Payroll Tips, Training, and News for Small Business

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Payroll Professionals: Work Opportunity Tax Credit Stays for 2011

adding to payroll with WOTCIf you’re planning to add employees to your payroll this year, don’t forget about the Work Opportunity Tax Credit (WOTC), which could save you money on your income taxes. The credit is available to employers who hire from target groups that experience barriers to employment, including qualified veterans or ex-felons.The WOTC was due to expire, but it’s been extended through December 31, 2011, as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 signed into law in December.

Designed to encourage employers to add hard-to-employ individuals to their payroll, the credit is generally equal to 40% (only 25% if the employee doesn’t reach a minimum employment level) of the first $6,000 of wages paid to each qualified employee on your payroll. Employers can take the credit on their federal income tax return using IRS Form 5884. Note: You must reduce any wages deducted as a business deduction by the amount of credit you were allowed.

Minimum Employment
The WOTC only applies to qualified employees working a minimum of 120 hours. The 40% credit applies to qualified employees on your payroll program working 400 or more hours, while the 25% credit applies to employees working less than 400 hours.

Targeted Groups
Internal Revenue Code Section 51 identifies targeted groups who qualify under the WOTC:

  1.       Qualified IV-A recipients;
  2.       Qualified veterans (credit applies to the first $12,000 of wages for these employees);
  3.       Qualified ex-felons;
  4.       Designated community residents;
  5.       Vocational rehabilitation referrals;
  6.       Qualified summer youth (credit only applies to the first $3,000 of wages for these employees)
  7.       Qualified food stamp recipients;
  8.       Qualified SSI recipients; or
  9.       Long-term family assistance recipients (formerly welfare-to-work individuals; the credit is computed very differently for this group).

(Note: The 2010 Act did not extend the WOTC for two groups: unemployed veterans and disconnected youth.)

To apply for this credit, fill out two forms: the IRS Form 8850 (opens up your request for a tax credit), and the U.S. Department of Labor’s ETA Form 9061 (identifies the individual’s target group for certification). Then, send these forms to your local Agency WOTC Coordinator within 28 days of the new employee’s first day of work.To learn more about this tax credit opportunity, visit the U.S. Dept. of Labor website.

2011 Circular E Answers Your Payroll Questions

IRS Circular E Helps With PayrollEven if you’re using payroll software that automatically updates for payroll tax changes, Circular E — The IRS Employer Tax Guide — is a handy resource to have on your desk.

Offering more than just payroll withholding tables, Circular E can settle many of your payroll-related questions, such as definitions of employees, when certain payroll taxes are due and what are the lookback periods for employers.

The latest version of the IRS 2011 Circular E provides insight into recent federal tax law changes including the 2% Social Security payroll tax cut, as well as important government contact numbers.

IRS Small Business Tax Calendar Helps With Payroll

IRS Tax CalendarThe Internal Revenue Service publishes an annual calendar for small business owners. The Tax Calendar for Small Businesses and the Self-Employed can help you keep track of payroll tax deposit due dates and important dates for other business-related taxes.

While this year’s calendar is online only, you can print out your own copy to help you remember important dates, such as 941 payroll tax deposits and filing deadlines for payroll taxes and quarterly estimates.

[RELATED ARTICLE: What is Form 941]

The calendar offers plenty of other resources for small business owners, including employer news, links to payroll-related and other business pages on the IRS website, forms and publications. Small business owners can also find valuable advice on setting up accounting methods for their company and proper payroll practices.

Adding Employees To Payroll Offers Tax Benefits For Businesses

hire actWhen you figure your 2010 business taxes, don’t forget about the Hiring Incentives to Restore Employment (HIRE) Act, signed into law March 18, 2010. The HIRE Act created two new tax benefits for qualified employers who hire certain qualified employees. If you have added employees to your payroll in the last year, it’s worth your while to explore whether your business can qualify.The Payroll Tax Exemption
Qualified employers may receive an exemption on their 6.2% share of Social Security payroll tax for wages paid to qualified employees between March 19 – Dec. 31, 2010. While the payroll tax exemption is not available to employers in 2011, if you missed out, you can still get the exemption retroactively (for up to three years.) File an amended 941-X and complete the W-11 affidavit explained below.

[RELATED ARTICLE: Use Form 941-X to Correct Payroll Tax Errors]

The HIRE Retention Credit
If you added a new employee to your payroll between Feb. 3 – Dec. 31, 2010, you may qualify for the HIRE Retention Credit on your business income tax return.

