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

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

Taxes Cause Fireworks Too?

Q. We recently ran a fireworks stand for a business in another state.  They have stands over about 4 different states and they hire people to manage them for them.  This was our first year running the stand.  We sold off of commission.  We were to receive 20-25% of net sales that we took in.  I just received the check from the company.  The check made out to me in the amount of just over $6,000.  It is my understanding that when tax time comes, I will be receiving a 1099 for that amount.

Here is my problem, I do not want to have to pay taxes on the full amount when I’m planning on giving about $4,500 in wages to 9 workers.  I also have about $500 in expenses.  The way it looks to me right now, is that in April, I will be paying income tax on the whole amount.  Can I write them checks as contract labor?  If so, what is the max on it?  How do I show those expenses after I get the 1099 so it doesn’t look like I received the whole $6,000?

A. Taxes, Taxes, Taxes.  Everyone seems to want to avoid paying taxes on their income for some reason.  Actually, it is your legal right to only pay the taxes you actually owe.  You should be taking advantage of all possible legal deduction opportunities that are available in the tax code.  In your case, yes, you will receive a 1099 for the amount you earned running the stand.  The arrangement described almost sounds like a franchising opportunity. I wonder whether you are actually “self-employed” as you are being classified or if you are indeed an employee.  I wrote an article about that one awhile back that you can read here.

If you are actually considered a small business, then you need to track your expenses incurred while running the stand like a regular business would.  As a self-employed individual, the income and expenses from your business will be reported to the IRS on Schedule C of the tax return.  Schedule C allows many types of deductions.  You can read instructions for that form here.  Valid expenses could be everything from vehicle mileage or depreciation, office supplies, employee and benefit expenses, licenses you were required to purchase, business meals, commissions, insurance, etc.  If you paid people to run the stand with you, those people were likely employees and should have been paid and reported properly through a payroll system.  Basically a valid expense is something that a an auditor would allow during the course of an examination.  If you take a conservative approach and have receipts and documentation for expenses, you are much more likely to keep your claimed expenses from being denied if you are audited.

Of course, the best way to make sure you are doing this correctly is to retain the services of a knowledgeable accountant.  Both the IRS and the state government will have unique tax laws relating to your situation.  Your accountant will become your trusted advisor while guiding you through the labyrinth of tax laws that exist today and helping you make better business decisions.  Good luck!

—–
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.

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.

Non-profit donations before non-profit status

Q. Can a nonprofit corporation issue tax-deductible receipts while waiting for approval of 501(c)3 status from the IRS? Would the deduction be only for the state in which the nonprofit is located and not for a federal return?

A. Non-profits fulfill a great need in our society. Thankfully, the IRS still considers donations to qualified non-profits to be tax deductible within certain limits. There are certain types of non-profits that do not need to go through the official recognition process with IRS Form 1023.

• Churches, including synagogues temples, and mosques.
• Integrated auxiliaries of churches and conventions or associations of churches.
• Any organization that has gross receipts in each taxable year of normally not more than $5,000.

Regardless, it’s still recommended to get the official blessing of the IRS on your organization.

If your organization does not fall into one of those categories, it is not an official non-profit in the eyes of the IRS or your state (most likely) until Form 1023 is filed and you receive your official acceptance letter.  Donations made to the organization prior to the official designation are likely not deductible.  Even if you are accepted at the federal level, it’s a good idea to look into the requirements of registering your non-profit organization at the state level.  If there are extra steps required to provide non-profit status at y0ur state level, it would be a shame to ignore them and cause confusion amongst your donors.  They want to help fulfill your mission, so make sure you have completed all necessary steps to provide the tax benefit available from the IRS.

Unfortunately, the process of completing the form is onerous. There is a 38-page instruction booklet to mull over for requirements. The application form itself is 30 pages!  There is also a new fee structure.  Just to apply, get ready to hand over at least $400.  According to the application,

The entire process can even take up to a year.  For those with more complicated organizations, an attorney may be necessary to insure that the purpose and structure are properly communicated to the IRS.

—–
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.

Why Isn’t Payroll Considered Professional by Other than Payroll

My blog submission this month is not about payroll itself but rather the view that other professions, careers, occupations or basically anyone other than a payroll professional has of our chosen career field. I know that you have encountered the same reactions to being a payroll professional that I have. It can range from “what will you do when you finally decide on a career?” to “that’s not a bad job at least you get to know what everyone makes” to the worst of all “payroll really isn’t a profession it’s just a job”. That last one gets me most of all. I am proud of what I do for a living and of the people I associate with and the job we do.

But why isn’t payroll considered a profession in our society?

Well let’s look first at the definition of profession. As described at dictionary.com a profession is:

1. A vocation requiring knowledge of some department of learning or science: the profession of teaching.
2. Any vocation or business.
3. The body of persons engaged in an occupation or calling: to be respected by the Medical profession.

So if you go by the literal definition of profession we qualify. We have knowledge of some department or science. We have to know the law, the tax code, and computer software. These are areas that are used by other occupations that are deemed to be professions. There is definitely a body of persons engaged in our occupation. For every company in the United States with employees there is a payroll person paying somebody somewhere. And we certainly are a vocation and there is definitely big business wrapped up in payroll. Just check out the bottom lines of the major payroll processors, not to mention the fact that over 30 IRS publications or forms are created specifically for us.

