what goes on it. It is totally controlled by Congress.

In reaction to this uproar a new bill has been debated and passed in the House. H.R. 4994, the Taxpayer Assistance Act of 2010. Introduced by Rep. John Lewis, this bill calls for cell phones to be taken off the property list immediately. It has been sent to the Senate and is currently in the Committee on Finance. But this is not the first time that the House has attempted to take cell phones off the property list. And it always dies in the Senate. So if you care about having to tax cell phones or having your company cell phone taxed, now is the time to act. You need to write or call your senator and let them know you want this passed in the Senate and made law.

Vicki M. Lambert, CPP

www.thepayrolladvisor.com

Arizona’s New Withholding

Arizona has done it again.  Currently, anyone who is being paid in Arizona must select from several percentages on the A-4.  Arizona withholding is based on a percentage of federal withholding.  The percentage you pick will be multiplied times the federal withholding number on your paycheck to arrive at Arizona withholding.  If you selected 24.5%, and your federal withholding was $112, then your Arizona withholding would be .245×112 or $27.44.

This created a problem with all the federal withholding changes that have happened over the last 10 years.  Each time there was a withholding decrease, Arizona’s revenue decreased as well.  The Making Work Pay Credit last year decreased checks for everyone and was the last straw in the problem.  Arizona’s legislature had to increase the percentages on this form each time the federal government decreased withholding  just to keep withholding even. Finally, last year, the legislature directed the AZ Department of Revenue to develop a new withholding system to be put into place by July 1, 2010.

There are other glaring problems with this method.  Arizona’s tax rates are based on a formula.  By requiring employees to pick a flat percentage, they are forced to determine a marginal (or average) tax rate for their tax situation.  This can change based on events in a person’s life like marriage, divorce, new children, home purchase, a second job or a spouse begins working that didn’t before.  Any of these events change the marginal rate.  Most people never adjust their A-4.  This obviously causes frequent confusion.

Another problem is that many people simply have no federal tax liability.  With no federal withholding, there was no way to have any Arizona withholding and inevitably, these individuals would end up paying extra every year at tax time.

Yet another problem is those that move into the state mid-year.  As a Tax Preparing CPA, I found it very difficult to advise my clients when they move in mid- year which percentage to pick.  The problem still exists in the second year (first full year of residence) since they have no history to draw from in selecting their percentage.

So…..Arizona’s new method was recently announced and here is the form.  All employees must complete a new one of these by July 1, 2010.  Guess what? They solved none of the above mentioned problems and even made some new problems.  Now, the percentage you select is percent of gross pay.  This decouples the state from federal withholding changes but still does not give employees who are new a clue to which rate to select.  Now instead of new employees only being confused, any person working in the state gets to be confused and not just for half a year, but for next year as well.  There is still no basis in the actual tax rates with these percentages.

Instead of providing some rates that anyone can pick, there are still three lines for employees to select based on income level.  This should have been removed.  If you have very low tax liability but a higher than $15,000 income, you cannot select the lowest rate.  On the back of the new form, there is a worksheet provided.  Notice in line 10 of the worksheet that there is no provision in the instructions for selecting anything other than line 1 (front side) percentages.  What if the calculation result is lower than the percentages on the form?

Employees are not able to determine their “target” withholding without digging into last year’s tax return or contacting their tax preparer.  Again, changes in taxable life events make last year’s number irrelevant.  What are you supposed to choose? This value is difficult for those without a tax background to understand.

Supposedly, payroll “experts” were used to help develop this form.  Unfortunately, they chose to tweak the existing system enough to only make things more confusing.   I hope that the state will make some wholesale changes to this form to more closely match what other states are doing and what the Arizona tax system actually looks like.  It’s not bad to use withholding allowances and marital status.  We are forced to use that on the tax form.   Let’s get this right next time.

Yikes, A Big Tax Bill!!!

Q. My husband works for a large company, and I receive disability and do not work.  We just had our taxes done this week and got quite a shock!  We had a federal income tax refund of over $4000, but owed state tax of $1000 and local taxes of $600.  We are in PA.  How can we adjust our withholding so that this does not happen again next year?

