IRS Posts Revised Form 941 and Instructions for Claiming New Hire Payroll Tax Exemption

MAY 18, 2010

Stuart Rohatiner, CPA, JD

On May 18, the IRS posted a new version of Form 941, Employer’s QUARTERLY Federal Tax Return, and its instructions for claiming the special payroll tax exemption that applies to new workers hired in 2010.

The Hiring Incentives to Restore Employment Act (HIRE Act) created a payroll tax exemption for employers who hire workers who have been unemployed for at least 60 days and who are not replacement hires. For qualifying new employees hired after Feb. 3, 2010, and before Jan. 1, 2011, an employer can claim an exemption equal to the employer’s share of Social Security taxes on wages paid in 2010 after March 19.

On the newly revised Form 941, employers will claim the exemption related to wages paid after March 31 on lines 6a through 6e (or on lines 12c through 12e for the exemption related to wages paid between March 19 and March 31). These lines ask for the number of qualified employees who were first paid exempt wages or tips in the quarter, the number of qualified employees who were paid exempt wages or tips in the quarter, and the amount of the wages and tips paid to qualified employees, which are multiplied by 0.062 (the amount of the employer’s share of Social Security tax). This amount is subtracted from the total Social Security and Medicare tax reported on line 5d.

The exemption for the employer’s share of Social Security taxes on wages paid to eligible employees between March 19 and March 31 is treated on the second quarter Form 941 as an April 1 tax deposit and does not adjust the amount of tax liability reported on lines 10 and 17.

The instructions say that an employer cannot claim the Social Security tax exemption and the work opportunity credit for the same employee. If an employer does not wish to claim the Social Security tax exemption for an eligible employee, the employer omits that employee and his or her wages from lines 6a through 6d (and lines 12c through 12e, if applicable).

To be a qualified employee for purposes of the payroll tax exemption, the employee must have signed Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, (or a similar statement) under penalties of perjury. The employee must not be a replacement hire, unless the worker being replaced separated from service voluntarily or for cause, and the employee cannot be related to the employer or to a 50% owner.

CPAs Provide Expertise for Transfer Pricing Analyses

MAY 2010

Transfer pricing, the process by which multinational companies set arm’s-length prices for cross-border transactions within a corporate group, is complex and consistently ranks as the No. 1 international tax issue facing multinational companies, according to Ernst & Young’s 2009 Global transfer pricing survey. To avoid penalties and potential interest, most tax authorities require taxpayers to prepare annual transfer pricing reports when they file tax returns.

During its infancy, transfer pricing was dominated by economists. However, as global transfer pricing regulations developed, international examiners gained experience and financial accounting standards evolved. Consequently, companies now need experienced tax accountants not only to validate the reliability of the data during tax controversies but also to guide taxpayers during implementation. There is definitely still a role for economists on project teams, but CPAs are probably more conversant with such steps as making a compensating adjustment journal entry or quantifying FIN 48 risks (FASB Interpretation no. 48, Accounting for Uncertainty in Income Taxes, now codified in FASB ASC Topic 740) for financial reporting purposes.

Stuart Rohatiner, CPA, JD

Below are examples of transfer pricing issues where expert accounting skills are important:

Financial reporting. Certain industries have unique accounting revenue and expense treatment, and to calculate the appropriate benchmark ratios for transfer pricing purposes, an accountant needs to analyze the financial statement footnotes and understand which items are characterized as operating, pass-through, etc. For example, the income statements for a professional services firm include a special line item called “reimbursements” under the revenue and cost-of-sales categories. Reimbursements are generally pass-through contractor costs and reimbursed expenses and would likely be excluded from the operating revenue and operating expense calculations for transfer pricing purposes. In addition, with the currently volatile economy and corresponding impact on profitability, companies are increasingly monitoring their taxable income in each jurisdiction and likely making year-end compensating adjustments to the books and records to get profit margins within the arm’s-length ranges.

Transfer pricing audit document requests. The IRS and other tax authorities historically requested that taxpayers provide copies of their transfer pricing reports to support their pricing during audit years. Fast-forward to the current environment, and a typical audit request specifies tying the transfer pricing data from reports to general ledgers, consolidating income statements and balance sheets.

