Form 941 likely to be revised several times in 2010

The IRS is working on revising Form 941, Employer’s Quarterly Federal Tax Return, for the second quarter return due on Aug. 2, 2010. The revisions are necessary because of recent legislation in the “Hiring Incentives to Restore Employment Act” (HIRE Act, P.L. 111-47) that provides a Social Security tax exemption to certain employers that hire unemployed workers between March 19, 2010 and Dec. 31, 2010. Under the legislation, qualified employers will not have to pay their share of the Old Age, Survivors and Disability Insurance tax (OASDI, commonly known as the Social Security tax) on wages paid to a “qualified individual.” The OASDI tax rate is 6.2%. A qualified individual is anyone who:

 (1)     begins work for a qualified employer after Feb. 3, 2010 and before Jan. 1, 2011;

 (1)     certifies by signed affidavit (under penalties of perjury) that he was employed for a total of 40 hours or less during the 60-day period ending on the date the employment begins;

 (1)     is not employed to replace another employee of the employer unless that former employee separated from employment voluntarily, or for cause; and

 (1)     is not related to the employer (under rules similar to those for related individuals in IRC §51(i)).

Businesses, agricultural employers, tax-exempt organizations, and public colleges and universities all qualify to claim this tax benefit. Household employers cannot claim this tax benefit.

This payroll tax relief applies only to wages paid with respect to employment during the period from March 19, 2010 to Dec. 31, 2010. Employers may not claim a Social Security tax exemption on new hires who were first paid wages between Feb. 3, 2010 and March 18, 2010. The Social Security tax exemption will be reported by many employers on Form 941, Employer’s Quarterly Federal Tax Return. The exemption earned for the period from March 19, 2010 to March 31, 2010 may not be claimed on the first quarter Form 941. The tax benefit that employers would have received in the first quarter of 2010 will be claimed on the second quarter Form 941 instead. The IRS has issued a draft version of a revised Form 941 that would be effective beginning with second quarter returns due on Aug. 2, 2010.

The draft version of Form 941 includes the following lines:

·       Line 6a. Number of qualified employees hired or first paid this quarter.

·       Line 6b. Number of qualified new employees who were paid wages this quarter.

·       Line 6c. Exempt wages and tips paid this quarter.

·       Line 6d. Line 6c × .062.

·       Line 12c. Number of qualified individuals paid first quarter wages after March 18 and before April 1.

·       Line 12d. Exempt first quarter wages and tips paid after March 18 and before April 1.

·       Line 12e. Line 12d × .062.

The IRS discussed the draft Form 941 in a payroll industry teleconference call. Shelley Dockstader, IRS Acting National Account Manager, Electronic Tax Administration, pointed out that employers will still compute Social Security taxes on line 5a of Form 941 the same way they did before enactment of the HIRE Act legislation. However, their employment tax liability will be reduced by the amount that they report on line 6d (Social Security tax exemption on new employees hired in second quarter 2010). The amount reported on line 12e (Social Security exemption on new employees hired from March 19, 2010 to March 31, 2010) will be added to other credits that may be applied against an employer’s employment tax liability.

Understanding the HIRE Act. John Tuzynski, Chief of Employment Tax Operations for the IRS’s Small Business/Self-Employed Division, said that eligibility for the exemption is based on the date the new hire was actually paid (i.e., the “check date”). The IRS did not see any reason why an employer could not claim the exemption on a rehired employee who met the above eligibility requirements, as long as the employee wasn’t let go and then rehired in order to claim the exemption.

Employers should reduce their tax deposits to take into account the exemption. Employers who were eligible for the exemption from March 19, 2010 to March 31, 2010 should reduce their first tax deposit in April 2010. The tax liability reported on Form 941, Schedule B, Report of Tax Liability for Semiweekly Schedule Depositors, should be lower because of the exemption claimed on new employees hired in the second quarter of 2010. The second quarter Schedule B should not be adjusted to take into account the exemption claimed on new employees hired from March 19, 2010 to March 31, 2010.

