Small Business Tax Articles
Employees vs. Independent Contractors
By: Charles L. Telk Jr., CPA, Partner | email
The issue of whether a worker is an employee of your company or an independent contractor is very complicated, and it can be confusing to make the correct determination. Properly classifying a worker as an independent contractor can save a company payroll tax dollars, but an improper classification can subject the company to back payroll taxes, penalties and interest.
Recently the IRS launched a new program with the goal of allowing many employers to resolve worker classification issues. This program gives employers the opportunity to come into compliance by agreeing to classify workers as employees and making a reduced payment to cover past payroll tax liabilities.
This new program is referred to as the “Fresh Start” initiative and it coincides with a new Department of Labor program that will crack down on employers who incorrectly classify employees as independent contractors. The two organizations have signed a memorandum of understanding and have agreed to share information and coordinate enforcement efforts.
The intent here is fairly obvious: offer a reduced back payroll tax burden free from audit, penalties or interest as the incentive while providing for increased audit and enforcement actions as the consequence.
Under this program, eligible employers can reduce their past payroll tax obligations by prospectively treating workers as employees. To be eligible a company must:
- Consistently have treated workers in the past as non-employees.
- Have filed required forms 1099 for these workers for the previous 3 years.
- Not currently be under audit by the IRS, DOL or a state agency.
Once accepted, employers will pay only 10% of the amount of payroll taxes that would have been due from the most recent tax year. No interest or penalties will be due. Audit protection will be afforded in regards to payroll tax issues for prior years. But, for the first 3 years of the program, employers will be subjected to a 6-year statute of limitations instead of the usual 3-year rule.
Depending on your situation, this program may be worth checking into. Please call me at the Des Moines office should you have any questions regarding the “Fresh Start” initiative.
1099 Reporting Update
By: Charles L. Telk Jr., CPA, Partner | email
With the recent “relaxation” of the new tougher 1099 reporting requirements, there seems to be a misconception that 1099’s are no longer required. This misconception could prove costly to you and your organization. Make no mistake about it – 1099’s are still required in certain circumstances. Improperly reporting 1099’s to the IRS can cost your organization thousands of dollars in penalties and professional fees.
Several of our clients have recently received penalty notices from the IRS regarding incorrect taxpayer identification numbers. Issues range from names not matching the FEIN, erroneous FEIN’s, missing FEIN’s, etc. The IRS assess a $50 penalty per occurrence and the sum of the penalties in several cases approached $8,000.
This type of IRS action is increasing as the IRS looks for proper reporting and additional revenue.
Therefore, it remains important for your accounting department to have a current, signed and legible W-9 form on hand for all members as well as for any non-employee who receives a check from you. Of course, you should also have a current, signed and legible W-4 form for all employees. An illegible W-9 form can cause an error on form 1099 which can trigger a penalty. We recommend that you update your files on an annual basis to ensure you have the appropriate W-9 form on hand, without exception.
We realize that obtaining these forms can be problematic. I’ve heard every excuse in the book as to why a W-9 form is not required, such as: “We’re a non-profit,” “We’re a corporation,” “We’re a trust,” “We’re a governmental entity,” etc. But the bottom line is this: If you are issuing a check to a non-employee, you should have a current, signed and legible W-9 form on hand without exception. This is not to say that everyone who receives a check from you will also receive a 1099. But by having the W-9 on hand, you will have the information necessary to issue a 1099 should it be required.
This is an important issue that will continue to receive IRS attention. We are available to answer your questions regarding form W-9 and 1099 reporting. Please call me in the Des Moines office at 515-270-1446 should you have any questions or concerns.
Filing Requirements and Sales/Use Tax
By: Chris Coldiron, CPA, Tax Manager | email
Recent surveys indicate that individuals and businesses purchasing goods over the internet are not properly remitting sales or use tax, many times in violation of state law (the estimated non-compliance rate in California was greater than 98%). With states becoming more desperate for revenue sources to offset record deficits, this area becomes an easy target for state auditors. If you are unsure of your state’s laws regarding the payment of sales or use tax for internet purchases, please contact us so that we may research the matter and advise you accordingly.
State auditors are also on the lookout for businesses that might have a filing requirement in their state that is not being met. If your business engages in transactions outside your home state and you are unsure if this activity generates additional filing requirements, please contact us so that we may help you make that determination.
1099 Reporting Changes, Again
By: Chris Coldiron, CPA, Tax Manager | email
As you may have heard, H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011” repealed all new 1099 reporting requirements that were set to take effect January 1, 2012. The Act was signed into law by President Obama on April 15th. Basically, 1099 reporting requirements will continue to be the same as they’ve always been. This change will significantly decrease the compliance burden small businesses were anticipating. However, this recent change does not do away with the requirement that payers obtain and retain a form W-9, Request for Taxpayer Identification Number and Certification, for all payees. This requirement applies even to governmental agencies and corporations, although these entities are typically exempt from the 1099 reporting requirement. Absent obtaining a W-9 that either documents an exemption to the 1099 reporting requirement or provides the necessary information for that reporting, backup withholding at a rate of 28% is mandatory.
Section 199 Amended Returns
By: Chris Coldiron, CPA, Tax Manager | email
The case for Section 199 amended returns continues! The first pre-settlement appeals conference with the IRS Appeals Office is scheduled for August 8th and 9th. Please be aware that if you filed an amended return to claim an enhanced Section 199 deduction and have not heard from the IRS, please contact us so that we may follow up on and track the status of your amended return.