FIN 48 analysis. Public companies and their auditors are now required to analyze the income tax calculations and determine if the company needs to quantify and include in the financial statements any tax exposures that are “more likely than not” to be sustained upon examination. Auditors have increasingly identified transfer pricing risks, especially adjustments and penalties proposed by tax authorities, and forced taxpayers to disclose the details in SEC public filings and book reserves.

Reliability of financial data. Since much of transfer pricing financial analysis involves comparing unaudited financial statements with audited ones, a tax accountant who can validate the reliability of the unaudited data is invaluable, especially in tax controversy settings.

IRS analysis of adjustments and methods. The trend toward an increased focus on the accounting details of intercompany transactions may be a result of the IRS’ hiring international examiners with accounting backgrounds. Whatever the reason, the IRS has placed a new emphasis on reviewing all accounting and functional differences between the taxpayer-tested party and the comparable companies selected in the transfer pricing report. For example, during a recent meeting of a taxpayer with the IRS, the IRS international examiner compared each accounting line item from the taxpayer’s annual report with those of the comparable companies to make sure that adjustments were considered for any differences in functions or risks. Similarly, the examiner insisted on analyzing all potential transfer pricing methods and profit level indicators available, even though the IRS had agreed to the same method and profit level indicator with the taxpayer twice previously and the facts hadn’t changed significantly.

It shouldn’t come as a surprise that with the increasing complexity of transfer pricing and diminishing taxable income of corporations, the level of scrutiny by tax authorities has risen exponentially. In fact, in 2009, the IRS announced plans to hire an additional 800 agents in fiscal 2010 to focus on international examinations, and the agency’s proposed fiscal 2011 budget contains funding for 800 more. The field of transfer pricing will continue to grow and present employment opportunities for practitioners with the desired blend of economics and tax accounting skills.

 By Steve Snyder, CPA/CFF, CVA

Federal Income Taxes on Middle-Income Families at Historically Low Levels

By Chuck Marr and Gillian Brunet

Middle-income Americans are now paying federal taxes at or near historically low levels, according to the latest available data. That’s true whether it comes to their federal income taxes or their total federal taxes.

■Income taxes: A family of four in the exact middle of the income spectrum will pay only 4.6 percent of its income in federal income taxes this year, according to a new analysis by the Urban Institute-Brookings Institution Tax Policy Center. This is the second-lowest percentage in the past 50 years.

■ Overall federal taxes: Middle-income households are paying overall federal taxes — which include income as well as payroll and excise taxes — at or near their lowest levels in decades, according to the latest data from the Congressional Budget Office (CBO).

Federal Income Taxes Have Declined Significantly in Recent Decades

Federal income taxes on middle-income families have declined significantly in recent decades (see Figure 1).

In 2000, the year before the 2001 tax cut that President Bush and Congress enacted, the median-income family of four paid 8.0 percent of its income in individual income taxes, according to Tax Policy Center estimates — a smaller share than in any year since 1967 (except for 1998 and 1999). [1] The Bush tax cuts further reduced middle-income tax obligations.

This year, the Making Work Pay tax credit, which President Obama and Congress enacted as part of the 2009 American Recovery and Reinvestment Act, is providing a credit of $800 to married joint filers ($400 to single filers). A median-income family with two children thus will receive an $800 tax cut in the return it files this year.

With the new tax cut, the median family’s federal income taxes will equal just 4.6 percent of its income in 2009. That is lower than in any year since 1955 (the first year for which these data are available) except for 2008, when another stimulus-related tax cut was in effect.

The 4.6 percent effective tax rate — the percentage of its income that a family pays in taxes — is well below the 15 percent marginal tax rate that a family of four in the exact middle of the income spectrum faces. Typically, such a family reduces its effective tax rate by taking the standard deduction (or, in some cases, itemized deductions), personal exemptions, and tax credits such as the child tax credit. The Making Work Pay tax credit further reduces that family’s effective tax rate.

