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.

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. 

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.

Nearly 160 million workers will benefit from the extension of the reduced payroll tax rate that has been in effect for 2011.

The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year  amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).    

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions.  The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision.  For most employers, the quarterly employment tax return for the quarter ending March 31, 2012 is due April 30, 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.

FUTA (Federal Unemployment Tax) Rate for 2011

The Department of Labor has announced the Federal Unemployment Tax (FUTA) rate for 2011 is 6.0% on the first $7,000 of wages. Employers in Florida receive a credit of 5.1% for 2011, making their net FUTA tax rate 0.9%. This new rate is an increase from the 2010 rate of 0.8%

Note: Florida is one of the states that utilized Federal Unemployment Trust Fund loans to keep unemployment insurance benefit programs solvent during recent periods of extended high unemployment. As a result, Florida’s FUTA credit amount is reduced for the 2011 filing as a way to recover the funds still owed to the Federal Trust Fund loans.

 SUTA (State Unemployment Tax) for 2012

In 2012 the SUTA wage base will increase to $8,500 per employee (from $7,000 in 2011). Florida’s employers should receive their 2012 unemployment tax rate notices by December 19.   For new employers, the rate will remain the same at 2.7% (initial rate) until the employer has reported for 10 quarters.

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.

New IRS Program Will Reduce Misclassification Paperwork

Until a new Internal Revenue Service (IRS) voluntary worker classification settlement program went into effect many employers have avoided reclassification because of the impact.  The new program will greatly reduce the amount of red tape employers must cut through when reclassifying workers.

Up until last month, if an employer wanted to voluntarily change the classification of its workers from independent contractors to employees, the employer would have to amend tax forms for each quarter for the three previous years, meaning it would have to file up to 12 941-X forms to obtain Section 530 relief. It was quite an involved process.

Under the new voluntary classification settlement program, businesses could be reclassified for federal employment tax purposes without any sunset of the program announced.  To be eligible for the program, a business must:

• Have consistently treated the workers as nonemployees.
• Have filed all required Forms 1099 for the workers for the previous three years.
• Not be under an IRS, Department of Labor (DOL) or state government agency audit concerning the classification of the workers.
• Be in compliance with the results of any previous IRS or DOL classification audit.

The impact on the business is that:

• The taxpayer agrees to prospectively treat the class of workers as employees for future tax periods.
• The taxpayer will pay 10 percent of the liability amount based on the compensation paid to the workers for the most recent tax year.
• No Federal Unemployment Tax Act tax will be due.
• No penalties and no interest will be imposed.
• The IRS cannot audit the classification of the workers for prior years.
• The taxpayer agrees to extend the statute of limitations on the assessment of employment taxes for three years for the first, second and third calendar years beginning after the date the taxpayer agrees to treat workers as employees.

There will be likely be an impact on benefit plans.  If a qualified retirement plan says it benefits all employees and workers have been excluded as nonemployees, the reclassification to employees will make them benefit eligible automatically unless the plan is amended.

It is important to consider the impact on insured health plans because the company must provide similar coverage to 70 percent of all employees or a reasonable classification of employees that does not discriminate in favor of highly compensated employees.  The failure to provide nondiscriminatory coverage is subject to a $100 per day penalty per employee. The IRS is not enforcing the penalty, which was newly added by the Patient Protection and Affordable Care Act, until guidance is issued.

For self-insured health plans, the failure to provide nondiscriminatory health plan coverage makes the medical benefits provided to highly compensated employees taxable unless the entire premium is included in highly compensated individuals’ taxable income.

Are you confident that your Independent Contractors are classified correctly? If you have questions, please contact Sandie Peterson, SPHR at (239) 433-5554.

Based on article by Allen Smith, J.D., SHRM’s Manager of Workplace Law Content, October 20, 2011.

We were recently notified and would like to inform you that Intuit will be updating the pricing structure for QuickBooks payroll services later this year. Below is a table outlining the new fees for QuickBooks Basic, Enhanced, and Assisted Payroll services. Additionally, Intuit will be discontinuing the Complete Payroll service on December 31, 2011.  Not many are utilizing this service, but if you are and would like to discuss how to proceed, please contact our office. We are happy to discuss other complete payroll options and services available to you.

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 IRS has issued new guidance for employers on Form W-2 reporting of the aggregate cost of their employer-sponsored health coverage for employees, as required by the Patient Protection and Affordable Care Act (PPACA). Under the new guidance, reporting continues to be voluntary for all employers in 2011 (2012 filing), and further states:

• Reporting is voluntary for small employers that file less than 250 Forms W-2 for the previous tax year. This is effective for 2012 W-2’s (issued in January 2013) and future calendar years or until further guidance is issued.
• Reporting is required for employers that will file 250 or more Forms W-2 for the year 2011. This is effective for 2012 W-2’s (which will be issued January 2013) and future calendar years or until further guidance is issued.
• Employers do not have to issue W-2’s to individuals who would otherwise not receive a W-2.

The amounts of employer-sponsored health coverage reported on Forms W-2 are used for informational purposes only and are not taxable. The purpose of reporting the total value of an individual employee’s health benefits on their W-2 form is to educate employees about the benefit they receive through their employers, and at the same time gain awareness of the true cost to obtain health coverage.

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.

Effective June 1, 2011, the new Florida minimum wage will be $7.31.  Florida law requires the Agency for Workforce Innovation to calculate an adjusted minimum wage rate each year.  The annual calculation is based on the percentage change in the federal Consumer Price Index for urban wage earners and clerical workers in the South Region for the 12-month period prior to September 1, 2010.

Employers must pay their employees the hourly state minimum wage for all hours worked in Florida.  Employers of “tipped employees” who meet eligibility requirements for the tip credit under the FLSA (Fair Labor Standards Act), may count tips actually received as wages under the Florida minimum wage.  However, the employer must pay “tipped employees” a direct wage.  The direct wage is calculated as equal to the minimum wage ($7.31) minus the 2003 tip credit ($3.02), or a direct hourly wage of $4.29 as of June 1, 2011.

Whether or not you have employees at the minimum wage level, you are required to post the Florida Minimum Wage poster with your other mandatory postings in a conspicuous place. This poster is in addition to the federal requirement to post a notice of the federal minimum wage.  

If you have any questions regarding the new minimum wage and its impact, please call us at (239) 433-5554. You may also visit our website at www.markham-norton.com.