PAYROLL PROCESSING AND PAYROLL TAX GUIDE 2012 2013

Presented By - Jim Gante, Small Business Manager, Stambaugh Ness E-mail: jgante@stambaughness.com Carson Buck, Tax Advisor, Stambaugh Ness E-mail: cbuck@stambaughness.com Phone: 717.757.6999 Fax: 717.840.5985Contact Information: www.stambaughness.com Phone 1.800.745.8233

Table of ContentsPART A - CHARTS AND PAYROLL SAVING TIPSA A A A A A A A A A A A A A A A A A A A A A A 1 2 4 6 11 12 13 15 16 15 22 31 39 39 39 41 41 42 43 43 44 45 47 Payroll and Other Tax Data - 2012 Payroll and Other Tax Data - 2013 Taxability of Compensation and Benefits Withholding Requirements for Specific Payments Household Employment Taxes Agricultural and Household Employees List of Helpful Government Publications Essential Payroll Web Sites Essential Phone Numbers Indexed Employee Benefit Limits Independent Contractors Exempt versus Non-Exempt Employees Payroll Saving Tips Direct Deposit of Payroll Retirement & Social Security Watch Wage-Hour Exemptions Garnishments Employ Children/Spouses/Parents Reduce the Number of Payrolls Unemployment Compensation Common Paymaster Federal Business Credits Pennsylvania Business Credits

PART B - PROCESSING AND REPORTINGB B B B B B B B B B B B B B B 1 2 3 3 4 5 8 10 12 13 15 16 18 21 22 Federal Tax Deposit Requirements Form 941 Deposit Rules Same Day Payment Option Electronic Federal Tax Payment Systems (EFTPS) Form 940 Deposit Rules Pennsylvania Withholding Filing Requirements PA Electronic Funds Transfer PA e-Tides Maryland Withholding Filing Requirements Reciprocal Agreements Mandatory Postings for Employers Multi-State Reporting Bonuses and Supplemental Wages How and When to Use Cumulative Withholding Other Benefits Exempt From Taxes

Table of ContentsPART B - PROCESSING AND REPORTING - CONTINUEDB B B B B B B B B B B B B 22 24 28 31 33 39 39 39 40 43 46 47 49 Group Term Life Insurance Cafeteria Plans Heath Care: Patient Protection and Affordable Care Act Health Care: Reporting Requirements Personal Use of Company Provided Vehicle Medical and Move Related Mileage Rate Charitable Related Mileage Rate Sick Pay (Disability Income) Form 1099 - Miscellaneous Income Business Expense Reimbursements Moving Expense Reimbursements Military Spouse Residency Relief Act Stock Options

PART C - PAYROLL START UP GUIDE NEW EMPLOYERS - NEW EMPLOYEESC C C C C C C C C C C C C C C C C C 1 2 2 3 3 4 4 6 8 9 10 12 14 15 15 18 19 20 Employer Responsibilities New Employer Packets SS-4 Instructions (Application for EIN) PA-100 Instructions MD Registration Pennsylvania Income Tax PA Reciprocal Agreements Maryland and County Income Tax MD Reciprocal Agreements Federal Unemployment Tax Pennsylvania Unemployment Tax Maryland Unemployment Tax New Hire Reporting Requirements Pennsylvania Local Earned Income Tax PA Local Tax Enabling Act 32 Local Services Tax Designing the Payroll System Maintaining Payroll Records

Table of ContentsPART D - PAYROLL REPORTINGD - 1 D - 3 D - 4 D - 5 D - 6 D - 7 D - 8 D - 9 D - 10 D - 13 D - 14 D - 15 D - 16 D - 17 Quick Links to Payroll Tax Forms PA Unemployment Compensation MD Unemployment Compensation PA Employer Withholding Tax PA Local Earned Income Tax PA Local Services Tax MD Employer Withholding Tax MD Local Withholding Reference Guide for Form W-2 MD Annual W-2 Reconciliation PA New Hire Reporting Form MD New Hire Registry Social Security Number Verification Service E-Verify

