During 2010, several important pieces of legislation were enacted that extended many, and expanded some, income tax and payroll related regulations that significantly impact many businesses and families. 

2011 Annual Payroll and Business Tax Report

During 2010, several important pieces of legislation were enacted that extended many, and expanded some, income tax and payroll related regulations that significantly impact many businesses and families. 

 Payroll and business taxes continue to be complex and always changing. Some of the recently enacted laws schedule changes over the next few years and will impact you and your business.  Our job is to assist our clients to meet their tax responsibilities and, more importantly, to minimize their tax liability and non-compliance penalties. Providing you with a basic knowledge of tax matters also allows us to better assist you in meeting your financial goals.

Successful business people not only know their business but also have a basic working understanding of tax and financial matters.  We believe the information provided herein will assist you in better understanding basic payroll and business taxation.   As any further changes occur in 2011, we will provide updates to you.

Year-End Employer Filings Checklist

Labor Law Developments

Minimum Wage Rates:

The Federal minimum wage rate for 2010 remains $7.25 per hour, while California’s minimum wage rate stays at $8.00 per hour. The minimum hourly wage rate in San Francisco increases to $9.92 as of January 1, 2011.  CA AB 1835 requires minimum monthly compensation of at least $2,774 (twice the CA minimum wage rate) to meet the salary requirements for the professional, executive, and administrative exemptions.  Commissioned sales employees must earn at least $12.00 per hour (one and one-half times the CA minimum wage rate) to meet the pay requirements for their exemption.

Overtime Pay:

Employers must pay non-exempt employees at time-and-a-half of the employees hourly wage rate after eight hours of work in one day.  Unlike Federal regulations, California allows exemptions to the overtime rule only for employees who spend more than half of their time on duties that are managerial and require use of discretion and judgment.  Overtime must be paid even to salaried employees who hold the title of manager if they spend 50 percent or more of their time performing tasks that are not related to managing.

Required Workplace Postings:

Federal and state agencies require certain postings to be prominently displayed for all employees to read.  The posting requirements include, but may not be limited to, notices for:

• Minimum Wage
• Prohibition of Discrimination and Harassment
• Family Care and Medical Leave, Pregnancy Disability Leave, including Donors Leave
• Unemployment Insurance Benefits
• Equal Employment Opportunity
• Safety and Health Protection on the Job
• Workers Compensation Insurance and Coverage
• Payday Notice
• Emergency Phone Numbers
• Whistleblower Protection
• No Smoking Signage
• Rights of Working with or Exposure to Hazardous or Toxic Substances
• Employee Polygraph Protection
• Time Off to Vote (At Least 10 Days Before Every State-wide Election)

Posters may be obtained at various locations throughout the country as well as at www.dir.ca.gov/IWC.   Additional information for San Francisco’s minimum wage ordinance may be found at www.sfgov.org or by calling (415) 554-6292.

Health Insurance Continuation Premium Subsidy Sunset:

The American Recovery and Reinvestment Act (ARRA) of 2009 provided certain individuals, who are eligible for COBRA continuation health coverage, or similar coverage under state law, to receive a subsidy for 65% of the premium.  These individuals are required to pay only 35% of the premium.  To qualify, the individual must have been involuntarily separated from the workplace between September 1, 2008 and May 31, 2010.  The subsidy ends after the earliest of 15 months, the end of the COBRA coverage, or eligibility for other group health or Medicare coverage, no later than August 31, 2011.  Employers may recover the 65% subsidy provided to assistance-eligible individuals by taking the amount as a credit on its quarterly employment tax return.  The employer may provide the subsidy, only after it has received the 35% premium payment from the individual.  The subsidy phases out for individuals  whose modified adjusted gross income (MAGI) exceeds $125,000 ($250,000 for those filing joint returns)  and is not available for those individuals with MAGI exceeding $145,000 ($290,000 for joint returns).

Independent Contractor vs. Employee:

The 2011 Federal budget includes  funding and additional personnel to identify and penalize employers who improperly classify employees as independent contractors.  The Treasury anticipates receipts of more than $7 billion over 10 years.  Most states have entered into information sharing arrangements with the IRS regarding contractor classifications.  Among the concerns for employers who engage independent contractors is that such classification avoids much employment and tax regulations.  If not properly classified, the contractor classification can draw attention for litigation from government agencies and workers.  It would be advisable for employers to evaluate the propriety and risks of contractor classifications.

New Heat Illness Regulations in CA:

Effective November 4, 2010, CA issued new heat illness regulations that apply to all outdoor places of employment.  Employers must provide sufficient shade to accommodate 15% of the workforce at one time, cool down periods, and drinking water.  The new regulations can be found at www.calcpa.org/HIP.

W-2 Reporting of Health Benefits:

In 2010, the IRS deferred a new requirement for employers to report the cost of health benefit coverage, for informational and not taxable purposes.  The reporting is optional for employers in 2011.   However, effective January 1, 2011, CA employers must file quarterly returns form DE 9 and DE 9C, “Contribution Return and Report of Wages” , rather than the former annual filing requirement.

