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.

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

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.

Teacher Gifts From Students

Q. My question is: I work for a school. Sometimes parents gift money or gift cards at holiday time or for an appreciation event. Are these taxable. How about gift cards from a school committee (holiday drawing etc.) Even a child will offer a dollar in a card. If they are I am really upset. These are given from the heart, and not meant to be a burden. But I must know, as I’ve gotten different answers from different sources. thanks so much!

A. There are two things that come to mind in answering your question.  First, money given to a teacher from a child would generally not be considered taxable.  This would fall under the gift provisions of the IRS code.  Most children will give a $10 or $20 gift or gift card.  Unless the parent of the child is an employer of the teacher as well, there is probably no tax liability created by this gift.  If the child gives a large, extravagant gift to the teacher, it would be best to consult with a tax advisor regarding the potential liability issues in this case.

Let’s say the same class of students decided to be very efficient.  Instead of donating 25 or 30 different gifts cards or cash items to a teacher, they instead collected money and donated to the school.  The school was instructed to pay this to the teacher as a lump sum.  In this scenario, the gift idea is thrown out the window.  Now the money transfers as part of an employee/employer relationship and must be considered income because the school is the employer.  The employer will either need to withhold on the payment or “gross up” the payment and pay the taxes on behalf of the employee.  This is the same as providing gift cards to teachers in lieu of cash.  I wrote about that topic in another blog article 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.

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

S Corp Shareholder Health Benefits

Q. A 2% shareholder of an s corporation is also an emploeye.  The corporation offers health insurance under a premium only 125 cafeteria plan.  Is the shareholder/employee eligible to participate?  If so should the corporation’s contribution be reported as wages?

A. There are lots of good articles already on the web about 2% shareholders of S corporations. These would of course be secondary resources on the topic but they can provide coverage from the perspective of those who work in this field every day.

The key is that the IRS considers an S corp to be a partnership when dealing with employee fringe benefits.  If the company pays for the health insurance of a 2% shareholder, it is allowed to take a deduction for that benefit.  The full amount of that premium would be considered taxable income to the shareholder/employee.  So…yes, a shareholder can participate in the plan, but cannot get pre-tax treatment like the rest of the employees would under a section 125 or “cafeteria plan”.

Some states do not allow single person health plans to be purchased as a business.  If the 2% shareholder is the only shareholder in the S corp, then perhaps he should consider hiring his spouse to enable them to purchase a business plan.  Otherwise, health insurance must be purchased as an individual and can only be deducted once it passes 7.5% of AGI on the tax return if the individual itemizes.

The IRS published a bulletin about this topic that goes into much more detail.  It is IRB 2008-2 and can be found here.

Rent, Is It Taxable?

Q. We have an employee who is working on an extended assignment (1+ years) in another state.  This is not the state of his residence. My company is paying his apartment rent.  Is this taxable income to the employee?

A. That is a very good question.  In these turbulent economic times, employees are more apt to accept unique arrangements like this just so they can keep their job.  I see two issues at work here.  First, what amount of time is required before the employment state considers him a resident?  Second, is the employee living on-site at a business location.  Why do these questions matter?

Because I’m in Arizona and you did not mention which states are involved, I will use an Arizona example.  According to Arizona Income Tax Procedure (ITP) 92-1, if an employee is in the state for longer than 9 months, he is considered a resident.  Your employee is probably considered a resident of the state where he is working as well.  That means, he has technically relocated.  Unless he is residing on the premises of your business location (like a storage unit manager), any rent or mortgage that you pay on his behalf is taxable income to that employee and must be included in wages on the W-2.  He may also be subject to tax withholding in the state where he originally resided.  Check with a local tax advisor or CPA for details and guidance.  A good summary of this issue can be found in the Guide to Fringe Benefits, Publication 15-b from the IRS.

On a side note, if you read this page, you will see the minimum amount of time required to pass before an employee needs to have Arizona withholding. In your example, the employee is staying in the state much longer than the required 60 days.  Therefore, you would definitely have to withhold if this situation occurred in Arizona.  As you can see, withholding requirements normally begin much earlier than residency rules.  Check with the state that applies to your situation to see its requirements.

Bonus To Me or the IRS?

Q. I just got a bonus from my company and noticed the taxes were way higher than my normal tax bracket.  What is going on?  I live in California.

A. I have good news and bad news for you.  The bad news is, the calculation is probably correct.  You did not supply any numbers with your question, but hopefully, the following example will help to clear some of this up.

