Cantrell CPA Services, LLC

Danger! Payroll Tax Trust Funds

There are times when we receive correspondence from the IRS with little nit-picky issues that are easy to resolve and are fairly inconsequential. But, even with these letters many taxpayers get lumps in their throats and butterflies in their stomachs.

Then there are times when those letters from the IRS bring tidings of really serious issues that, if they are left unanswered, can break both a business and business owner. One such issue that is always a threat is unpaid payroll taxes.

Businesses are required to withhold and pay both employer and employee Form 941 payroll taxes to the IRS. Unpaid payroll taxes can result in a business having its bank accounts seized or its accounts receivable from customers frozen. But if there are any payroll taxes unpaid that represent taxes withheld from employees, these taxes are not only a threat to the business, but a threat to the business owner.

Unpaid withholding taxes are also know affectionately by the IRS at "Trust Funds". The special thing about trust funds is that the IRS can collect those taxes not only from the business but also from the individual that is deemed to be a "responsible person" who has negligently used withheld taxes to fund the operations of a business. As far as the IRS is concerned not having enough money to pay employees and taxes both isn't a valid excuse. They just assume if you don't have enough cash to pay both, you should simply pay the employees less to ensure that you have enough cash for the payroll taxes.

But, who is considered a responsible person? IRS Form 4180 is the tool the IRS uses to identify the individual that is subject to personal liability for unpaid 941 taxes. This form is a simple interview form that lists a set of responsibilities and functions that are indicative of control over the decision to not pay the taxes due.

These functions include:

1. The ability to set the financial policies for a business.
2. The ability to direct and authorize the payment of bills.
3. The authorization to open and close bank accounts for the business.
4. The capacity to guarantee or co-sign loans.
5. The authorization to sign checks.
6. The responsibility for authorizing payroll.
7. The responsibility for making federal tax deposits.
8. The responsibility to prepare, review, and sign payroll tax reports.
9. The authorization to hire and fire employees.

The IRS makes its determination of responsibility based upon the overall picture painted concerning an individual and not simply because one or more of the above is answered yes. However, the more yes answers you get, the more likely you are the responsible person.

In addition to identifying the responsible person, the IRS must also determine that the individual operated in that capacity during the time period where the payroll taxes were unpaid. For instance, if a business hires a new CEO or CFO and it is found that payroll taxes were unpaid for periods prior to their hire, these new managers are not liable. The old managers are considered the responsible parties.

After this determination is made, then its the individual's bank accounts and wages that become the targets.

So what can be done to avoid this trauma? The first step is to identify the total payroll taxes due by period and break them down between trust funds and employer taxes. Next, begin paying out the oldest taxes first. But, be sure to identify on the face of the payment checks the tax periods that each covers and the fact that those payments are to be directed to pay trust funds first. A taxpayer has the absolute right to designate payments to cover trust funds first. But, if this designation isn't made, the IRS will be sure and apply the balance to the employer portion.

In addition, it is very important to keep track of all the outstanding periods and update the balances due for each as payments are made. Finally, whenever you receive a notice from the IRS, don't ignore the notice. You would be amazed at how much time you can buy simply through communication. The IRS will respect the fact that you are trying to resolve the issue and will delay collections as long as you are making steady attempts at communicating with them and dealing with the outstanding taxes. But, the best way to get yourself in trouble quick is to just ignore the bad news and try to live like there isn't a problem.

Good luck! And remember, a good plan for dealing with any crisis is always better than just watching the IRS take your stuff after you've lived a nice life in denial.

Update on the Renewal of the Bush Tax Cuts

The renewal of the Bush Tax Cuts have been pushed into the last days of the 111th Congress.  The consensus has been that all the tax cuts will be extended for a temporary period of time - 2 to 3 years.  In fact, the Republicans in the Senate have guaranteed as much with their filibuster threats.  However, the House today dealt a serious blow to any hope of this issue being settled before January of next year.  Today in the face of Senate threats and promises of compromise, the House passed only a partial extension of the tax cuts.  This will either end in the House bill stalling in the Senate or another bill being forced through negotiators that will reconcile the current bill with a Senate version.  However, all tax bills must originate in the House so the Senate cannot start from scratch with a separate bill.  This could make it almost impossible to complete the process this month.

