May 2010 - Conrad and Company CPAs Newsletter

New health care law includes tax provisions

The new health care legislation includes sweeping changes for both individuals and businesses. The two laws, the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010, encourage universal health insurance coverage through options such as employer plans, state-operated exchanges, and private plans. Here are highlights of tax-related provisions included in these laws.

• Small businesses. Starting this year, a small business with fewer than 25 employees and average annual wages of less than $50,000 may use a tax credit to partially offset the cost of employer-provided health insurance. The full credit is available to a business with ten or fewer employees and average annual wages of $25,000 or less per employee.

• Individual coverage. Starting in 2014, an individual who doesn’t obtain at least “minimum essential coverage” may be assessed a nondeductible tax penalty. The monthly penalty is calculated using a percentage of the taxpayer’s income or a flat dollar amount.

• Employer coverage. Beginning in 2014, an employer with at least 50 full-time employees may be assessed a nondeductible tax penalty if it doesn’t offer minimum essential coverage.

• Medicare tax. Currently, the 1.45% Medicare tax applies to earned income like wages. Starting in 2013, two additional Medicare taxes may be imposed on high-income taxpayers:

• Adoption credit. The adoption credit is increased to $13,170 for 2010 (from $12,170) and extended through 2011. The credit is also made refundable.

• Information reporting. Effective for 2011, employers must report the value of health insurance coverage on each employee’s Form W-2. Effective for 2012, a business must file information returns for annual payments totaling $600 or more to every corporate recipient (other than tax-exempt entities).

• Medical deductions. Currently, you can deduct unreimbursed medical expenses in excess of 7.5% of adjusted gross income (AGI). Starting in 2013, the floor will be raised to 10%. Exception: Prior to 2017, individuals who are 65 or older are exempt from this increase.

• Flexible spending accounts (FSAs). Beginning in 2013, the maximum amount that may be contributed to a health care FSA will be limited to $2,500 (adjusted for inflation thereafter).

• The IRS has launched a three-year auditing project that will examine about 6,000 U.S. companies for compliance with employment tax obligations. The project is the first of its kind in 25 years, and its primary objective is to collect data to identify areas of noncompliance across all industry sizes and sectors, including nonprofits and governmental entities. This data will be used by the IRS to update its audit selection formulas in an area where noncompliance is considered a serious drain on the U.S. Treasury.

• Among the issues the audits will look at:

• Classification of workers as employees or independent contractors, including executives rehired as consultants, dual status employees, and employee leasing arrangements.

• Fringe benefits, including expense reimbursement arrangements and noncash benefits.

• Executive compensation and fringe benefits, executive retirement contracts, golden parachutes, and stock options.

• Employers can take some steps to prepare for these payroll tax audits. For example, conduct a mock audit to check how your company handles the three focus areas – classification of workers as employees or independent contractors, fringe benefits, and executive compensation. Your company may not be selected for the research audit program, but you also need to be ready to face an audit following the three-year project.

• For more information or assistance, give our office a call.

• The HIRE Act, passed in March, provided tax incentives for companies to hire unemployed workers. One of these incentives is an exemption from social security payroll taxes for every qualified worker hired after February 3, 2010, and before January 1, 2011.

• A new IRS form is now available for employers to document this payroll tax exemption for hiring unemployed workers. Form W-11 (Hiring Incentives to Restore Employment Act Employee Affidavit) is to be filled out by the new hire, certifying under penalties of perjury that he or she was either unemployed or worked fewer than a total of 40 hours during the 60 days prior to taking the current job. The W-11 forms are not filed with the IRS; the employer must retain them along with other payroll records.

This newsletter provides business, financial, and tax information to clients and friends of our firm. This general information should not be acted upon without first determining its application to your specific situation. For further details on any article, please contact us.

June 2010 - Conrad and Company CPAs Newsletter

Second estimated tax payment due June 15

• June 15, 2010, is the due date for making your second installment of 2010 individual estimated tax. Your check to the United States Treasury should be accompanied by Form 1040-ES. June 15 is also the due date for calendar-year corporations to make their second quarter 2010 estimated tax payment.