Qualified employers can take this General Business Credit of $1,000 for each qualified employee retained for at least 52 consecutive weeks, whose wages do not significantly decrease during the last 26 weeks. The credit is the lesser of $1,000 or 6.2% of wages paid to the employee during the 52-week period. The employee’s wages in the last 26 weeks must equal at least 80% of wages for the first 26 weeks. This credit can’t be carried back to years before March 18, 2010, but can be carried forward.
Qualified employees:

  1. Began employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011;
  2. Are not family members of or related in certain other ways to the employer;
  3. Are not replacing another employee of the qualified employer, unless the other employee terminated employment voluntarily or was terminated for cause; and
  4. Certify by signed affidavit, under penalties of perjury, that they have not been employed for more than 40 hours during the 60 days ending the date they started employment.

You can use Form W-11, The (HIRE) Act Employee Affidavit, to meet the employee affidavit requirement. Although you need this certification to claim both tax benefits, you won’t file these statements with the IRS. Retain the documents with your payroll and income tax records.

Qualified Employers:

  1. Taxable businesses and tax-exempt organizations in the U.S. or in any U.S. territories subject to Social Security tax.
  2. Federal, state, and local government employers generally do not qualify. However, public colleges and universities can qualify, as well as Indian tribal governments.
  3. Household employers do not qualify.

A Recap of Recent Tax Changes Affecting Payroll

save money on payrollRecent tax changes affecting payroll may be confusing for employers and employees. I thought it would be helpful to recap these changes to help you better understand and communicate with your employees. While those on your payroll may wind up with a slightly larger net (take-home) pay resulting from these changes, the amount will depend on their marital status and withholding. Ending of the Advanced Earned Income Tax Credit
The government eliminated the “advance” feature that allowed taxpayers to receive their earned income tax credit (EITC) spread out through the year in their paychecks. Your employees who were receiving the credit as an advance in their pay may be concerned that the EITC has gone away for good. You can assure your employees they can still take the credit as a lump sum on their annual 1040 tax return. For more info, read A Quick Update for Employers on the Earned Income Tax Credit.

The Tax Relief, Unemployment and Insurance Reauthorization and Job Creation Act of 2010
Enacted in December 2010, this act extended for two years the tax cuts that were due to expire, preventing a large tax increase for American workers. This Act did not, however, extend the 2009-10 Making Work Pay (MWP) credit that was factored into the rate tables for those years. The 2011 tax tables reflect the loss of this MWP credit.

New Payroll Tax Withholding Tables
For 2011, the government lowered the amount that workers contribute to to their Social Security to 4.2%. Employers still contribute to Social Security at the same rate of 6.2%.

The IRS gave employers until 1/31/11 to adjust for the Social Security payroll tax “holiday” on their employee paychecks or change it in their payroll software. If you haven’t made this change and ran payroll calculating the 6.2% employee share instead of the new rate, you’ll need to issue your employees a refund for the amount.

How the Tax Changes Affect Pensioners
Retired employees receiving pensions may question why their retirement checks are smaller. Retirees receiving pensions aren’t getting the 2% payroll tax break on their Social Security; the amount they contribute remains at 6.2%. Retirees also didn’t receive the Making Work Pay credit for the last two years, but your payroll administrator might have adjusted their withholding using separate tax tables for those years. With the new withholding tables, retirees may see their withholding increase by $7-50 per payment, depending on the filing status, payment amount, and frequency of their pension checks.

Deadline for Personal and Payroll Taxes Extended

payroll taxes extended picture of timer

Thanks to Emancipation Day, we all get three more days this year to file our 1040 federal tax returns for 2010. Businesses also get a few more days to report certain payroll taxes and estimated taxes.

The IRS has extended this year’s 1040 tax filing deadline to Monday, April 18 because Emancipation Day, a holiday celebrated in the District of Columbia, falls on April 15. (By law, all D.C. holidays affect tax deadlines the same as federal holidays.) Postmark your federal income tax return by midnight on April 18.

If you want to request a six-month extension on filing your income taxes, file Form 4868 by April 18. You’ll have until October 17, 2011, to file your tax return (note: a filing extension doesn’t let you off the hook from paying any tax due. If you think you might owe the government, send your estimated taxes with your filing extension paperwork to avoid penalties.)

Payroll Taxes Extended: What it means for your business

If you or your business is required to make quarterly estimated income tax payments, your deadline is also April 18 for the first quarter 2011.

Don’t assume this extended tax deadline applies to your state or locality, so make sure you observe their tax filing deadlines (which are most likely found somewhere on the tax forms).

Certain federal payroll tax deposits normally due on April 15 also are extended to April 18 this year. If you are a monthly depositor for federal payroll taxes, your March 2011 deposit won’t be due until April 18. If you are a semi-weekly depositor, any taxes withheld for pay dates falling between April 9 and April 12 also come due on April 18. (Remember to initiate your payroll tax deposit via EFTPS at least one banking day before the due date to be consider timely.)


Trust Online Payroll to Save You Time and Money

Online payroll software can make your small business payroll program run more smoothly.

