Archive for Payroll Tax Problems

Withholding Tax for Social Security Goes to 6.2% of Wages

January 6, 2013 Employment Tax, FICA, Paying Taxes, Payroll Tax Problems, Self Employ, Small Business, Sole Proprietor, Sub-chapter S, Tax Guidance & Preparation, Tax Problems & Requests

Contrary to the manufactured ‘news’ dribbling out of the main stream media to sell advertising, last week the IRS published updated employer’s withholding guidance clearly stating that employers are to now withhold Social Security tax at the rate of 6.2 percent of wages rather than the previous rate of 4.2 percent in place for the past two years.

Alas THOSE OF US IN THE ‘MIDDLE CLASS’ WITH JOBS ARE ALL PAYING MORE TAX!!

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The ‘Fiscal Cliff’ and Your Tax Obligations

January 2, 2013 Capital Gain, Charitable Contribution, Children, Earned Income Tax Credit, Education Expense, Estate Tax, Paying Taxes, Payroll Tax Problems, Self Employ, Small Business, Social Security Tax, Tax Filing Status, Tax Guidance & Preparation, Tax Preparer, Tax Problems & Requests, Tax Relief, Taxable Income

Our esteemed President has proven to me to be extraordinarily disingenuous with his statements about the middle class and their purported tax obligations as pretty much everyone’s taxes will go up in 2013 as a direct result of the cumulative efforts of our ‘elected officials’ over the last few days.  Please don’t get me wrong as I find the man’s leadership in most regards to be much more stoic than any other President in my life time.

What I find particularly galling however is that everyone it seems from pundits to established economists speak about the need to create jobs in America as the best way to reduce the deficit. I believe as a matter of principal that the best way to create jobs from a policy or legislative perspective is to drastically reduce employment tax and to completely eliminate self employment tax as these are some of the biggest costs and risks associated with being an employer or job creator.

Either way if you would like to read the actual legislation a pdf version can be found here at the US Government Printing Office and summaries can be found here at the Library of Congress.  The following are some highlights of what to expect:

Starting in 2013, there will be a new 39.6% rate placed on these thresholds:

  • Married Filing Jointly: $450,000 of taxable income

  • Qualifying Widow(er):  $450,000 of taxable income

  • Head of Household: $425,000 of taxable income

  • Single: $400,000 of taxable income

  • Married Filing Separately: $225,000 of taxable income

Starting in 2013 the tax rates on long-term gains would be:

  • 0% if income falls below the 25% tax bracket

  • 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate

  • 20% if income falls in the 39.6% tax bracket

The Senate proposes the following AMT exemption amounts for 2012 indexed for inflation starting after 2012:

  • Married Filing Jointly: $78,750

  • Qualifying Widow(er): $78,750

  • Single: $50,600

  • Head of Household: $50,600

  • Married Filing Separately: $39,375

The proposed threshold amounts at which itemized deductions would start to be limited are:

  • Married Filing Jointly: $300,000 of AGI

  • Qualifying Widow(er): $300,000 of AGI

  • Head of Household: $275,000 of AGI

  • Single: $250,000 of AGI

  • Married Filing Separately: $150,000 of AGI

The Senate proposes to re-instate the personal exemption phase-out starting in 2013. Taxpayers would see their total personal exemptions reduced by two percent for each $2,500 by which adjusted gross income exceeds the threshold. The proposed threshold amounts for 2013:

  • Married Filing Jointly: $300,000 of AGI

  • Qualifying Widow(er): $300,000 of AGI

  • Head of Household: $275,000 of AGI

  • Single: $250,000 of AGI

  • Married Filing Separately: $150,000 of AGI

The Senate proposes that the following tax provisions be extended through the end of the year 2017:

  • American Opportunity Credit

  • Child Tax Credit at $1,000 maximum and partially refundable

  • Earned Income Credit for 3 or more dependents

The following provisions would be extended through 2013:

  • Educator expenses deduction

  • Exclusion for cancellation of debt on primary residences

  • Mass transit and parking benefits excluded from income set at maximum of $175 per month.