• Challenges that merely annoy an established firm often capsize a start-up company. This is especially true in the area of staffing. When a big corporation makes a hiring mistake, the company suffers, but survives. Committed by a fledgling firm, the same mistake may spell disaster. After all, if your company employs only five people, one wrongly hired employee will make up a fifth of your work force. That person’s incompetence or poor people skills can bludgeon the firm’s bottom line.

• Following are three of the most common hiring mistakes made by start-up companies. Avoid these blunders and you’ll be well on your way to building a productive team.

• Staffing the firm with friends and family. While this strategy may work in some circumstances, hiring pals and relatives often spells trouble. For one thing, friends and family members often expect – even subconsciously – to be treated differently from other employees. Such a double standard, whether real or perceived, can hurt morale and productivity. As a general rule, hiring decisions should focus solely on the needs of the firm and applicant qualifications.

• Trusting in a handshake. Memories fade. Expectations fluctuate. As with other important aspects of your business, employee arrangements should be laid out in writing. This can be as simple as drafting employee offer letters that cover compensation, rights to intellectual property, and bonus arrangements. Employee handbooks are also a good way to spell out the responsibilities of the firm and its staff.

• Bringing in a partner for the wrong reasons. Sure, you might save money in the short term by selling a portion of your firm to a partner. But think long and hard about the downside risks. Do you really need to surrender a portion of your company – including control over important management decisions – to someone else? What will this partner contribute? Can you find other ways to fill gaps in your team? Remember, a bad partnership may end up in the business equivalent of divorce court. So choose wisely.

• For assistance with any of the issues facing your start-up business, give us a call.

• If wedding bells are in your future, your tax situation will be changing also. For starters, your tax filing status will change. You will have the choice of filing a joint return with your spouse or filing a separate return as a married person.

• Filing a joint return usually gives you the bigger tax savings. Both spouses’ income and deductions for the entire year will be combined onto one return. Any deductions that are subject to limitations will be determined based on the combined income of both spouses.

• In some cases, filing a separate return may save you taxes. A spouse who has high medical expenses or miscellaneous itemized deductions and low income, for example, might be better off filing a separate return. However, you may not claim certain credits and deductions if you file separate returns. Generally, only if you file a joint return can you claim the child and dependent care credit, the earned income credit, or education credits. Filing separate returns could affect the taxability of your social security benefits and the deductibility of rental losses.

• The tax law has been changed to eliminate some of the additional tax that married couples once paid (called the “marriage penalty”). However, once you marry, you should review your federal income tax withholding at work. Fill out a new Form W-4 and indicate that you are married.

• Several other limitations may come into play once you get married. For example, your IRA contribution may not be deductible if your spouse is covered by a retirement plan at work and your income exceeds certain limits.

• Newlyweds can be faced with a surprise tax bill on April 15 unless they do advance planning. For details or planning guidance, give us a call.

• Is your child looking for a job this summer? If so, you both may have questions about taxes. Here are three common concerns.

• Is a tax return required? The answer depends on several factors, including the total amount of income received. For instance, if wages are the only source of income, your child can generally earn up to $5,700 during 2010 before a federal tax return is necessary. However, unless your child can claim an exemption from withholding, a return may be required even when wages earned are lower than the filing requirement. That’s because filing is the only way to claim a refund of overpaid taxes. In addition, self-employment income, tips, interest, dividends, and stock sales can affect the filing requirement.

• Can my child open an IRA? Anyone under age 70½ who has earned income can contribute to a traditional IRA. There’s no age restriction for Roth accounts, though the amount of the contribution phases out at higher income levels (starting at $105,000 for single individuals in 2010). The maximum standard contribution for 2010 is $5,000.

• Are there any tax breaks if my child works for me? You can take a business tax deduction when you pay a reasonable wage for work your child performs in your business. If your business is a sole proprietorship or a partnership you and your spouse operate, and your child is under age 18, you don’t have to pay social security, Medicare, or federal unemployment taxes. The child’s wages are subject to income taxes.

• If you have other questions about the tax implications of a summer job, give us a call.

This newsletter provides business, financial, and tax information to clients and friends of our firm. This general information should not be acted upon without first determining its application to your specific situation. For further details on any article, please contact us.