A recent article in The Wall Street Journal on March 14, 2013 entitled “Payroll Audits Put Small Employers of Edge” prompted us to remind you that misclassifying employees as independent contractors is risky and can be costly.

Many employers look at using independent contractors as a way to save money.  The employer is not responsible for paying the Social Security, Medicare, unemployment taxes and workers’ compensation insurance on independent contractors.  “Some employers also are turning to contractors to avoid hitting the 50-employee threshold that would require them to pay for employees’ health insurance, starting next year, under the federal health-care law, or pay a penalty.”

In addition, it eliminates paying other benefits such as paid time off and provides the flexibility of utilizing the worker only when there is sufficient work.  It can be seen as a great cost savings measure.  “A Michigan State University study estimates that contractors can save employers as much as 40% on labor costs.”

However, the IRS has cracked down on the misclassification of workers over the past three years.  Audits have increased dramatically because the IRS increased its budget for this purpose.  “Since September 2011, the government has collected $9.5 million in back wages for more than 11,400 workers who were misclassified as independent contractors by their employers, the Labor Department says.”

How do you know if you are correctly classifying a worker?

The classification guidelines are not black and white, which is the source of much confusion.  The determination is based on three Common Law Rules:

1. Behavioral.  Does the company control or have the right to control what the worker does and how the worker does his or her job?
2.  Financial.  Are the business aspects of the worker’s job controlled by the payer?  (This includes things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship.  Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)?  Will the relationship continue and is the work performed a key aspect of the business?

You must weigh all these factors.  Unfortunately, there is no “magic” or set number of factors that “makes” the worker an employee or independent contractor.  Many times employers do not know that they have misclassified workers until they get audited.

Confused?

If you are still unclear as to the classification of a worker after considering the three Common Laws, the IRS has created Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) which can be filed by either the business or worker.  The IRS will review the facts and circumstances and then make an official determination of the worker’s status.

Because this is an area of much confusion, many employers do not want to run the risk of penalties from misclassification and choose to hire employees.  We encourage you to measure the workers you have classified as independent contractors against the guidelines.  If you discover that you have misclassified a worker, there is some good news.  In January, 2013 the IRS extended an amnesty program which waives or reduces some of the penalties of misclassification.

Don’t run the risk of IRS penalties.  Please contact us at 239-433-5554 if you would like additional guidance or have questions about the classification of workers.

American Taxpayer Relief Act

On Tuesday, Congress preserved most of the Bush-era tax cuts and extended many other lapsed tax provisions. The newly created American Taxpayer Relief Act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRAA).

The act’s non tax features include one-year extensions of emergency unemployment insurance and agricultural programs and yet another “doc fix” postponement of automatic cuts in Medicare payments to physicians. In addition, it delays until March a broad range of automatic federal spending cuts known as sequestration that otherwise would have begun this month.

Among the tax items not addressed by the act was the temporary lower 4.2% rate for employees’ portion of the Social Security payroll tax, which was not extended and has reverted to 6.2%.

Here are the act’s key provisions related to taxes:

Individual tax rates             

• Individual marginal Bush-era tax rates are retained (10%, 15%, 25%, 28%, 33%, and 35%).
• A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
• The personal exemptions and itemized deductions phase-out is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Capital gains and dividends

• A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold.
• The 15% rate is retained for taxpayers in the middle brackets.
• The zero rate is retained for taxpayers in the 10% and 15% brackets.

Alternative minimum tax (AMT) 

• The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers.
• Relief from AMT for nonrefundable credits is retained.

Estate and gift tax

• The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

Individual credits and provisions

• The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018.
• Other credits and items from the American Recovery and Reinvestment Act of 2009 that were extended for the same five -year period include enhanced provisions of the child tax credit and the earned income tax credit.
• The bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs.
• The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:
  • Deduction for certain expenses of elementary and secondary school teachers
  • Exclusion from gross income of discharge of qualified principal residence indebtedness
  • Parity for exclusion from income for employer-provided mass transit and parking benefits
  • Mortgage insurance premiums treated as qualified residence interest
  • Deduction of state and local general sales taxes
  • Special rule for contributions of capital gain real property made for conservation purposes
  • Above-the-line deduction for qualified tuition and related expenses
  • Tax-free distributions from individual retirement plans for charitable purposes

