YEAR-END UPDATE FOR PAYROLL AND RELATED TAXES WITH ADDITIONAL INFORMATION FOR INDIVIDUALS JANUARY 2011 This memo provides information that is useful in the annual preparation of employment related forms and also contains a number of highlights from recent tax legislation. Please feel free to contact members of our staff for help with your questions. Information applicable to individual taxpayers may be found on pages 11 through 13. 1) DEPOSIT REQUIREMENT ELECTRONIC FUNDS TRANSFER In 2011, you must make electronic deposits of federal income tax withheld, Social Security, and Medicare taxes using the Electronic Federal Tax Payment System (EFTPS). Penalties will be imposed for failure to make deposits electronically. Paper coupons for federal tax deposits are no longer acceptable. Only employers who incur a liability of $2,500 or less in a quarter may remit those taxes by check with a tax return. You may enroll in on-line payment by EFTPS at www.eftps.gov. Use of EFTPS for Form 1040 payments is voluntary and at this time only the ACH Debit method is available to individuals. For more information please contact our office or the Internal Revenue Service at 1-800-555-4477. As before, New York State employers whose aggregate tax withheld through NYS-45, Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return, for the previous tax year was $100,000 or more, must enroll in the PrompTax program. You may enroll at https://www.nysetax.com/tpweb/ and click on Enroll, or you may call (800) 338-0054. Please note that PrompTax filers are required to have payments settle on the third business day after the salary was paid. All NYS employers may now also register to file quarterly Form NYS-45 to report wages and to remit income taxes by e-filing Form NYS-1 by creating an account at www.tax.ny.gov/online/ and clicking Create Account. -1-
2) SOCIAL SECURITY AND MEDICARE TAXES The biggest new tax break for individuals in the recently enacted Tax Relief Act of 2010 is the one-year payroll tax reduction. The Social Security payroll tax on individual wages will be lowered to 4.2% in 2011, from the usual 6.2%. Since the reduction applies to the first $106,800 in earnings in 2011, the benefit for high earners tops out at $2,136. The employer s share of Social Security tax remains unchanged at 6.2%, and both employee and employer are still responsible for 1.45% each of total wages for Medicare. Self-employed workers will also get the tax break. Their self-employment tax will be cut from 12.4% to 10.4%, with Medicare tax remaining at 2.9% of total earnings from selfemployment. This benefit replaces the $400 Making Work Pay Credit that ended in 2010. 3) PER-DIEM REIMBURSEMENTS USING THE HIGH-LOW SUBSTANTIATION METHOD For purposes of reimbursing employees for per diem allowances for travel away from home, the travel expenses are deemed substantiated, and therefore not includable in the employees income, if they do not exceed the Federal per diem rate. Effective October 1, 2010, the rates have been decreased to $233 for any high-cost locality, and $160 for travel to any other locality within the continental U.S. Of the per diem rates noted above, the portion allocated for Meals and Incidental expense remains at $65 for the high-cost localities but increases to $52 for the low-cost localities. A listing of the high-cost and lowcost localities is available from our office or the Internal Revenue Service. You may request IRS Publication 1542. Rates are also available for those entities that use the city by city method of determining per diems. Please consult our staff for these rates as the need arises, or you can go to www.gsa.gov/portal/gsa/ep/home.do?tabid=0 4) SUMMARY OF STANDARD MILEAGE RATES Effective for expenses incurred on or after January 1, 2011, the standard mileage rates are $.51/mile for business use of an automobile and $.19/mile for purposes of determining travel for medical or moving expenses. Charitable rates remain at $.14/mile. -2-
