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American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition

American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
It's more important than ever to be in compliance with payroll laws and regulations! How do you stay in compliance and avoid penalties? The APA Basic Guide to Payroll is written to make understanding the laws and regulations as easy as possible. And this single-volume guide is filled with tools to help you apply the law and make proper calculations – with ease!

CCH® PAYROLL — 02/09/10

President’s 2011 budget includes some payroll items

The President has released the proposed budget for fiscal year 2011. There are several payroll-related items highlighted below:

FUTA surtax

The 0.2% FUTA surtax would be made permanent.

Making work pay credit

The Making Work Pay tax credit would be extended for one year through December 31, 2011.

Small business tax credit

Under the president's plan, small businesses and non-profit organizations would receive a $5,000 tax credit for every new employee hired in 2010. The credit would be capped at $500,000 per business and $250,000 for start-up businesses. Small businesses would be reimbursed for the social security payroll taxes paid on real increases in their payrolls. Businesses that increase wages, expand hours or hire new workers would get a credit against the added payroll taxes. The bonus would be based on social security payrolls and would not apply to wage increases above the current taxable maximum of $106,800. Businesses could claim the credit on a quarterly basis.

Income tax rate increases

Beginning in 2011, the highest income tax rate would be increased to 39.6%. At 2010 levels, the 39.6% rate would apply to taxable incomes over $373,650 for married taxpayers filing jointly, heads of household and single filers. However, the taxable income levels at which this rate begins to apply would be indexed for inflation for 2011 and for each year thereafter. Beginning in 2011, the second highest tax rate would be increased to 36%. The taxable income levels at which that rate begins to apply would vary by filing status and would be indexed annually for inflation. The 36% tax rate would apply to taxable income above the following amounts but less than the income levels at which the 39.6% rate would apply:

The 28% tax rate bracket would be expanded so that taxpayers earning less than these amounts would not see their taxes rise as a result of the increased tax rate brackets.

Person exemption phase-out

For 2011, the phase-out would be repealed. The adjusted gross income floors would be adjusted for inflation starting with a value of $250,000 in 2009 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 in 2009 for single taxpayers. After 2011, the AGI floors would be indexed annually for inflation.

Cell phones

Cell phones (and other similar telecommunications equipment) would no longer be classified as listed property, effectively removing the requirement of strict substantiation of use and the limitation on depreciation deductions. The fair market value of personal use of a cell phone (or other similar telecommunications equipment) provided primarily for business purposes would be excluded from gross income, effective for taxable years ending after the date of enactment.

Advance earned income tax credit

The advance payment option of the earned income tax credit (EITC) would be repealed. Separate withholding tables would no longer be necessary. Workers would no longer be able to receive an advance payment of the EITC through their employer. Individuals with positive tax liability would still be able to receive any non-refundable portion of the EITC during the year through adjustments in regular withholding, effective for taxable years beginning after December 31, 2010.

Information return penalties

The first-tier penalty would be increased from $15 to $30, and the calendar year maximum would be increased from $75,000 to $250,000. The second-tier penalty would be increased from $30 to $60, and the calendar year maximum would be increased from $150,000 to $500,000. The third-tier penalty would be increased from $50 to $100, and the calendar year maximum would be increased from $250,000 to $1,500,000. For small filers, the calendar year maximum would be increased from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard would be increased from $100 to $250. The proposal would also provide that every five years the penalty amounts would be adjusted to account for inflation, effective for information returns required to be filed after December 31, 2011.

Employee leasing

Standards would be set for holding employee leasing companies jointly and severally liable with their clients for federal employment taxes. Standards would also be provided for holding employee leasing companies solely liable for such taxes if they meet specified requirements. The provision would be effective for employment tax returns required to be filed with respect to wages paid after December 31, 2010.

Independent contractors

Under this proposal, the IRS would be permitted to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. The reduced penalties for misclassification provided under current law would be retained, except that lower penalties would apply only if the service recipient voluntarily reclassifies its workers before being contacted by the IRS or another enforcement agency and if the service recipient had filed all required information returns (Forms 1099) reporting the payments to the independent contractors. For service recipients with only a small number of employees and a small number of misclassified workers, even reduced penalties would be waived if the service recipient (1) had consistently filed Forms 1099 reporting all payments to all misclassified workers and (2) agreed to prospective reclassification of misclassified workers. After enactment, new enforcement activity would focus mainly on obtaining the proper worker classification prospectively, since in many cases the proper classification of workers may not have been clear. Statutory employee or nonemployee treatment as specified under current law would be retained.

