Category: Payroll

Posted on Feb 18, 2016

The IRS recently launched a pilot program called “Early Interaction Initiative” to try to prevent employers from running into unmanageable payroll tax problems.

When it seems likely that an employer will owe a payroll tax balance at the end of a quarter, IRS revenue officers will contact that employer before the quarterly federal tax return is due, the IRS stated in an e-newsletter sent to payroll professionals. The agency noted that information on federal tax deposits is available in IRS Publication 15, Employers Tax Guide.

Basic Deposit Rules

Employers must deposit quarterly employment taxes they report on Form 941, Employer’s QUARTERLY Federal Tax Return. Employers use Form 944, Employer’s ANNUAL Federal Tax Return only if the IRS notifies them in writing or they’ve asked the agency for permission because they believe their employment taxes for the calendar year will be $1,000 or less.

If you’re starting a new business and have completed Form SS-4, Application for Employer Identification Number, you’ll receive a notice listing the employment tax forms you’re required to file. If you hired employees for the first time and weren’t assigned a specific employment tax return to file, you must file Form 941 unless you contact the IRS to request to file Form 944.

The two forms include federal income tax, as well as employer and employee shares of Social Security and Medicare tax, withheld from your employees. The amount you report determines which deposit schedule you must use, monthly or semiweekly.

Employers make quarterly deposits if their employment tax liability for the preceding quarter or current quarter is less than $2,500. Employers may pay the taxes with their tax returns, provided they don’t incur a $100,000 next-day deposit obligation during the current quarter. If you aren’t sure your total tax liability for the current quarter will be less than $2,500, (and your liability for the preceding quarter was not less than $2,500), make monthly or semiweekly deposits so you won’t be subject to penalties.

If you file Form 941, your deposit schedule for a calendar year is determined from the total taxes in a four-quarter look-back period beginning July 1 and ending June 30. If you reported $50,000 or less of taxes for the look-back period, you are a monthly schedule depositor. If you reported more than $50,000, you are a semiweekly schedule depositor. Monthly schedule depositors shouldn’t file Form 941 or Form 944 on a monthly basis.

The Penalties

Penalties may apply if you don’t make deposits on time or if they’re less than the required amount, unless there’s a justifiable reason and there’s no indication of willful neglect. The IRS also may waive penalties in some circumstances if an employer has filled its employment tax return in a timely manner.

Otherwise, the penalties for late deposits are a percentage of the amount underpaid based on how late the deposit is:

No. of Days Late Penalty Rate Penalty on $3,000
One to five days 2% $60
Six to 15 days 5% $150
Sixteen or more days 10% $300
More than 10 days after first IRS bill 15% $450

Late deposit penalty amounts are determined using calendar days starting from the due date of the liability.

Special rule for former Form 944 filers: If you’re filing Form 941 for the current year but filed Form 944 the previous year, the penalty won’t apply for January if the taxes are deposited in full by March 15.

Finally, the “trust fund penalty” may be imposed on any person responsible for withholding payroll taxes. That person can be an officer of the company, partner, sole proprietor, employee or a trustee or agent. The individual may be personally liable for 100% of the unpaid taxes, plus interest. Be careful, this penalty is triggered more times that you might think.

The potential penalties provide a strong incentive to comply with the rules. Consult with your tax adviser and coordinate payroll activities with the responsible parties both inside and outside your organization.

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Posted on Jan 18, 2016

Workers’ compensation coverage is required by most states as a way to ensure that employees get the medical care and wage replacement they need when injuries occur in the workplace. Traditional workers’ compensation providers generally require you to make a down payment of at least 25% of your annual premium, based on your estimated annual payroll. You’re also expected to periodically fill out time-consuming audit forms that can lead to expensive unexpected premium adjustments.

An alternative in some states is a Pay-as-You-Go workers’ compensation service. This eliminates the need to tie up a large amount of cash in a down payment. Instead, premiums are automatically calculated with each payroll, so you only pay the exact premium due. This also eliminates the need to fill out monthly and quarterly reports, saving you time and a potentially expensive surprise if your payroll was underestimated.

How Does Pay-as-You-Go Work?

After running payroll, your payroll information is securely sent to your insurance provider. Premiums are calculated based on each individual employee’s wages and pay types. An email is sent to you with your premium amounts, and a few days later the premiums are electronically debited to your account.

