Medicare Tax Twice From Payroll?

Q. Because of the economic situation, I now have to work two jobs because  my main job cut my hours.  I have Medicare and Social Security tax coming out of both checks.  Isn’t there a way to stop this tax deduction from one of them?

A.  Unfortunately…no.  Medicare withholding is required on all your wages.  It is calculated at 1.45% of taxable gross.  Your employer matches this amount as well.  There is no limit on Medicare withholding tax.  Therefore, it should be withheld from wages at all jobs, even if you are retired.  Those who are self-employed must make estimated tax payments  to cover this obligation as well.  Self-employed individuals should get with a tax preparer or adviser to ensure they are making enough estimated tax payments and to determine what that liability might look like in their situation.

Social Security on the other hand has some different rules.  Like Medicare, Social Security withholding is required to be withheld from every job even if you are retired.  However, there are two quirks to this tax.  For 2011, the most income that can be taxed for Social Security purposes is $106,800.  This number changes almost every year.  In 2011, as the result of a tax cut, employees pay only 4.2% of their taxable wages towards the Social Security liability.  Employers must pay 6.2%.  That means in 2011, 10.4% of all taxable wages go towards Social Security.  Employees, however, pay at most $4485.60 per year.

But wait!  There is a catch.  If you have multiple jobs during the year, and your withholding is more than $4485.60 for Social Security purposes, you can get a refund of the extra Social Security tax you paid during 2011 on your tax return when you file in 2012.  When would this happen?  As mentioned, you could have multiple jobs that push you over the limit. You could also change jobs after meeting the limit.  The employer at your second job would also start withholding as if there was none taken during the year.

The seemingly unfair part about the Social Security tax is the employee gets a refund for overwithheld Social Security tax.  The employer does not.  The employer must pay 6.2% of all wages up to the limit on each employee regardless if they met the withholding limit somewhere else.

Remember, if you want to see how changes in your W-4 status or benefits affect your paycheck, PaycheckCity offers free Paycheck Calculators that are simple to use.  They provide quick, accurate answers to payroll questions.  Check them out.

Did You Tell Your Payroll Department?

This week’s post was inspired by my attendance at the American Payroll Association‘s 29th Annual Congress.  This is the biggest gathering of payroll professionals and vendors anywhere in the world.  The common theme I observed during workshops and networking opportunities was that employees just don’t communicate changes to their payroll system well enough.  Many presenters and attendees experienced the problem of  a significant payroll event that was never given to them for processing.  The demand was that the payroll department “just fix it.”

This post is to motivate anyone who is an employee to stay on top of changes to their payroll situation.  The following examples can provide a taste of items that you can help with.

1. Getting married. This requires a change to the filing status on the federal and maybe state W-4 forms.  Those with the married filing status often see significantly lower withholding.  If you don’t make this change, you may receive a much larger than is necessary tax refund.
2. Changing state.  Generally, withholding is required in the state where you work.  If you change states, you need to make sure and complete a new federal and state W-4 to notify your payroll department of the change.  Without this change, you may end up with no withholding where payments were required.  This would force you to file a return in the state with incorrect withholding in order to get a refund of this money so you can forward it to the correct location.  This is such a hassle!
3. Garnishments/Levies/Child Support. If you have paid off the amount that was being withheld from your check and you do not follow up with that entity quickly enough, your payroll department will have no idea they are supposed to discontinue withholding.  This means you will end up paying money for something that you don’t owe.  It’s often really difficult to get this money back in a timely fashion.
4. Terminations. This one really is the job of the manager or supervisor of employees.  If you do not complete the necessary paperwork with the payroll department, you could allow an employee to continue to be paid for no work.  That means you as a boss are directly hurting the profitability of your company.  Unless in the case of a mass layoff or headcount reduction policy, employees are normally terminated for cause.  Why pay them extra?  They may already be receiving termination payments at the same time.  It is very difficult for a company to recover these funds.  It’s so much easier just to communicate the event to payroll

These events are more common that most people realize.  By staying on top of these issues before they create a problem you are helping improve company profitability, reduce stress of employees, and reduce confusion with employees.

Health Care and Overtime—Do the Twain Meet in 2014?

This month’s post from guest blogger, Vicki Lambert:

The passage of the Affordable Care Act has certainly generated questions in the payroll
community. Will the taxation of health care change? No it is still nontaxable. Will it need to be
reported on the Form W-2 anyway? Yes, but not mandatory until 2012. But one question is still
outstanding and is in fact not being raised quite as strongly as the other two and that is… Will
health insurance being paid for by employers have to be included in calculating regular rate of
pay under the Fair Labor Standards Act?

