paa lehigh valley cfo forum

PAA LEHIGH VALLEY CFO FORUM

Year-End Payroll Processing

Wednesday, November 12, 2008

1099 VS. W-2 TREATMENT

• What to File W-2 issued when employer/employee relationship exists 1099 issued to independent contractors paid over $600

during calendar year


• IRS has issued guidance to determine whether an employment relationship exists. Factors to be considered:

Instructions Training Integration Services rendered personally Hiring, supervising and paying assistants


Factors to be considered: (continued)

Continuing relationship Set hours of work Full-time required Work performed at employer’s place

of business Order or sequence set


Factors to be considered: (continued) Oral or written reports Payment by hour, week, month Payment of business and/or traveling

expenses Furnishing of tools or materials Significant investment


Factors to be considered: (continued) Realization of profit or loss Working for more than one firm at a time Making service available to general public Right to discharge Right to terminate Other factors


• IRS ReclassificationFrequently asked questions when IRS

reclassifies workers as employees What should I do now? How do I figure my liability for FICA tax

and federal withholding? Do I qualify for any type of reduced tax

rates, and if so, what are these rates?


Frequently asked questions when IRS reclassifies workers as employees (continued)

What are the reduced rates under Section 3509?

What do I do about Form 941? What do I do about Forms W-2

DEMONSTRATORSRev. Proc. 2001-56

• What is the purpose of the Revenue Procedure?– Provides optional simplified methods for

determining the value of the use of Demonstration Vehicles.

• What is the effective date?– January 1, 2002


• The Methods Include:– Simplified Method for the Full Exclusion of

Qualified Automobile Demonstration Use– Simplified Partial Exclusion Method– Simplified Inclusion Method


• Who may use the Simplified Methods?– Available to any Automobile Dealer engaged

in the business of Retail Sales of New or Used Vehicles

• What Vehicles Qualify as Demos?– Vehicles currently in inventory and available

for test drives by customers during the normal business hours.


• Which employees qualify for the simplified Methods?– Limited to use by Full-Time Salespeople.

• Does new Rev. Proc. Describe all methods available?– No - a dealer may use any other method

that complies with the Internal Revenue Code


• Simplified Full Exclusion– Use of vehicle in Sales Area– Employer must have a qualified written policy

• Substantial restrictions on personal use• Use limited to salesperson (ie spouse not allowed)• Use of personal vacation trips prohibited• Storage of personal possessions is prohibited

– Employer must reasonably believe that sales person is complying with written policy


• Simplified Full Exclusion Method (cont.)– Use outside normal working hours is limited

to commuting plus an average of 10 miles per day on a monthly basis.

– Mileage records must be maintained such as recording the mileage at the time of arrival and departure at the sales office each day. Some verification is necessary


• Simplified Partial Inclusion Method – Written Policy required– Prohibited use includes personal vacations,

storage of personal possessions and use by anyone other than the full-time salesperson

– Unlimited miles– No record keeping requirement


• Simplified Partial Inclusion Meth. (cont.)– Salesperson taxed on $6 per day for

vehicles valued at $15,000 - $30,000 (determined on the dealership average sales price basis).

– Can be used for any month a full-time salesperson does not qualify for the simplified exclusion method


• Simplified Inclusion Method – Can be used for any month a full-time

salesperson does not qualify for the simplified full or partial exclusion methods.

– Simplified method of determining value of demo used by employee (dealership average sales price basis).

– Must be used on a monthly basis.


• Summary of Methods available for full-time salespersons– Full exclusion• Keep records, limit personal use to

commuting plus 10 miles per day and other restrictions apply. Taxable amount-zero


• Summary of Methods available for full-time salespersons (Continued)– Partial exclusion• No records, no mileage limit to personal

use, some other restrictions. Taxable amount - about $6 per day.


• Summary of Methods available for full-time salespersons (Continued)– Inclusion Method• Available if does not qualify for Full or

Partial Inclusion Method. Taxable amount - simplified method of determining value of demo used by employee


• Summary of Methods available for full-time salespersons (Continued)– Commuting and de minimis• No record keeping if the employer

reasonably believed that there was no personal use except for de minimis and no amount would be includible in income for the value of commuting (may have to maintain some evidence of this). Taxable amount-Zero


• Method available for all dealership employees:– Full inclusion at annual lease value amount

based on average dealership vehicle sales price, no record keeping. Taxable amount-$17 per day average.

GROUP TERM-LIFE INSURANCE (GTL)

• Premiums for coverage over $50,000• Amount of such “excess” premiums must be

reported through payroll• Non-taxable jurisdictions

Federal unemploymentPA income taxPA unemployment taxNJ unemployment tax

THIRD PARTY SICK PAY

• What is reportable?Taxable AND Non-taxable sick pay made to employees

from a third party• W-2 Requirements

Sick pay MUST be included on the employees’ W-2 or on a separate form provided by the third party

THIRD PARTY SICK PAY

• Non-taxable jurisdiction determinationFirst six months

New Jersey income tax New Jersey unemployment tax Delaware unemployment tax

After six months PA unemployment tax New Jersey unemployment tax Delaware unemployment tax Social Security and Medicare Federal Unemployment

S-CORP MEDICAL INSURANCE

• Shareholders of an S-Corp may not participate in Section 125 plans (cafeteria plans)

• Medical insurance premiums paid by the employer on behalf of 2% shareholder are taxable to the shareholder


• Non-taxable jurisdictionsSocial security taxMedicare taxFederal unemployment taxPA income taxPA unemployment tax


• Non-taxable jurisdictions (continued)Philadelphia wage taxNew Jersey income taxNew Jersey unemployment taxDelaware unemployment tax