CHARTS & PAYROLL SAVINGS CHARTS

A

PART A - CHARTS AND PAYROLL SAVING TIPSA A A A 1 2 4 6 Payroll and Other Tax Data - 2012 Payroll and Other Tax Data - 2013 Taxability of Compensation and Benefits Withholding Requirements for Specific Payments Household Employment Taxes Agricultural and Household Employees List of Helpful Government Publications Essential Payroll Web Sites Essential Phone Numbers Indexed Employee Benefit Limits Independent Contractors Exempt versus Non-Exempt Employees Payroll Saving Tips Direct Deposit of Payroll Retirement & Social Security Watch Wage-Hour Exemptions Garnishments Employ Children/Spouses/Parents Reduce the Number of Payrolls Unemployment Compensation Common Paymaster Federal Business Credits Pennsylvania Business Credits

A - 11 A - 12 A - 13 A - 15 A - 16 A - 20 A - 22 A - 31 A - 39 A - 39 A - 39 A - 41 A - 41 A - 42 A - 43 A - 43 A - 44 A - 45 A - 47

PAYROLL AND OTHER TAX DATA - 2012FEDERAL FICA (Social Security)Maximum Taxable Earnings: Employee Deduction: Employer Deduction Maximum Deduction EE/ER: Self-Employment Tax: $110,100

FICA (Medicare)Maximum Taxable Earnings: EE / ER Deduction: Maximum Deduction: Self-Employment Tax:

No Limit 1.45% No Limit 2.9%

4.2 % 6.2 % $4,624.20 / $6,826.20 10.4%

Maximum Taxable Earnings: Percent of Taxable Wages:

FUTA (Employer-Paid)

$7,000 .6% *1

Supplemental Wage/Bonus Rate Flat rate withholding method: Pay is over $1 Million

25% 35%

PENNSYLVANIAMinimum Wage Tipped Employees Maximum Tip Credit

MARYLAND$7.25 $2.83 $4.42 3.07% 3.07% 3.07% $8,000 .08% on all wages/no limit 2.437 -10.5836% 3.7030% $7.25 $3.63 $3.62 Varies based on W-4 Withholding MD resident = 5.75% plus county w/h rate MD resident = 5.75% plus county w/h rate $8,500 None 2.2 - 13.5% 2.6%

Minimum Wage

State Income TaxWage Withholding Supplemental Wage Bonus Rate

Unemployment InsuranceMaximum Taxable Earnings Employee Deduction

Employer Tax Rates Standard New Employer Rate1

____________________________________________________________________

Plus the applicable surcharge see page C8 or Form 940 (Schedule A) for more information.

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PAYROLL AND OTHER TAX DATA - 2013FEDERAL FICA (Social Security)Maximum Taxable Earnings: EE & ER Deduction: Maximum Deduction EE/ER: Self-Employment Tax: $113,700 6.2 % $7,049.40 12.4%

FICA (Medicare)Maximum Taxable Earnings: EE / ER Deduction: Maximum Deduction: Self-Employment Tax: No Limit 1.45% 1 No Limit 2.9% 1

FUTA (Employer-Paid)Maximum Taxable Earnings: Percent of Taxable Wages: $7,000 .6%

Supplemental Wage/Bonus Rate

Flat rate withholding method: Pay is over $1 Million

25% 35%

2012 Standard Mileage Rate:55.5 per mile

201356.5 per mile

1

The 1.45% employee rate applies to the first $200,000 of wages/self-employment earnings. Wages/selfemployment earnings beyond $200,000 are withheld at 2.35%.