Benefits from Using Pay-As-You-Go

  1. Better cash management.Because a Pay-as-You-Go program eliminates the need to make the large down payment, less cash is tied up, allowing for better cash flow to meet current expenses.
  2. Greater accuracy.Pay-as-You-Go workers’ compensation bypasses the traditional and often faulty estimated payment method. With this service, your payments are determined by on actual data, your payroll amounts and information from the insurance company. This is especially helpful for companies where the payroll varies throughout the year due to seasonality, making it difficult to estimate.
  3. Time saved. For many employers, one of the most welcome benefits of the Pay-as-You-Go service is the reduced time commitment. By automatically calculating premiums based on actual payroll, there’s no longer a need to fill out periodic reports or undergo a potentially stressful year-end audit. You can use the time to keep your company moving forward rather than combing through the details of the previous year’s payroll.
  4. Lower costs. You can save money by not having to undergo year-end audits. That, plus better cash management, greater accuracy, and time saved all add up to an overall cost reduction.

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Posted on Dec 1, 2015

Recordkeeping

The year will be wrapping up soon and your business needs to submit the information we require to complete your documents.

With that in mind, we’re providing you with a list of important information. Some or all of the following items may apply to your business.

Company Level Changes

Company address. Make sure your company address is correct. We prepare all W-2s and annual filings with your legally registered address. Any changes must be registered with all government agencies. Please visit irs.gov and any applicable state agencies to obtain instructions.

When you initially registered with the IRS, you may have used your home address. If that address hasn’t been updated, it will appear on W–2s and tax returns.

Contact information. Review payroll and ownership contact information to make sure they’re up to date in our system. Also, we may have received authorization from you to allow CPA and/or bookkeeping access to obtain online reporting on your behalf. Please notify us of any changes regarding these authorizations.

Policy changes. Alterations to company policies that will affect 2016 payrolls should be submitted as soon as possible. This will give our team time to set up and test the changes. Submissions may include but aren’t limited to:

  • Pay frequencies,
  • Insurance rate changes,
  • Time off policies, and
  • 401k plan changes.

Employee Level Changes

W-2s Forms. Verify employee names, addresses and Social Security Numbers (SSN). Correct addresses allow accurate delivery of W-2 statements.

In addition, employees must have correct SSNs listed on their W-2s and reported to state agencies for unemployment purposes. Missing or invalid numbers are subject to penalties.

Deferred comp/retirement plan. Do you have employees who contribute to a deferred compensation plan by payroll deduction? They will have the “Retirement Plan” box marked on their W-2s automatically.

If your business has a qualified pension plan that doesn’t run through payroll, the “Retirement Plan” box should be marked for any individual for whom you’ve made contributions. This isn’t automated.

Let us know what applies in these circumstances.

Manual checks. Submit all relevant payments that were issued to employees that haven’t been included with previous payrolls.

Miscellaneous. Other changes to submit to us may include new earnings codes, voided checks and new deductions.

Insurance

S Corporation 2% shareholders health insurance. The cost of premiums provided to 2% shareholders must be reported as income on the W-2s. This amount isn’t subject to Social Security or Medicare taxes.

Group term life. If you provide this insurance to employees, all premium amounts exceeding $50,000 are subject to withholding tax.

Third Party Sick Pay

Third party sick pay benefits must be included on W-2s, as well as be reported to the IRS and Social Security Administration (SSA) during the same year that the employee received the disbursement.

Your disability vendor will send you year-to-date notices of disbursements as they occur, as well as an annual reconciliation of benefits after the year-end. It’s important that you provide us with records of these payments as they are made, rather than relying on the annual reconciliation. This allows us to record the payments with payroll, and fulfill the reporting requirements to the IRS and SSA.

Fringe Benefit Adjustments

Personal use of company car. If you provide employees with company vehicles, the personal use of that vehicle is taxable.

Dependent care. As much as $5,000 contributed by an employee to a flexible spending account for child and dependent care expenses is excluded from taxable income, provided both spouses work.

Gifts. The value of gifts to employees in the form of such tangible good or services as real estate rentals, gift cards, televisions or electronic tablets is taxable and subject to withholding taxes.

Bonus Payrolls

If you’re planning to run an extra bonus payroll, please advise us ASAP. We need the date you will run this payroll in order to update your 2015 payroll calendar. Payroll processing for the year must be completed before December 31.

 

Did You Know?

If you issue 250 or more W-2s, you must report the aggregate cost of employer-sponsored health coverage. (This amount is for medical insurance only. Supplemental health, dental and vision don‘t have to be included.)

Reporting the cost of health care coverage on W-2s doesn’t mean it is taxable. The reporting is only designed to provide employees with information on the cost of their coverage. In order to process W-2s for you, we need these amounts.

 

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Posted on Nov 18, 2015

The federal government is always on the lookout for businesses that improperly classify workers as independent contractors rather than employees. But the heat was recently turned up even more.