CAFETERIA PLANS

• Plan under which certain qualified benefits, paid for by the employees are not taxable under certain jurisdictions

• Non-taxable jurisdictionsFederalSocial security taxMedicare tax

CAFETERIA PLANS

• Non-taxable jurisdictions (continued)Federal unemployment taxPA income taxDelaware income tax

• Must have a formal plan in place

CAFETERIA PLANS

• Employees must agree to pay for their benefits under the plan

• Form 5500 must be filed annually for the plan (due seven months after the end of the plan year)

401(k) PLAN

• Maximum amounts that an employee can defer per federal regulations$15,500

• Refer to plan documents for restrictions• Non-taxable jurisdictions

Federal income taxNew Jersey income taxDelaware income tax

401(k) PLAN

• Employees must authorize salary deferrals• Form 5500 must be filed annually for the plan

(due seven months after the end of the plan year)

SERVICE TECHNICIAN TOOL REIMBURSEMENTS

• IssueAre amounts paid to technicians as

reimbursements for the use of the technicians’ tools paid under an accountable plan?


• IRS conclusionEffective date - July 21, 2000Generally, amounts paid to technicians as

tool reimbursements will not meet the accountable plan requirements. Therefore, amounts paid under a non-accountable plan are included in the employee’s gross income, must be reported to the employee on Form W-2 and are subject to the withholding and payment of federal employment taxes.


• Corrective proceduresDo not exclude for 2001

1099 REPORTING REQUIREMENTS

• Due date to workers/independent contractors• Due date to federal government• Penalty for failure to file

$50 per return (non-filing or filed after August 1)

Maximum penalty $250,000 per year


• Penalties also apply if: File on paper when you should have filed on magnetic

media ( 250 forms) You report on incorrect taxpayer ID You fail to report a taxpayer ID You fail to use forms that are machine readable


• Use your computer system to accumulate data• Use your computer system to print returns• ADP

Set up all unincorporated vendors to have computer accumulate and print 1099’s

Use ADV function to properly set up vendors


• ADP (continued)Make sure that all “on demand” checks are

coded as “Type 2” - vendor for proper accumulation

Run 1099 reportCheck amounts to vendor filesCorrect any errorsRe-run 1099 reportPrint 1099’s

• Reynolds & ReynoldsUtilize Function O551 to set-up

unincorporated vendors and change vendors to collect data for 1099 purposes

Utilize Function 0794 to run the 1099 balance report and check amounts to vendor files

Utilize Function 0792 to adjust 1099 balances and correct any errors



• Reynolds & Reynolds (continued)Utilize Function 0794 to re-run 1099 balance

reportUtilize Function 0414 to print 1099 forms

DEALER’S SAFEHARBOR BONUS

• Getting this amount?This should be calculated by the

shareholder’s CPA• Why are we paying the federal withholding at

year end?Withholding is pro-rated as if paid evenly

throughout the yearThink time value of money

• Example - $1,000,000 due in the year If estimates paid, payments paid on . . .

April 15 $ 250,000 June 15 250,000 September 15 250,000 January 15 250,000

$1,000,000



• Example - $1,000,000 due in the year (continued) If paid $1,000,000 through withholding at

December 30th Interest at 8.5% on money kept until

December 30th . . . $17,000


Remember . . . . Federal tax liabilities in excess of

$100,000 must be deposited by the NEXT banking day after the check date.

FEDERAL PAYROLL TAX DEPOSIT RULES

• Determination statusBased on annual determination

• Types of status• Monthly

If aggregate amount reported for lookback period is $50,000 or less


• Semi-weekly If aggregate amount reported for lookback

period is $50,000 or more• Lookback period

Lookback period for each calendar year is twelve month period ended the preceding June 30th.


• Deposit datesMonthly rule

Must deposit employment taxes on or before the 15th day of the following month


• Deposit dates (continued)Semi-weekly rule

Payment Dates Deposit Date

Saturday, Sunday, Monday and/or Tuesday

On or before the following Friday

On or before the following Wednesday

Wednesday, Thursday and/or Friday


• Deposit dates (continued)One day rule

If on any day within a deposit period an employer has accumulated $100,000 or more of employment taxes, those taxes must be deposited by the close of the next banking day.


• Tax deposits by electronic funds transferAggregate annual taxes exceed $200,000


• Penalties and interestDeposits made 1 to 5 days lateDeposits made 6 to 15 days lateDeposits made 16 or more days lateAmounts paid within 10 days of first notice the IRS sent asking for the tax dueAmounts unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due

2%5%10%10%

15%


• Penalties and interest (continued)

Deposits made at an unauthorized financial institution, paid directly to the IRS, or paid with your returnAmounts subject to electronic deposit requirements but not deposited using the Electronic Federal Tax Payment System (EFTPS)

10%

10%

THE ENTITIES ARE CHANGING

• LLP• LP

Forms of partnerships• LLC

Members are treated like partners in partnerships

TAX TREATMENT OF PARTNERS

• Payments to partners do not go on form W-2

• Payments to partners do not get reported on quarterly payroll tax returns

• All taxes are paid by the individual through their personal tax return


• What do you do?• Follow the partnership agreement• Payments will take on different characteristics

• Guaranteed payments• Draws


• What do you do?

• Personal use of company auto• Medical insurance premiums• 401K contributions

THE END

“The material contained in this presentation is for general

information and should not be acted upon without prior

professional consultation.”

paa lehigh valley cfo forum

Documents

methods available

forms w

optional simplified

use of demonstration

normal business hours

reduced rates

exclusion method cont

personal useuse