Reasonable Compensation:

The IRS continues to emphasize that  all corporations must pay “reasonable compensation” to an employee-shareholder in return for services provided to the corporation before any non-wage distributions may be made.  Factors determining reasonable compensation include, but are not limited to, training and experience, duties and responsibilities, time and effort devoted to the business, payments to non-shareholder employees, compensation agreements, and what comparable businesses pay for similar services.  The courts have affirmed the IRS’s authority to reclassify other forms of payments to an employee-shareholder as compensation, subject to employment taxes.

Medical Insurance Premiums:

Health insurance premiums paid or reimbursed pursuant to a plan of an S-corporation on behalf of a 2% shareholder-employee, are deductible by the S-corporation and reportable as wages to the shareholder-employee.  According to IRS regulations, the S-corporation is allowed to deduct the health insurance premiums paid on behalf of a 2% (or more) shareholder-employee, only if the premiums are included as taxable wages on the shareholder’s Form W-2 in the same year that the S-corporation paid directly, or reimbursed the employee, for the premium.

Privacy Threats and Personal Information:

Federal regulations require employers to shred or burn paper, and permanently erase hard drives and other computer memory devices, before disposing of documents and files containing personal employee information.  Unless security provisions are in place, the data in your office photocopiers and multi-function printers is often stored unencrypted and remains there until the hard drive is full and new data overwrites the old.  Multi-function printers are very exposed and are often networked; they offer a portal to the overall network as well.  Minimize your exposure to identity theft and fraud by establishing procedures for sanitizing or destroying photocopier hard drives, ensuring maintenance agreements include a non-disclosure agreement by service vendors, separate your data modem from your fax modem, and avoid using copiers or multi-function printers in public venues.

Payroll Record Keeping

Employers are required by federal law to keep annual records for:

Total reimbursements for each employee, taxable wages for each calendar year, dates of payments, payroll periods covered, tax deductions from the employee’s wages, and taxes paid by the employer, but not deducted from the employee

Employers are also required to have on file:

Form W-4 and state Employee’s Withholding Allowance Certificate (In CA, Form DE4)

Form I-9   Employment Eligibility Verification Form, dated 08/07/09.  Every employer is required by Federal law to verify whether its employees have the legal right to work within three business days after the employment begins.   Copies of the documents provided by the employee to substantiate the compliance of the Form I-9 should be kept with the signed forms.  See www.uscis.gov/files/forms/i-9.  E-Verify is an online employment verification system operated by the Department of Homeland Security and the Social Security Administration.  Participating employers can quickly check employment eligibility of new hires online (www.calcpa.org/e-verify).  If identities do not match, further investigation should be made to verify the information.

Federal law requires that payroll records must be maintained for a minimum of three years, four years in CA.

Reporting Workers to State Agencies

Employers are required to report specific information periodically to state agencies to assist government agencies in locating and tracking individuals who may be delinquent on child-support payments, alimony, etc. 

In California, businesses must report new employees and certain independent contractors to the EDD.

Independent Contractors:

Businesses must report individual independent contractors subject to Form 1099 filing requirements to the EDD within 20 days of making payments to or entering into a contract for $600 or more within that calendar year.  This is an annual requirement, so even if the business reported the independent contractor in the prior year, the contractor must be reported again in 2011 if requirements are met for that year.  Use Form DE 542, Report of Independent Contractor.

Employees:

All employers must report the hiring or rehiring of all workers to the EDD within 20 days of hire.  This includes all employees, regardless of age or projected wages, who work full or part time, are seasonal, discontinue their employment prior to the 20th day of employment, work in California but live outside of California, or are a shareholder/employee.

File Form DE 34, Report of New Employee(s), or send a copy of the employee’s Form W-4, Employee(s) Withholding Allowance Certificate, to the EDD to meet the reporting requirement.  If you use the employee’s Form W-4, you must add the employee’s date of hire and the employer’s state identification number.  Filing Form DE 6, Quarterly Wage Report, does not meet the reporting requirements.

Penalties:

The EDD may assess penalties for each failure to report a new hire or an independent contractor unless the failure is due to good cause.  If the employer and employee conspire to omit filing the required information or issue a false or incomplete report, the EDD may assess even higher  penalties.

Internet Sales Subject To Sales Tax

The U.S. Supreme Court had previously ruled that retailers are exempt from collecting sales taxes in states where they have no physical presence, such as a store, office, or warehouse.  The legal term for this physical presence is “nexus”.  In its ruling, the Court specifically noted that Congress has the authority to change this policy and could enact legislation requiring all retailers to collect sales taxes.  Congress has thus far failed to extend sales tax to online retailers.  The result is a public policy with at least three impacts:

It disadvantages local businesses.  Exempting online retailers from collecting sales tax as local stores must, gives these companies a sizable competitive advantage of the amount of sales tax, generally 4 to 9 percent.

It undermines state and local governments by reducing tax revenue for schools, police, and other services.

