Normally, the FUTA tax rate is 6.2% of taxable wages, with the base as the first $7,000 paid to each employee during a calendar year. Employers who pay the state unemployment tax on a timely basis will receive an offset credit of up to 5.4%, making the net FUTA tax rate 0.8% for a maximum of $56 per employee per year. In 2010, when states failed to turn in their loans, the FUTA rate was increased, resulting in a $77 per-employee contribution. However, with this new act, the FUTA rate will be decreased to 6% in the absence of any credit reduction.

The revenue gained from FUTA is used to provide loans to states to control the unemployment situation and pay benefits to the unemployed. A 0.2% surtax that was added in 1976 is going to be dissolved if the extension of benefits is not approved. This is going to create severe unemployment condition in states since the FUTA taxable wages are going to remain unaffected. Therefore, while workers will suffer, the liability computation is going to favor the employers affected in the 2011 calendar year.

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1. The End of Unemployment Insurance? Through the Social Security Act of 1935, the US federal...

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With an average benefit of $270 per week, no one is getting rich off unemployment insurance, but even that amount has decreased. According to the laws of most states, once a person becomes unemployed, benefits last for at least 26 weeks. That time can be extended if one is still unable to find work, with a maximum extension of up to 99 weeks. During the economic recession, however, this duration was severely cut in many states. In 2010, roughly 1.4 million people had already used up their benefit period, and about 4 million are expected to end theirs by 2011.

In an average year, the states ask for about $80 million in federal grants to subsidize funding for the unemployed. Though the government hasn’t indulged the amount still available, it has declared that the benefit tenure will end in December 2011. At that point, those who have not exhausted their basic unemployment benefits will not be able to extend them.

Unfortunately this is not a new issue. Long-term unemployment situations have troubled the government fund for years. It is obviously not possible for the government to provide for the unemployed for an indefinite period of time, so the issue needs to be tackled in a different way. If the government is successful in creating new jobs, then more people will be able to support themselves and lessen the government burden. Another option is for the government to set up employment exchanges, where people will be judged on the basis of eligibility and ability to do work, and they will be assigned jobs accordingly.

What do you think? Has this information affected how you’re approaching employment issues in your office?

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What does this mean for you?

The original 1099 reporting requirement in the Patient Protection and Affordable Care Act would have made nearly every business-to-business transaction reportable to the Internal Revenue Service. The goal of the reporting was to raise nearly $19 billion to help pay for healthcare reform, and it stated that all business owners would need to report any transactions of $600 or more (or aggregate balances across a calendar year) with individuals or corporations. Previously, only payments to individuals were reportable.

Because this component of the healthcare law was repealed, that means business can continue as usual—at least for the foreseeable future. It also means less paperwork and less hassle for your small business. See, democracy does pay off!

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Payroll Series Part 4 0f 4

When you are starting or expanding a small business there comes a time when you must hire employees to take on some of the workload. While many entrepreneurs believe they can do it all, the long hours can begin to take its toll on your stress levels. There are a few items that need to be considered with the type of payroll system you are going to use at the top of the list.

Choosing a Small Business Payroll System

A small business payroll system involves making several decisions as to the format of the process. Here are a few questions to answer in order to get you started.

• Will you be paying employees by the hour or with a salary? This will depend a lot on the type of work they are performing. Production workers are generally paid by the hour while support staff tends to draw a salary. No matter what you decide overtime rules apply to both hourly and salary. There are no hard and fast rules here so decide which option works for you.

• If you opt for hourly workers then you’ll need to decide on how they will report their hours.

• How often will you run the pay cycle? Pay cycles in the United States can run weekly, biweekly, twice a month, or monthly in most states. Consider how you expect your cash flow to run when deciding this process. The longer the pay cycle, the more time you have to receive payments from your customers. Note that some states require that withholding taxes are to be paid more frequently than once a month so be sure to check with the tax authorities before choosing a monthly pay cycle.

• What will your overtime pay policy contain? All employers must at least follow Federal guidelines for paying overtime. Some states have more stringent rules so check the state rules for paying overtime in your jurisdiction.

• Will you be providing paid time off? This includes sick time, personal days, statutory holidays, bereavement, and vacation time.

• What benefits are you going to offer? Are they going to be fully funded by the company or are deductions from employees required? Benefits such as health, dental, and 401(k) require written authorization from the employee in order to be legally deducted. This is also true of wage garnishments, property, and employer loans.

Processing Payroll

Once those questions are answered, the next step for a small business owner is to decide how the payroll will be processed. There are a few options to consider and with the complexity of the payroll process in our times its ideal that there are so many choices to consider.

• Professional Employer Organization (PEO) – is an outsourcing firm that handles hiring, payroll, benefits administration, and withholding tax submission. These firms handle the details while the small business owner grows the business.

• CPA or Bookkeeper – will in some cases process the payroll for small businesses.

• Payroll Software – there are many excellent software programs that can be implemented to process payroll. The downside is that you require an employee to run the software including data entry, printing checks, direct deposits, and calculating and remitting withholding taxes.

• Online Payroll Processing – is a fairly new way to process payroll. Again, you require an employee to enter the data into the system but the actual processing is done by the supplier of your choosing.