The Department of the Treasury and the IRS also would be permitted to issue generally applicable guidance on the proper classification of workers under common law standards. This would enable service recipients to properly classify workers with much less concern about future IRS examinations. Treasury and the IRS would be directed to issue guidance interpreting common law in a neutral manner recognizing that many workers are, in fact, not employees. In addition, Treasury and the IRS would develop guidance that would provide safe harbors and/or rebuttable presumptions, both narrowly defined. To make that guidance clearer and more useful for service recipients, it would generally be industry- or job-specific. Priority for the development of guidance would be given to industries and jobs in which application of the common law test has been particularly problematic, where there has been a history of worker misclassification, or where there have been failures to report compensation paid.

Service recipients would be required to give notice to independent contractors, when they first begin performing services for the service recipient, that explains how they will be classified and the consequences thereof, e.g., tax implications, workers’ compensation implications, wage and hour implications.

The IRS would be permitted to disclose to the Department of Labor information about service recipients whose workers are reclassified.

To ease compliance burdens for independent contractors, independent contractors receiving payments totaling $600 or more in a calendar year from a service recipient would be permitted to require the service recipient to withhold for Federal tax purposes a flat rate percentage of their gross payments, with the flat rate percentage being selected by the contractor.

The proposal would be effective upon enactment, but prospective reclassification of those covered by the current special provision would not be effective until the first calendar year beginning at least one year after date of enactment. The transition period could be up to two years for independent contractors with existing written contracts establishing their status.

National Directory for New Hires

The Social Security Act would be amended to expand IRS access to National Directory for New Hires (NDNH) data for general tax administration purposes, including data matching, verification of taxpayer claims during return processing, preparation of substitute returns for non-compliant taxpayers, and identification of levy sources. Data obtained by the IRS from the NDNH would be protected by existing taxpayer privacy law, including civil and criminal sanctions, effective upon enactment.

Bad check penalty

The bad check penalty would be expanded to cover all commercially acceptable instruments of payment that are not duly paid, effective for returns required to be filed after December 31, 2010.


The COBRA premium assistance eligibility period would be extended by allowing qualified individuals who qualify for COBRA coverage as the result of an involuntary termination of employment prior to January 1, 2011 to qualify for the assistance. The duration of the COBRA premium assistance that results from an involuntary termination of employment after February 28, 2010 would be 12 months. Appropriate transition relief would be provided to ensure that COBRA premium assistance is available for individuals who become qualified as a result of an involuntary termination of employment after February 28, 2010, and before enactment of the extension (if not enacted before March 2010).

Electronic filing

The proposal would permit the Treasury Department to issue regulations requiring electronic filing for any return, including Form 1042 and Form 1042-S filed by a financial institution with respect to any taxes withheld by the financial institution, regardless of the general 250 return threshold. The proposal would apply to returns the due date for which (determined without regard to extensions) is after the date of enactment.

Paid family leave

The Family and Medical Leave Act allows workers to take job-protected time off unpaid. A handful of states have enacted policies to offer paid family leave. The Budget establishes a $50 million State Paid Leave Fund within the Department of Labor (DOL) that will provide competitive grants to help States that choose to launch paid-leave programs cover their startup costs. The Budget also provides resources to allow DOL to explore ways to improve the collection of data related to intersection of work and family responsibilities.

Mandatory IRAs

Employers in business for at least two years that have more than ten employees would be required to offer an automatic IRA option to employees, under which regular contributions would be made to an IRA on a payroll-deduction basis. If the employer sponsored a qualified retirement plan, SEP, or SIMPLE for its employees, it would not be required to provide an automatic IRA option for its employees. Thus, for example, a qualified plan sponsor would not have to offer automatic IRAs to employees it excludes from qualified plan eligibility because they are covered by a collective bargaining agreement, under age eighteen, nonresident aliens, or have not completed the plan’s eligibility waiting period. However, if the qualified plan excluded from eligibility a portion of the employer’s work force or a class of employees such as all employees of a subsidiary or division, the employer would be required to offer the automatic IRA option to those excluded employees.