Permanent extensions

Various temporary tax provisions enacted as part of EGTRRA were made permanent. These include:

• Marriage penalty relief (i.e., the increased size of the 15% rate bracket and increased standard deduction for married taxpayers filing jointly
• The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one)
• The exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships
• The exclusion for employer-provided educational assistance
• The enhanced rules for student loan deductions introduced by EGTRRA
• The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts
• The employer-provided child care credit
• Special treatment of tax-exempt bonds for education facilities
• Repeal of the collapsible corporation rules
• Special rates for accumulated earnings tax and personal holding company tax
• Modified tax treatment for electing Alaska Native Settlement Trusts

Business tax extenders

The act extended and modified many business tax credits and other provisions. A partial list as follows:

• The increased expensing amounts are extended through 2013. The availability of an additional 50% first-year bonus depreciation was also extended for one year by the act. It now generally applies to property placed in service before Jan. 1, 2014 (Jan. 1, 2015, for certain property with longer production periods).
• Extended through 2013 and modified the credit for increasing research and development activities, which expired at the end of 2011. The credit is modified to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one.
• Indian employment tax credit
• Employer wage credit for employees who are active duty members of the uniformed services
• Work opportunity tax credit
• Qualified zone academy bonds
• Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
• Accelerated depreciation for business property on an Indian reservation
• Enhanced charitable deduction for contributions of food inventory
• Modification of tax treatment of certain payments to controlling exempt organizations
• Temporary exclusion of 100% of gain on certain small business stock
• Basis adjustment to stock of S corporations making charitable contributions of property
• Reduction in S corporation recognition period for built-in gains tax

Energy tax extenders

The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011:

• Credit for energy-efficient existing homes
• Credit for alternative fuel vehicle refueling property
• Credit for two- or three-wheeled plug-in electric vehicle
• Cellulosic biofuel producer credit
• Incentives for biodiesel and renewable diesel
• Credits with respect to facilities producing energy from certain renewable resources
• Credit for energy-efficient new homes
• Credit for energy-efficient appliances
• Special allowance for cellulosic biofuel plant property
• Special rule for sales or dispositions to implement Federal Energy
• Alternative fuels excise tax credits

Foreign provisions

• The IRS’s authority to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent, and the amount is increased to 20%.

New taxes

In addition to the various provisions discussed above, some new taxes also took effect Jan. 1 as a result of 2010’s health care reform legislation. The new provisions include:

• Additional hospital insurance tax on high-income taxpayers. The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return.
  • The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
  • For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.

• Medicare tax on investment income. Starting Jan. 1, a tax equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount.
  • For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.
  • For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.
  • Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.

• Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.

• Flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500.

This information has been provided as a summary of the provisions included in the American Taxpayer Relief Act which has yet to be signed by the President. Please contact our office at (239) 433-5554 if you have questions regarding this information and how it will impact your specific situation.

Federal Unemployment Tax Rate for 2012

The Department of Labor has announced the list of states who will pay a higher Federal Unemployment Tax (FUTA) for 2012 due to a reduction in the credit that they normally receive.  These states will receive a reduced credit because they borrowed funds from the federal government to pay benefits during the last few years, and they have not yet repaid them.  For Florida employers, this means that their 2012 effective rate will be 1.2% for the first $7,000 of wages when Form 940 is filed in January 2013.  Employers who made the first three quarterly payments of 2012 at a rate of .6% will be required to make a catch up payment in January of 2013 due to the adjustment of the rate.

Here’s an example:  Smith Corporation pays Bob $40,000 in wages during 2012.  Smith Corporation’s FUTA tax due on Bob’s wages paid in 2012 will be $84 ($7,000 x 1.2%). Assuming that the FUTA tax was paid quarterly at a rate of .6% or $42, a catch up payment of $42 will be due in January 2013.

If you have any questions regarding this information, please contact our office at (239) 433-5554.  Our team of professionals welcomes the opportunity to discuss your specific situation further. 

