December 2011
Dear Clients,
It was the year of annoying notices – as budget issues within all the governmental agencies
seems to have spurred a significant increase in the number of notices clients are receiving
from IRS, FTB and EDD. Disturbingly, they are severely increasing penalties for fairly
innocuous issues. The greatest penalties seem to be on forms or actions that have no
revenue associated with them but a simply infraction can cost thousands of dollars. While not
comprehensive, enclosed are several areas that we have concerns about:
Merchant charges, Form 1099-K – A new reporting form will be sent to businesses and
others who receive credit card or other merchant payments (Paypal, for example) for more
than 200 transactions and $20000 gross income. Ensure that your merchant services has
your correct Identification Number or you will be subject to a 28% backup withholding on
each payment. Be on the lookout for this new form and please provide us with any 1099-K’s
you receive.
Beginning with your 2012 returns, you will have to report sales figures separately on
your tax return– two lines for: merchant and third party payments (in most cases this will
be credit card payments received) and another line for cash and check payments. This
requirement will apply to sole proprietorships (Schedule C), rental properties, and all other
business returns (corporations, partnerships, LLC’s, etc).
Ensure your accounting system is able to track payments by type beginning January 2012.
1099 reporting - two new lines now appear on every tax return asking: Did you make
payments to anyone requiring the filing of form 1099? and secondly: Did you file the required
Forms 1099? The message couldn’t be more clear – YOU MUST FILE FORMS 1099!
The law I mentioned last year that would have required 1099’s for all payments of any kind
was repealed, but please do not forget to issue 1099’s to all persons (other than
corporations, but including LLC’s and partnerships) you paid to provide your business labor
and materials. If in doubt – send the form! FTB is now disallowing the entire deduction
related to all missed 1099’s. IRS will collect 20% of the amount paid on any 1099 not
issued. Failure to file penalties have increased to $100 per return, up to a $1,500,000
maximum!!!
S corporation wages and health insurance premiums shown on W-2
The issue of reasonableness in S corporation wages continues to be a hot button for IRS.
Additionally, legislation has been introduced at the House level that would clamp down on
owners of S corporations who try to minimize taxes by classifying wages as distributions. All
recent Court activity has sided with IRS on this issue. Please remember that reasonable
compensation must be paid, health insurance premiums added to W-2’s and losses can
not exceed basis.
Use Tax Registration for Business
After torturing many of us with their new “use tax registration”, State Board of Equalization
(sales tax) is now in the process of notifying businesses who filed 3 returns with zero use tax
that they have been de-registered and no longer need to file unless they have something to
report. If you qualified, you have or will receive shortly a notice informing you of this. If you
are not contacted – you MUST file an annual return by April 15 of each year. This is not part
of your tax return filing and must be completed by each of you rather than our office.
“Use tax” is due on out of state, internet or otherwise untaxed purchase (that would have
been subject to sales tax if you had purchased it within the State of California).
Corporate and LLC Clients – Important reminder
Corporate clients continue to be hit with the $250.00 late filing fee from the Secretary of State
regarding the annual Statement of Information. This simple form must be filed each and
every year.
The best method to ensure timely filing is the Secretary of State’s website:
https://businessfilings.sos.ca.gov/
LLC’s need to file with the SOS within 90 days of forming and then every two years in the
month of organization or registration. You can fill and print the form at:
http://www.sos.ca.gov/business/llc/forms/llc-12.pdf
SOME GOOD NEWS Credit for Retained Workers – any worker who qualified for the payroll tax holiday in 2010
under the HIRE Act (hired after 2/3/10) may also qualify for the employer credit of up to
$1000 if that worker was retained as an employee for at least 52 weeks. Please let us know
if you have workers who qualify for this credit.
The Health Care Act – Small Employer Health Insurance Credit
For tax years beginning in 2010 through 2013, a credit will be available for employers who
provide and pay 50% or more for their employee’s health insurance. The credit is most
effective for employers with 10 or less employees and employee annual pay of $25000 or
less per employee (owners, S-corp shareholders, sole props and their family members do not
count for the credit or in the computations above). The credit is reduced to zero as employers
reach 25 employees and/or for those who pay averages more than $50000. Other
calculations and criteria apply. Let us know if you pay your employees health care.