Overall Federal Taxes Also at Low Levels

The decline in income taxes on middle-class households in recent years has driven a decline in these households’ overall federal taxes.

Households in the middle fifth of the income spectrum paid an average of 14.2 percent of their income in overall federal taxes in 2006, the latest year for which data are available, according to CBO.[2] This is just slightly above this group’s effective tax rate of 13.8 percent in 2003, which was the lowest level since at least 1979.

Most Americans pay more in payroll taxes, which support Social Security and Medicare, than they do in income taxes. Thus, the 14.2 percent figure reflects the impact of payroll taxes far more than income taxes.

Due to the impact of the recession and the temporary tax cuts in the Recovery Act, particularly the Making Work Pay tax credit, CBO data for 2009 (when they become available) will likely show that middle-income families faced significantly lower effective overall federal tax rates than in 2006.

End Notes:

[1] Tax Policy Center, “Historical Federal Income Tax Rates for a Family of Four,” April 12, 2010. The Tax Policy Center’s estimates were derived by updating (using Treasury’s methodology) a 1998 Treasury Department analysis that examined changes since 1955 in the percentage of income that the median-income family of four pays in federal income taxes.

[2] The CBO study covers the 1979-2006 period and includes federal income, payroll, and excise taxes. Congressional Budget Office, “Historical Effective Federal Tax Rates, 1979-2006,” April 2009.

You owe the IRS 99 days of hard work

Stuart Rohatiner, CPA, JD

By Blake Ellis, staff reporter

NEW YORK (CNNMoney.com) — This year, it’s going to take the average American 99 days to earn enough money to pay the IRS. That’s one day longer than last year.

“Tax Freedom Day” marks the date that most Americans have earned enough money to pay their federal, state and local taxes, and this year that day arrives on April 9, according to the Tax Foundation’s annual calculation, which is based on government tax and income data.

Tax Freedom Day arriving one day later than it did last year means most Americans will have to work that much harder — for more than three months — just to pay their 2010 taxes.

The number of days Americans have to work to pay off their taxes has declined steadily since 2007. That’s due to a handful of tax cuts, certain income tax provisions that were repealed for 2010 and because the recession has reduced tax collections faster than it has cut income, according to the Tax Foundation.

But while it will take people less time to earn the money this year than it did in 2007, Americans will still spend more on taxes in 2010 than they will on food, clothing and shelter combined, the Tax Foundation said.

State-by-state:

Each state has its own Tax Freedom Day. The day arrived earliest in Alaska and Louisiana — on March 26 — because of “modest incomes and low state and local tax burdens,” the Tax Foundation said.

Mississippi, South Dakota and West Virginia celebrated soon after, on March 28, March 29 and March 30, respectively.

Connecticut, the state with the highest per capita income, will be the last to celebrate. Tax Freedom Day won’t arrive until April 27, the 117th day of the year.

New Jersey, New York, Maryland and Washington will join Connecticut as the last states to celebrate. In these states, Tax Freedom Day will fall on April 25, April 23, April 19 and April 15, in that order.

‘Tis the Season for Catching Tax Scofflaws

By CATHERINE RAMPELL

If your fear of getting caught for tax fraud starts to spike in the next few weeks, it’s probably by design. The Internal Revenue Service appears to deliberately ramp up publicity of its tax

Stuart Rohatiner, CPA, JD

 fraud cases just before Tax Day, a new study finds.

The paper, by Joshua D. Blank and Daniel Z. Levin, looked at press releases issued by the Department of Justice’s Tax Division from 2003 to 2009 in which the agency announced a civil or criminal tax enforcement action against a specific taxpayer identified by name. They found that the number of press releases issued by the I.R.S. per week more than doubles in the fortnight preceding April 15 compared to the rest of the year:

The authors suggest that this trend is probably part of the I.R.S.’s fraud deterrence strategy:

By presenting individual taxpayers with vivid examples in which the I.R.S. has detected tax fraud — whether it involves a popular celebrity’s phony business deductions, a high-profile banker’s offshore bank account or a local tire salesman’s underreporting of gross  income — the government may provide an individual taxpayer with available images that showcase the I.R.S.’s detection capabilities. Because the government consistently provides more of these images to individual taxpayers during the weeks leading up to Tax Day than it does during other times of the year, individual taxpayers may draw upon these available images as they teeter on the decision to claim questionable tax positions on their annual individual tax returns. … In reality, a rational individual taxpayer should recognize that the chance that the I.R.S. will detect and challenge a claim of an illegitimate tax position is very low (1.03 percent in 2009).