It makes a regressive tax more regressive because not all households have access to the online retailers.

It is important to note that while the internet retailers are not required to collect sales tax on those sales, the tax is still owed to the state and local government by the purchaser.  These purchases are supposed to be tracked and pay “use” tax, an equivalent amount of what the sales tax would have been, on their state tax returns.  Recently, many states, including California, have been more direct in trying to gain compliance of use tax reporting.  In the past several years, CA has issued notices to many businesses and self-employed individuals requiring their sales/use tax registration and requesting the use tax be reported and remitted for the previous several years, as well as reminding businesses to report the use tax on their sales tax returns.

Several states have followed CA to amend their sales tax laws to clarify that the e-commerce arms of national chains still have nexus and that entity isolation does not absolve them of their obligation to collect sales tax.  Many national chains, despite having nexus in every state by virtue of their stores, claimed their e-commerce sites were distinct legal entities, unrelated to their bricks-and-mortar stores and therefore exempt from collecting sales tax.  New York became the first state to further extend the definition of nexus to cover some web-only retailers that said the web retailers have nexus in NY and must collect sales taxes if the company and affiliates in the state generate a combined annual total revenue of $10,000 or more for the retailer.

Having aligned and greatly simplified their sales tax policies, states are hoping to persuade Congress to pass legislation that would authorize states to require large online and catalog retailers to collect sales taxes.  Small businesses would still be exempt.  Many other states are considering legislation similar to New York’s.

Two general classifications of items subject to “use” tax are:

Items purchased for resale but the business removes them from inventory and uses the items for business purposes.  For example, if you purchase goods intended for resale but instead give the goods to employees to take home, you are liable for “use” tax on the purchase price of those items given to the employees.

Items purchased for business use from an out-of-state retailer who does not collect the appropriate sales tax.  For example, if you purchase office supplies over the internet from an out-of-state vendor who does not collect sales tax, you are liable for “use” tax on the purchases.

As states seek additional sources of revenue, be certain to report such use tax to avoid future penalties and interest.

What To Do If You Receive A Notice From A Taxing Authority

Please contact us immediately.

We can determine the issues, narrow the scope of the audit, gather the data required, and personally represent you so that you do not disclose information which may not be in your best interest.  We can also negotiate settlements, file appeals, reduce penalties, and arrange for payment plans.  We represent taxpayers in audits and collection matters pertaining to income taxes, payroll taxes, sales taxes, local taxes (i.e., the San Francisco Payroll Tax), as well as the various county business property taxes.

Has Your Business Changed?

Have you…

   • moved to a new location?

   • added or closed a business?

   • added or dropped a partner?

   • incorporated?

   • sold or closed your business?

If any of these changes have occurred, you must notify the State Board of Equalization.  Your permit is valid only for your specific activities.  If you do not notify the Board, you may still be held liable for taxes, interest and penalties even though you are no longer involved in the ownership or operation of that business.

Reporting Ownership of Foreign Bank Accounts

The IRS has successfully negotiated for sharing of information with Swiss bank, UBS.  This was a significant expansion of the IRS gathering information on U.S. holders of bank accounts, custody accounts, and offshore nominee accounts through which a business or individual may indirectly hold beneficial ownership in the accounts.

The IRS now requires the filing of Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, for accounts where taxpayers have signature authority on the account or for taxpayers with foreign hedge funds or private equity accounts.  June 30, 2011, is the deadline to report accounts maintained in earlier years.

The filing of Form TD F 90-22.1 is required for any citizen or resident of the U.S., a domestic partnership, a domestic corporation, or a domestic estate or trust, that has a foreign bank account.

A financial account includes any bank, securities, securities derivatives, or other financial instruments accounts.  The account does not have to be income-earning.  A financial account is not the same as ownership of real estate.

Investments in international funds for investments such as an IRA or 401(k) are not required to report the investment if the mutual fund is located within the U.S.

The stakes are high.  There are many potential criminal and civil penalties associated with the late filing of Form TD F 90-22.1, or for making material or willful misstatements on it.  Failure to file can be punitive.   The civil penalties for willful violations are the greater of $100,000 or 50% of the amount of the transaction or 50% of the balance in the account at the time of the violation.  Non-willful violations are subject to a civil penalty of not more than $10,000 for each violation.  A 20% accuracy-related penalty may also be imposed.

Be certain to report these accounts to your tax preparer.

Corporate Records

Each corporation must maintain (1) adequate and correct books and records of accounts, (2) minutes of the proceedings of its members, board and committees of the board, and (3) records of its members, names, address, and class. 

Proper Corporate Minutes can save your business from possible dissolution and/or bankruptcy.  Once your business has been discredited, it can lose its legal protections, deductions and its status as a corporation.  Minutes of board and committee meetings are required regardless of the size of the company or its board of directors.  S-corporations as well as C-corporations must maintain corporate minutes appropriately for compliance with applicable laws. and regulations.