California’s New Jobs Credit –
The State of California is still offering a credit up to $3000 for each net increase in qualified
full-time employees hired by a small business (20 or fewer employees on 12/31/10) during
the taxable year. This credit has a cap of $400 million which means that when the funds are
given out, the credit ends. If you feel you may be eligible contact our office ASAP so that
we can run through the calculations necessary to determine your credit.
Tax Planning Strategies for 2011 –
It is always wise to do some end of year tax planning and here are some changes that may
be of benefit in your plan:
Bonus Depreciation – Bonus depreciation was extended through 2011 for up to 100% of the
cost of new, depreciable assets. It will revert to 50% in 2012.
Section 179 – The enhanced Sec. 179 was extended into 2011. The maximum Section 179
deduction for assets purchased in 2011 is $500,000 on a threshold of $2M in purchased
assets. Heavy SUV’s are still being allowed a $25,000 Sec. 179 write off in the first year and
favorable depreciation deductions in the following five years.
Payroll Taxes for 2012 For clients for whom we calculate taxes - we will need to recalculate all payroll checks for
2012 changes. Please phone or fax all checks to our office for each employee. These
changes are effective for any wage paid on or after January 1, 2012, regardless of when the
wages were earned.
The 2012 rates will be as follows:
SDI – the SDI rate for 2012 will be 1.0 percent (.01 x gross wage). The maximum wage
subject to the tax is $95,585 per employee in the calendar year (SDI max of $955.85).
FICA - the wage base increased to $110,100. AS of this printing, the rate is scheduled to
return to 7.65% for both employee and employer. A last minute change is being
discussed as we write this – please check with our office before calculating your 2012
checks.
FUTA – In what is sure to confuse and create issues – the rate for FUTA last year was .008
from 01/01/11 to 06/30/11 and .006 from 7/1/11 to 12/31/11. HOWEVER, since the State of
California was late in paying the feds for unemployment – the employers within the state are
now having to pay a surcharge of .003 - call our office with questions on this.
IRS – Publication 15, Circular E – available at: http://www.irs.gov/publications
EDD- withholding tables available at: http://www.edd.ca.gov/pdf_pub_ctr/de44.pdf
Two important forms continue to be sent by the agencies: If we prepare your payroll, please
forward your:
1. 2012 SUI rate to our office as soon as possible.
2. IRS sends notice of your 2012 941 deposit requirement. Please do not routinely file
this notice, as it is often overlooked that your requirement has changed. Any
requirement change takes affect the first payday in 2012.
W-4
Please remember that although you are no longer required to send IRS an employee’s form
W-4 if they claim exempt or more than 10 allowances, you must send them to the Franchise
Tax Board.
Independent Contractors
Mis-classifying workers as independent contractors continues to be an issue.
EDD is now offering a Web-based e-learning course on the subject of Employment Status. To
access the course use the link: www.edd.ca.gov/Payroll_Tax_Seminars/.
The penalties and taxes related to the audits of employee versus independent contractor can
be devastating.
EDD Reporting
Do not forget the following forms are required each year:
Form DE 542- to report any service provider, subcontractor or independent contractor who
qualifies to receive an IRS Form 1099 to EDD within 20 days of making payments totaling
$600 or entering into a contract for $600 or more.
File online at: https://eddservices.edd.ca.gov/index.html
Form DE 34 – to report any newly hired employee. File within 30 days of date of hire. File
online at: https://eddservices.edd.ca.gov/index.html
**These filings are your responsibility – we do not file these forms for any of our
clients.**
Audits and Other IRS Threats –
New audit guidelines for field auditors are stressing the need to look extensively at travel
expenses, specifically for spousal/family travel and personal travel. Auditors have also been
alerted to check the meals and entertainment categories. Please ensure you have all the
proper documentation necessary to substantiate these expenses.
Mileage Rate for business miles
The 2011 mileage rate was 51.0 cents per mile from 1/1 to 6/30/11 and 55.5 cents per mile
from 7/1 to 12/31/11.
The 2012 mileage rate will be 55.5 cents per mile.
Paying a rate less or more than this set amount will result in taxability of the payment to your
employee on their W-2 and payroll taxes due from you.
All Corporate clients – please remember to have your attorney complete your
corporate minutes on a regular basis (at least yearly) – they are very important.
We look forward to meeting with each of you in the upcoming year. Please feel free to contact
our office with any questions or concerns.
Christine Farris
Certified Public Accountant