Health and Taxes

From: TaxVox: the Tax Policy Center blog
by Howard Gleckman

Health reform is (almost) law. And while the Senate must still agree to a package of technical fixes approved by the House late last night, we now can see historic changes in the way we will buy health insurance. We can also see big new tax increases, at least for some relatively high-income people. But the most important won’t take effect for years. And there’s the rub.

I have never quite seen a law so full of powerful tax bombs attached to delayed fuses. The two biggest: A stiff new Medicare tax on high-earners that does not bite until 2013 and a tax on high-cost health insurance that does not kick in until 2018—long after the end of an Obama second term, if he has one.

Take the Medicare tax. Singles earning more than $200,000 and couples making more than $250,000 (in modified adjusted gross income) would pay an extra 0.9 percent of their wage income. Plus, they’d pay an entirely new tax of 3.8 percent on investment income. This effectively raises the rate on capital gains and dividends from 15 percent to nearly 19 percent. Initially, only about 2 percent of taxpayers would face the higher rates. But in an echo of the disastrous Alternative Minimum Tax, the earnings floor is not indexed for inflation so eventually many middle-class taxpayers could be hit by the levy. By 2018, the new tax would generate $37 billion.

The “Cadillac” tax on high-cost health insurance is the fave of nearly every economist, although it is widely disliked by the public. The current system that excludes the value of health care from tax is unfair since it is far more beneficial to high-earners (whose after-tax cost of insurance is reduced by 35 percent) than to low-wage workers (whose cost may be reduced by only 10 percent). It is also a big reason why consumers of health care are so disconnected from the true cost. After all, who cares about getting that unnecessary MRI if insurance is paying anyway?

Taxing those high cost health plans would encourage employers to offer cheaper policies, and workers could expect to get at least some of the cost savings back in wages, though economists argue endlessly about how much.

The final House-Senate compromise would change that–eventually. Health coverage in excess of $10,200 for individual plans and $27,500 for family plans would be hit with a 40 percent excise tax. Keep in mind the tax is only on the amount in excess of the floor, so with an $11,000 individual plan, only $800 would be taxed (the 40 percent rate would yield the government $320).

There are all sorts of exceptions. And the tax is indexed for inflation plus 1 percent. Today, the average family policy costs less than $14,000, far below the threshold. But since health costs have been growing much faster than regular inflation+1, the new tax would eventually hit many more workers—unless we can control medical costs. This tax is potentially a health care game changer. But it won’t take effect for 8 years.

Will any of us ever pay either tax? Who knows? The odds are very high that Congress will enact a significant tax reform long before anyone ever pays the Cadillac tax. And unions are poised to kill it. Similarly, the Medicare tax will be hugely controversial. Plus it eliminates a major revenue option for those who want to find new taxes to help balance the budget.

In the end, I’m betting that nobody will pay these taxes in quite the way the new law requires. It will be fun, however, to see how they change.

Medicare tax hikes: What the rich will pay

Fixing Health Care

By Jeanne Sahadi, senior  writer
March 25, 2010: 10:54 PM ET

NEW YORK (CNNMoney.com) — High-income households will be paying more into Medicare as a result of the new health reform law.

For starters, the Medicare payroll tax is going up for individuals making more than $200,000 in wages, and couples making more than $250,000.

Currently, the Medicare payroll tax is 2.9% on all wages — with the worker and his employer each paying 1.45%.

Under the new law, starting in 2013, high-income individuals will pay another 0.9 percentage points — so their share will total 2.35% of their wages.

A single person making $250,000 will pay an additional $450 a year into Medicare relative to what he pays today, according to calculations by Deloitte.

If he made $1 million, he will pay an additional $7,200.