  • Mortgage insurance premium deduction

  • Deduction for state and local sales taxes

  • Charitable deduction for donating real property for conservation purposes

  • Tuition and fees deduction

  • Exclusion for charitable distributions from individual retirement accounts

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Service Fee v. Tip – IRS Guidance to Examiners

June 25, 2012 Audit Technique Guide, Business Expense, Disallowed Expenses, Employment Tax, IRS Enforcement, IRS Examination, Payroll Tax Problems, Tax Guidance & Preparation, Tax Problems & Requests, Taxable Income, Uncertain Tax Position

According to IRS administrative guidelines to its examiners concerning Rev. Rul. 2012-18, published in the 2012-26 Internal Revenue Bulletin, when performing a tip examination (aka audit), IRS examiners must ensure that service fees or charges are properly characterized as wages and not tips. If the payment is not a tip then it is a service charge and reported as wages.

Whether payments should be reported as tips or service charges basically distills down to whether the following factors were present:

(1) The payment was made free from compulsion;
(2) The customer had the unrestricted right to determine amount;
(3) The payment was not be the subject of negotiation or dictated by employer policy; and
(4) The customer determined who receives the payment.

Automatic gratuities (for parties of a certain size for example) should according to this directive to examiners be reported as service charges and not tips in my humble opinion. Comments on the interim guidance may be submitted either electronically at TIP.Program@irs.gov or in writing to:

Internal Revenue Service
National Tip Reporting Compliance
3251 North Evergreen Dr. NE
Grand Rapids, MI 49525

Also I learned that the IRS intends to solicit public comments on proposed changes to it’s existing voluntary tip compliance agreements.  Specifically, the Tip Reporting Alternative Commitment (TRAC) program and other variations of TRAC agreements.

The principal author of this revenue ruling is Linda L. Conway-Hataloski of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities).  For further information regarding this revenue ruling, contact Linda L. Conway-Hataloski at 202-622-0047.

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US Treasury SS-8 Determination of Worker Status for Purposes of Federal Employment Tax

June 4, 2012 Appeals & Audit Resolution, Audit Reconsideration, Business Expense, Employee Business Expense, Employment Tax, FICA, Payroll Tax Problems, Self Employ, Small Business, Sub-chapter S, Tax Guidance & Preparation, United States Treasury

In my dealings with the US Treasury Department regarding worker classification disputes I have learned that although in reality there may be shades of gray distinguishing between what constitutes an employee and what constitutes an independent contractor the US Treasury has some very specific positions.  Here are four that will hopefully help you make the correct determination and avoid future problems:

1. A relationship between an employer and an employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to what is to be done, but also how it is to be done.  It is not necessary that the employer actually direct or control the individual, it is sufficient that the employer merely has the right to do so. The designation of a worker as an agent, sub-contractor or independent contractor is irrelevant if the relationship of employer and employee exists.  The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed.

2. A worker who is required to comply with another person’s instructions about when, where and how he or she is to work is ordinarily an employee.  This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions.  Some employees may work without receiving instructions because they are highly proficient and conscientious workers or because the duties are so simple or familiar to them.  Furthermore, instructions, that show how to reach the desired results, may have been oral and given only once at the beginning of the relationship.

3. Lack of significant investment by a person in facilities or equipment used in performing services for another indicates dependence on the employer and, accordingly, the existence of an employer-employee relationship.  The term “significant investment” does not include tools, instruments, and clothing commonly provided by employees in their trade; nor does it include education, experience or training.

4. A person who can realize a profit or suffer a loss as a result of his or her services is generally an independent contractor, while the person who cannot is an employee.  “Profit or loss” implies the use of capital by a person in an independent business of his or her own.  The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and, thus, does not constitute a sufficient economic risk to support treatment as an independent contractor. If a worker loses payment from the firm’s customer for poor work, the firm shares the risk of such loss. Control of the firm over the worker would be necessary in order to reduce the risk of financial loss to the firm. The opportunity for higher earnings or of gain or loss from a commission arrangement is not considered profit or loss.

