Category Archives: Small Business Taxes

Payroll Tax Cut Extended For First Two Months of 2012


The two percent payroll tax cut for employees that was in effect for 2011 has temporarily been extended until the end of February 2012. Under this measure, employees pay a reduced 4.2 percent of Social Security tax withholding on wages instead of the usual 6.2 percent. It has no impact on employees’ future Social Security benefits.

Employers must make the change to the reduced payroll tax rate by January 31, 2012 at the latest. If any employee’s Social Security tax is withheld at the higher rate in January, the employer has until March 31, 2012 to adjust that employee’s withholding so that the total withholding amount is correct for that period.

For more information, see the IRS website at http://www.irs.gov/newsroom/article/0,,id=251650,00.html.

2012 Business Standard Mileage Rates Announced by IRS

The Internal Revenue Service announced the 2012 optional standard mileage rates for calculating the deductible costs of operating an automobile for business purposes. Starting January 1, 2012, the standard mileage rate for the business use of a car, van, pickup, or panel truck will be 55.5 cents per mile for miles driven. This rate is the same as the the rate that went into effect on July 1, 2011. Taxpayers can choose between the standard mileage rate or their actual costs to calculate their deduction for the business use of a vehicle.

New Relief From IRS For Improper Worker Classifications

The IRS announced today that it would allow employers who have improperly classified workers to reclassify them as employees and make a minimal payment for past due unpaid taxes. Employers who voluntarily join and are accepted into the program would get a fresh start from the IRS with no further audit, penalty, or other IRS concerns related to the improperly classified workers. Many employers face the possibility of substantial federal payroll tax obligations for workers who should have been classified as employees but were treated instead as nonemployees or independent contractors. “This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

To be eligible, the employer must:

  • consistently have treated the workers in the past as nonemployees
  • have filed all required Forms 1099 for the employees for the previous three years
  • not currently be under audit by the IRS or any other agency concerning the classification of these workers.

To apply for the relief, you must file IRS Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before you want to reclassify your workers as employees.

The amount the employer will be required to pay is approximately 1% of the wages paid to the reclassified workers for the past year. No other interest or penalties will be due and no further audits for those workers will occur. Employers accepted into the program will be subject to a 6-year statute of limitations, rather than the usual 3 years that applies to payroll taxes.

For more information, see the IRS website at www.irs.gov.

IRS Clarifies Tax Treatment of Cell Phones Provided to Employees

The IRS issued guidelines today to clarify the tax treatment of cell phones provided by employers to employees. The Small Business Jobs Act of 2010 removed cell phones from the definition of listed property under the tax code. This meant that employer-provided cell phones were no longer subject to the more onerous record keeping requirements that apply to certain property defined as “listed property” under the tax code. However, the Act left unclear whether the value of cell phones provided by an employer should be included in an employee’s taxable income.

The new IRS guidelines provide that as long as a cell phone is provided to an employee for noncompensatory reasons—meaning primarily business reasons–the IRS will treat it as a tax-free working condition fringe benefit. The employer’s purpose for providing the cell phone must not be to give the employee additional income. So, for example, the employer could provide a cell phone to ensure its employee could speak with clients at any time or to be able to contact the employee anytime for work-related emergencies. In those circumstances, the value of the cell phone or any reimbursement to the employee for cell phone expenses would be tax free. However, if the cell phone was provided for the purpose of giving the employee additional income or to promote goodwill or attract employees, the employee would have to report the value of the phone or any reimbursement for cell phone use as taxable income.

 

Reminder About the Small Business Health Care Tax Credit As Filing Deadlines Approach

There are two significant tax filing deadlines coming up for small businesses that requested an extension to file their taxes: (1) September 15th for corporations that file on a calendar year and requested an extension, and (2) October 17th for sole proprietors who file Form 1040, partners, and S corporation shareholders who requested an extension to file.

The IRS and the Department of Health and Human Services have launched a series of outreach to these small business tax filers to make sure they check whether they are eligible to claim the small business health care tax credit. The credit was passed last year as part of the Affordable Care Act and is available for small businesses that employ 25 or fewer workers with average income of $50,000 or less. The employer must pay at least half of the health insurance coverage premiums for their employees under a qualifying plan to be eligible for the credit.

Corporations calculate the small employer health care credit on Form 8941 and then claim it as part of the general business credit on Form 3800, which they would include with their corporate income tax return. Sole proprietors who file Form 1040, partners, and S corporation shareholders who file Form 1040 would also use Form 8941 to calculate the credit and then would claim it as a general business credit on Form 3800, shown on line 53 of Form 1040.

The IRS also has posted the following information about the credit:

  • Businesses who have already filed can still claim the credit: For small businesses that have already filed and later determine they are eligible for the credit, they can always file an amended 2010 tax return. Corporations use Form 1120X and individual sole proprietors use Form 1040X
  • Businesses without tax liability this year can still benefit: The Small Business Jobs Act of 2010 provided that for Tax Year 2010, eligible small businesses may carry back unused general business credits (including the small employer health care tax credit) five years.  Previously these credits could only be carried back one year.  Small businesses that did not have tax liability to offset in 2010 should still evaluate eligibility for the small business health care tax credit in light of this expanded carry back opportunity.
  • Businesses that couldn’t use the credit in 2010 can claim it in future years: Some businesses that already locked into health insurance plan structures and contributions for 2010 may not have had the opportunity to make any needed adjustments to qualify for the credit for 2010. So these businesses may be eligible to claim the credit on 2011 returns or in years beyond. Small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.

In addition to today’s IRS announcement, HHS posted additional information on this credit at HealthCare.gov.

Additional information about eligibility requirements and calculating the credit can be found on the Small Business Health Care Tax Credit for Small Employers page of IRS.gov.

IRS Increases Standard Mileage Rate for Last Six Months of 2011

The IRS has increased the standard mileage rate to 55.5 cents per mile for business miles driven from July 1, 2011, through December 31, 2011. The standard mileage rate is an optional rate that taxpayers can use to calculate their deduction for the cost of using an automobile for business purposes instead of tracking their actual costs. Small businesses also use this rate when reimbursing employees for business travel.

The IRS usually sets the standard mileage rate annually but decided to make this special adjustment for the second half of 2011 because of the recent increases in gasoline prices. The rate is 4.5 cents higher than the 51 cent rate that was in effect for the first six months of 2011. For more information, go to the IRS website at www.irs.gov.