5) SUPPLEMENTAL WAGE WITHHOLDING RATE For supplemental wages paid in 2011 & 2012, the federal withholding rate remains at 25%. The NYS withholding rate for supplemental wages remains at 9.77% but the withholding rate for New York City increased from 4.00% to 4.75%, effective September 1, 2010. Supplemental wages are compensation paid to an employee in addition to the employee s regular wages. Examples of supplemental wages are bonuses, commissions and severance pay. For supplemental wages of $1 million or more, federal withholding is 35%, the maximum personal tax rate presently in effect. 6) BACK-UP WITHHOLDING The rate for back-up withholding remains at 28% for 2011 & 2012. Back-up withholding is required if a social security number or TIN is not provided. Form 945 should be filed to report all back-up withholding. 7) USE FORM 945 TO REPORT ALL NONPAYROLL ITEMS Withholding on nonpayroll items should be reported on Form 945 - Annual Return of Withheld Federal Income Tax. The nonpayroll items include backup withholding and withholding for pensions, annuities, IRAs, and gambling winnings. For example, if federal taxes were withheld from a pension distribution and reported on Form 1099-R, a Form 945 is required to report the liability. Form 945 filers who are required to deposit on a semiweekly deposit schedule are required to attach Form 945-A, Annual Record of Federal Tax Liability. 8) PAYROLL AND NONPAYROLL DEPOSIT RULES The IRS bases the frequency of an employer s required deposits on an annual determination that depends upon the aggregate amount of employment taxes reported during a lookback period. The lookback period is the twelve-month period ended the preceding June 30 th. For annual return filers, the lookback period is the calendar year preceding the previous year. Should you have any questions as to when your payroll tax deposits are due, please contact us, and we will assist you in making the correct determination. -3-
An employer who accumulates $100,000 or more of taxes on any day during a deposit period must deposit the tax on the next banking day and is considered a semi-weekly depositor for the rest of the year. Those employers with a liability of less than $2,500 may remit the tax with form 941, 944 or 945, as applicable. The threshold applies to each type of return separately. 9) SELECTED UPDATES - EMPLOYEE BENEFITS and RETIREMENT PLAN CONTRIBUTIONS Adoption assistance plans - Employers may establish an adoption assistance plan for their employees in order to provide up to $13,360 in 2011 of tax-free assistance for all adoptions of eligible children, including special needs children. There is a phase-out for the exclusion available to higher income taxpayers. The benefits, reported on form W-2, box 12, Code T, have been made a permanent part of the law with phase-out for taxpayers with income between $185,210 and $225,210. Although not subject to income tax withholding, the benefits are subject to employment taxes. The credit for adopting a special needs child is available even if the taxpayer incurs a lesser amount of qualified expenses. The exclusion and credit may not be used for the same expenses. For individuals, the credit remains the same ($13,360) and has been made refundable. In 2012 the maximum credit will decrease to $12,170. Elective deferrals under 401(k) and 403(b) - For 2011, the maximum employee contribution remains at $16,500. In addition, catch-up provisions will permit employees who are age 50 or over by December 31, 2011 to contribute an additional $5,500. IRA Contribution - The deduction for 2010 and 2011 is $5,000. The catch-up amount for traditional IRA plans remains at $1,000. Contributions to a SIMPLE Plan Contributions of up to $11,500 are permitted for 2011. The SIMPLE Plan catch up contribution is $2,500 for those fifty and over. Defined Contribution Plans For 2011 the deduction for contributions to defined contribution plan has remained at $49,000. -4-
10) ELECTRONIC FILING REQUIREMENTS Corporations and certain tax exempt organizations with total assets of $10 million or more must file their 2010 income tax returns electronically, if the entity files a combination of 250 or more information returns in a year (Forms W-2, W-2G, 1042-S, 1098, 1099, and 5498). This requirement has been effective for tax years ending on or after December 31, 2006. Exempt organizations with $10 million or more in total assets are required to e-file if the organization files at least 250 returns in a calendar year, including income, excise, employment tax and information returns. Private foundations and non-exempt charitable trusts are required to file Forms 990-PF electronically regardless of their asset size, if they file at least 250 returns annually. As in the past, if you file 250 or more information returns (Forms W-2, W-2G, 1042-S, 1098, 1099, or 5498), you must file those returns