Couples making $500,000 in wages will pay an additional $2,250. If they made $1 million, they would pay an additional $6,750.

In addition, high-income households would also be subject to a new 3.8% Medicare tax on investment income starting in 2013.

What qualifies as investment income, also known as “unearned income”? Capital gains, dividends, interest, annuities, royalties and rents are some examples. Any investment income that had previously been characterized as “tax exempt” would not be subject to the new tax, however.

Here’s how the new tax on investment income would work: It will hit those people whose gross income (roughly speaking, wages plus investment income) exceeds the $200,000 threshold for individuals or $250,000 for couples.

But because of how the proposal is structured, you might not owe the 3.8% tax on all your investment income. Here’s why: the tax would apply to whichever is less — your investment income or the amount that your modified adjusted gross income (AGI) exceeds the high-income threshold.

Say you have $50,000 more in modified AGI than the threshold. If your investment income exceeds that amount, you would only owe the 3.8% tax on $50,000.

So how might a high-income person’s tax bill change overall when the Medicare wage tax is increased and a new Medicare tax on investment income is also imposed? A single taxpayer making $1 million in wages and $100,000 in capital gains income would pay an additional $11,000 into Medicare than he does today, according to Deloitte.

Deloitte notes that it’s possible that even if a person’s total income exceeds the income threshold, he may only be subject to the Medicare investment tax but not the increase in the Medicare payroll tax.

Say a person makes $190,000 in wages and on top of that takes in $30,000 in investment income. That person would not be subject to the increased Medicare payroll tax because his wages fall below the threshold, but he would have to pay the new investment income tax because his total income exceeds the $200,000 threshold.

Raising the Medicare tax on wages will raise an estimated $87 billion over 10 years. But combined with a new Medicare tax on investment income, the revenue collected will jump to an estimated $210 billion, making it the biggest single revenue raiser to help pay for health reform.

Don’t Have Enough To Pay Your Taxes?

What do you do when you finally get all of your information together to file your income taxes, and you find out that not only aren’t you getting a tax refund, but you actually have to pay taxes?! It’s not a problem if you have enough money set aside to pay it off, but for people who don’t have enough money in their bank account to pay their taxes, this can be a very scary experience.

First of all, you don’t need to panic. You are not the first (or the last!) person to owe the IRS money and not have access to the money immediately to pay them back. These are some tips for paying your taxes when you don’t have the money to pay on time.

File your taxes on time.

Even if you owe a ton of money and have no idea where you’ll get it, you need to file your taxes on time (including filing for an extension). If you send your information in late, you’ll be adding fees and penalties to the amount you owe. If you decide not to file your taxes at all — you’ll be looking at criminal charges.

Check all resources.

Take a look in all of your savings accounts and investments to see if there is any way you can come up with the money to pay your taxes. Think about friends or family who may be able to lend you the money.

Get an installment plan.

The IRS can also help you set up a payment plan if you can’t pay for your taxes in one lump sum. When you file your return, you’ll receive a letter from the IRS that states how much you owe. Begin saving money and looking for ways to pay your taxes. If you know for sure you won’t be able to pay your taxes in a lump sum, ask the IRS for the installment plan. You can indicate how much you feel you can afford and as long as you will pay off the balance in a 12 month period, the IRS will usually grant you an installment plan. Having an installment plan will cost you additional money in fees, but it gives you an opportunity to pay it over time.

Apply for Offer of Compromise.

If you get turned down for the installment plan with the IRS, you might consider the Offer of Compromise. This lets you make a one time payment or schedule several payments over time but is a much more involved process than asking for an installment plan. It also costs $150 to apply and each person is evaluated individually based on their financial situation. You are not guaranteed approval even if you pay the $150 application fee so you will want to try the installment plan option first.

If you owe money to the IRS, the worst thing you can do is sit back and hope it goes away. The longer you wait, the harder it will be to pay it because the penalties and fees will continue to add up. The best you could hope for after waiting and hoping it will all go away is a tax settlement of some sort! You need to establish a plan of action that works for your financial situation right now, and follow through with it until the amount you owe is paid in full.