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PAYROLL AND OTHER TAX DATA 2013 continuedPENNSYLVANIA Minimum WageMinimum Wage Tipped Employees Maximum Tip Credit $7.25 $2.83 $4.42 3.07% 3.07% 3.07%

MARYLAND$7.25 $3.63 $3.62 Varies based on MW-507 MD resident = 5.75% plus county w/h rate MD resident = 5.75% plus county w/h rate

State Income TaxWage Withholding Supplemental Wage Bonus Rate

Unemployment InsuranceMaximum Taxable Earnings Employee Deduction

Employer Tax Rates Standard New Employer Rate New Construction Employer Rate

$8,500 .07% on all wages/no limit 2.801 -10.8937% 3.6785% 10.1947%

$8,500 None 1.1 - 10.5% 2.6% 10.5%

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TAXABILITY OF COMPENSATION AND BENEFITST - Taxable E - Exempt Federal & MD Income Tax PA Income Tax Medicare Local Income Tax FUTA

Social Security

State Unemployment

Company Automobile: Business Use Personal Use E T E T E T E E E E E T E T

Awards and Prizes: Employee Achievement Safety/Service (Qualified Plan) T E T E T E T E T E T E T E

Business Expense Allowance: (1) Accountable Plan Non-Accountable Plan E T E T E T E T E T E T E T

Cafeteria Plan: Pre-Tax Benefits E E E E(3) E(3) E T

Group Term Life Insurance: Up to $50,000 Excess of $50,000 E T E T E T E E E E E E E E

Retirement Plans: Elective Deferrals 401(k) - 403(b) E T T T T T T

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Simplified Employee Plans (SEP) Employer Paid Salary Reduction 408(k)(6) E E E T E T E T E T E T E T

Simple Plans: Employer 2% Match Salary Reduction

E E

E T

E T

E T

E T

E T

E T

S Corp Health Insurance Premium 2% > Shareholder T E E E E E E

Sick Pay: Salary Continuation Insured-Third Party T T T T(2) T T(2) T E T E T T(2) T T

Tips: More than $20.00 per month Less than $20.00 per month

T E

T E

T E

T T

T T

T E

T T

(1) Amounts in excess of specified government rate for per diem or standard mileage is taxable. (2) Taxable only during first six months following month employee last worked. (3) Except child care benefits.

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WITHHOLDING REQUIREMENTS FOR SPECIFIC PAYMENTSWithholding Required Type of Income Adoption Assistance - Up to $13,170 expense Advances Aircraft - Personal Use Athletic Facilities (On Premises) Achievement Awards and Prizes Back Pay Awards & Damages Bonuses Business Expense Reimbursements Commissions Company Car - Personal Use Death Benefits Deceased Employee Wages - Paid after Calendar Year of Death Deceased Employee Wages - Paid in Same Calendar Year as Death Dependent Care Assistance - Up to $5,000 Directors Fees 3 Discounts (Employee) Dismissal or Severance Pay A-6 No No No No Yes Yes No No No Yes No Yes No No Yes No No No No Yes Fed I.T. No Yes Yes No Yes 1 Yes Yes No Yes Optional No No F.I.C.A. Yes Yes Yes No Yes 1 Yes Yes No Yes Yes No No PA Yes Yes No No Yes 2 Yes Yes No Yes No No No MD No Yes Yes No Yes Yes Yes No Yes Yes No No

Dividends Eating Facilities Educational Assistance - Up to $5,250 Equipment and Tool Allowances Golden Parachute Payments Group Legal Services Guaranteed Wage Payments

No No No No Yes Yes Yes

No No No No Yes Yes Yes

No No Yes No Yes Yes Yes

No No No No Yes Yes Yes

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WITHHOLDING REQUIREMENTS FOR SPECIFIC PAYMENTS continued