Form W-2 will need to be revised to take into account the legislation.

It’s possible that the draft Form 941 will be revised again. Forms 941-PR, 941-SS, CT-1, and the amended forms in the “X” series will also need to be revised. There will also be a new version of Form 941 for the third quarter of 2010.

New tip examination adjustment line. The draft Form 941 also includes line 5e, Section 3121(q) Notice and Demand tax due on unreported tips. The IRS has started a new compliance program to determine whether employers are paying their share of the FICA tax reported on Form 4137, Social Security and Medicare Tax on Unreported Tip Income. Quarterly filers who owe additional tax may report this tax on line 5e.

Source:  Payroll Updates on Checkpoint Newsstand tab 3/24/2010

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Hire Act Tax Credit on Form 941 June 30th

For the latest on the IRS website on the New Hire Tax Credit:

http://www.irs.gov/businesses/small/article/0,,id=220746,00.html

For the new 941 for the 2nd Quarter ending June 30th:

http://www.irs.gov/pub/irs-pdf/f941.pdf

IR-2010-33, March 18, 2010 WASHINGTON — Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law today.

Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after March 18, 2010.

This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.

In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

The two tax benefits are especially helpful to employers who are adding positions to their payrolls.

New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause.

Family members and other relatives do not qualify.

In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period.

The IRS is currently developing a form employees can use to make the required statement.

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees.

Household employers cannot claim this new tax benefit.

Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS.

Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010. Revised forms and further details on these two new tax provisions will be posted on IRS.gov during the next few weeks.

Post script warning:  The IRS is rejecting Form 941-Xs that are filed for the first quarter of 2010 since the payroll tax exemption could not be claimed on Form 941 until the second quarter. The second quarter return included the payroll tax exemption for the period from March 19 to March 31, 2010.

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Congress passes HIRE Act carrying hiring incentives, stimulus measures, and new foreign account tax compliance rules

FULL TEXT OF THE ACT:  http://www.govtrack.us/congress/billtext.xpd?bill=h111-2847

Today 3/17/2010, the Senate by a vote of 68-29 approved H.R. 2847, carrying the Hiring Incentives to Restore Employment (HIRE) Act, as passed by the House. Thus, the HIRE Act is cleared for the President’s signature. The HIRE Act contains these tax change provisions:

 ·       Exempts employers from paying the employer share of Social Security employment taxes on wages paid in 2010 to newly hired qualified unemployed workers. These are workers who: (1) begin employment with the employer after February 3, 2010 and before January 1, 2011, (2) were previously unemployed and (3) do not replace other employees of the employer. The payroll tax relief applies only for wages paid with respect to employment beginning on the day after the enactment date (the date the HIRE Act is signed into law by the President) and before 2011.

 ·       Provides employers with an up-to-$1,000 tax credit for retaining qualified unemployed workers. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.

 ·       For tax years beginning in 2010, boosts to $250,000 the maximum amount that can be expensed under Code Sec. 179, and boosts to $800,000 the beginning of the investment based phaseout amount.

 ·       Allows issuers of certain tax credit bonds to elect to receive a direct payment instead of a tax credit to the bondholder.

 ·       Enacts a comprehensive set of measures to reduce offshore noncompliance.

 ·       Delays the application of worldwide allocation of interest for an additional three years.

 ·       Tinkers with estimated tax payments of large corporations in future tax years.

 (RIA Newsstand 3/17/2010)

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Misconceptions about the LLC

The Limited Liability Company or LLC is a popular form of business entity these days.  When looking at incorporations versus LLC’s, ninety percent of those new business entity filings in the State of Wisconsin are LLC’s.

Our great State of Wisconsin has capitalized on that trend, and requires not only a $130 registration fee (that’s for online registration; otherwise, it is $170 on paper), but also an annual $25 registration renewal fee to keep the LLC registration active.