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Reporting Back Pay

February 27, 2012 Employment Tax, Paying Taxes, Payroll Tax Problems, Social Security Tax, Tax Guidance & Preparation, Tax Problems & Requests, Taxable Income

Reporting back pay is not as straight forward as one imagines.

If you issued back pay you should report it on IRS Form W-2 (in boxes 1, 3, and 5) for the year payment is made.

If any punitive damages are involved in a settlement they should be reported by the company on IRS Form 1099-MISC because they are not payment for actual wages.

If the settlement included attorney fees, they are also reported on IRS Form 1099-MISC, whether they were paid directly to an attorney or not.

Interest associated with either the wages or the punitive damages is reported on IRS Form 1099-INT.

If you receive back pay you report the wage portion of the settlement on the tax return for the year in which the back pay is received. Note that only the part of the settlement that relates
to the back pay is subject to payroll taxes.

Interest paid on the settlement is taxable and likewise reported on the return for the year it is received.

IF you receive punitive damages they are reported as other income on line 21 of IRS Form 1040.

Finally, note that any attorney fees associated with the lawsuit may be deducted as a miscellaneous itemized deduction subject to the two-percent-of-AGI threshold.

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IRS Implications of Paying Yourself

September 28, 2011 Paying Taxes, Payroll Tax Problems, Sole Proprietor, Sub-chapter S, Tax Guidance & Preparation

Another fabulous question came my way today from a small business owner that is actually proving to be monetarily successful and wants to know how to pay herself while minimizing her tax burden. Basically the answer depends first on the type of business structure elected, sole proprietorship, partnership, corporation, S-corporation, or LLC.  The following is some text and links pulled off the IRS web site to help answer the question…

Corporate officers

An officer of a corporation is generally an employee, but an officer who performs no services or only minor services, and who neither receives nor is entitled to receive any pay, is not considered an employee. Refer to “Who Are Employees?” in Publication 15-A, Employer’s Supplemental Tax Guide (PDF).

Partner distributions

Partners are not employees and should not be issued a Form W-2 in lieu of Form 1065, Schedule K-1, for distributions or guaranteed payments from the partnership. Refer to partnerships for more information.

Dividend distributions

Any distribution to shareholders from earnings and profits is generally a dividend. However, a distribution is not a taxable dividend if it is a return of capital to the shareholder. Most distributions are in money, but they may also be in stock or other property. For information on shareholder reporting of dividends and other distributions, refer to Publication 550, Investment Income and Expenses.

Form 1099-MISC or Form W-2 wages

You cannot designate a worker, including yourself, as an employee or independent contractor solely by the issuance of Form W-2 or Form 1099-MISC. It does not matter whether the person works full time or part time. You use Form 1099-MISC, Miscellaneous Income (PDF) to report payments to others who are not your employees. You use Form W-2 to report wages, car allowance, and other compensation for employees.

Treating employees as non-employees

You will be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold them because you treat an employee as a non-employee, including yourself if you are a corporate officer, and you may be liable for a  trust fund recovery penalty. Refer to Publication 15, Circular E, Employer’s Tax Guide for details about the trust fund recovery penalty or Independent Contractor for more information on employee classification.

Shareholder loan or officer’s compensation?

A loan by a corporation to a corporate officer should include the characteristics of a loan made at arm’s length. That is, there should be a contract with a stated interest rate, a specified length of time for repayment, and a consequence for failure to repay the loan. Collateral would also be an indication of a loan. A below-market loan is a loan which provides for no interest or interest at a rate below the federal rate that applies. If a corporation issues you, as a shareholder or an employee, a below-market loan, the lender’s payment to the borrower is treated as a gift, dividend, contribution to capital, payment of wages, or other payment, depending on the substance of the transaction. Refer to “Employees’ Pay/Kinds of Pay/Loans or Advances” in Publication 535, Business Expenses for more information.