Withholding Required Type of Income Holiday Gifts: Cash or equivalent Non-cash subject to de minimis rules Interest Free or Below Market Interest Rate Employer Loan more than $10,000 Jury Duty Pay Meals and Lodging for Employers Convenience Meeting Payments Military Pay (For Temporary Assignments) Moving Expenses - Qualified (See B-48) Moving Expenses - Non-qualified (See B-48) Parking Expense - Up to $240/month Probationary Pay Retiree Consulting Fees 3 No Yes Yes No Yes No Yes No Yes No No A-8 No Yes Yes No Yes No Yes No Yes No No No 4 Yes Yes No Yes No 4 Yes No Yes No No Yes Yes No Yes No Yes No Yes No No Fed I.T. F.I.C.A. PA MD

Yes No

Yes No

Yes No

Yes No Yes

Yes Yes

Yes Yes

Yes Yes Yes No

Retroactive Wage IncreasesRoyalties Scholarships 5

Standby/Idle Time Pay Supper Money Supplemental Unemployment Uniform Allowances Union Payments Vacation Pay Workers Compensation Benefits

Yes No Yes No Yes Yes No

Yes No Sometimes 6 No Yes Yes No

Yes Yes No No No Yes No

Yes No Yes No Yes Yes No

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WITHHOLDING REQUIREMENTS FOR SPECIFIC PAYMENTS continued

1. Exempt from withholding up to $1,600 per employee per year for qualified plans ($400 per employee, per year under a non-qualified plan). S-Corp shareholders do not qualify for this benefit. 2. Exempt from withholding unless the winner is required to render any substantial services as a condition to receiving the prize or award. Amounts over the federal limits listed in 1 above are subject to withholding.3. Fees in excess of $600 are required to be reported on 1099-MISC. 4. The employee must not have the choice between the benefit and cash, reduce their salary to receive the benefit, or be reimbursed for the expense. 5. Any portion which represents payment for teaching, research, or other services by the student as a condition for receiving the scholarship is considered compensation and may be subject to withholding. See publication 15 for further details. 6. Supplemental unemployment benefits are subject to specific rules to be eligible for FICA exemption. See publication 15-A for more information. See Circular E for more complete information at http://www.irs.gov/pub/irs-pdf/p15.pdf.

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HOUSEHOLD EMPLOYMENT TAXESWho is a household employee?You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job. Examples of household employees include babysitters, butlers, cooks, caretakers, drivers, gardeners, housekeepers, and private-duty nurses. Example: You pay Betty Shore to babysit your child and do light housework 4 days a week in your home. Betty follows your specific instructions about household and child care duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee.Schedule H, Household Employment Taxes, is used to report cash wages paid to a person who worked in your home, and is submitted annually with Form 1040. The schedule is used to report and pay federal income taxes withheld and to calculate FICA, Medicare and federal unemployment taxes on wages paid to household employees. The wage threshold for domestic employees remains unchanged at $1,800 per year in 2012. Social security tax is not necessary for household workers under age 18. Household employers are required to include the social security and federal employment taxes in their estimated tax payments.Household Employer's Checklist You may need to do the following things when you have a household employee. When you hire a household employee: When you pay your household employee: Find out if the person can legally work in the United States. Find out if you need to pay state taxes. Withhold social security and Medicare taxes. Withhold federal income tax. Decide how you will make tax payments. Keep records. Get employer identification number (EIN). Give your employee Copies B, C, and 2 of Form W-2, Wage and Tax Statement.

By January 31, 2013:

By February 28, 2013 (April 1, Send Copy A of Form W-2 to the Social Security 2013 if you file Form W-2 Administration (SSA). electronically): File Schedule H (Form 1040), Household Employment Taxes, with your 2011 federal income tax return (Form 1040, 1040NR, or Form 1041). If you do not have to file a return, file Schedule H by itself.

By April 15, 2013:

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AGRICULTURAL EMPLOYMENT TAXESAccording to the IRS, any plot of ground or other area used primarily for the raising of an agricultural or horticultural commodity constitutes a farm for employment tax purposes. Only cash wages paid to employees are subject to FICA and federal income tax withholding. Noncash items such as lodging, food, clothing, and transportation are not subject to FICA and federal income tax withholding.FICA and federal income tax withholding apply to cash payments if either: 1) The employee is paid $150 or more for the year, 2) The employers total payments (cash and noncash) to all employees for agricultural labor are $2,500 or more for the year.