The law states that employers must offer their employees’ health care coverage or face a penalty
beginning in 2014. The law does not give a mandate that employers must offer health care, only
that they will be penalized if they don’t. And there is an exception for under a certain number of
employees so small employers will not be penalized at all. This is as close to a mandate on fringe
benefits as we have ever come on the national level.

The question arises because the Fair Labor Standards Act requires that all remuneration for
employment unless specifically excluded be included in the regular rate of pay for overtime
calculations. These excluded items are sometimes referred to as “statutory exclusions” and
they are spelled out in the laws. For example, payments for hours not worked are excluded.
These include the fringe benefits of vacation, sick or holiday pay. But these are specifically
listed and are made in most cases voluntarily by the employer. It also lists payments made to
a bona fide plan providing old-age, life or health insurance. But these are contributions made
on behalf of the employee to the employer’s plan. Does this change if the employer is making
the contribution to avoid a penalty by the government? Does this now make the payment
remuneration?

I contacted the Department of Labor directly to find the answers to these questions. I was
referred to the Employee Benefits Security Administration (EBSA). They’re answer…they don’t
know yet. They are looking into the matter to make a determination. The new law is just not
clear enough right now. This is unchartered territory with a new concept for employers in the 21st
century hitting smack up against a law written in 1938. So we will have to wait and see if we
need to include the payment for health care in the regular rate of pay in 2014.

In the meantime maybe this should open up the debate of whether or not these older wage and
hour laws should be revisited for the 21st century. But that is the topic for another blog.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Mandatory Electronic Filing of FTDs—This is a Good Thing

Today’s edition comes from guest blogger, Vickie, Lambert, CPP:

Effective January 1, 2011, the IRS adopted the Financial Management Service (FMS) decision to discontinue the system of processing federal tax deposit coupons. In other words, the IRS is no longer allowing businesses to make employment tax deposits with PAPER coupons. For this move I say to the IRS—BRAVO! I applaud the IRS for moving forward in using 21st century technology.

But not everyone felt this way when the IRS first announced this planned moved. In the guidelines for this new requirement the IRS explained why the decision was made and addressed the various arguments for moving in this direction.

Three main arguments were offered against this new procedure.

1. Placed an undue burden on small businesses. In this day and age most businesses have computers. And since the IRS offers their Electronic Federal Tax Payment System (EFTPS) for free to all businesses this argument really was not well founded. But even if a business does not have an internet accessible computer it does have a phone line. Again since the IRS offers their ACH deposit method which only requires the use of a phone line to schedule a payment through EFTPS this argument fell flat. To take it one step further to ensure access, the IRS increased their support service for this deposit method to 24/7 year-round.
2. Will increase errors in deposits therefore increase the need for the IRS to respond to requests for penalty abatements thus negating any cost savings to the IRS. This argument was not supported by the IRS’s statistics. In fact, their statistics show that businesses that make their FTDs electronically have significantly lower error rates than paper coupon filers.
3. Why not just continue offering the paper coupon option? What is the drawback to having both? The IRS determined that more and more financial institutions are no longer accepting the coupons so continuing their use simply keeps an archaic system going for no purpose. If they were left as an option it would negate the decision to cease processing them even though they are no longer being used.

The one major change to this new regulatory requirement that will put some burden on former paper files for the short term is the change in the definition of legal holidays. Prior to this change a legal holiday included state-wide holidays since local financial institutions would be closed. Now the definition of legal holiday is consistent with all other returns.

So for once I can actually say good job IRS for modifying and upgrading regulations to keep in line with modern technology and for doing away with old and outdated methods.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

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.

Holidays and Taxes – Part 1

Greetings readers.  The next three blog posts will discuss some things that will help you during – and right after- the holiday season.  This week, I’ll discuss employee holiday parties and gifts to employees.  Next week, I’ll discuss year end planning tips. The end of the month will be about making some new goals for the new year.  Perhaps there will be time for one more summarizing tax law changes that should have been passed by Congress by that time.