Choose the Tax Form that Best Fits Your Needs

IRS TAX TIP 2010-05

To file your 2009 individual tax return, you’ll have to decide which form to use…unless you e-file. If you file electronically, the software automatically selects the simplest and best form for you. Whether you use e-file or prepare on paper, using the simplest form will help avoid costly errors or processing delays. And remember, if you file electronically, it speeds up the processing of your tax return and the delivery of your refund.

Stuart Rohatiner, CPA, JD

Here are things to consider when deciding which IRS form to file.

Use the 1040EZ if:

•             Your taxable income is below $100,000

•             Your filing status is Single or Married Filing Jointly

•             You and your spouse – if married — are under age 65 and not blind

•             You are not claiming any dependents

•             Your interest income is$1,500 or less

•             You are not claiming the additional standard deduction for real estate taxes, taxes on the purchase of a new motor vehicle, or disaster losses

Use the 1040A if:

•             Your taxable income is below $100,000

•             You have capital gain distributions

•             You claim certain tax credits

•             You claim deductions for IRA contributions, student loan interest, educator expenses or higher education tuition and fees

               If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040. You must use the 1040 if:

•             Your taxable income is $100,000 or more

•             You claim itemized deductions

•             You are reporting self-employment income

•             You are reporting income from sale of property

              All IRS forms, instructions and information about e-file can be found on IRS.gov. 

Resources:

•             Form 1040EZ, Individual Income Tax Return

•             Form 1040A, Individual Income Tax Return

•             Form 1040, Individual Income Tax Return  

 Join our Google Group: Tax Deadlines & Forms! Get all the April 15 information without having to navigate the IRS website. Ask a question, make a comment or a request. You will get help without anyone asking you to buy or download products, newsletters, etc. All inquiries are welcomed!

Stuart Rohatiner, CPA, JD 305-868-3600
www.StuartRohatiner.com
www.CPA4GPR.com
666 71 Street
Miami Beach, FL 33141

Income tax brackets: 2009 Income Tax Rates for Filing Personal Income Taxes

April 15th is just around the corner and many Americans are starting to get serious about filing their 2009 personal income taxes. While preparing your taxes, many Americans are interested in how the tax system works and how the amount of taxes that they are paying is configured. Tax brackets were created by the IRS to determine how much each individual is required to pay in income taxes.

There are six different tax brackets that were created for the 2009 tax year. Each tax bracket has a corresponding tax rate that ranges from 10% up to 35%. The amount that you pay in taxes each year is dependent on the amount that you earned in gross income. One thing is true year after year- the more money that you earn, the more money Uncle Sam will take. The people who file with the highest taxable income are who carry the majority of the tax burden.

As mentioned, there are six different tax brackets with six different tax rates. The tax rates are 10%, 15%, 25%, 28%, 32% and 35%. As your income increases, you will move into a higher tax bracket and pay a higher percentage of tax for the portion your income falls into. Your taxes are calculated based on the dollar amount in each bracket. Calculating the amount that you are required to pay in taxes does not take much time when you use a tax table.

General Income Tax Brackets: What You Should Know

The IRS provides a pdf with tables outlining all the different tax brackets. Any that are not listed you can calculate. The materials are attached for your convenience. You will need this to file you 2009 income tax properly. They give the following example on how to use the attached tax tables:

Example. Mr. and Mrs. Brown are filing a joint return. Their Tax Table taxable income on Form 1040, line 43, is $25,300. First, they find the $25,300–25,350 taxable income line. Next, they find the column for married filing jointly and read down the column. The amount shown where the taxable income line and filing status column meet is $2,964. This is the tax amount they should enter on Form 1040, line 44.

To read more about the federal income tax brackets, visit the official IRS website. Or you can leave a comment/question and it will be answered promptly. The official IRS website has lots of valuable information that can be helpful when filing your 2009 personal income taxes.

Don’t wait until the last minute!
Next: Free filing software: open source tax filing software. No hooks, pitches or anything to buy!

More information is on my website at StuartRohatiner.com where you can join our Google group Tax Deadlines &Forms  and keep up with all the information you will need to be ready to file on or before April 15!