Business Property Statements

Many states, including California, prescribes an annual ad valorem tax based upon property valuations as of 12:01 AM on January 1st, the tax lien date.  In CA, Form 571L constitutes the official request that you declare all assessable business property that are owned, claimed, possessed, controlled, or managed on the tax lien date that are situated in that county.

The property statements report the original cost and year of the acquisitions.  The County Assessor’s office will then determine the taxable valuations and assess the tax rate, then in effect, on those valuations.  The County Assessor’s office will then issue a tax bill towards the end of the year.

The annual property reporting is due in each county by April 1st following the tax lien date.  Penalties may be assessed if the reports are not filed on a timely basis.

Annual Statements

Most states require corporations, limited liability companies, and common interest development associations to update various information on an annual or biennial basis.

Filing of such statements and payment of the appropriate filing fees may be made online.   Failure to properly and timely file these forms may result in the “suspension” of your corporation by the Secretary of State office as well as the state Department of Revenue.

For CA, filings can be verified at www.sos.ca.gov/business.

Electronic Payment Requirements

Many states, along with California, require electronic payment of employment and income taxes, if the amount of withholding for the prior year exceeds $20,000, or if the estimated tax liability for any one installment exceeds $20,000 or $80,000 in any tax year.

SF Business Registration Fee

The San Francisco Business Registration Renewal form is due May 31, 2011, rather than February 28, 2011.  Filing information will be mailed in April 2011. 

Every business operating in San Francisco must possess a valid Business Registration Certificate.  This provision applies to businesses located outside of San Francisco that perform business transactions or services in San Francisco.  

San Francisco Payroll Taxes

Payroll tax reports are due no later than February 28, 2011,  and apply to San Francisco and certain other counties.  The tax is 1.5% of the gross payroll expense incurred.  Businesses are required to make prepayments of at least 52% of the preceding year’s liability.

In an effort to increase tax revenues, the city’s payroll tax is imposed on profits of “pass-through” entities, such as partnerships, limited liability companies, limited liability partnerships, professional corporations, and S-corporations.  The amount of profits subject to the payroll tax would be limited to the profits derived from services performed by the owners within the city and would not include any return on capital investment.

To comply with the measure, a partnership could choose to tell the city how much of its distributions to partners counts as payroll and is therefore subject to the payroll tax.  If it chooses this approach, the partnership would make its own calculation but could be subject to an audit.  However, if the partnership opted not to calculate how much it owed the city, then it would fall under Proposition Q’s “safe harbor Provision”, whereby the city itself would calculate the payroll expenses for each owner by combining the owner’s salary as reported on the Federal Form W-2 and 200% of the average annual compensation of the partnership’s most highly paid employees who work in San Francisco, provided that the partnership has at least 4 employees who work in the city.

The threshold amount for Payroll Expense Tax filing changed from $66,667 to $150,000.  If the total annual San Francisco payroll expense is less than or equal to $150,000, you are not required to file the tax return.  Generally, taxpayers who are exempt from paying the tax are still required to compile their receipts and payroll, and file an annual statement.  The $2,500 tax exemption does not apply if the report is not filed timely.  Additional penalties may  then apply.

San Francisco Health Care Ordinance

The San Francisco Health Care Security Ordinance requires covered employers to make health care expenditures for their covered employees.  Employers may purchase health insurance coverage for their covered employees, make payments to the city for the benefit of their employees, or make required health care expenditures in a variety of manners.  Employers with less than 20 employees, on average per week, are exempt from this requirement.  Employers with a weekly average of 20 employees, but less than 100 employees, must pay for health insurance coverage at the rate of $1.37 per hour per employee ($1.31 per hour in 2010).  Employers with 100 or more employees are required to pay at least $2.06 per hour per employee ($1.96 per hour in 2010) towards health insurance costs.

Paid Sick Leave:

San Francisco’s Paid Sick Leave Ordinance requires employers to provide paid sick leave to each employee, including temporary and part-time employees, who perform work in San Francisco.  For every 30 hours worked, an employee shall accrue 1 hour of paid sick leave.  The accrued paid sick leave (up to 40 hours per employee for employers of less than 10 employees, and for employers with more than 10 employees, 72 hours per employee) carries over from year to year.  Contact Office Labor Standards Enforcement at (415) 554-6271 for more information.

FEDERAL & CALIFORNIA PAYROLL TAXES

The federal and state payroll tax rates and/or wage bases effective January 1, 2011 are listed below.  Changes from 2010 rates/bases are highlighted by an asterisk (*):

(1) CA will determine the company rate based on your prior years unemployment history; the rates can vary between 1.5% to 8.2%.

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During 2010, several important pieces of legislation were enacted that extended many, and expanded some, income tax and payroll related regulations that significantly impact many businesses and families. 

Morling & Company WE MAXIMIZE YOUR FINANCIAL WELL-BEING Annual Payroll and Business Tax Report

During 2010, several important pieces of legislation were enacted that extended many, and expanded some, income tax and payroll related regulations that significantly impact many businesses and families. 