Reasonable compensation

Because an officer of a corporation is generally an employee with wages subject to withholding, corporate officers may question what is considered reasonable compensation for the efforts they contribute to conducting their trade or business. Wages paid to you as an officer of a corporation should generally be commensurate with your duties. Refer to ”Employee’s Pay, Tests for Deducting Pay” in Publication 535, Business Expenses for more information. Public libraries may have reference sources that provide averages of compensation paid for various types of services. The Internal Revenue Service may determine that adjustments must be made to the income and expenses of tax returns for both the corporation and an individual shareholder if the officer is substantially underpaid for services provided.

Draw account

If you are a sole proprietor  or partner in a partnership, the money or other forms of payment you take from your business should be accounted for in a draw account. This helps you know what amount of benefits you have taken from the business during the year. You cannot deduct the sole proprietor s own salary or any personal withdrawals made from the business.

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Payroll Service Providers: Further Guidance Defining “Responsible Person”

September 12, 2011 Payroll Tax Problems, Self Employ, Small Business

It has been truly amazing to see so many failed payroll service providers all around the United States screw over small business owners by collecting tax revenue from business owners to be passed on to federal and state governments and then fail to turn the money over to the governments before closing up shop and leaving the small business owner liable for payroll taxes to the government already paid once to the payroll service provider.

Usually several weeks or even months pass by without the small business owner recognizing the magnitude of such an event. This is a federal offense bringing with it HUGE PENALTIES and even incarceration. These nefarious payroll organizations bring a bad name to legitimate payroll service providers meaning that background checks should be carefully conducted on any entity engaged.

Many small business owners usually don’t realize that as an Officer of their entity (usually the sole Officer) they (up until recently) were the only people personally “responsible” for the fraudulent failure to submit payroll taxes of their contractually engaged payroll services providers.

Some relief is now available.  Recently the IRS Small Business Self-Employed Division (SB/SE) issued a memorandum “Interim Guidance for Conducting Trust Fund Recovery Penalty Investigations in Cases Involving a Third-Party Payer.”

The memorandum expands the scope of “responsible persons” under Code §6672 to include third-party payers, such as payroll service providers (PSPs) and professional employer organizations (PEOs) and complies with the recommendations made by the IRS National Taxpayer Advocate. This memorandum is an attempt to protect businesses from PSPs and PEOs that have to pay the IRS withheld payroll taxes.

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How to Get a ‘Fresh Start’ with the IRS

June 1, 2011 Alternative Minimum Tax (AMT), Amended Tax Return, Appeals & Audit Resolution, Back Taxes Owed, Business Expense, Colorado Department of Revenue, Disallowed Expenses, Intent To Levy, Intent To Lien, IRS Appeal, IRS Audit, IRS Collections, IRS Enforcement, IRS Examination, IRS Levy, IRS Lien, IRS Mediation, IRS Penalties, IRS Penalty and Interest Abatement, Non-filed Tax Returns, Paying Taxes, Payroll Tax Problems, Rental Real Estate, Self Employ, Small Business, Tax Problems & Requests, Tax Relief

According to IR-2011-20 published on Feb. 24, 2011, in its latest effort to help struggling taxpayers, the Internal Revenue Service announced a series of new steps to help people get a fresh start with their tax liabilities. The goal is to help individuals and small businesses meet their tax obligations, without adding unnecessary burden to taxpayers. Specifically, the IRS is announcing new policies and programs to help taxpayers pay back taxes and avoid tax liens. The changes include:

  • Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.

  • Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.

  • Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.

  • Creating easier access to Installment Agreements for more struggling small businesses.

  • Expanding a streamlined Offer in Compromise program to cover more taxpayers.

Tax Lien Thresholds

The IRS will significantly increase the dollar thresholds when liens are generally filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances.

The IRS plans to review the results and impact of the lien threshold change in about a year.

A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt. Filing a Notice of Federal Tax Lien is necessary to establish priority rights against certain other creditors. Usually the government is not the only creditor to whom the taxpayer owes money.

A lien informs the public that the U.S. government has a claim against all property, and any rights to property, of the taxpayer. This includes property owned at the time the notice of lien is filed and any acquired thereafter. A lien can affect a taxpayer’s credit rating, so it is critical to arrange the payment of taxes as quickly as possible.

Tax Lien Withdrawals

The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals.

Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government.

In order to speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.