The employer offering automatic IRAs would give employees a standard notice and election form informing them of the automatic IRA option and allowing them to elect to participate or opt out. Any employee who did not provide a written participation election would be enrolled at a default rate of three percent of the employee’s compensation in an IRA. Employees could opt out or opt for a lower or higher contribution rate up to the IRA dollar limits. Employees could choose either a traditional IRA or a Roth IRA (with Roth being the default). For most employees, the payroll deductions would be made by direct deposit similar to the direct deposit of employees’ paychecks to their accounts at financial institutions. Payroll-deduction contributions from all participating employees could be transferred, at the employer’s option, to a single private-sector IRA trustee or custodian designated by the employer. Alternatively, the employer, if it preferred, could allow each participating employee to designate the IRA provider for that employee’s contributions or could designate that all contributions would be forwarded to a savings vehicle specified by statute or regulation.

Employers making payroll deduction IRAs available would not have to choose or arrange default investments. Instead, a low-cost, standard type of default investment and a handful of standard, low-cost investment alternatives would be prescribed by statute or regulation. In addition, this approach would involve no employer contributions, no employer compliance with qualified plan requirements, and no employer liability or responsibility for determining employee eligibility to make tax-favored IRA contributions or for opening IRAs for employees. A national web site would provide information and basic educational material regarding saving and investing for retirement, including IRA eligibility, but, as under current law, individuals (not employers) would bear ultimate responsibility for determining their IRA eligibility.

Contributions by employees to automatic IRAs would qualify for the saver’s credit (to the extent the contributor and the contributions otherwise qualified), and the proposed expanded saver's credit could be deposited to the IRA to which the eligible individual contributed.

Employers could claim a temporary tax credit for making automatic payroll-deposit IRAs available to employees. The amount of the credit for a year would be $25 per enrolled employee up to $250, and the credit would be available for two years. The credit would be available both to employers required to offer automatic IRAs and employers not required to do so (for example, because they have not more than ten employees), effective January 1, 2012.

Small employer startup credit

Under current law, small employers are eligible for a tax credit equal to 50% (up to a maximum of $500 a year for three years) of the start-up expenses of establishing or administering a new retirement plan. To encourage small employers to offer pensions to their workers in connection with the automatic IRA proposal, the Budget will increase the maximum credit from $500 a year to $1,000 per year, effective January 1, 2012.

401(k) annuitization

The Budget proposes a number of initiatives to improve the transparency and adequacy of 401(k) retirement savings. Specifically, DOL will undertake regulatory efforts to reduce barriers to annuitization of 401(k) plan assets; increase the transparency of pension fees; improve transparency of target date and other default retirement investments; and reduce conflicts of interest between pension advisers and fiduciaries.

Automatic enrollment in 401(k)s

The Administration will streamline the process for 401(k) plans to adopt automatic enrollment; make it easier to increase saving overtime; and allow automatic enrollment in SIMPLE-IRAs.

State unemployment benefits

The resources for the recovery of state unemployment benefit overpayments and delinquent employer taxes would be increased. States would be allowed to redirect up to 5% of overpayment recoveries to additional enforcement activity. The proposal would require states to impose a penalty of at least 15% on recipients of fraudulent overpayments, and penalty revenue would be used exclusively for additional enforcement activity. The proposal would expand the ability to collect benefit overpayments due to a state from income tax refunds owed to a benefit recipient. In addition, would allow states to deposit up to 5% of moneys recovered in the course of an unemployment insurance tax investigation into a special fund dedicated to implementing the State Unemployment Tax Act (SUTA) Dumping Prevention Act of 2004 or enforcing state laws relating to employer fraud or tax evasion. Lastly, the proposal would require employers to report a “start work date” to the National Directory of New Hires for all new hires, effective upon the date of enactment.

(President’s State of the Union Address, January 27, 2010; Budget of the US Government Fiscal Year 2011, Office of Management and Budget,; Terminations, Reductions, and Savings, Budget of the US Government Fiscal Year 2011, Office of Management and Budget,; General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals, Department of the Treasury February 2010.)

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