 Payroll and business taxes continue to be complex and always changing. Some of the recently enacted laws schedule changes over the next few years and will impact you and your business.  Our job is to assist our clients to meet their tax responsibilities and, more importantly, to minimize their tax liability and non-compliance penalties. Providing you with a basic knowledge of tax matters also allows us to better assist you in meeting your financial goals.

Successful business people not only know their business but also have a basic working understanding of tax and financial matters.  We believe the information provided herein will assist you in better understanding basic payroll and business taxation.   As any further changes occur in 2011, we will provide updates to you.

Year-End Employer Filings Checklist

Labor Law Developments

Minimum Wage Rates:

The Federal minimum wage rate for 2010 remains $7.25 per hour, while California’s minimum wage rate stays at $8.00 per hour. The minimum hourly wage rate in San Francisco increases to $9.92 as of January 1, 2011.  CA AB 1835 requires minimum monthly compensation of at least $2,774 (twice the CA minimum wage rate) to meet the salary requirements for the professional, executive, and administrative exemptions.  Commissioned sales employees must earn at least $12.00 per hour (one and one-half times the CA minimum wage rate) to meet the pay requirements for their exemption.

Overtime Pay:

Employers must pay non-exempt employees at time-and-a-half of the employees hourly wage rate after eight hours of work in one day.  Unlike Federal regulations, California allows exemptions to the overtime rule only for employees who spend more than half of their time on duties that are managerial and require use of discretion and judgment.  Overtime must be paid even to salaried employees who hold the title of manager if they spend 50 percent or more of their time performing tasks that are not related to managing.

Required Workplace Postings:

Federal and state agencies require certain postings to be prominently displayed for all employees to read.  The posting requirements include, but may not be limited to, notices for:

• Minimum Wage
• Prohibition of Discrimination and Harassment
• Family Care and Medical Leave, Pregnancy Disability Leave, including Donors Leave
• Unemployment Insurance Benefits
• Equal Employment Opportunity
• Safety and Health Protection on the Job
• Workers Compensation Insurance and Coverage
• Payday Notice
• Emergency Phone Numbers
• Whistleblower Protection
• No Smoking Signage
• Rights of Working with or Exposure to Hazardous or Toxic Substances
• Employee Polygraph Protection
• Time Off to Vote (At Least 10 Days Before Every State-wide Election)

Posters may be obtained at various locations throughout the country as well as at www.dir.ca.gov/IWC.   Additional information for San Francisco’s minimum wage ordinance may be found at www.sfgov.org or by calling (415) 554-6292.

Health Insurance Continuation Premium Subsidy Sunset:

The American Recovery and Reinvestment Act (ARRA) of 2009 provided certain individuals, who are eligible for COBRA continuation health coverage, or similar coverage under state law, to receive a subsidy for 65% of the premium.  These individuals are required to pay only 35% of the premium.  To qualify, the individual must have been involuntarily separated from the workplace between September 1, 2008 and May 31, 2010.  The subsidy ends after the earliest of 15 months, the end of the COBRA coverage, or eligibility for other group health or Medicare coverage, no later than August 31, 2011.  Employers may recover the 65% subsidy provided to assistance-eligible individuals by taking the amount as a credit on its quarterly employment tax return.  The employer may provide the subsidy, only after it has received the 35% premium payment from the individual.  The subsidy phases out for individuals  whose modified adjusted gross income (MAGI) exceeds $125,000 ($250,000 for those filing joint returns)  and is not available for those individuals with MAGI exceeding $145,000 ($290,000 for joint returns).

Independent Contractor vs. Employee:

The 2011 Federal budget includes  funding and additional personnel to identify and penalize employers who improperly classify employees as independent contractors.  The Treasury anticipates receipts of more than $7 billion over 10 years.  Most states have entered into information sharing arrangements with the IRS regarding contractor classifications.  Among the concerns for employers who engage independent contractors is that such classification avoids much employment and tax regulations.  If not properly classified, the contractor classification can draw attention for litigation from government agencies and workers.  It would be advisable for employers to evaluate the propriety and risks of contractor classifications.

New Heat Illness Regulations in CA:

Effective November 4, 2010, CA issued new heat illness regulations that apply to all outdoor places of employment.  Employers must provide sufficient shade to accommodate 15% of the workforce at one time, cool down periods, and drinking water.  The new regulations can be found at www.calcpa.org/HIP.

W-2 Reporting of Health Benefits:

In 2010, the IRS deferred a new requirement for employers to report the cost of health benefit coverage, for informational and not taxable purposes.  The reporting is optional for employers in 2011.   However, effective January 1, 2011, CA employers must file quarterly returns form DE 9 and DE 9C, “Contribution Return and Report of Wages” , rather than the former annual filing requirement.

Reasonable Compensation:

The IRS continues to emphasize that  all corporations must pay “reasonable compensation” to an employee-shareholder in return for services provided to the corporation before any non-wage distributions may be made.  Factors determining reasonable compensation include, but are not limited to, training and experience, duties and responsibilities, time and effort devoted to the business, payments to non-shareholder employees, compensation agreements, and what comparable businesses pay for similar services.  The courts have affirmed the IRS’s authority to reclassify other forms of payments to an employee-shareholder as compensation, subject to employment taxes.