Direct Debit Installment Agreements and Liens

The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:

  • Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.

  • The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.

  • The IRS will also withdraw liens on existing Direct Debit Installment greements upon taxpayer request.

Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored.

Installment Agreements and Small Businesses

The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate.

Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.

The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.

Small businesses will need to enroll in a Direct Debit Installment Agreement to participate.

Offers in Compromise

The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers.

This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.

OICs are subject to acceptance based on legal requirements. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

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Severance Payments NOT Subject to FICA Tax according to court, but ….

May 25, 2011 FICA, Payroll Tax Problems, Social Security Tax

In February 2010, a federal district court in U.S. v. Quality Stores, Inc., (DC MI 2/23/2010) 105 AFTR 2d 2010-1110, ruled that severance payments made to terminated employees by a company going out of business were not “wages” subject to FICA. The Court said that “…where severance payments are intended to serve the same purpose as social security benefits, i.e., support for workers in lieu of a lost ability to earn wages, the collection of social benefi t taxes on the wage-replacement benefits makes little sense.”

The Court believed that the severance payments were in effect supplemental unemployment  compensation benefits, not taxable remuneration for the employees’ services or wages. Therefore, the Court reasoned that the severance payments were not subject to taxation for FICA purposes.

The IRS has indicated it will appeal the decision, and will continue to deny claims for a refund of FICA tax paid on severance payments. The IRS continues to rely on CSX Corp. v. U.S., (Ct of Fed Cl 4/1/02) 89 AFTR 2d 2002-1935, that severance payments are “wages” for FICA tax purposes, there is no statutory exception to exclude them from taxation, and they are not “supplemental unemployment benefits” because they are not conditioned on eligibility for, or receipt of, state unemployment benefits.

Taxpayers should file protective claims to preserve their right to receive a refund if Quality Stores is upheld on appeal. Protective refund claims are filed to preserve a taxpayer’s right to claim a refund when the taxpayer’s right to the refund is contingent on future events (e.g., future litigation), and may not be determinable until after the statute of limitations expires. Without a protective refund claim, taxpayers will only have a three-year statute of limitations in which to seek a refund.

A taxpayer who paid FICA tax in 2007 on severance pay will only be eligible to receive a refund of these payments until April 15, 2011, unless the taxpayer files a protective refund claim.  A protective claim can be either a formal claim or an amended return (1040X, 1120X, etc.) for credit or refund. A protective claim does not have to state a particular dollar amount or demand an immediate refund. However, to be valid, a protective claim must:

• Be in writing and be signed;

•   Include the taxpayer’s name, address, social security number or individual taxpayer identification number, and other contact information;

•   Identify and describe the contingencies affecting the claim;

•   Clearly alert the IRS to the essential nature of the claim; and

•   Identify the specific year(s) for which a refund is sought.  Generally, the IRS will delay action on the protective claim until the contingency is resolved. Once the contingency is resolved, the IRS may obtain additional information necessary to process the claim and then either allow or disallow the claim.  Taxpayers can mail a protective  claim for refund to the address listed in the instructions for Form 1040X, under Where To File.  This post written by Erik Lammert and published on National Association of Tax Practitioners web site

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W-2 Missing or Not Received – What to do? … If needed file IRS form 4852, Substitute Wage and Tax Statement

February 14, 2011 Paying Taxes, Payroll Tax Problems

You should have received a Form W-2, Wage and Tax Statement, from each of your employers by January 31, 2011. If you haven’t received your W-2 yet you should contact your employer(s) or previous employer(s) to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. Remember you still must file your tax return or request an extension to file by April 18, 2011, even if you do not receive your Form W-2.  If you have not received your Form W-2 by the due date, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  Keep in mind there may be a delay in any refund due while the information is verified.

Also on occasion, you may receive your missing W-2 after you filed your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

If you do not receive your W-2 by February 14th, 2011 you may contact the IRS and report this problem.  In the correspondence (phone is fine if you can endure the hold music) provide your name, address, city and state, including zip code, Social Security number, phone number employer’s name, address, city and state, including zip code and phone number, dates of employment, and an estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2010. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement.

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