electronically. This requirement applies separately to each type of information return you file. Additional information about this filing method is available from the Social Security Administration (www.ssa.gov) or our office. Partnerships with more than 100 partners must file federal Form 1065, Partnership Tax Return, electronically. Please contact our office for information regarding this method of filing. New York State and many other states are requiring professional practitioners to electronically file all individual, corporate and partnership returns. This includes the filing of New York State form IT-204-LL, due on January 31 st this year. There will no longer be an opt-out form to opt out of efiling New York returns through tax professionals. You must have reasonable cause to not file your return electronically and we must have the documentation in our files in order to avoid a penalty. 11) EARNED INCOME CREDIT NOTIFICATION As of January 1, 2011 the Earned Income Credit for low income taxpayers with children is no longer payable in advance. Therefore there is no longer a requirement to provide written notice regarding possible eligibility for a refund. -5-
12) NEW REPORTING REQUIREMENTS: W-2 AND 1099-MISC Pursuant to recent health care legislation, employers will be required to report the total cost of health insurance coverage provided to each employee on Form W-2. Originally scheduled to begin January 1, 2011, the requirement has been made optional for reporting of 2011 wages and mandatory for reporting of 2012 wages on Forms W-2 required to be filed by January 31, 2013. The amount will likely be reported in Box 12 of the W-2. Beginning January 1, 2011, all individuals or businesses that receive rental income from real property must issue Form 1099- MISC to service providers who provided $600 or more of services. This applies to 2011 payments that will be reported in 2012. 13) REMINDERS WHEN PREPARING 2010 FORMS W-2 a. Payments of accident and health insurance premiums for a qualified plan, paid on behalf of a more than 2% "S Corporation" shareholder-employee, must be included in Box 1 (wages, tips, and other compensation). However, these payments are not subject to FICA and Medicare. In addition, you may report the premium included in Box 1 in Box 14 (other) and label it as "health insurance". b. If you provided more than $50,000 of group-term life insurance to an employee, include the cost of coverage over $50,000 (as published in Internal Revenue Code Regulations) in boxes 1, 3, and 5. In Box 12 denote this excess premium with a code "C". c. If you reimburse your employee for business expenses under an accountable plan and the amount reimbursed exceeded the (1) standard mileage rate, (2) government per diem rates or (3) the high-low substantiation method, you must reflect amounts as follows: 1) Include in Boxes 1, 3 and 5 only the amount in excess of the government specified rates. 2) Enter in Box 12, using code "L" the portion of the reimbursement that is equal to the amount allowed under the government specified rates. -6-
If you reimbursed your employee for business expenses under a non-accountable plan, the full amount of the reimbursement is includable in Boxes 1, 3, and 5 and is subject to income tax withholding and Social Security and Medicare taxes. In addition, other fringe benefits may need to be separately stated on Form W-2. Please refer to the instructions or contact us with any questions. d. Signing bonuses are considered taxable wages and therefore subject to payroll tax withholding. e. An employee s use of an employer provided vehicle is considered a taxable fringe benefit if the employee uses the vehicle for commuting and/or personal purposes. These noncash fringe benefits are subject to income and FICA taxes. Please refer to IRS Publication 15-B for the amount to include on the employee's W-2 or contact us with any questions. The amount included in wages may be separately disclosed as a taxable fringe benefit in Box 14 (other). 14) FORM W-2G Raffle and Prize Reporting As in 2010, you must report the following on Form W-2G: Winnings from gambling, lotteries, raffles, sweepstakes, wagering pools or drawings having a value of $600 or more. Prizes and gambling winnings having a value in excess of $5,000 are subject to withholding at the rate of 28%. For reporting other types of gambling winnings, please refer to the instructions or call our office. 15) PAYROLL AND OTHER COMPENSATION REPORTING FORMS For all 2010 Forms 1099: Each recipient copy must have a contact phone number for the payer. If your form does not contain a field for the phone number, use one of the address fields. - Form 1099-MISC: In addition to payments for non-employee compensation, this form is used to report gross proceeds and payments made to attorneys, including payments made to a corporation. -7-