Medical Insurance Premiums:

Health insurance premiums paid or reimbursed pursuant to a plan of an S-corporation on behalf of a 2% shareholder-employee, are deductible by the S-corporation and reportable as wages to the shareholder-employee.  According to IRS regulations, the S-corporation is allowed to deduct the health insurance premiums paid on behalf of a 2% (or more) shareholder-employee, only if the premiums are included as taxable wages on the shareholder’s Form W-2 in the same year that the S-corporation paid directly, or reimbursed the employee, for the premium.

Privacy Threats and Personal Information:

Federal regulations require employers to shred or burn paper, and permanently erase hard drives and other computer memory devices, before disposing of documents and files containing personal employee information.  Unless security provisions are in place, the data in your office photocopiers and multi-function printers is often stored unencrypted and remains there until the hard drive is full and new data overwrites the old.  Multi-function printers are very exposed and are often networked; they offer a portal to the overall network as well.  Minimize your exposure to identity theft and fraud by establishing procedures for sanitizing or destroying photocopier hard drives, ensuring maintenance agreements include a non-disclosure agreement by service vendors, separate your data modem from your fax modem, and avoid using copiers or multi-function printers in public venues.

Payroll Record Keeping

Employers are required by federal law to keep annual records for:

Total reimbursements for each employee, taxable wages for each calendar year, dates of payments, payroll periods covered, tax deductions from the employee’s wages, and taxes paid by the employer, but not deducted from the employee

Employers are also required to have on file:

Form W-4 and state Employee’s Withholding Allowance Certificate (In CA, Form DE4)

Form I-9   Employment Eligibility Verification Form, dated 08/07/09.  Every employer is required by Federal law to verify whether its employees have the legal right to work within three business days after the employment begins.   Copies of the documents provided by the employee to substantiate the compliance of the Form I-9 should be kept with the signed forms.  See www.uscis.gov/files/forms/i-9.  E-Verify is an online employment verification system operated by the Department of Homeland Security and the Social Security Administration.  Participating employers can quickly check employment eligibility of new hires online (www.calcpa.org/e-verify).  If identities do not match, further investigation should be made to verify the information.

Federal law requires that payroll records must be maintained for a minimum of three years, four years in CA.

Reporting Workers to State Agencies

Employers are required to report specific information periodically to state agencies to assist government agencies in locating and tracking individuals who may be delinquent on child-support payments, alimony, etc. 

In California, businesses must report new employees and certain independent contractors to the EDD.

Independent Contractors:

Businesses must report individual independent contractors subject to Form 1099 filing requirements to the EDD within 20 days of making payments to or entering into a contract for $600 or more within that calendar year.  This is an annual requirement, so even if the business reported the independent contractor in the prior year, the contractor must be reported again in 2011 if requirements are met for that year.  Use Form DE 542, Report of Independent Contractor.

Employees:

All employers must report the hiring or rehiring of all workers to the EDD within 20 days of hire.  This includes all employees, regardless of age or projected wages, who work full or part time, are seasonal, discontinue their employment prior to the 20th day of employment, work in California but live outside of California, or are a shareholder/employee.

File Form DE 34, Report of New Employee(s), or send a copy of the employee’s Form W-4, Employee(s) Withholding Allowance Certificate, to the EDD to meet the reporting requirement.  If you use the employee’s Form W-4, you must add the employee’s date of hire and the employer’s state identification number.  Filing Form DE 6, Quarterly Wage Report, does not meet the reporting requirements.

Penalties:

The EDD may assess penalties for each failure to report a new hire or an independent contractor unless the failure is due to good cause.  If the employer and employee conspire to omit filing the required information or issue a false or incomplete report, the EDD may assess even higher  penalties.

Internet Sales Subject To Sales Tax

The U.S. Supreme Court had previously ruled that retailers are exempt from collecting sales taxes in states where they have no physical presence, such as a store, office, or warehouse.  The legal term for this physical presence is “nexus”.  In its ruling, the Court specifically noted that Congress has the authority to change this policy and could enact legislation requiring all retailers to collect sales taxes.  Congress has thus far failed to extend sales tax to online retailers.  The result is a public policy with at least three impacts:

It disadvantages local businesses.  Exempting online retailers from collecting sales tax as local stores must, gives these companies a sizable competitive advantage of the amount of sales tax, generally 4 to 9 percent.

It undermines state and local governments by reducing tax revenue for schools, police, and other services.

It makes a regressive tax more regressive because not all households have access to the online retailers.

It is important to note that while the internet retailers are not required to collect sales tax on those sales, the tax is still owed to the state and local government by the purchaser.  These purchases are supposed to be tracked and pay “use” tax, an equivalent amount of what the sales tax would have been, on their state tax returns.  Recently, many states, including California, have been more direct in trying to gain compliance of use tax reporting.  In the past several years, CA has issued notices to many businesses and self-employed individuals requiring their sales/use tax registration and requesting the use tax be reported and remitted for the previous several years, as well as reminding businesses to report the use tax on their sales tax returns.