Now here’s the big misconception:  Limited Liability.  That “limited liability” might only be with trade creditors, however.  The Wisconsin Department of Revenue and the Internal Revenue Service both have the means to recover money owed them from the “responsible” parties in the LLC.  Anyone signing the checks is a responsible party.  Anyone filing sales tax, payroll tax or income tax returns is a responsible party.  And of course, anyone with ownership in the LLC is a responsible party.

If a financial institution lends money to the LLC, they are certainly going to get some personal guarantees from ownership before lending that money.  There is no limited liability with that transaction.

If the LLC’s business involves services provided by individual persons, there is the concept of personal negligence from which the LLC form of business entity can NOT protect.  Insurance can provide protection from acts of personal negligence; realtors have errors and omissions insurance and most other professions have malpractice liability insurance.

What the LLC structure can protect an individual owner from is the personal negligence caused by the actions of other owners of the LLC.  In other words, when an LLC has multiple owners, it is wise to use the LLC form of entity  organization.  If you are a single member LLC, the extra fees paid to form and maintain an LLC registration do not buy you anything more in the form of protection, except from trade creditors.

Unless you are planning to stiff your trade creditors, there is no reason to form an LLC for a single member LLC which will be a disregarded entity.

There may be reasons to be an LLC, especially when you have multiple owners, but if you are a sole proprietor, providing services to others or other business entities, the LLC form of business will probably be just an added expense with no benefit for the extra cost over being the sole proprietor.

Thirty years ago, it was fashionable to incorporate.  This only created a second set of tax returns, extra accounting fees, banking fees for separate checking accounts and confusion for the owner.  But there was this “mystique” that incorporating would save taxes.  Hogwash!  The extra paperwork created more expense and even more taxes in the long run for most very small businesses.

Now it is fashionable to create an LLC which may not require separate tax returns, but it certainly requires separate checking accounts and extra registration fees with the Wisconsin Department of Financial Institutions.  Before jumping into this trend, ask yourself if it is necessary:

Does the LLC have multiple owners?  If yes, then an LLC is probably necessary.  Otherwise, NO…..a sole proprietorship is better.

And there is one MAJOR DISADVANTAGE to being an LLC versus being a sole proprietor.

For the LLC, tax law mandates that single member individual owners of LLC’s provide your Social Security Number to your customers for reporting your nonemployee compensation on Form 1099-MISC.   Check out the instructions to the W-9 here which have been highlighted so that you can see this issue:

https://poppycpa.sharefile.com/d-s81b85e589cc4fbfa

Do you want to be handing out your Social Security Number to your LLC customers?

For a sole proprietor, the Internal Revenue Service prefers, but does not mandate, use of the Social Security Number on Forms 1099-MISC.  As a sole proprietor, you can apply for an employer identification number, EIN, and then provide this number to your customers for reporting service payments (nonemployee compensation) to you on a 1099-MISC.   I personally believe this is a much safer route to go than handing out your Social Security Number to all of your customers.

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Haiti Charitable Contributions P.L. 111-126

Congress has passed legislation designed to encourage charitable contributions for the relief efforts in Haiti. The President signed it into law January 22, 2010. Under the new law, taxpayers may deduct charitable contributions made for the relief of earthquake victims in Haiti on their 2009 tax return rather than wait to deduct it on their 2010 return.

Observation: The language in the law indicates this is an election and not a requirement. The election is made by simply deducting the contribution on the 2009 return.

Qualifications: The deduction is allowed on the 2009 return if all of the following conditions are met:

  • The contribution is made after January 11, 2010 and before March 1, 2010.
  • The contribution is a cash contribution. (Contributions of food and clothing are not cash contributions.)
  • The contribution is made for the relief of victims in areas affected by the earthquake in Haiti on January 12, 2010.
  • All other requirements for deducting cash contributions under Section 170 of the Internal Revenue Code are satisfied. (Example: The contribution has to be made to a qualified charitable organization.)

Recordkeeping. For purposes of the above rules, a telephone bill showing the name of the donee organization, the date of the contribution, and the amount of the contribution is treated as meeting the recordkeeping requirements of IRC Section 170(f)(17).

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