- Form 940: Until June 30, 2011, the FUTA tax rate is 0.8% on the first $7,000 of wages per employee, as in prior years. On July 1, 2011, the rate is scheduled to decrease to 0.6%. Use that rate to compute the liability on wages for employees who had not yet reached the $7,000 wage base in the first two quarters of the year, and on the wages of newly hired employees. The threshold for required minimum deposits is $500 per quarter. - Form 944 Employer s Annual Federal Tax Return is designed so that employers with annual employment tax liabilities of $1,000 or less may file and pay annually, instead of quarterly. You will receive written notification if you qualify to file this form. - If you have been notified of your change to 944 filing, and you incur a liability of greater than $ 1,000, we advise that you deposit the liability as though you were a monthly depositor. 16) HOUSEHOLD EMPLOYEES 2010 SOCIAL SECURITY AND MEDICARE TAXES FOR HOUSEHOLD EMPLOYEES - The threshold for paying Social security and Medicare taxes on the wages of household employees continues to be $1,700 or more per year. - HOUSEHOLD EMPLOYEES UNDER AGE 18 - Household employment wages paid to workers under age 18 are exempt from social security and Medicare taxes unless household employment is the worker s principal occupation. - HOUSEHOLD EMPLOYERS - Social Security, Medicare taxes - Federal income tax withheld and the Federal unemployment tax will be reported and paid on the individual's Form 1040, Schedule H. NEW EMPLOYEES - REQUIRED FORMS Employers are required to keep verification of eligibility of employment in the United States on file for each newly hired employee. Form I-9 may be obtained from our office or at the INS website at www.uscis.gov. This form along with form W-4 should be kept on file for each employee. New hires should be reported to New York State by faxing a copy of form W-4 to (518) 869-3318. -8-
17) HIRING INCENTIVES TO RESTORE EMPLOYMENT (HIRE) CREDIT FOR HIRING UNEMPLOYED WORKERS This Act provides for a payroll and income tax credit if you hired new workers between February 3 and December 31, 2010 who were previously unemployed. The tax credit equals the employer s portion of the new employees Social Security tax (6.2%). If you keep these employees for 52 consecutive weeks you may be eligible for a retained worker tax credit of up to $1,000 per worker in 2011 on form 941 and on your personal or business income tax return. 18) HEALTH INSURANCE CREDIT FOR SMALL BUSINESSES AND EXEMPT ORGANIZATIONS For years beginning on, or after, January 1, 2010, a tax credit for the cost of health insurance premiums is available to small businesses and also to small tax-exempt organizations. The maximum credit is 35% for small businesses and 25% for nonprofits. In order to qualify, you must have fewer than 25 full time equivalent employees whose average wages are less than $50,000. This credit applies retroactively to 2010 and continues through 2013 when it is expected to rise. Since the basis for this credit is the number of full time equivalent employees, you could still qualify if you employ more than 25 employees, but some of them are part-time. The credit will be computed on Form 8941 and included in the general business credit. Nonprofits will also compute the credit on Form 8941 and report the amount of the credit on Form 990-T. 19) DEDUCTION FOR NEW CAPITAL ASSETS PLACED INTO SERVICE IN 2010 & 2011 Congress recently enacted legislation providing increased incentives for equipment purchases. The bonus depreciation allowance will be 100% of the cost of qualifying property placed in service after September 8, 2010 and before January 1, 2012. For calendar 2012 the bonus depreciation rate reverts to 50% for one year. For tax years beginning in 2010 or 2011, the section 179 deduction for qualified property is limited to $500,000 of the first $2,000,000 of business property placed in service. The section 179 limitation is applied prior to the bonus depreciation and phases out if acquisitions are $2.5 million and over. You must have taxable income in order to take advantage of section 179 depreciation. Qualified leasehold improvements, qualified retail property and qualified restaurant property are eligible for $250,000 of the $500,000 deduction. -9-