So why then aren’t we given the respect we deserve as a profession? Last December I was involved in expert witness for a court case concerning payroll. I was asked to give my opinion about whether or not I thought a practice by the defendant was within the bounds of normal payroll procedures. When I gave my written report I used the word payroll industry rather than payroll profession because I know that society does not accept payroll as a profession. Well the attorney taking my deposition for the defense jumped on that one. He asked “Don’t you consider payroll a profession?” in a smug tone. And I got on my soap box. Yes I do, I stated forcefully but the rest of the professional world such as lawyers, CPAs and medical personnel do not. He had to agree that it is definitely viewed that way. And again I ask why?

When I first started in payroll back in 1977 personnel (as it was called in the old days) and payroll were pretty much equal. We both were paper pushers and clerks. But 12 years later, in 1989 I received my BBA in Personnel Management because there was no academic degree for payroll only personnel. And in the 20 years hence, Human Resources has soared into a profession with Masters degrees and maybe even doctorates at some universities. But yet there is still not one course of training at the college level that I am aware of for payroll other than the odd payroll accounting course or labor studies. But you certainly can’t get a full BA in it. Again I have to ask why?

I guess for one answer to my question maybe I have to quote Shakespeare in the play Julius Caesar, “The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.” Did we spend so much time doing payroll that we didn’t push payroll? That is certainly a question to ponder.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Sole Proprietor on Payroll?

A good question today for discussion:
“My husband is self-employed with no other employees.  I generate his paychecks.  This year, he has been doing a few jobs outside of our county; therefore, the local tax amounts vary from county to county.  The payroll program I use is a very basic program so there are not a lot of different options to use.  (This is a new program I started using this year.)  To keep local taxes correct, I have to issue him a check for each job completed outside of our county.  When I generated a paycheck to him for a small job in a different county, ($300 paycheck), I noticed there were no federal withholding taxes.  I didn’t know this before, but it appears tax calculations are different based on daily, weekly, monthly, etc. pay periods.  I played around with this in the program and noticed the variance each time I changed this option.  With the flexibility of him being self-employed, I generate a paycheck on an as-needed basis to cover our personal needs.  It is never a fixed amount and the frequency varies. Taking the issue of local tax variances out of the picture, I am now worried if the federal and state taxes are being calculated correctly because of the varied amounts and time frames of the paychecks.  I don’t know whether to choose the option of him getting paid daily, weekly, bi-monthly or monthly. The federal and state withholdings changes in each of these categories.  I feel that it is incorrect to have no federal withholding if I generate a paycheck to him for only $300.00.  Can you help?”

A.  Your question contains one of the most common misconceptions of those who are self-employed.  You did not state if you were an LLC, S corp or a C corp.  I assume by your use of the words “self-employed” that you are simply a Schedule C filer with the IRS.  Most of the included fact pattern is actually irrelevant to answer your question.  Simply put, schedule C sole proprietors do not receive paychecks.  The profit earned from the business each year is the “paycheck” for your husband for tax purposes.  You will pay income taxes based on the profit of the business, less any allowed personal deductions on the form 1040.  Self-employed individuals make estimated payments to the IRS based on their estimated tax liability each year.  These estimated payments are made on a quarterly basis.  Your CPA or tax adviser should be able to look at your situation and determine what estimated payments are required.

While you do not have employees now, it is important to note that when you do have employees, you should match your pay frequency with the way you pay.  If you are having employees work in a different city each day, and your payroll system cannot accommodate multiple city tax rates, you would pay based upon a daily frequency for federal, state and local purposes.  If you pay daily and use any other table, the amount of wages will be too low to trigger withholding for federal and state in most cases.  If you think about it, $300 per day is about $81,000 when annualized (assuming a 270 day work year).  If you annualized $300 using a weekly table, it only adds up to $15,600 of gross wages.  There must be a low-cost system available that could handle such a problem when you get to the point of actually having employees and needing it.

——-
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

Which 1040 Do I Use?

Q. How do I know which 1040 I’m allowed to use? Does it really make a difference?

A. Yes! Each form has specific requirements that a taxpayer must meet in order to use it. IRS Tax Tip 2010-05 contains instructions on which form you should select.  Your options are:

1040EZ Requirements
Your taxable income must be below $100,000 and your earned interest below $1,500. You can only use the Single or Married Filing Jointly filing status. You must be under age 65 and not claim any dependents. You will not be claiming any of the special additional deductions for real estate taxes, motor vehicle purchase or disaster losses.

1040A Requirements
Your taxable income still must be below $100,000 to use this form. You want to claim the credits disallowed on the EZ form. You have capital gain distributions. You contributed to and IRA, paid student loan interest or higher ed tuition.

1040
Anyone can file with this form. However, if you have a simple tax situation, why go through the trouble of the long 2-page form if you don’t have to?

If you are confused about which form to file, you may wish to use the services of a professional tax preparer or CPA. Professionals are trained to help you understand your tax situation and can often make recommendations to help you improve your take home pay or lessen your tax bill in the upcoming year. Make sure you interview your tax preparer carefully. Not all of them are as prepared for any situation as you hope they will be.