Several states have followed CA to amend their sales tax laws to clarify that the e-commerce arms of national chains still have nexus and that entity isolation does not absolve them of their obligation to collect sales tax.  Many national chains, despite having nexus in every state by virtue of their stores, claimed their e-commerce sites were distinct legal entities, unrelated to their bricks-and-mortar stores and therefore exempt from collecting sales tax.  New York became the first state to further extend the definition of nexus to cover some web-only retailers that said the web retailers have nexus in NY and must collect sales taxes if the company and affiliates in the state generate a combined annual total revenue of $10,000 or more for the retailer.

Having aligned and greatly simplified their sales tax policies, states are hoping to persuade Congress to pass legislation that would authorize states to require large online and catalog retailers to collect sales taxes.  Small businesses would still be exempt.  Many other states are considering legislation similar to New York’s.

Two general classifications of items subject to “use” tax are:

Items purchased for resale but the business removes them from inventory and uses the items for business purposes.  For example, if you purchase goods intended for resale but instead give the goods to employees to take home, you are liable for “use” tax on the purchase price of those items given to the employees.

Items purchased for business use from an out-of-state retailer who does not collect the appropriate sales tax.  For example, if you purchase office supplies over the internet from an out-of-state vendor who does not collect sales tax, you are liable for “use” tax on the purchases.

As states seek additional sources of revenue, be certain to report such use tax to avoid future penalties and interest.

What To Do If You Receive A Notice From A Taxing Authority

Please contact us immediately.

We can determine the issues, narrow the scope of the audit, gather the data required, and personally represent you so that you do not disclose information which may not be in your best interest.  We can also negotiate settlements, file appeals, reduce penalties, and arrange for payment plans.  We represent taxpayers in audits and collection matters pertaining to income taxes, payroll taxes, sales taxes, local taxes (i.e., the San Francisco Payroll Tax), as well as the various county business property taxes.

Has Your Business Changed?

Have you…

   • moved to a new location?

   • added or closed a business?

   • added or dropped a partner?

   • incorporated?

   • sold or closed your business?

If any of these changes have occurred, you must notify the State Board of Equalization.  Your permit is valid only for your specific activities.  If you do not notify the Board, you may still be held liable for taxes, interest and penalties even though you are no longer involved in the ownership or operation of that business.

Reporting Ownership of Foreign Bank Accounts

The IRS has successfully negotiated for sharing of information with Swiss bank, UBS.  This was a significant expansion of the IRS gathering information on U.S. holders of bank accounts, custody accounts, and offshore nominee accounts through which a business or individual may indirectly hold beneficial ownership in the accounts.

The IRS now requires the filing of Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, for accounts where taxpayers have signature authority on the account or for taxpayers with foreign hedge funds or private equity accounts.  June 30, 2011, is the deadline to report accounts maintained in earlier years.

The filing of Form TD F 90-22.1 is required for any citizen or resident of the U.S., a domestic partnership, a domestic corporation, or a domestic estate or trust, that has a foreign bank account.

A financial account includes any bank, securities, securities derivatives, or other financial instruments accounts.  The account does not have to be income-earning.  A financial account is not the same as ownership of real estate.

Investments in international funds for investments such as an IRA or 401(k) are not required to report the investment if the mutual fund is located within the U.S.

The stakes are high.  There are many potential criminal and civil penalties associated with the late filing of Form TD F 90-22.1, or for making material or willful misstatements on it.  Failure to file can be punitive.   The civil penalties for willful violations are the greater of $100,000 or 50% of the amount of the transaction or 50% of the balance in the account at the time of the violation.  Non-willful violations are subject to a civil penalty of not more than $10,000 for each violation.  A 20% accuracy-related penalty may also be imposed.

Be certain to report these accounts to your tax preparer.

Corporate Records

Each corporation must maintain (1) adequate and correct books and records of accounts, (2) minutes of the proceedings of its members, board and committees of the board, and (3) records of its members, names, address, and class. 

Proper Corporate Minutes can save your business from possible dissolution and/or bankruptcy.  Once your business has been discredited, it can lose its legal protections, deductions and its status as a corporation.  Minutes of board and committee meetings are required regardless of the size of the company or its board of directors.  S-corporations as well as C-corporations must maintain corporate minutes appropriately for compliance with applicable laws. and regulations.

Business Property Statements

Many states, including California, prescribes an annual ad valorem tax based upon property valuations as of 12:01 AM on January 1st, the tax lien date.  In CA, Form 571L constitutes the official request that you declare all assessable business property that are owned, claimed, possessed, controlled, or managed on the tax lien date that are situated in that county.

The property statements report the original cost and year of the acquisitions.  The County Assessor’s office will then determine the taxable valuations and assess the tax rate, then in effect, on those valuations.  The County Assessor’s office will then issue a tax bill towards the end of the year.