The issue of worker classification has many tax and benefit implications. And it continues to be problematic for employers.

Your Responsibilities

If a worker is an employee, you generally must withhold federal income tax and the employee’s share of Social Security and Medicare taxes from his or her wages. Your business must then pay the employer’s share of Social Security and Medicare taxes, pay federal unemployment tax, file federal payroll tax returns and follow lots of other burdensome IRS and DOL rules.

You may also have to pay state and local unemployment and worker compensation taxes and comply with more rules and regulations.

In addition, employees may be eligible for fringe benefits such as health insurance, retirement plans and paid vacations.

If a worker is an independent contractor and you pay him or her $600 or more during the year, you must issue a Form 1099-MISC to the individual and the IRS to report what you paid.

If you incorrectly treat a worker who is actually an employee as an independent contractor, your company could be assessed unpaid payroll taxes plus interest and penalties. It also could be liable for employee benefits that should have been provided but weren’t, including significant penalties under federal laws. In addition, businesses with misclassified workers also generally owe taxes and penalties to their states.

During 2015, both the IRS and the U.S. Department of Labor’s Wage and Hour Division (WHD) issued communications to employers about employee classification.

The IRS issued a Fact Sheet reminding employers “to correctly determine whether workers are employees or independent contractors.” The tax agency and courts generally take the stand that workers are independent contractors if they meet specific criteria focusing on the amount of control they have over their jobs.

The WHD, on the other hand, issued an “Administrator’s Interpretation” stating that worker classification isn’t just about control. Rather, the focus is “whether the worker is economically dependent on the employer or in business for him or herself.”

The WHD added that “most workers are employees” under the broad definitions of the Fair Labor Standards Act (FLSA).

The two federal agencies are working together and with states to tackle misclassification.

Many businesses prefer to classify workers as independent contractors to lower costs, even if it means having less control over workers’ day-to-day activities. Federal and state government agencies have always cracked down on businesses that classify workers as independent contractors to evade taxes or sidestep providing benefits. Now there’s another reason to focus on worker classifications: Employers may treat individuals as independent contractors to avoid health insurance obligations that involve employee headcounts under the Affordable Care Act.

Note: Be aware that a worker or a business can file a form with the IRS to ask for a determination about classification. Disgruntled former workers may file the form to show that a business improperly denied employee benefits by classifying them as independent contractors. Businesses should consult with their tax advisers before filing this form because it may alert the IRS to worker classification issues — and inadvertently trigger an employment tax audit.

Here’s the rub for your business: If you incorrectly classify an employee as an independent contractor, your company could be assessed unpaid payroll taxes plus interest and penalties. You also could be liable for employee benefits that should have been provided but weren’t, including significant penalties under federal laws.

That doesn’t mean that you shouldn’t use independent contractors. You just have to be careful to handle the relationships properly. A written contract can help support a worker’s independent contractor status. But that’s no guarantee.

The determination traditionally boils down to this: A worker is an independent contractor if you have little or no control over the way he or she gets the job done. For example, do you set the hours, provide equipment and require the worker to come to your facilities? These are only some of the questions that need to be asked. The bottom line is that if you provide substantial day-to-day supervision, the worker is probably an employee.

Worker classification is a complex issue. Contact us if you have questions about the status of an individual or the filing of 1099 forms. We can help.

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Posted on Apr 18, 2015
Recordkeeping
Just in time for spring cleaning, the Social Security Administration and the IRS have issued a joint publication — the Spring 2015 issue of SSA/IRS Reporter — which offers valuable pointers for employers who want to clean up their old payroll files. In most (but not all) cases, that means following a four-year retention rule. The Reporter cautions that failure to meet record retention requirements can result in sizable penalties and large settlement awards for employers that are unable to provide the required information when requested by the IRS or as part of an employment-related lawsuit. (Records could also be requested by state agencies.)

 

The Records-in-General Rule

As applied to employers that withhold and pay federal income, Social Security and Medicare taxes, the SSA/IRS Reporter says records relating to such taxes must be kept for at least four years after the due date of the employee’s personal income tax return (generally, April 15) for the year in which the payment was made.1

According to the SSA/IRS Reporter, these records include:

  • The Employer Identification Number;
  • Employees’ names, addresses, occupations and Social Security numbers;
  • The total amounts and dates of payments of compensation and amounts withheld for taxes or otherwise, including reported tips and the fair market value of non-cash payments;
  • The compensation amounts subject to withholding for federal income, Social Security, and Medicare taxes, and the corresponding amounts withheld for each tax (and the date withheld if withholding occurred on a different day than the payment date);
  • The pay period covered by each payment of compensation;
  • Where applicable, the reason(s) why total compensation and taxable amount for each tax rate are different;
  • The employee’s Form W-4, Employee’s Withholding Allowance Certificate;
  • Each employee’s beginning and ending dates of employment;
  • Statements provided by the employee reporting tips received;
  • Fringe benefits provided to employees and any required substantiation;
  • Adjustments or settlements of taxes; and
  • Amounts and dates of tax deposits.