Once you have answered these questions and decide on a course of action then you can get to work on finding key employees.  The payroll process is not something to take lightly as there can be serious repercussions from federal and state tax authorities if things go awry. If the thought of all this makes your head spin a little then a PEO may be your best option.

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Payroll Series Part 3 of 4

In Part I of “Understanding the Payroll Process for Small Business” series we discussed the necessary documentation required in order to hire employees in the United States. In Part II we looked at the various withholding and employer taxes that the small business owner is responsible for deducting and recording. In this post we are going to cover the necessary government reporting that must be done for the various taxing authorities.

Reporting Payroll Taxes to the IRS

In addition to depositing the appropriate payroll taxes to government agencies it is the responsibility of small business enterprises to file various tax reports as well as Worker’s Compensation. The reporting requirements include:

• Form 941 – Employers Quarterly Tax Return
• Form 940/940EZ – Federal Unemployment Tax Act (FUTA) Return
• Form 945 – Annual Return of Withheld Federal Income Tax
• Form W-2 – Wage and Tax Statements
• State Worker’s Compensation
• State and Local Tax Authorities – Depends on your area(s) of operation. For example, Arizona requires the quarterly filing of the A1-QRT and UC-018 as well as an annual A1-R. So be sure to check with state tax authorities.

Form 941 – Employers Quarterly Tax Return

This report is filed with the IRS detailing the withholding taxes payable for each employee, the amounts paid, and those still owing. Social Security and Medicare deductions are also included in this report.

Form 940/940EZ – Federal Unemployment Tax Act (FUTA) Return

This report, filed with the IRS, details the unemployment deductions made from each employee, the amounts paid to date, and the amounts owed. These two reports have been simplified (as much as the IRS can simplify things) and combined into one report. For those who have filed a Form 940EZ in the past you will now use Form 940.

Form 945 – Annual Return of Withheld Federal Income Tax

This filing reports all non-payroll deductions withheld for payment to the IRS. It includes backup withholding taxes, pensions, annuities, and IRAs among others.

Form W-2 – Wage and Tax Statements

Small business employers are also responsible for filing a Form W-2 for each employee in the organization. It must be issued to the employee by January 31st based on the previous year’s income. If an employee’s income is earned in more than one state then it must be broken down into amounts earned in each jurisdiction. Form W-3 is a summary of all of the data reported in the W-2 forms.

State Worker’s Compensation and State and Local Taxes

Be sure to check with state and local tax authorities for regulations in your area(s) of business operation.

As you can see, the tax authorities don’t make it easy to be in compliance when it comes to payroll taxes and reporting. And any errors can come back to haunt the small business owner in the form of interest and penalties so be sure to find the best solution for your payroll needs.

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Payroll Series Part 2 of 4

In Part I of “Understanding the Payroll Process for Small Business” we discussed the legal forms that are necessary to be filled out upon hiring a new employee. In Part II we are going to delve into deducting and processing payroll withholding taxes. While the responsibility of filling out the various forms falls to the new employee, it is the employer’s responsibility to withhold and remit the various withholding taxes to the proper taxation authorities.

The key phrase for handling these taxes is ‘attention-to-detail’ – you need to get it right to prevent interest and penalties being assessed.

Withholding Taxes for Small Business Payroll

There are basically five types of employee withholding taxes that the small business owner must be concerned with. In some cases, there are employer taxes to be paid in conjunction with the employee portion which we will cover further on. The five types of withholding taxes include:

1. Federal Income Tax
2. FICA Tax – Social Security and Medicare
3. Federal Unemployment Tax Act (FUTA)
4. State Unemployment Insurance (SUI)
5. State Income and Other Local Tax

Each pay period will have you deducting taxes from each employee at the federal, state, and local levels. These amounts will be cumulatively accrued or recorded into payroll tax accounts until it comes time to pay them. In addition, the employer must also calculate and record the company portion of employee taxes such as Social Security, Medicare as and Unemployment Insurance. Worker’s Compensation is calculated for each employee and is a burden to the employer as opposed to a payroll deduction. Be aware that some of these taxes are payable at both the state and federal levels. Other deductions such as healthcare insurance, 401(k) plans, and life/accident insurance are also deducted, recorded, and paid where applicable.

Remitting/Paying Taxes to the Government

How often you have to remit taxes to the government is based on the amount of your company payroll. Federal, State, and Local taxing authorities will determine the frequency of payment although, in most cases, it will be semi-weekly at the federal level. Many states require you to deposit taxes on the same schedule as at the federal level but be sure to check with state tax authorities.

Late payments will result in an automatic penalty of up to 10% of the amount due and non-payment can result in a penalty up to 100%. Be sure to keep these funds separate from your general cash accounts so that payment can always be made when they become due. A separate bank account for withholding taxes is always a good idea.

Federal taxes are the easiest to handle when it comes to recording and remitting amounts due. Local and state taxes can be a little more complicated even if you operate in only one locality. If you operate in several states and localities then the record-keeping and payments become a much more complicated process. The good news is that the whole process can be outsourced at an affordable rate allowing the small business owner to concentrate on doing what they do best…growing their business.