Standard Business Mileage Rates – 2011
By: Chris Coldiron, CPA, Tax Manager | email
To help offset the bite of rising gas prices, the IRS announced on June 23rd that the standard business mileage rate will increase for the second half of 2011 (beginning July 1st) to 55.5 cents per mile, up from 51 cents per mile for the first half of 2011. The mileage rate used in computing deductible moving expenses and medical transportation costs also increased by 4.5 cents per mile to 23.5 cents per mile with the same effective date. The rate used to compute mileage for charitable driving did not change and remains at 14 cents per mile for all of 2011.
401K Fee Disclosure Requirements To Change
By: Ryan Taylor, CPA, Audit Manager | email
Starting January 1, 2012, the Department of Labor will require 401(k) plans to clearly spell out all fees and expenses each quarter so that investors can more readily compare the costs of their holdings and investment choices.
Current laws don’t require sufficient information to allow workers to make the best investment decisions. Even if workers were given abundant investment information in the past, they didn’t always receive it in a user-friendly format.
Companies must begin laying out the administrative expenses, including accounting and recordkeeping fees, and the charges that apply to the individual choices a worker makes, such as fees charged for loans. The charges for administrative expenses must be laid out in the quarterly reports workers receive and also be made available online.
The fees and expenses associated with the funds a worker chooses must be explained as a percentage of assets held, and also expressed as a dollar amount for each $1,000 invested. Performance data must be provided for the various mutual funds offered, including 1-year, 5-year, and 10-year returns. Comparisons to appropriate benchmarks must also be provided for those time periods to enable investors to assess how their funds are performing.
The new rules also require that workers have access to an easily understood glossary of terms to help explain the investment options, fees, and other details. These rules can help fill an important knowledge gap because many investors don’t know that more than a half a dozen fees may be charged against their 401(k) account for recordkeeping, administration, investment advisory, brokerage and management services.
The regulations, however, offer protection to plan administrators on the completeness and accuracy of the information provided by a plan’s service provider, upon which the administrator reasonably and in good faith, relies.
The new regulations mean that plan administrators will want to discuss with their service providers (third-party administrators, record-keepers, fund managers) the various disclosure requirements and amend plan, trust, and provider agreements as necessary to allocate responsibility for satisfying those requirements.
W-2 Reporting of Health Coverage
By: Gardiner Thomsen CPAs | email
The Internal Revenue Service (IRS) issued interim guidance concerning the Affordable Care Act (ACA) requirement to report the cost of employer-provided health care coverage on Form W-2. Under the new interim guidance, voluntary reporting has been extended for small employers to 2012.
Under the ACA, effective for tax years beginning after December 31, 2010, employers were required to report on Form W-2 the total cost of group health coverage, including the portion paid by the employer and the portion paid by the employee. Last year, the IRS issued guidance making the reporting requirement voluntary for all employers on 2011 Form W-2. Just recently, the IRS provided further relief to small employers- those with less than 250 W-2 forms. Under the new guidance, small employers will not be required to report the cost of employer-provided health care coverage on 2012 Form W-2 as well.
The IRS reminds employers that the new reporting requirement is intended to be informational only, and to provide employees with a better appreciation of the amount that their employers spend on their overall health care costs.
The full notice to employers of interim guidance can be found at:
Disclosure Requirements for Multi-employer Pension Plans
By: Mark Rodruck, CPA, Partner | email
On September 1, 2010, the Financial Accounting Standards Board (FASB) issued an Exposure Draft of a proposed Accounting Standards Update. The proposed update is intended to increase transparency in financial reporting for organizations that participate in multi-employer pension and other postretirement benefit plans. The update suggests new disclosures that the Board believes would help users of financial statements better assess the potential risks faced by those organizations.
Current U.S. GAAP requires employers to disclose their total contribution to multi-employer plans, but there is no requirement to describe the funding status of these plans. The objective of the project is to enhance the disclosures of an employer’s participation in a multi-employer pension plan. The Exposure Draft proposes the following disclosures, among others:
- Total assets and accumulated benefit obligation of the plan
- Quantitative information about the employer’s participation in the plan, for example, the number of its employees as a percentage of total plan participants
- A description of the contractual arrangements between the employer and the plan, including the length of the arrangement, the contribution rates agreed to, and any minimum funding arrangements
- Expected contributions for the next period and known trends in future contributions
- The amount required to be paid upon withdrawal from the plan
- A narrative description of any funding improvement plans adopted by the plan, including the expected effects on the employer.
This change was proposed to be effective for fiscal years ending after December 15, 2010 for public companies. A private company would be required to provide the enhanced disclosures for fiscal years beginning on or after December 15, 2010 (one year later than public companies). However, at its November 10, 2010 meeting, the Board decided that it will not be effective for the 2010 calendar year-end reporting period and it will decide on an effective date at a future meeting after it has substantially concluded its redeliberations. FASB will use the additional time to analyze and digest the more than 320 comments it received on the Exposure Draft, and to decide how to modify its Exposure Draft, if at all. The Board’s technical plan calls for the standard to be issued in the second quarter of 2011.
1099 Update: President Obama Repeals Business Tax Reporting Mandate
By: Gardiner Thomsen CPAs | email
Just recently, President Obama signed a bill repealing a tax-compliance mandate that was included within last year’s health care law. This mandate was going to require any U.S. business, large or small, public or private, to issue a Form 1099 to each and every entity to which it had paid more than $600 for goods and services rendered for business purposes within its fiscal year. This provision was to close the “tax gap,” the estimated $300 billion difference between tax revenue that is collected by the government and that which is not, presumably because of unreported business income. Further, it was doubted that the IRS had the matching capabilities to handle the massive volume of paperwork resulting from this provision, had it not been repealed.
As many of you do, most corporations file taxes on a fiscal year that is different than the calendar year in which 1099 forms are filed which could have resulted in substantial errors in IRS attempts to accurately match information.
If you need additional information or have specific questions about 1099 reporting requirements for your organization please let us know.