Employers should also follow the four-year retention rule for records relating to wage continuation payments made to employees by the employer or third party under an accident or health plan. Such records should include the beginning and ending dates of the period of absence, and the amount and weekly rate of each payment (including payments made by third parties). Employers also should keep copies of the employee’s Form W-4S, Request for Federal Income Tax Withholding From Sick Pay, and, where applicable, copies of Form 8922, Third-Party Sick Pay Recap.

A different rule applies for records substantiating any information returns and employer statements to employees regarding tip allocations. Under the tax code, these records must be kept for at least three years after the due date of the return or statement to which they relate.2

Claims for Refund of Withheld Tax

The SSA/IRS Reporter says employers that file a claim for refund, credit or abatement of withheld income and employment taxes must retain records related to the claim for at least four years after the filing date of the claim.

Fringe Benefit Records

The tax code provides an explicit recordkeeping requirement for employers with enumerated fringe benefit plans, such as health insurance, cafeteria, educational assistance, adoption assistance or dependent care assistance plan. They are required to keep whatever records are needed to determine whether the plan meets the requirements for excluding the benefit amounts from income.3

Note: Tax code provisions regarding fringe benefit records do not specify how long records pertaining to specified fringe benefits should be kept. Presumably, they are subject to the four-year rule under the records-in-general rule cited above, and thus should be kept at least four years after the due date of such tax for the return period to which the records relate or the date such tax is paid, whichever is later.

Caution: To the extent that any fringe benefit records must also comply with ERISA Title I, then a longer retention period of six years applies.4

Unemployment Tax Records 

The Federal Unemployment Tax Act (FUTA) requires employers to retain records relating to compensation earned and unemployment contributions made. Under the records-in-general rule, such records must be retained for four years after the due date of the Form 940,Employer’s Annual Federal Unemployment Tax Return or the date the required FUTA tax was paid, whichever is later.

Records should be retained substantiating:

  • The total amount of employee compensation paid during the calendar year;
  • The amount of compensation subject to FUTA tax;
  • State unemployment contributions made, with separate totals for amounts paid by the employer and amounts withheld from employees’ wages (currently, Alaska, New Jersey and Pennsylvania require employee contributions);
  • All information shown on Form 940 (with Schedule A and/or R as applicable); and
  • If applicable, the reason why total compensation and the taxable amounts are different.

The SSA/IRS Reporter reminds employers that record retention requirements are also set by the federal Department of Labor and state wage-hour and unemployment insurance agencies.

If you have additional questions, contact us at 972.202.8000.

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Posted on Mar 17, 2015

Starting, growing, and running a successful business is one of life’s truly great pleasures. With that pleasure, however, comes various laws and record-keeping requirements. As States look to grow their revenue base, they are continually modifying their sales tax laws. In recent years, the sales tax laws have grown more complex since it has become easier and easier to complete interstate transactions online.

For instance, during its inception, Amazon correctly omitted sales tax from many of its interstate sales. The States quickly realized this and have begun to update their sales tax laws accordingly. Most states now require a business to collect and remit sales tax if the business has nexus. Nexus is the term used to refer to whether or not a business has a presence in the state. To make this determination, most states first look at if the business has a brick and mortar (rent still counts!) –physical presence in the state. Additional factors include whether or not the company has employees or salespeople in the state, or the manner in which the product was delivered and payment by the customer made.

Amazon has a team of employees dedicated to its state sales tax research and compliance. This team, in conjunction with the Amazon software developers, have created processes and applications to track sales by jurisdiction and automatically charge, collect, and remit sales tax when applicable. This is fine for a large company with the resources needed to fulfill this mandate, but what about small and medium sized business that are still subject to the same laws but aren’t large enough to hire one dedicated person much less an entire department?

There is a simple answer with extraordinary results: Outsource your sales tax compliance!

By outsourcing, your business will have a dedicated sales tax team at an affordable price. Cornwell Jackson’s sales tax team builds on our combined experience with clients from across the United States to offer you the same expertise you would find at any large corporation. By partnering with our outsourcing team, you get a dedicated team to manage your filings, payments, research, exemption certificates, and develop solutions in real time. Additionally, we stay up to date with the increasingly complex tax law changes and keep you in compliance, so that you can focus on the success of your business.

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