20) SIMPLE CAFETERIA PLANS MADE EASIER FOR SMALL BUSINESSES Cafeteria plans of certain small employers can qualify as Simple Cafeteria Plans starting in 2011. Cafeteria Plans are advantageous because they permit employees to use part of their wages for health insurance or child care, for example, without paying tax. They are advantageous to employers because payroll taxes do not need to be paid on the withheld amounts. Cafeteria Plans have a rigorous requirement to not discriminate in favor of highly compensated participants. With the new Simple Cafeteria Plans, small businesses will have safe harbor status for the nondiscrimination rules if they meet the following requirements: The business has an average of 100 or fewer employees on business days during either of the 2 preceding tax years. All employees who have at least 1,000 hours of service are eligible to participate. All employees must have the same election rights. The minimum benefit is 2% of gross wages. If the safe harbor criteria are met, all employees, including owners, are eligible. 2011 TAX CALENDAR AND IMPORTANT DATES BY January 31, 2011: 1) Form W-2 must be distributed to employees. 2) Form 940, Federal Unemployment Insurance, (FUTA), must be mailed by January 31, 2011. However, if you deposited all the FUTA tax when due, you may file Form 940 by February 10, 2011. 3) File form 941, Social Security and withheld income tax return for the 4 th quarter of 2010. However, if taxes were deposited in full and on time for the quarter, you may file Form 941 by February 10, 2011. 4) Form 945, Annual Return of Withheld Federal Income Tax for nonpayroll payments including pensions, annuities etc. Again, if taxes were deposited in full and on time, return can be filed by February 10, 2011. 5) Form 1099-MISC. must be mailed to persons who received $600 or more in fees, or $10 or more in royalties. Forms 1099-DIV and Forms 1099-INT must be mailed to persons who received $10 or more in dividends or interest from you during 2010. Form 1099-R must be mailed to persons who received any distribution from retirement or profit-sharing plans, IRA's, SEP's, or insurance contracts. -10-
6) New York State Forms NYS-45 and, if applicable, NYS-4-ATT, for the fourth quarter of 2010 (Quarterly Combined Withholding and Wage Reporting Return) must be prepared and filed. For other states, please refer to specific state instructions. BY FEBRUARY 15, 2011: Ask for a new Form W-4, Employees Withholding Allowance Certificate, from each employee who claimed exemption from withholding last year. For those employees claiming exemption the W-4 must be completed annually. If the employee does not give you a new Form W-4, withhold tax as if he or she is single, with zero withholding allowances. For all other employees, a new Form W-4 should be completed for any change in status. These forms may also be filed on magnetic media with transmittal Form 6466. You may apply for magnetic or electronic filing of Form W-4 on Form 4419. BY FEBRUARY 28, 2011: 1) Form 1096 must be filed along with government Copy A of Form 1099. 2) Federal reconciliation Form W-3 must be prepared and submitted with the government s Copy A of Form W-2. BY MARCH 15, 2011: 1) Federal Form 1042 - Annual Withholding Tax Return for U.S. Source Income of Foreign Persons must be prepared and submitted with Forms 1042-S - Foreign Person's U.S. Source Income Subject to Withholding. 2) Form 1042-S must be mailed to recipients. BY MARCH 31, 2011: Electronically filed forms W-2 must be submitted to SSA and Copy A of electronically filed forms 1099 must be submitted to the IRS. The forms can also be created, printed and filed online by going to www.socialsecurity.gov/employer and selecting Business Services Online. -11-