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2010 has seen changes in the business landscape for all of us, from the small start up to the large corporations, including H.R 2847, the Hiring Incentives to Restore Employment Act (HIRE Act) aimed at encouraging businesses to hire and retain unemployed workers. .

The nitty gritty of the HIRE Act focuses at putting America to work by providing businesses with a tax credit for qualified employees retained for at least one year, of up to $1,000 per worker. As well as a payroll tax exemption of the employers’ share (6.2%) of Social Security payroll taxes on the wages of a qualified workers paid between March 19, 2010 and December 31, 2010. In total these tax savings can add up to $7,621.60 ($1000 credit plus up to $6,621.60 in forgiven Social Security withholding for 2010) per employee. Better yet, you don’t have to wait till the next tax filing to see the benefits since the Social Security withholding’s never even leaves your pocket.

To make sure your new employee will save you money check the following:

* Were they hired after Feb. 3, 2010 but before Jan. 1, 2011?
* Were they hired for a newly created position, or a position that opened up from an employee willingly resigning or being terminated for a cause?
* Sorry guys, they can’t be related to you(the employer)
* Your new employee must sign an affidavit (form W-11) stating they have not been employed, or working 40 hours a week, in the prior 60 days to beginning work.

One great, and not as well known, gem in the HIRE Act -a qualified worker meeting the above criteria CAN be a formerly laid off employee of the company! And with no full time work requirements companies, small to medium sized business especially, can rehire at part time those great former employees, already knowledgeable in the field, as well as re-staff positions currently left vacant due to economic down turns, all while saving money!

And since we all love saving money through tax credits and forgiveness’ now is the time to take advantage of these incentives and work with us to maximize effectiveness. As we’ve seen with other tax credit, such as the New Homebuyer Incentives of 2009/2010, requirements and payouts are constantly changing and funds are available only for a limited time. Contact your tax professional for advice(it’s after tax season, and they will love to hear from you!), feel free to contact us for more information or refer to the IRS website for specific details

So how does this Act effect you, as a PEO client? Thanks to the efforts of the National Association of Professional Employer Organization(NAPEO) you can continue the smart decision to focus on what your company does best, and let us what we do best, while still reaping the potentially enormous benefits of the HIRE Act. But plain and simple, whether you hire directly or through a PEO service you can reap the full benefits of the HIRE Act.

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Don't let upcoming IRS audits worry you. (Image courtesy of FreeDigitalPhotos.net)

participate in a special audit by the IRS. This study, conducted by the IRS National Research Program (NRP) will study employment taxes. The purpose of the study is to gather data to calculate possible ‘employment tax gap’ issues and target areas that may be future problems.

Audit specifics
The audits will likely involve a thorough review of the Employer’s Quarterly Tax Returns for the targeted year(s). Other related documents may also be reviewed, possibly forms 1120, 1065 and more.

This will be the largest audit since 1984, and will take place over the next three years. The IRS will examine 2,000 businesses in each of those years. The businesses will be selected at random and will represent a large cross-section of U.S. companies.

There are five main areas that the IRS will focus on: worker classification, reimbursed expenses, officer compensation, fringe benefits and non-filers. It’s a good bet that the auditors may look at other details as they review the five targeted elements.

There is nothing that a company can do to prevent being chosen for the audit, but there are steps that they can take to help make possible audits, future filings and compliance easier.

Review payroll services
Small business owners should review the current payroll practices, focusing on the five areas that the NRP have identified as their specific focus. Review the three most recent years’ employment tax returns, the filing documents and supportive records. A third party payroll service expert can help with this process.

If your company is selected, follow these steps:

• Designate a company representative who is responsible for IRS communications
• Early in the process, retain a payroll service and tax expert
• Request time to respond to IRS requests

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This is the first time since 1975, the year that the Social Security Administration instituted a cost of living adjustment, that they have not adjusted the benefit.

The SSA’s Office of the Chief Actuary predicts that there will be little or no change in the wage base in 2011. The actual number won’t be determined until next October, but the estimate is sound, based upon the accuracy of the previous years’ predictions.

The 2011 prediction will help your CFO with budgeting for payroll services in 2011, as social security contributions are paid by both the employer and employee.

According to the SSA’s report, the projected benefit wage for the next few years:
2011 $106,800
2012 $114,900
2013 $119,400
2014 $124,200
2015 $129,300
2016 $134,700

The SSA report says that in 2016 tax revenues not be adequate enough to fund the full social security expense. However, the SSA expects to pay full benefits until the trust funds run out, which they predict to be 2037. Once that occurs, tax revenues will cover 76% of the scheduled benefits if tax revenues remain at today’s rates.

To get a copy of the report, go to www.ssa.gov/OACT/TR/2009/index.html.”

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If you do business in Utah, you need a heads-up on this small article recently published in this daily Salt Lake City newspaper. It isn’t unheard of for this type of situation to arise. Be sure to know who you are working with or even see if they are willing to prove that they are making current tax deposits from time to time. Click here to read more about this article.

To find a Professional Employer Organization (PEO) provider in good standing with both the IRS and NAPEO, check out PEO Services.

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