A new law requires sales and use tax dealers to file tax returns and pay tax electronically in order to receive a collection allowance. You will not be entitled to a collection allowance if you file a paper tax return or pay tax by cash, check, or money order. Also, if you file and pay tax electronically but are late, you cannot deduct a collection allowance from the amount due with the return.

For sales and use tax returns and payments due on or after July 1, 2012, dealers may deduct a collection allowance only when they:

• File sales and use tax returns electronically;
• Pay tax electronically; and
• Electronically file and pay tax (“e-file and e-pay”) timely.

This change in law will affect returns and payments due beginning in July 2012 for:

• Monthly filers’ June 2012 tax returns and payments;
• Quarterly filers’ April-June 2012 tax returns and payments; and
• Semi-annual filers’ January-June 2012 tax returns and payments.

In June, replacement coupon books will be mailed to all dealers who use coupon books for filing quarterly and monthly tax returns. If you choose not to switch to e-filing and e-paying tax in July, make sure to use the DR-15 or DR-15EZ payment coupons included in your replacement coupon book.

To file and pay sales and use tax electronically, visit: http://www.myflorida.com/dor

If you have any questions regarding this information, please contact our office at (239) 433-5554.  Our team of professionals welcomes the opportunity to discuss your specific situation further. You may also visit us on the web at www.markham-norton.com.

Businesses won’t have to separately report amounts shown on 1099-Ks on a special line on Schedule C and on Forms 1065, 1120 and 1120-S after all. The IRS has reversed course and waived permanently the separate reporting requirement for reconciling gross receipts with 1099-K forms for 2012 and beyond.   

In October 2011 the IRS released guidance on reporting revenues from third-parties such as Visa, American Express and PayPal. These settlement companies were to issue Form 1099-K to businesses and the IRS, documenting all transactions and gross receipts processed throughout the year. This information was to be reported on tax returns beginning with 2012.

If you have any questions regarding this information, please contact our office at (239) 433-5554.  Our team of professionals welcomes the opportunity to discuss your specific situation further. You may also visit us on the web at www.markham-norton.com.

Unemployment Tax Changes for 2012

Florida Governor Rick Scott has signed a bill affecting the current unemployment tax rates and the taxable wage base. The bill changes the employer tax rate calculation and reduces the taxable wage base to $8,000. These changes will apply to the Employer’s Quarterly Report (Form UCT-6) due by April 30, 2012. A new Unemployment Compensation Tax Rate Notice (Form UCT-20) will be mailed very soon to employers. Employers who file quarterly report forms via paper will receive their UCT-6 form with the new tax rate in early April 2012.

A separate special interest assessment will be due in 2012 on funds borrowed from the federal government to pay unemployment compensation claims. In February, the Department mailed a notice (Form UCT-27Fi) to contributing employers, informing them of their proportionate share of the assessment.

If you have any questions regarding this information, please contact our office at (239) 433-5554.  Our team of professionals welcomes the opportunity to discuss your specific situation further. You may also visit us on the web at www.markham-norton.com.

Beware of QuickBooks Scam

We were recently notified and would like to inform you of email phishing scams targeting QuickBooks users. The spam email tells recipients that Intuit, the maker of QuickBooks, needs to verify their name and tax identification number because it is different from the information held by the Internal Revenue Service. The scam email then directs the recipient to click on a link in order to “check and verify” account information. Unfortunately, QuickBooks users who fall victim to the scam are directed to a website that is infected with a malicious code.

Please be aware that these phishing emails frequently have attachments and/or links to websites that host malicious code and software. Do not open these attachments or follow the web links in any unsolicited emails from unknown parties or from parties with whom you do not normally communicate, or that appear to be known but are suspicious or otherwise unusual. You can also call Intuit to confirm any requests for account information received in the email. 

If a malicious code is detected or suspected on a computer, consult with a computer security or anti-virus specialist to remove the harmful code. Always use anti-virus software and ensure that it updates automatically to reduce the risk of exposing your system to new or updated malicious code.

If you have any questions regarding this information, please contact our office at (239) 433-5554.  Our team of professionals welcomes the opportunity to discuss your specific situation further. You may also visit us on the web at www.markham-norton.com.