Congratulations on your bonus.  Many folks these days would love to be in your situation instead of standing in the unemployment line.

Your payroll department has two ways to calculate withholding on bonuses or supplemental payments as we say in the payroll industry.  They can either calculate using a flat percentage or they can add the bonus to your previous check, calculate taxes on the total and subtract out the values from the last check.  The latter method is called the aggregate method.  What is left after subtracting is nothing more than the bonus and associated taxes.  Because it is much more involved, most employers will choose not to use the aggregate method.  Unfortunately, this is the more accurate method since it aligns with your regular pay to get closer to your actual tax liability.  It is also a better method for higher income individuals whose marginal rate may be higher than the flat rate.

If your bonus is $500, most payroll departments will simply use the flat percentage method to get your withholding.  If you have received less than $1million of bonuses for the year, the federal withholding percentage will be 25%.  That means right off the top, you pay $125 in taxes. Social Security and Medicare remove another 7.65% or $38.25.  In California, there are two percentages possible: 9.3% and 6%.  Bonuses use the 9.3% rate which takes another $23.25.  If you have not reached the limit on California SDI (State Disability Insurance) withholding for the year, this will be calculated at 1.1% for 2009 for another $5.50.  This is a total withholding burden of 43.05%.  You will take home $284.75 unless your employer grosses up the bonus and pays the taxes for you.  Tax withholding on your regular wages may be lower for federal and state purposes which is why this seems so high.

The good news is that if this is actually too much withholding, you will get some of it back when you file your tax returns for federal and state purposes.  But until then, check with your tax planner or CPA, you may be able to adjust your W-4 to have less withholding on your regular wages and reduce the size of your eventual refund.  If you always end up owing extra when you file your tax return, this is a great time to catch up.

Learn About Payroll

Q.  I just started a new job and my employer wants me to do the payroll too. How do I learn some more about it so I don’t mess it up?

A. Thank you for looking for more education.  So many people think that payroll is nothing more than taking out taxes.  The payroll process has grown so complex in the last 15 to 20 years that it takes some serious education and study to keep up with everything.  There are several places you can look for payroll education.

1. I don’t know what state you are in, but there is likely a local chapter of the American Payroll Association close to you.  You can find the one closest to you using this chart.  Local chapter meetings allow you to network with your payroll peers and gives you a chance to ask questions as you learn.
2. The American Payroll Association itself has courses and books available that can guide you through issues you may be having.  They also offer an email list-serve and member hotline that can be useful resources as well.
3. PayrollTalk.com is a good resource.  It is a free online forum for discussion payroll topics.  Everything from tax calculation, to international payroll, to handling complaints is discussed.  You can read and search other posts or add your own after registering.  There are already several thousands members of this community who actively discuss payroll issues each day.
4. PaycheckCity.com can help you learn about the effect of different pay frequencies and W-4 values on your paycheck.  It can even be used for training your employees how to read their paycheck and the impact on take home pay of making changes to their W4.
5. Your local community college likely offers a class or two about payroll.  If not, payroll is often included as part of the accounting curriculum.
6. Publication 15 is the document published by the IRS that spells out fairly clearly your responsibilities as an employer for paying withholding taxes from employees.

I Can’t Get An Unemployment Check

Q. I was fired from my job last week. When I tried to file for unemployment, they said I couldn’t claim because I was self-employed.  I thought unemployment was for this reason.  What do I do?

A. Unemployment benefits are designed for employees who are unemployed, under-employed, downsized, rightsized, or fired.  If you were actually an employee, then your employer should have been paying unemployment tax to the state where you performed your duties.  You would then be given benefits by the state if one of the above-listed events actually occurred.

If you are actually a contractor or self-employed, then you are really out of luck.  The problem with your post is that it looks like you assumed you were an employee, but were classified as self-employed.  This may be a sneaky trick by your former employer not to pay taxes for your situation.

There are specific guidelines as to what actually qualifies as an employee vs. and independent contractor.

• Did the establishment provide you an office?
• Were you required to supply your own tools?  This could mean anything from a computer to actual tools used by laborers.
• Were you issued a 1099 at the end of the year instead of a W-2?  While this one doesn’t actually prove anything, it does show the intent of the hiring organization.
• Who controlled the work you performed?
• Who set your hours?

Companies can get into all kinds of trouble for taking the easy route and calling their employees something else.  Check with your State’s Department of Labor for details.