As a small business owner, you’re good at what you do. You’ve built your business from the ground up. You know how to make your customers happy. It’s the paper-pushing that gets you down.

One of the conundrums of owning a small business is learning how to manage all the administrative “stuff”. Building your business can get muddied with complicated and ever-changing taxes, laws, and regulations. Payroll, in particular, can be confusing and time-consuming.

We understand. Anymore, running payroll goes beyond paying your employees for a good day’s work. There are payroll taxes and IRS forms that you need to send to the right people at the right time. And because no one business is the same, your payroll needs are different from the next company’s.

Of course, you can tackle your payroll all by yourself, but you’ll need to invest time in learning the ins and outs of running payroll correctly (and time is money). You also run the risk of getting your payroll wrong, exposing you to unnecessary risks. And, who wants that?

There is a better way to go. With basic online payroll software, you have the freedom to pay your employees from almost anywhere. Online payroll programs are generally comparable in price, or sometimes less costly, than traditional desktop software.

Benefits of online payroll software

There are benefits to having your payroll online:

  • No downloading means no extra programs gobbling up memory on your computer.
  • All data is stored outside your computer.  If there is ever a computer malfunction, you don’t lose your payroll records.
  • Tax table automatically update.
  • Software updates and enhancements occur automatically.
  • You can log in from any computer (with Internet connection).

When looking for a payroll software program, be sure payroll calculations are guaranteed to be correct. Customer support should be included in your payroll program and provide help when you need it, without charge.

Full service payroll programs

Full service online payroll is the new generation of payroll services. You save money by entering employee hours into an online payroll software application by yourself. At the end of a pay period, you can pay your employees by direct deposit, printing paychecks, or hand writing checks.

The online payroll company files and deposits all your federal, state, and local taxes. (Patriot Software includes local payroll tax filings with their service. Be aware, not all payroll companies will.) The online payroll company may also remit and file Form W-2 and Form W-3.

Feel free to read our payroll software reviews. Then, sign up for a no-obligation free trial with our online payroll. Remember, we are here to help!

A Quick Update for Employers on the Earned Income Tax Credit

employees save on payroll taxesQ. Is the Earned Income Tax Credit going away?
A. No. The EITC, also known as the EIC, which was enacted by Congress in 1975 to help low-income workers, has not gone away. But the AEITC has.

Q. What was the AEITC?
A. The Advanced Earned Income Tax Credit program was designed to give qualified employees a tax credit that was distributed throughout the year in their paychecks. This option has gone away as of Dec. 31, 2010.  

Q. Why did the advance option go away?
A. The law changed. Workers didn’t take advantage of the advance option as much as the government had hoped. The Education Jobs and Medicaid Assistance Act of 2010 repealed the AEITC, and it became unavailable to workers in 2011.

Q. What will my employees do now?
A. Eligible employees can still get the earned income credit in a lump sum when they file their personal tax return. And if they received the tax credit in 2010, they need to report it on their tax return.

Q. What does it mean for me as an employer?
A. As an employer, you are are no longer part of the equation for your employees’ EITC. You no longer will calculate the tax credit in your employee payroll. Your payroll provider should have already updated their payroll software and forms to prepare for this change.You no longer need to give employees Form W-5 (Earned Income Credit Advance Payment Certificate); that form has been eliminated. However, you still must notify employees that they may be eligible to receive the earned income credit. (To find out if your employees are eligible, read Notice 1015: Have You Told Your Employees About the Earned Income Credit?)

You can satisfy the EITC notification requirement when you give employees their Form W-2 (required information is on the back of Copy B), or give them Form 797.

Payroll Tax Cut Gives Employees More Take-Home Pay in 2011

If you haven’t heard the news yet, employers will withhold less Social Security from their employee payroll taxes starting Jan. 1, 2011. The 2% payroll tax cut is designed to give employees more take-home pay for 2011. The Social Security “holiday” is one part of the recently passed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Employers will calculate employee payroll taxes using the new Social Security rate of 4.2%, down from the current rate of 6.2%. The employer’s share of payroll taxes remains the same; they will contribute to the employees’ Social Security at a rate of 6.2% for 2011.

According to the Internal Revenue Service, employers should withhold at the new rate as soon as possible in 2011 and no later than Jan. 31. If you’re using payroll software or a payroll service, the rate change should be automatic — check with your payroll provider to be sure. Also, notify your employees of the rate adjustment and how it will affect their pay (they may be pleasantly surprised at the new amount of their paycheck.)

If you’re an employer still figuring payroll by hand, and you forget and continue to use the old rate, the IRS advises you to make an offsetting adjustment to your employees’ Social Security withholding no later than March 31, 2011 (the end of the first quarter.) For more details about this change in payroll tax withholding and the recently passed Act, read IRS notice 1036.