As a result of today's vote, we are almost guaranteed to have the withholding tables increased effective January 1st of next year on every employee.  So now is the time to inform your employees of the impending increase in withholdings and plan for the situation for your own families.  This increase in withholdings will result in at least $100 less per month in every paycheck.  On average, this will result in about $400 per family per month until an agreement is reached.  With the Republican majority in the House in the next Congress, we can expect nothing short of a temporary extension of all the tax cuts.  This will probably pass the Senate, and the President has hinted that he would accept this.  But, for Americans - time is money.  Hang in there taxpayers!

What's New With QuickBooks 2011 - Podcast Episode 7

In this episode of the podcast, I review a few of the changes to QuickBooks 2011.  It is just a fact of life that most small business owners are either using QuickBooks now or will be soon.  But, it is a hard decision as to whether there is a need to upgrade the software from year-to-year.  By looking over these changes you can decide if it's worthwhile for you.  Also, in my years of QuickBooks consulting, there are a few questions that you get from every client.  I have addressed a couple of these.  

I would love to hear from any of you that are using QuickBooks and have some specific questions or problems that you would like answered.  I would like to put these together along with some suggestions on dealing with them in a future blog post.  So, please email your questions or problems to me at Chip@CantrellCPA.net.  I would love to help and maybe spread the info to anyone else with the same problems.

I hope you enjoy this episode and thanks for listening.

 

Episode7-CantrellCPAServices

 

The HIRE Act Payroll Tax Credit - It's Not Too Late to Claim Your Credit for 2010

On March 18, 2010, the Hiring Incentives to Restore Employment (HIRE) Act was enacted.  This legislation provided for two payroll tax credits related to the employer portion of the social security tax for qualified new employees hired between February 3, 2010, and January 1, 2011.  As we come to the close of the fourth quarter of 2010, now is the time to make sure that you have claimed the credit on all qualifying employees on your quarterly payroll tax returns (Form 941's) for the year.  It's not too late to claim the credit for the entire year.  In this post, I will provide details on the credits in the HIRE Act and how you can claim those credits.  

There are two credits in the ACT.  The first credit is a payroll tax credit on the employer portion of the social security tax (6.2% of the first $106,800 of wages for 2010) on wages for certain qualifying employees hired after February 3, 2010, and before January 1, 2011.  The second credit is available for employers who retain these qualifying employees for a continuous 52 week period.

The first credit is known as the payroll tax exemption and here are the details:

• Credit for the full employer portion of social security taxes on the qualifying employees.
• A qualifying employee:
  • Was unemployed or employed for 40 hours or less during the 60 day period prior to hiring.
  • Was not replacing another employee unless the other employee left employment voluntarily (quit) or was terminated for reasonable cause.
  • Includes employees straight out of school with no prior work experience or otherwise meeting the unemployment requirement above.
  • Does not include the hiring of family members or owners of a small business.  
  • Be careful with bringing contract labor type employees on payroll for this credit.  This will define those types of employees as always employees subject to withholding and payroll taxes from now on.  You can't just hire them for the credit and then reclassify them later as contract labor.
• Employees must sign a Form W-11 (http://www.irs.gov/pub/irs-pdf/fw11.pdf )prior to the date that the credit is claimed.  However, there is no requirement that a Form W-11 be signed prior to the date of qualifying wages.  Therefore, you can get your W-11's signed now and claim the credit for the past quarters after the signatures are obtained.
• The credit is claimed on the quarterly Form 941.  If you receive late Form W-11's you can file amended Form 941-X's ( http://www.irs.gov/pub/irs-pdf/f941x.pdf ) to claim the credit for those prior quarters.
• A Box 12 code has been added to report the qualifying wages for the HIRE Act employees on the 2010 Form W-2.  So you need to take care of this before the end of the year so you can have all the paperwork done for the 4th quarter and year-end tax payroll tax reports.