A.  When payroll people hear the Pennsylvania, they run screaming from the room.  The local tax debacle there is the stuff legends are made of.  In most states, when someone has too little withholding, an employee can simply get a copy of the state’s W-4 equivalent, and reduce the number of allowances claimed.  This has the effect of increasing the amount of income subject to tax and thus increasing the tax withheld.  Unfortunately, in PA, there is no W-4 equivalent.  PA is calculated as a flat percentage of taxable income, 3.07% to be exact.  I’m not sure where to point you on this one.  Did you have non-wage income like dividends or capital gains that were not taxed?  Do you have a small business on the side where there were no estimated payments made?  Perhaps the payroll system at your husband’s employer has a way to allow for additional withholding beyond the standard percentage.

For the local tax, there is again no W-4 equivalent in most cases.  However, there is very likely an obvious cause for this under withholding.  In PA, employers are required to withhold where the employee works.  If he works in a different jurisdiction than the one he lives in, then the withholding rate will be lower.  He will have the non-resident rate applied to his wages.  In most cases for PA, the resident rate is 1% (could be higher) and the non-resident rate is half of that.  Therefore, he could have only half as much tax taken from his check as was required.  If an employer opts to withhold at the higher resident rate, it is called courtesy withholding.  Not all employers wish to do this because of the extra record keeping requirements.  Check with your employer to see what is possible with regards to increasing the local tax withholding as well.

What Are These Taxes?

Q. I just started as a temp through an agency.  I work full-time and just received my first paycheck.  I want to ask about the OASDI and the NY 2010-NYCNY withholdings.  I was taxed heavily for the OASDI.  What is the NYCNY withholding? Most importantly, I wanted to ask you is there any way to check whether I had overpaid for taxes in a paycheck?

A. The items that came out of your check look completely appropriate.  The most common questions from employees to payroll departments about paychecks come from the cryptic descriptions of deductions shown on the paystub.  In your case, OASDI is the abbreviation for “Old age, survivors, and disability insurance.”  This is the official name for Social Security.  It is calculated as 6.2% of taxable wages up to a maximum of $106,800.  This means, you can pay up to $6,621.60 this year towards this tax.  Your employer(s) will also match 6.2% of your taxable wages.  For lower income individuals, this tax can be the highest amount taken from the paycheck.  There is another tax that is closely associated with this called Medicare.  It is 1.45% of all taxable wages.

NYCNY looks like New York City Tax.  All residents of New York City get to pay an extra tax.  Rates on this tax range from 1.9 to 4% depending on your level of income.

As for your last question, there are only three ways to determine the correct amount of withholding.  First, you download withholding formulas from each jurisdiction in which you owe tax and run hand calculations to see what is correct.  Since that is time consuming and too difficult for most of us, I recommend the second method.  PaycheckCity.com has a free Salary Calculator that calculates all your taxes for you using the formulas from each jurisdiction.  You simply need to know what settings are on the W-4 Form you gave to the payroll department.

Most importantly, if you have specific questions about your paycheck, your payroll department should be able to assist you as long as you are not asking for tax advice.

Filing Status? What is that?

Q. My payroll person told me that the filing status on the W-4 doesn’t necessarily mean the same thing as my marital status.  Is that true?  What is filing status?

A. Filing status on the W-4 and filing status on your tax return are not necessarily the same thing.  The W-4 drives withholding only.  The withholding formulas issued by the IRS come in only two flavors, married and single.  Any other situation is handled by the number of allowances claimed.  Other situations include head of household, children and multiple jobs.  In certain situations, if married folks claim married on their W-4s, they will not have enough withholding.  By switching over to the single withholding formula, additional withholding takes place.  Some companies use the W-4 to determine the marital status of their employees.  This is not a good policy. In fact, if an employer receives a lock-in letter for a specific employee, he/she may be directed to withhold at Single with zero allowances regardless of the marital status of the employee.

On your tax return, the rules are different.  You are only allowed to claim married if you are in fact married.  If you are married, you cannot claim single.  There is a special status called married filing separately for those who wish to use it.  Certain situations may warrant this for better tax treatment.  The key here is that your marital status on the last day of the tax year determines your status for the tax return for that year.

I hope this helps.