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  • temporary vs permanent accounts

    Do You Know How Temporary vs. Permanent Accounts Differ?

    posted by Maria Tanski
    Recent Article
  • The New Health Care Credit for Small Businesses

    The Patient Protection and Affordable Care Act instituted a new income tax credit for small businesses that provide health care coverage for their employees. Small businesses are those who employ 25 or fewer full time employees with average annual wages of less than $50,000. The employer must pay at least 50% of the premium cost of the health care coverage for its employees. The credit is effective for tax years beginning after December 31, 2009.

    The credit is calculated as a percentage (generally 35% through 2013) of the nonelective employer contributions made toward the employees’ health insurance premiums. The contribution base is capped at the amount of “the average premium for the small group market in the State” in which the employer offers the health coverage. This average premium is determined annually by the Secretary of Health and Human Services.

    The IRS recently published these HHS determined premium rates in Revenue Ruling 2010-13.

    With this new information, you are now able to more accurately project the impact of the credit on your business. For some, it enables you to consider the cost benefit of increasing your contributions toward your employees’ coverage in order to meet the required threshold.  Remember to consider the potential effect of the HIRE Act on your employee headcount and therefore your eligibility as a small business for this credit.

    IRS Explains New Healthcare Tax Credit for Small Businesses

    The recently passed Health Care Reform Act included a “Credit for Small Business Employee Health Coverage Expenses.” This credit falls under one of the subtitles in the Act that will go into effect immediately. For tax years beginning in 2010, eligible small businesses may be able to claim an income tax credit for expenditures for qualifying health care coverage for their employees.

    An eligible small business is (1) an employer who employs fewer than 25 full-time equivalent employees (“FTEs”) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a “qualifying arrangement.”   A qualifying arrangement includes plans whereby the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.

    In addition, the amount of an employer’s premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area within the State) in which the employer offers coverage were substituted for the actual premium.  The average premium for the small group market in a State (or an area within the State) will be determined by the Department of Health and Human Services and published by the IRS.  Publication of the average premium for the small group market on a state-by-state basis is expected to be posted on the IRS website by the end of April.

    You can read more on the IRS website where they have posted a FAQ list.

    The first two questions address eligibility, questions #3  – 8 address calculation of the credit, #9 – 15 explain how to determine FTE’s and average annual wages for eligibility purposes, #16 – #21 tell how to claim the credit.  Be sure to read the last question (#22) on the transition rules for 2010.

    One Thing That Can Trigger an IRS Audit for Your Company

    The Internal Revenue Service estimates it has lost $34.7 billion in unpaid taxes because contractors have been misclassified as 1099 independent contractors (IC) instead of W-2 employees.  In one year, the Government Accountability Office estimated that misclassification cost the federal government $4.7 billion in income taxes.  Worker misclassification is one of the major IRS audit red flags, and could be one of the employment laws you might be breaking. Understandably, the IRS has made it a priority to investigate the issue of worker misclassification and has ramped up their audit staff.

    The IRS is sharing information with Federal agencies like the U.S. Department of Labor, to determine if overtime laws, minimum wage laws or prevailing wage laws are being followed.

    The IRS is also communicating with state agencies that administer taxes.  Employers who are found to have violated state labor laws will be required to pay back taxes, back wages, unpaid workers’ compensation premiums and unemployment premiums.  Depending on which law was violated, there is a potential for additional liability.  Several states have made worker misclassification a priority and the penalties are getting more severe.

    The topic of proper worker classification has quite a history.  In 1987, the IRS published a 20-factor test to help determine whether or not a worker was a common law employee.  However, in 1996 the IRS restructured the test into three main categories — behavioral control, financial control and type of relationshipThis is discussed in an IRS article . The degree of control the business has over its workers is a key factor. Generally, the more control a business has over a worker, the more likely it is that the worker is an employee rather than an independent contractor.