The Internal Revenue Service (IRS) has announced the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

 If you have any questions regarding this information, please contact our office at (239) 433-5554.  Our team of professionals welcomes the opportunity to discuss your specific situation further. You may also visit us on the web at www.markham-norton.com.

Homeowners still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits.

The Non-business Energy Property Credit is aimed at homeowners installing energy efficient improvements such as insulation, new windows and furnaces. The credit is more limited than in the past years, but can still provide substantial tax savings.

• The 2011 credit rate is 10 percent of the cost of qualified energy efficiency improvements. Energy efficiency improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count.
• The credit can also be claimed for the cost of residential energy property, including labor costs for installation. Residential energy property includes certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel.
• The credit has a lifetime limit of $500, of which only $200 may be used for windows. If the total of non-business energy property credits taken in prior years since 2005 is more than $500, the credit may not be claimed in 2011.
• Qualifying improvements must be placed into service to the taxpayer’s principal residence located in the United States before January 1, 2012.

Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment.

• The credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.
• No cap exists on the amount of credit available except for fuel cell property.
• Generally, labor costs are included when figuring this credit. 

Not all energy-efficient improvements qualify for these tax credits, so homeowners should check the manufacturer’s tax credit certification statement before they purchase. Taxpayers can normally rely on this certification statement which can usually be found on the manufacturer’s website or with the product packaging.
 
Eligible homeowners can claim both of these credits when they file their 2011 federal income tax return. Because these are credits and not deductions, they reduce the amount of tax owed dollar for dollar. An eligible taxpayer can claim these credits regardless of whether he or she itemizes deductions on Schedule A.

If you have any questions regarding this information, please contact our office at (239) 433-5554.  Our team of professionals welcomes the opportunity to discuss your specific situation further. You may also visit us on the web at www.markham-norton.com.

 Notices of Possible Name/TIN Discrepancy

Each year the IRS issues discrepancy notices for prior year information returns that contained missing or incorrect taxpayer identification numbers (TIN).  Upon receipt of the “Notice of Possible Payee Name/TIN Discrepancy” (notice number CP-2100), the IRS procedure requires each recipient to compare their records with the information furnished by the IRS. 

There are two separate procedures that must be followed depending on whether the Payee Name/TIN listing agrees or disagrees with your records. Additionally, you must determine whether this is the first or second time within three calendar years that the IRS has notified you of incorrect information for the payee. 

If it’s the first time you have received a “Notice of Possible Payee Name/TIN Discrepancy” for the payee, the following steps should be taken:

1. Compare the listing enclosed with the notice with the W-9 you received from each payee
   1.  If they do not match because you made an input error when the 1099 was issued, the IRS made a processing error, or if the payee information changed after you filed the 1099, you do not have to do anything.
   2. If they do match, you must
      1. Send a First B-Notice and a Form W-9 within 15 business days from the date of the notice
      2. Update your records with the corrected information you receive from the payee
      3. If you do not receive a signed Form W-9 in response to the First B Notice, within 30 business days from the date you received the notice, you must begin backup withholding at a rate of 28%.  You must stop backup withholding once you receive a signed Form W-9.

If this is the second time you have received a “Notice of Possible Payee Name/TIN Discrepancy” from the IRS for the same payee, the following steps should be taken:

1. Compare the listing enclosed with the notice with the W-9 you received from each payee
   1. If they do not match because you made an input error when the 1099 was issued, the IRS made a processing error, or if the payee information changed after you filed the 1099, you do not have to do anything.
   2.  If they do match, you must
      1. Send a Second B-Notice within 15 business days from the date of the notice (do NOT include a Form W-9)
      2. The payee must go to their local SSA office to have the social security number validated or get an IRS letter 147C
      3. If you do not receive a social security number validation or a letter 147C within 30 business days from the date you received the notice, you must begin backup withholding at a rate of 28%.  You must stop backup withholding once you receive a social security number validation or a letter 147C.

Do not:

1. Amend the 1099 or
2. Mail any of the documentation to the IRS

If you have any questions regarding this information or would like assistance with preparing and sending B-notices, please contact our office at (239) 433-5554.  Our team of professionals welcomes the opportunity to discuss your specific situation further. You may also visit us on the web at www.markham-norton.com.