The annual property reporting is due in each county by April 1st following the tax lien date.  Penalties may be assessed if the reports are not filed on a timely basis.

Annual Statements

Most states require corporations, limited liability companies, and common interest development associations to update various information on an annual or biennial basis.

Filing of such statements and payment of the appropriate filing fees may be made online.   Failure to properly and timely file these forms may result in the “suspension” of your corporation by the Secretary of State office as well as the state Department of Revenue.

For CA, filings can be verified at www.sos.ca.gov/business.

Electronic Payment Requirements

Many states, along with California, require electronic payment of employment and income taxes, if the amount of withholding for the prior year exceeds $20,000, or if the estimated tax liability for any one installment exceeds $20,000 or $80,000 in any tax year.

SF Business Registration Fee

The San Francisco Business Registration Renewal form is due May 31, 2011, rather than February 28, 2011.  Filing information will be mailed in April 2011. 

Every business operating in San Francisco must possess a valid Business Registration Certificate.  This provision applies to businesses located outside of San Francisco that perform business transactions or services in San Francisco.  

San Francisco Payroll Taxes

Payroll tax reports are due no later than February 28, 2011,  and apply to San Francisco and certain other counties.  The tax is 1.5% of the gross payroll expense incurred.  Businesses are required to make prepayments of at least 52% of the preceding year’s liability.

In an effort to increase tax revenues, the city’s payroll tax is imposed on profits of “pass-through” entities, such as partnerships, limited liability companies, limited liability partnerships, professional corporations, and S-corporations.  The amount of profits subject to the payroll tax would be limited to the profits derived from services performed by the owners within the city and would not include any return on capital investment.

To comply with the measure, a partnership could choose to tell the city how much of its distributions to partners counts as payroll and is therefore subject to the payroll tax.  If it chooses this approach, the partnership would make its own calculation but could be subject to an audit.  However, if the partnership opted not to calculate how much it owed the city, then it would fall under Proposition Q’s “safe harbor Provision”, whereby the city itself would calculate the payroll expenses for each owner by combining the owner’s salary as reported on the Federal Form W-2 and 200% of the average annual compensation of the partnership’s most highly paid employees who work in San Francisco, provided that the partnership has at least 4 employees who work in the city.

The threshold amount for Payroll Expense Tax filing changed from $66,667 to $150,000.  If the total annual San Francisco payroll expense is less than or equal to $150,000, you are not required to file the tax return.  Generally, taxpayers who are exempt from paying the tax are still required to compile their receipts and payroll, and file an annual statement.  The $2,500 tax exemption does not apply if the report is not filed timely.  Additional penalties may  then apply.

San Francisco Health Care Ordinance

The San Francisco Health Care Security Ordinance requires covered employers to make health care expenditures for their covered employees.  Employers may purchase health insurance coverage for their covered employees, make payments to the city for the benefit of their employees, or make required health care expenditures in a variety of manners.  Employers with less than 20 employees, on average per week, are exempt from this requirement.  Employers with a weekly average of 20 employees, but less than 100 employees, must pay for health insurance coverage at the rate of $1.37 per hour per employee ($1.31 per hour in 2010).  Employers with 100 or more employees are required to pay at least $2.06 per hour per employee ($1.96 per hour in 2010) towards health insurance costs.

Paid Sick Leave:

San Francisco’s Paid Sick Leave Ordinance requires employers to provide paid sick leave to each employee, including temporary and part-time employees, who perform work in San Francisco.  For every 30 hours worked, an employee shall accrue 1 hour of paid sick leave.  The accrued paid sick leave (up to 40 hours per employee for employers of less than 10 employees, and for employers with more than 10 employees, 72 hours per employee) carries over from year to year.  Contact Office Labor Standards Enforcement at (415) 554-6271 for more information.

FEDERAL & CALIFORNIA PAYROLL TAXES

The federal and state payroll tax rates and/or wage bases effective January 1, 2011 are listed below.  Changes from 2010 rates/bases are highlighted by an asterisk (*):

(1) CA will determine the company rate based on your prior years unemployment history; the rates can vary between 1.5% to 8.2%.

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The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.

Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.

Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.

House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.

One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.

Extenders

The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.

President Obama’s FY 2013 proposals

President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.

Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.

On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.

If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

Previous disclosure programs

The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.

Reopened program

The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.

The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.

In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.

The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.

Quiet disclosures

One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.

Critics

The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.

If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Dependency Exemption

In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.

Child Tax Credit

Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.

Child and Dependent Care Credit

If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.

Adoption Credit

Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.

Higher Education Credits

There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.

Extended Health Care Coverage

Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.

Child Care Assistance Credit (for businesses)

Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.

If you have any questions about these provisions and how they may benefit you, please contact our office.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

• Past-due child support
• Federal agency non-tax debts
• State income tax obligations, or
• Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

February 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.

February 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.

February 10

Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.

February 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.

February 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.

February 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.

March 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.