    An IRS audit can be triggered by any number of things, but some common occurrences that may flag your company for an audit includes:

    • The 1099 IC files a claim for unemployment benefits.  (They are not eligible for unemployment.)
    • The 1099 IC files a claim for workers’ compensation or disability benefits. (They should carry workers’ compensation on themselves because they are not eligible through an employer.)
    • A worker receives a W-2 and a 1099 Form from the same employer in one year because they converted from a 1099 IC to a direct hire of the company.  (If they are performing the same task as a 1099 IC and W-2 employee, they are normally classified as W-2 employees.)
    • The worker feels they are being improperly treated as a 1099 IC and files a complaint with the Department of Labor’s Wage and Hour Division.
    • The worker feels they are being improperly treated as a 1099 IC and files a Form SS-8 with the IRS for their own classification determination, or files a Form 8919, Uncollected Social Security Tax and Medicare Tax on Wages, with their personal income tax return.
    • The IRS is anonymously alerted about the worker or the employer not paying taxes.
    • Additional Initiatives

    A further illustration of the growing relationship between the IRS and other initiatives include:

    • Questionable Employment Tax Practices (QETP) Initiative
    • IRS National Research Program (NRP)
    • The 1099 Matching Program
    • The Employment Tax Examination Program

    avoid IRS audit

    [ Debbie Fledderjohann of Top Echelon contributed to this article. ]

    Classify as a W2 Employee or a 1099 Independent Contractor?

    When a person is paid on the Form W-2, the employer automatically withholds from the payroll and pays all of the necessary employee income taxes as required by the IRS.  These taxes include: Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare).  In addition, the employer will pay all of the necessary employer taxes. These taxes include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State Unemployment Tax).

    When a person is paid on the form 1099-Misc, all money earned by the individual is paid on an untaxed basis. It is then the responsibility of the individual to file and pay the appropriate taxes. The IRS has found that when an individual is responsible for paying his/her own taxes, etc., many times it is not as much as it would be when the employer is paying the correct tax amount. This is primarily due to workers taking full advantage of any potential business deductions so that they pay less in taxes. Hence, the IRS is cracking down on misclassifications and imposing some hefty penalties.

    Be forewarned, the IRS places strict qualification guidelines on the types of jobs that are truly performed by independent contractors and the types of people (sole proprietors) who are true independent contractors. Unfortunately, not only is the IRS strict, but their guidelines are sometimes vague. Therefore, you must evaluate the project and the proposed independent contractor in accordance with IRS guidelines to ensure that the arrangement is a true “independent contractor” relationship.  For more information relative to the IRS’ guidelines for independent contractors, consult IRS Form SS-8.

    In today’s business environment, it is imperative that workers are properly classified and that proper taxes are paid to the correct government entities.  [Julie Majors of Top Echelon contributed to this article]

    For more information, download our  Independent Contractor vs. Employee Classification Whitepaper.

    The New Health Care Credit for Small Businesses

    The Patient Protection and Affordable Care Act instituted a new income tax credit for small businesses that provide health care coverage for their employees. Small businesses are those who employ 25 or fewer full time employees with average annual wages of less than $50,000. The employer must pay at least 50% of the premium cost of the health care coverage for its employees. The credit is effective for tax years beginning after December 31, 2009.

    The credit is calculated as a percentage (generally 35% through 2013) of the nonelective employer contributions made toward the employees’ health insurance premiums. The contribution base is capped at the amount of “the average premium for the small group market in the State” in which the employer offers the health coverage. This average premium is determined annually by the Secretary of Health and Human Services.

    The IRS recently published these HHS determined premium rates in Revenue Ruling 2010-13.

    With this new information, you are now able to more accurately project the impact of the credit on your business. For some, it enables you to consider the cost benefit of increasing your contributions toward your employees’ coverage in order to meet the required threshold.  Remember to consider the potential effect of the HIRE Act on your employee headcount and therefore your eligibility as a small business for this credit.

    IRS Explains New Healthcare Tax Credit for Small Businesses

    The recently passed Health Care Reform Act included a “Credit for Small Business Employee Health Coverage Expenses.” This credit falls under one of the subtitles in the Act that will go into effect immediately. For tax years beginning in 2010, eligible small businesses may be able to claim an income tax credit for expenditures for qualifying health care coverage for their employees.

    An eligible small business is (1) an employer who employs fewer than 25 full-time equivalent employees (“FTEs”) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a “qualifying arrangement.”   A qualifying arrangement includes plans whereby the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.

    In addition, the amount of an employer’s premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area within the State) in which the employer offers coverage were substituted for the actual premium.  The average premium for the small group market in a State (or an area within the State) will be determined by the Department of Health and Human Services and published by the IRS.  Publication of the average premium for the small group market on a state-by-state basis is expected to be posted on the IRS website by the end of April.

    You can read more on the IRS website where they have posted a FAQ list.

    The first two questions address eligibility, questions #3  – 8 address calculation of the credit, #9 – 15 explain how to determine FTE’s and average annual wages for eligibility purposes, #16 – #21 tell how to claim the credit.  Be sure to read the last question (#22) on the transition rules for 2010.