OTHER INFORMATION FOR INDIVIDUAL TAXPAYERS IN-PLAN ROLLOVER FROM 401(K) AND 403(B) PLANS TO ROTH IRAS For the first time 401(k) and 403(b) vested retirement plan assets can be rolled over into Roth plans by individuals with a distributable event (separation from service or attaining age 59 1/2). This applies to rollovers made after the legislation was passed on September 27, 2010. Form 1099-R is used to report the conversion. Roth plans require payment of tax when the plan is set up, but income and withdrawals are not taxed. Employer plans may need to be amended to permit the conversions. Beginning 2011, 457(b) plans will be eligible for the conversion as well. As with IRA-to-Roth conversions, the conversion is treated as a taxable distribution, taxed as ordinary income at your marginal tax rate. This in effect accelerates the taxable income that you would eventually pay on distributions from a traditional IRA once you retire, but does so in exchange for never taxing any future appreciation in the value of your account. These ROTH accounts are subject to minimum required distribution rules while the ROTH IRA is not subject to MRD rules. The rollover mechanism is most beneficial to those who have other funds on hand for the tax payments and for those who will have an extended period of time available before they will take distributions from the Roth account, or will pass it to the next generation. If you are interested in discussing the Roth conversion, please contact our office. IRA-to-ROTH IRA Conversion Opportunity Still Available Taxpayers still have the option to roll over their traditional IRAs (and funds that have been rolled over from a qualified plan) to a ROTH IRA, regardless of their income level or filing status. Annuities may also be eligible. FOREIGN BANK ACCOUNT REPORTING Individuals with an aggregate balance of more than $50,000 in foreign financial assets will be required to file a disclosure with their tax return for that year. This requirement will be in addition to the Financial Accounts (FBAR) Reporting. -12-
KIDDIE TAX APPLIES TO CHILDREN UNDER 19 AND FULL-TIME STUDENTS UNDER 24 Previously, tax at the parents highest marginal rate applied to children under the age of 18. Beginning with 2008 tax returns, the kiddie tax was permanently extended to children under the age of 19 and full-time students under the age of 24. CREDIT CARD PAYMENTS FOR ESTIMATED TAXES You may continue to pay individual taxes using American Express, MasterCard, or Discover Card by calling 1-800-2PAY-TAX. The service is now available for paying New York, and several other states taxes, as well. Your credit card company may charge a fee for this service. NEW YORK CHANGES DOMESTIC WORKER BILL OF RIGHTS New York State is the first state to pass a Domestic Workers Bill of Rights which was signed into law in September of 2010. Employers of household workers in New York State are required to provide overtime pay, time off, vacation after one year of work, and disability benefits. NEW FORM LS-52 New York State employers are now required to complete and provide a copy to employees of new Form LS-52. The form advises employees of their hourly and overtime rate, and confirms their scheduled paydate. REDUCTION OF CHARITABLE CONTRIBUTION DEDUCTION The charitable contribution deduction for taxpayers with New York adjusted gross income over $10 million is limited to 25% of the federal deduction for charitable contributions, applicable Jan 1, 2010 through 2012. No other federal itemized deductions are allowed for New York purposes for these high-income taxpayers. For taxpayers with income over $1 million, charitable contributions are limited to 50% of federal itemized deductions. -13-
ESTATE TAX Under the new Tax Relief Act passed in December 2010, the estate tax which had been repealed completely in 2010 is reinstated for individuals dying in 2011 and 2012. However, the exemption amount is increased to $5 million for each person or $10 million for a couple. In 2009 the exemption was $3.5 million. The top rate of estate tax was 45% tax in 2009 and has been reduced to 35%. The gift tax and GST tax exemptions are both $5 million for 2011-2012 and the maximum gift tax rate is 35%. Keep in mind that most states also have estate taxes and some of these have de-coupled, or no longer tie in with the federal estate tax. For example, beginning January 1, 2010 New York State imposed a tax on estates in excess of $1 million, as compared to the $5 million exemption now in effect at the federal level. IRS Circular 230 Disclosure: To comply with requirements promulgated in U.S. Treasury Department regulations, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended nor 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 person any transaction or matter addressed herein. -14-