The second credit is know as the Business Credit for Retention of Certain Newly Hired Individuals:

• Claimed for the same HIRE act employees as the payroll tax exemption.
• The credit is calculated as the lesser of $1,000 or 6.2% of the wages paid by the employer to these employees.
• Credit can only be claimed after the employees noted above have been retained for a continuous 52 week period from the date of hire.
• The wages of these employees for the second 26 weeks of their employment must be at least 80% of their wages from their first 26 weeks of employment.
• The earliest date to claim the credit will be 2011 (at least 52 weeks from the beginning date of February 3, 2010).
• The credit is claimed on the employers 2011 income tax return.
• This credit is in addition to the payroll tax exemption above.  You get the first credit for hiring them and the second for retention.  It isn't an "either-or" situation.

So contact your payroll tax preparers and make sure that steps will be taken to get all the necessary information for these credits by year-end.  The first step is to identify the qualifying employees and then get their signatures on the Form W-11's.  Then you can amend those prior quarters and get your refunds now.  Good luck!

Update on the AMT

In my last post, I discussed the impact on taxpayers for 2010 if Congress failed to alter the income level at which the Alternative Minimum Tax would apply.  No action on this issue was taken up by Congress prior to the election; so we have been waiting patiently to see what happens now that November 2nd has come and gone.  It is estimated that 2.1 million taxpayers could be impacted (always negatively) by the AMT unless the income thresholds were increased.

Well, we finally have some good news.  In a letter signed by both Democratic and Republican lawmakers addressed to the IRS, Congress is promising to once again approve a one-year correction to the AMT to avoid the potential tax carnage it could cause.  The AMT is sort of like the evil alter-ego of the regular tax code.  Just when you think you've paid all you should, out jumps the dreaded AMT to add a little more.  

The whole problem with these thresholds is that the original legislation didn't have any sort of cost of living adjustment.  But, rather than put some form of permanent cost of living adjustment going forward, Congress just pushes it down the road one year at a time.  So, we will be having this same discussion a year from now I'm sure.

2010 Tax Changes - A Heads-Up Before Year-End

As we come racing towards the end of 2010, it's time for all of us to do a little tax planning before New Years Day.  To help with that, I have put together a quick list of some of the tax changes for 2010 and a peak at some of the changes that come into effect in 2011.  With a month and a half left in the year, we have some time to take care of any loose ends for tax purposes so here we go:

• The American Opportunity Credit - This credit replaces the Hope credit from prior years.  It provides up to a $2,500 per student per year credit for all four years of college.  The nice thing about this credit versus what we've seen in the past is that is includes the cost of books and not just tuition.  If the credit exceeds your income tax liability for 2010, then 40% it will be refundable anyway.
• 401(k) Contribution Limits - The maximum employee contribution to a 401(k) plan for 2010 is $16,500.  However, employees that are age 50 or older can contribute an additional $5,500 for a total for them of $22,000.
• Alternative Minimum Tax - The exemption level for alternative minimum tax drops to $45,000 for a married couple and $33,750 for single filers for 2010.  Relief from the lower AMT limits was passed for 2009 but hasn't been addressed yet by Congress.  Hopefully, this will be taken care of in the lame duck session.  But, if it isn't addressed, many taxpayers are going to find themselves victims of AMT.  In general, there are certain tax benefits that are allowed under the regular tax calculation that are not allowed or are reduced in the AMT tax calculation.  Also, you income, if AMT applies is taxed at 26% for income up to $175,000 and 28% for income over $175,000.  AMT doesn't use the standard graduated rate schedules with rates from 10% up to 35%.  When tax is calculated for AMT purposes, it is compared to the regular tax calculation and you pay the higher amount. 
• Sales Tax on Vehicles - For 2010, sales tax on the purchase of a vehicle can no longer be taken in addition to the standard deduction if a taxpayer does not itemize.  For 2009, a taxpayer could deduct the sales tax attributable to the first $49,500 of the cost of a vehicle even if they did not itemize.  However, the one year tax relief disappears this year.
• The Estate Tax ("Death Tax") - The estate tax is completely repealed for 2010.  However, if a person happens to live an extra month or two into 2011, the tax will revert to 50% for estate values over $1 million dollars.  
• Increased Depreciation for Equipment Purchases - The Small Business Jobs and Credit Act of 2010 provided for bonus depreciation of 50% of the cost of qualified small business equipment and other fixed assets purchased and put into service in 2010.  Taxpayers who purchase equipment in a few specific categories may also be allowed to actually deduct the full cost of the equipment up to $500,000.  These types of equipment may qualify:
  •  
    • Construction
    • Manufacturing
    • Medical
    • Agriculture
    • Office and Technology Equipment
    • Trucks
    • Trailers
    • Printing Presses
    • Corporate Aircraft
• Residential Energy Tax Credits - For 2010 there is a 30% tax credit for the cost of certain qualifying energy efficient home improvements.  The credit is capped at $1,500 combined for 2009 and 2010.  http://www.energystar.gov/index.cfm?c=tax_credits.tx_index provides a great list of the property allowable in each category.  For 2011, the credit reverts to 10% and the cap is reduced to $500.

This is a quick taste of some of the most important changes.  Now is a great time to get in touch with your tax preparer and see if this will impact you and what information you need to be getting together before year end.  Good luck this tax season!

Meeting With a Tax Preparer - Podcast Episode 6

Annually many taxpayers gather up all their receipts, tax forms, and questions and haul them to the tax preparer to turn them into State and Federal tax returns.  However, there is often a lot of confusion on how to best accumulate this information to make the process as smooth as possible.  Also, the more efficient the process, the cheaper the preparation fees.  In this episode I give some suggestions on how to accumulate and provide the information in a way that will make it faster and easier for the preparer.  

I provide some ideas on how to organize your tax forms.  I prepare explanations on what self-employment tax is and how it is calculated.  I explain the methods and required documentation for deducting vehicle expenses for a small business.  I give some ideas on information that should accompany your tax forms that you can provide for the preparer instead of pay them to get it themselves.  I also try to explain the different ways tax preparers bill for their services and what you can do to lower your fees.

Just like Christmas is just around the corner, tax season is lurking just beyond there.  So what better time than now to start thinking about making it the easiest one of your life.  Thanks to all and good luck!

Episode6-CantrellCPAServices

Federal Tax Withholding Problems Ahead - More Worries from the Expiring Bush Tax Cuts

Every day we seem to have more and more bad news for taxpayers regarding the coming expiration of the Bush Tax Cuts.  Another really worrisome part of the discussion that we will address today is the impact on Federal withholding tax on paychecks next year.  

The 111th Congress punted addressing any extensions of the Bush Tax Cuts until after the November 2nd election next week.  They planned either to debate the extensions in the lame duck session or pass them on to the 112th Congress next year.  The problem with this strategy is that it may offer aid to Americans for their 2011 income tax returns that are filed at the beginning of 2012, but it won't save American workers from increases in their Federal withholding on each paycheck next year until the extensions are passed.

A Bloomberg article today warned of reduced paychecks for American workers as the IRS adjusts the withholding tables for January.  The problem is that the IRS can't just wait until the Congress settles the issue and then prepare the adjustments.  They have to act now and go ahead and assume that the tax cuts are going to expire as planned.  So the IRS will start preparing the adjusted tables for submission to employers prior to January 1st.  At that point employees are going to immediately see a decrease in the amount of take home pay at every pay scale.  Bloomberg calculated that a married couple making approximately $80,000 per year could lose around $200 per semi-monthly paycheck to Federal withholding in January.  