Gift Cards
According to some statistics software attached to this blog, my post a couple years ago on employee gift cards and taxability is consistently the most visited page on this site.  It seems there is a lot of confusion regarding employer responsibility and payments to employees for holiday bonuses and gifts.  Somehow, the notion has entered the minds of the taxpaying public that if you give money or gift cards to employees below $25 or $50 that the amount is not taxable.  That is absolutely false.  The key to withholding on an employee gift is whether or not the value can be tracked easily.  If you give turkeys to all your employees, they cannot exchange that for cash, and determining the value of each turkey as it is given to an employee is nearly impossible.  If you give $25 gift cards to all your employees, it is very easy to determine the value: $25.  This amount should be taxed appropriately.  Likely, you will need to “gross up” the value.  A $25 gift card using supplemental rates could cost the company nearly $50 once payroll, withholding and unemployment taxes are added into it.  There is a simple gross up calculator available at PaycheckCity.com.  It is free to use after  registration.  This tool will tell you the cost from the paycheck perspective.

Holiday Parties
According to the IRS, the cost of  holding an employee holiday party can be deducted 100% as business expense.  As an employer, this can give your employees a chance to relax and talk about non-work topics.  It also causes team building.  Holiday parties should not be overly extravagant.  Think of the old Tyco/Koslowski debacle.  Having a reasonable party that shows your appreciation for their hard work during the year is a great way to give back and avoid the cost of giving out trinkets or gift cards.  You can find many articles that can help you provide guidelines for your employees during one of these parties.  You want it to be the social event of the year, but not because you ended up with a sexual harassment or discrimination lawsuit on your hands.

What if you invited clients to attend the party as well?  This actually takes away part of the deductible nature of the party.  Now it is for advertising purposes which means only 50% of the cost of the party can be deducted.  So you say, “I’ll just send my customers a nice gift like a goodie box from Fairytale Brownies or Rocky Mountain Chocolate Factory.”  Keep in mind that there is a limit on these as well for tax purposes.  For marketing purposes, spend as much as you want on a customer.  For tax purposes, you can only deduct up to $25 of the cost of gifts to your clients/customers.

Should the United States Celebrate Thanksgiving?

This month’s post from guest blogger, Vicki Lambert:

Should the United States Celebrate Thanksgiving?

Or any holidays for that matter? That sounds like I am advocating not celebrating Thanksgiving or Labor Day, or Memorial Day or even the Fourth of July. And that is not the case. What am saying is that if we, as a nation, celebrate a day of Thanksgiving across this great nation, why is it not a national holiday under wage and hour law? Why is it left up to each individual employer whether to allow employees time off to be with their families? And if they are given time off but its unpaid why should the employee be penalized a day pay because the CEO wants time off to be with his (or her) family and gets paid for it anyway?

In other words, if the holiday is so important that we have parades and special concerts, then why don’t non-government workers get the day off with pay to celebrate?

The United States is practically the only industrialized nation that does not have mandated holidays. I can understand not having nationalized holidays that subscribe to one particular religion, (i.e. Christmas) or are based on a calendar change such as New Years.  But on days in which we celebrate our national heritage and history workers should be able have the day off to join in the celebration and to do so without loss of pay.

Just a thought, what do you think?

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Multiple Rates of Pay—Finally a Use for High School Math

A post from guest author, Vickie Lambert:

Under the FLSA it is required that employers pay employees overtime based upon the regular rate of pay. For this blog entry I want to look at one facet of calculating overtime and the regular rate of pay. What to do when an employee works at two or more different rates within the same workweek. In this type of situation, the regular rate of pay for the week is the weighted average of all the rates. Remember weighted average is not the same as average.

Let’s do an example: At Secrest Corp this week Paul worked to cover for other employees on vacation. His time card reads as follows:

Paul does not work in a state which requires daily overtime. So under the FLSA we would calculate his gross pay as follows:

Step 1… Calculate the Earnings for Each Day
Monday       8 x $8.00 = $64.00
Tuesday       8 x $8.00 = $64.00
Wednesday 8 x $9.00 = $72.00
Thursday     9 x $8.75 = $78.75
Friday         10 x $7.50 = $75.00
$353.75

Many times I have seen payroll professionals confuse weighted average with average. They add up the rates then divide by the number of rates. For example $41.25 (total of all the rates) divided by 5 (number of rates) = $8.25 and try to use that as the regular rate of pay. In this case it would be close enough. But unfortunately it doesn’t always work out so close and can end up underpaying the employee.

Step 2: Divide the total earnings by the total hours worked to determine the regular rate of pay
$353.75 divided by 43 = $8.23 (regular rate of pay)

Step 3: Determine the premium pay for overtime by multiplying the regular rate of pay by .5 (or divide by 2) then multiplying that amount by the number of overtime hours
$8.23 x .5 x 3 = $12.35

Step 4: Determine the total weekly compensation by adding the total earnings (step 1) and the premium pay (step 3)
$353.75 + $12.35 = $366.10 (total weekly compensation)

These 1938 rules under the FLSA require this method to properly pay employees working at more than one rate in a workweek. So you see, you should have paid closer attention to your teacher in high school math class.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Why Doesn’t the IRS Think Payroll Needs Affordable Tax Workshops?

