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Get Ready to Submit Payroll Tax Payments Electronically

The IRS has announced that it will no longer accept paper deposit coupons starting January 1, 2011. If your business is still using paper coupons, you must switch over to the EFTPS payment system before the end of this year.

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US Business Law / Taxes Spotlight10

Jean's Business Law / Taxes: U.S. Blog

Advance Earned Income Tax Credit Ends December 31, 2010

Tuesday December 28, 2010

While the Earned Income Tax Credit for low-income individuals continues into 2011, the  Advance Earned Income Credit has been discontinued beginning January 1, 2011.  The advance was taken by the employer, reducing the person's withholding during each pay period.  Employers were required to provide Advance Earned Income Credits to eligible employees,  if the employee provided a Form W-5 to the employer. Advance Earned Income Credits were reported to the IRS on Form 941.

What You Need to Do:

If you have employee to whom you have been making Advance EIC payments:

  • You will still need to include this information when you file Form 941 for the last quarter, by January 15, 2011.
  • Be sure paychecks beginning January 1, 2011 do not include the Advance EIC tax credit.  If you are using a payroll preparer or payroll software, be sure this change has been recognized by your software or preparer.
  • Inform the employees that the advance will not continue to be taken, but they will be able to take the credit when they file their 2011 tax return.



2010 and 2011 Business Tax Changes Confusing? - Here's Help

Monday December 27, 2010

Are you confused and frustrated by all the new laws that have been passed in 2009 and 2010?  Are you wondering how to comply with all these changes?  Are you so confused you don't even know what questions to ask your tax advisor?  I have a simple list of tax changes that will affect your 2010 business taxes and your 2011 business tax planning.   Let's get started:

Changes for 2010 only:

  • If you hired previously unemployed people in 2010, you may be eligible for a tax credit under the HIRE Act (Jobs Bill). This credit expires December 31, 2010.
  • The Making Work Pay tax credit (part of the American Recovery and Reinvestment Act), expires at the end of 2010.

Changes for 2010 and 2011:

  • Accelerated depreciation (Section 179 and Bonus Depreciation) has been increased for business purchases in 2010, and bonus depreciation will increase to 100% in 2011.  Be sure you talk to your tax advisor, though, before you make any decisions to purchase business property.
  • An increase from 50% to 100% on the exclusion from gross income of the capital gains from the sale or exchange of qualified small business stock acquired after March 15, 2010, and before January 1, 2012.
  • Business Tax Credits for Use of Alternative Fuels were continued into 2011.

Changes for 2011 Only

  • Under the new Tax Relief Act, The Social Security portion of payroll taxes (OASDI) will be reduced from 6.2% to 4.2% for 2011 only. This reduction affects only the employee portion, not the employer portion, which remains at 6.2%. You will need to change your payroll deduction calculations to reflect this reduction.
  • The self-employment tax rate will also be reduced for self-employed individuals, by 2%, in 2011 only; the rate will be reduced from 12.4% to 10.4% on net business income.

At this point, that's what I have on tax changes for 2010 and 2011. I'll keep you posted if anything changes.  To be sure you receive the most up-to-date information, sign up for the U.S. Business Law & Taxes newsletter (twice a week, usually).

Disclaimer: The information provided in this article is intended to be general information, and not to be tax or legal advice. Each tax situation is different. Be sure to talk with your tax advisor before taking any action based on this information.

More details in this article about 2010 and 2011 Business Tax Changes

Image: Getty Images

IRS Backup Withholding Rate To Increase in 2011

Sunday December 26, 2010

The backup withholding rate you withhold from payments to contractors is increasing from 28% in 2010 to 31% in 2011.

Backup Withholding for Payments to Contractors

If you have independent contractors you are paying, and you pay any one of these people $600 or more in 2011, you may have to withhold income taxes from this person's payments.  In the same way as you must withhold federal income taxes from employees, you must withhold federal income taxes from contractors IF they don't provide you with a valid taxpayer ID number.  Here are the details:

First, remember that everyone you pay must have a Taxpayer ID number (either an EIN or a Social Security Number or some other number).  And you must include that number on any payments to employees or independent contractors.

Then, you must figure the amount of withholding.  Employee withholding rates are determined by employees on their W-4 form.  But contractors don't have withholding UNLESS the Tax ID is missing or incorrect.  If you don't have a correct tax id number for a contractor (W-9), you must take withholding from payments to that person.  That means backup withholding.  The rate at which you must withhold income taxes is set by the IRS.  And that's the rate that is increasing for 2011.

For more detailed information, read my article with questions and answers on backup withholding

Tax Relief Act and Payroll Changes - Including W-4 and Withholding

Tuesday December 21, 2010

Several provisions of the Tax Relief, Unemployment Insurance Continuation and Job Creation Act of 2010 will change how your process payroll in 2011.  As William Perez, About.com Guide to Tax Planning reports, this tinkering with withholding rates by the IRS is the result of changes to Making Work Pay, which has been eliminated, and other changes in the tax code. Here are the details:

Employee Social Security Tax  Reduced 2% in 2011

In attempt to boost taxpayer income - and thus encourage spending - the new law includes a 2% reduction in the employee portion for the Social Security part of FICA taxes.  For an employee earning $50,000 in gross income, this means an additional $1,000 available in 2011.  This cut in Social Security tax is only effective for 2011 (unless it's extended) and it does not change your employer contribution to FICA taxes.

New Withholding Tables for 2011

In response to the new tax law, the IRS has made changes to withholding tables for 2011.  You can download IRS Notice 1036, which provides more details on the percentage method for income tax withholding.

Employee Changes to W-4 Forms

Although employees don't have to make changes to their withholding, this might be a good time to contact all your employees and remind them to check their W-4 form for changes in filing status, marital status, or additional deductions to avoid underpayment.

You can help employees make changes in their W-4 forms by providing them with this link to the IRS withholding calculator. Employees can also refer to IRS Publication 919 for more information on how to change their withholding allowances.

Adjusting Payroll Tax Withholding in 2011

To reflect the new 2% reduction in Social Security taxes, you will need to change your payroll deductions for employees by this amount.  You should make these changes as soon as possible, but no later than January 31, 2011.  If you don't get the changes made immediately, you will need to make an adjustment in worker pay to reflect the over-payment.  The IRS says the adjustment should be made no later than March 31, 2011.

For example, if you were not able to make the adjustment with the first paycheck in January, the 2% overpayment would need to be refunded to employees in a later paycheck.

Remember:

1. You must reduce the amount you withhold from employee paychecks by 2% for the Social Security portion of FICA taxes.

2. The Social Security maximum taxable income amount for 2011 hasn't changed (it's still $106,800), so some employees may reach this maximum sooner.

3. The employer portion of FICA taxes is not reduced by 2%.

4. New withholding tables are in effect for 2011.  You can see the tables in IRS Notice 1036, or get them from your payroll service.

More on the Tax Relief Act and how it affects your business taxes

More on Setting up your payroll system.

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