It takes the IRS time to adjust these tables.  So, even if Congress passes the extensions around year end, it could take at least a month (or maybe two) for the new rate tables to be issued.  During that time, employees will see less cash in their pockets.  I guarantee this will result in a lot of phone calls to payroll preparers.  Most employees know what they should be receiving pretty close to the penny with each paycheck.  So when something this big happens to their net pay, they start looking for someone to blame.  Employers need to inform employees before the end of the year to expect this reduction in net pay.  This will help avoid some of the "sticker shock" when the first checks are issued.  You should explain to employees that the withholding tables may be slow to change after the tax cuts are extended.

A lot of employees live paycheck to paycheck.  This type of change will require these people to plan ahead to make sure they have adjusted their expenditures to handle whatever reduction in pay they will see.  Good luck to us all!

Tax Trouble Ahead for Families

Today, the national news is reporting that a deficit reduction panel is promoting the idea of removing or at least reducing two darling tax benefits for families - the Child Tax Credit and the Mortgage Interest Deduction.  Unlike many targeted credits and deductions that have limited impact on specific groups of taxpayers, these two tax incentives are very broad in their reach. 

The Child Tax Credit has been responsible for putting a lot of dollars in the hands of taxpayers around tax refund time.  The joy of this credit has been that it was not only refundable up to the amount of income tax shown on the individual tax return, it also refunded Social Security and Medicare tax up to $1,000 per qualifying dependent child on the return.  The impact has been huge across all income levels - talk about some serious stimulus payments.  But, the deficit reduction panel doesn't believe the government can afford this tax incentive.  The real question is can a dollar left in the hands of a taxpayer to spend on whatever they want generate more economic stimulus for the overall economy than a dollar paid to the Federal Government.  But, regardless, removing this tax credit will be a $1,000 per child tax increase for every family receiving the credit regardless of income level.  The Child Tax Credit is already going to be cut in half at year end if Congress and the President don't extend the Bush Tax Cuts.  This notice from the deficit panel may just be a shot over the bow to families that they may not get the extension; and this expiration may be the easiest way for them to at least get a reduction in the credit.

The Mortgage Interest deduction has been a bright star for the housing market for years.  The tax savings calculated for those taxpayers that itemize and can use the deduction have helped them afford their annual mortagage payments.  This deduction has always been critical for families that want to itemize at all.  Most families without home mortgage interest usually don't have enough itemized deductions to exceed the standard deduction that all taxpayers get.  So, without this deduction, the benefit of the other itemized deductions will be minimized and the standard deduction will be far more prevalent on tax returns.  Most people that itemize have, state taxes, mortgage interest, and charitable contributions.  These big three usually push taxpayers over the threshold for itemizing.  Remove one of them and the others don't usually cut it.  This is a big threat to the housing market at a very tenuous time.  Removing the deduction will simply result in one less incentive for a taxpayer to purchase or build a home.  The real estate market sure needs one more negative.

Whatever, your political take on these two tax incentives.  The reality is that they will impact families at all income levels.  That means we all need to plan for their impact financially on our own personal budgets.  This is definitely one threat from Washington that could get into every wallet.  The earliest that these reductions could take place is January 1, 2011.  So, understand that could me a substantial decrease in your tax refund in early 2012.  So don't run up some crazy amount of credit for Christmas next year and expect a big refund will pay it all off.  It may not.  Once again - Stay Informed so you don't get in trouble.

Healthcare Reform - Presentation Notes

 A lot of people were apparently interested in the information in my podcast entitled - Healthcare Reform - What's actually in that bill?!? .  So I thought I would provide a pdf copy of the presentation that I gave on the healthcare bill in Shreveport in August.  I hope you all find this info useful.  It was really a blast presenting it at the Summer Institute for LaHFMA.  A special thanks to that wonderful organization for all their support and the opportunity they provided to speak at the conference.

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