Every year the IRS offers a series of Tax Forums across the country, usually in seven or eight cities from east to west coast. The Forums offer all kinds of workshops on all kinds of tax issues. It is geared primarily to CPAs and Enrolled Agents. But the cost is only $209 so even if there are only two or three workshops for payroll it is still a great deal. This is especially true if you are a CPP like me who needs to have these types of classes to renew.

For the past several years I have attended the Tax Forum here in Las Vegas with my CPA friend. I even wrote several articles touting how great they were for payroll professionals. Workshops I have attended included taxing nonresident aliens and filing W-2s electronically. After the first Forum I attended they asked for a survey of attendees as to what workshops they would like to see in the future. I, of course, jotted down some quick suggestions on adding Form 941, third party sick pay, and taxing fringe benefits in general. I submitted the survey and went merrily on my way, knowing I would see at least one or two of these courses next time around.

The next year came around but they did not have any new workshops for payroll people. In fact they had dropped a few from the time before. But still they had enough to get my money’s worth so I attended. And again they asked for ideas for workshops. Well this time I got a large cup of Starbuck’s coffee, a muffin and a pen and off I went. War and Peace it wasn’t but it was nearly that large. I explained how they could attract payroll professionals thereby increasing attendance, and ensure better compliance by offering these workshops. And it’s not like CPAs don’t need the information, they do. I submitted my tome of a survey and headed off into the future secure in the knowledge that I would see these workshops this year. I mean the IRS would surely jump at the chance to educate those professionals who are responsible for collecting at
least half of the taxes in this country. Isn’t compliance in payroll one of the most important things to them? They have all these publications to tell us how to handle fringe benefits surely a workshop or two wouldn’t be out of line?

So as soon as I got the e-mail for the Tax Forum this year I opened it with great anticipation. Wondering how I was going to fit in all the payroll related workshops this year. You know where this is going of course. Not only did they ignore my suggestions for workshops related to payroll but actually dropped any workshops that would even matter to payroll professionals. They only ones they kept were the tired old ones they always offer. Those are the ones on how to submit W-2s electronically and matching names and numbers on the W-2 to the SSA’s data base. Those both are actually offered by the Social Security Administration so I can’t fault them for not adding any new ones.

So the question arises, why doesn’t the IRS want to offer affordable tax compliance workshops to payroll professionals at their Tax Forums? Are they worried that so many payroll professionals will show up there will not be enough room for the CPAs? I don’t think so! Do they not care about compliance when it comes to payroll? I doubt that. So why not use this opportunity to offer sessions for payroll professionals? It’s a question the IRS needs to address.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Self-Employed on Unemployment?

Q. I am a OTR driver and am the only person working for this company. Now he’s shutting down the company. He classified me as self employed. Can I draw unemployment? I do not have a home, but license is North Carolina. Employer was in Nebraska.

A. The arrangement between you and the company providing your work is very important to get right.  The key here is, how much financial and behavioral control over your work did the hiring entity have?  If he provided your truck and directed all of the shipments you hauled, you may have been an employee.  If you have your own truck and were allowed to contract with other companies, you may actually be independent.  How have you filed your tax return since working with this individual?  Did you use Schedule C, which is typical for self-employed individuals?  Were you provided a 1099 or W-2 at the end of previous years?

The biggest problem with mis-classification is when termination, layoff or work stoppage occurs.  Employers typically attempt to avoid the employee classification simply to save money on the Social Security/Medicare match, unemployment taxes and workmen’s compensation insurance.  If you were actually an employee, then you are due unemployment compensation.  If you were not, then you are not eligible to collect unemployment benefits.  It makes sense that as a self-employed individual, it is my responsibility to keep myself busy.  If I am not finding enough work and lose clients, it is my own responsibility to find more business. No unemployment benefits should be received.  In an employee/employer situation, it is the employer’s responsibility to pay into the unemployment system and thus provide benefits for those employees who are terminated.

The state where you were based is likely the state where you will need to attempt to collect unemployment.  That state will make the determination if you were truly an employee or not.  If it is determined that you were not, you are out of luck.  This may take some time to sort out unfortunately.  In the meantime, the best thing you can do is find another source or income instead of waiting around for an answer. You can read a more in depth article a few years back regarding this topic as well.

The IRS also has a very good publication regarding worker classification.  You can read it here.

—–
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.