    One Thing That Can Trigger an IRS Audit for Your Company

    The Internal Revenue Service estimates it has lost $34.7 billion in unpaid taxes because contractors have been misclassified as 1099 independent contractors (IC) instead of W-2 employees.  In one year, the Government Accountability Office estimated that misclassification cost the federal government $4.7 billion in income taxes.  Worker misclassification is one of the major IRS audit red flags, and could be one of the employment laws you might be breaking. Understandably, the IRS has made it a priority to investigate the issue of worker misclassification and has ramped up their audit staff.

    The IRS is sharing information with Federal agencies like the U.S. Department of Labor, to determine if overtime laws, minimum wage laws or prevailing wage laws are being followed.

    The IRS is also communicating with state agencies that administer taxes.  Employers who are found to have violated state labor laws will be required to pay back taxes, back wages, unpaid workers’ compensation premiums and unemployment premiums.  Depending on which law was violated, there is a potential for additional liability.  Several states have made worker misclassification a priority and the penalties are getting more severe.

    The topic of proper worker classification has quite a history.  In 1987, the IRS published a 20-factor test to help determine whether or not a worker was a common law employee.  However, in 1996 the IRS restructured the test into three main categories — behavioral control, financial control and type of relationshipThis is discussed in an IRS article . The degree of control the business has over its workers is a key factor. Generally, the more control a business has over a worker, the more likely it is that the worker is an employee rather than an independent contractor.

    An IRS audit can be triggered by any number of things, but some common occurrences that may flag your company for an audit includes:

    • The 1099 IC files a claim for unemployment benefits.  (They are not eligible for unemployment.)
    • The 1099 IC files a claim for workers’ compensation or disability benefits. (They should carry workers’ compensation on themselves because they are not eligible through an employer.)
    • A worker receives a W-2 and a 1099 Form from the same employer in one year because they converted from a 1099 IC to a direct hire of the company.  (If they are performing the same task as a 1099 IC and W-2 employee, they are normally classified as W-2 employees.)
    • The worker feels they are being improperly treated as a 1099 IC and files a complaint with the Department of Labor’s Wage and Hour Division.
    • The worker feels they are being improperly treated as a 1099 IC and files a Form SS-8 with the IRS for their own classification determination, or files a Form 8919, Uncollected Social Security Tax and Medicare Tax on Wages, with their personal income tax return.
    • The IRS is anonymously alerted about the worker or the employer not paying taxes.
    • Additional Initiatives

    A further illustration of the growing relationship between the IRS and other initiatives include:

    • Questionable Employment Tax Practices (QETP) Initiative
    • IRS National Research Program (NRP)
    • The 1099 Matching Program
    • The Employment Tax Examination Program

    avoid IRS audit

    [ Debbie Fledderjohann of Top Echelon contributed to this article. ]

    Classify as a W2 Employee or a 1099 Independent Contractor?

    When a person is paid on the Form W-2, the employer automatically withholds from the payroll and pays all of the necessary employee income taxes as required by the IRS.  These taxes include: Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare).  In addition, the employer will pay all of the necessary employer taxes. These taxes include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State Unemployment Tax).

    When a person is paid on the form 1099-Misc, all money earned by the individual is paid on an untaxed basis. It is then the responsibility of the individual to file and pay the appropriate taxes. The IRS has found that when an individual is responsible for paying his/her own taxes, etc., many times it is not as much as it would be when the employer is paying the correct tax amount. This is primarily due to workers taking full advantage of any potential business deductions so that they pay less in taxes. Hence, the IRS is cracking down on misclassifications and imposing some hefty penalties.

    Be forewarned, the IRS places strict qualification guidelines on the types of jobs that are truly performed by independent contractors and the types of people (sole proprietors) who are true independent contractors. Unfortunately, not only is the IRS strict, but their guidelines are sometimes vague. Therefore, you must evaluate the project and the proposed independent contractor in accordance with IRS guidelines to ensure that the arrangement is a true “independent contractor” relationship.  For more information relative to the IRS’ guidelines for independent contractors, consult IRS Form SS-8.

    In today’s business environment, it is imperative that workers are properly classified and that proper taxes are paid to the correct government entities.  [Julie Majors of Top Echelon contributed to this article]

    For more information, download our  Independent Contractor vs. Employee Classification Whitepaper.

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