Exceptions. The $150 and $2,500 tests do not apply to wages that you pay to a farmworker who receives less than $150 in annual cash wages and the wages are not subject to social security and Medicare taxes, or federal income tax withholding, even if you pay $2,500 or more in that year to all of your farmworkers if the farmworker:

Is employed in agriculture as a hand-harvest laborer, Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of employment, Commutes daily from his or her permanent home to the farm, and Had been employed in agriculture less than 13 weeks in the preceding calendar year.

Amounts that you pay to these seasonal farmworkers, however, count toward the $2,500-or-more test to determine whether wages that you pay to other farmworkers are subject to social security and Medicare taxes.

Agricultural wages are subject to FUTA and SUTA if: 1) Agricultural wages of $20,000 or more are paid in any quarter in the current or preceding calendar year. 2) 10 or more individuals are employed in agricultural labor for some portion of a day for 20 weeks in the current or preceding calendar year.Agricultural employers who pay wages for both agricultural and nonagricultural labor must keep the wages separate. Agricultural wages and taxes due are reported on Form 943; other wages and taxes due are reported on Form 941.

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LIST OF HELPFUL GOVERNMENT PUBLICATIONSThe following Publications are available from the Internal Revenue Service. You may order them by calling 1-800-TAX-FORM (1-800-829-3676). You may also download some of them from www.irs.gov:

Publication Number 15

Title Circular E, Employer's Tax Guide

Description All employers receive a copy of this publication automatically. This is an annual publication that includes the current year's tax tables, FICA rate, FUTA rate, and a general explanation of rules for depositing federal tax withheld. Supplement to Circular E. Detailed information on proper way to handle fringe benefits. Same as Circular E, except this is specifically for agricultural employers. Explanation of the rules for claiming personal exemptions on the Form W-4. Excellent guide to assist employees in completing a new Form W-4. Explains which educational expenses qualify for deduction for tax purposes. This booklet may assist the payroll practitioner in understanding the taxability of various types of educational expense reimbursements paid by the employer. Essential publication for explaining the reporting and taxation of reimbursed moving expenses, both for the employer and the employee. Essential guide to understanding the taxability of wages, salaries, fringe benefits, and other compensation received for services as an employee. A guide to the reporting, withholding, record keeping.

15-A 15-B 51 505

Employer's Supplemental Tax Guide Employer's Tax Guide to Fringe Benefits Circular A, Agricultural Employers Tax Guide Tax Withholding and Estimated Tax

970

Tax Benefits for Education

521

Moving Expenses

525

Taxable and Nontaxable Income

531

Reporting Tip Income

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LIST OF HELPFUL GOVERNMENT PUBLICATIONS - continuedPublication Number 919 1494

Title How Do I Adjust My Tax Form Withholdings? Table for Figuring Amount Exempt from compensation. Levy On Wages, Salary & Other Income Per Diem Rates 2012 Instructions 1099 - ALL Household Employers Tax Guide

Description Another guide to employees for completing W-4. This is a table for figuring the amount from a levy on wages, salaries, and other

1542 -926

A table of the federal per diem rates for lodging, meals and incidental expenses. Instructions to filers of Form 1099, 1098, 5498 and W-2G. A guide to who qualifies as a household employee and instructions on figuring the tax.

Compliance assistance information is available from the U.S. Department of Labor in regards to the following:

Americans with Disabilities Act of 1990 (ADA) The Davis-Bacon and Related Acts (DBRA) The Fair Labor Standards Act (FLSA) The Family and Medical Leave Act (FMLA) Federal Employee Compensation Act (FECA) And many more

You may order by calling 1-866-4-USA-DOL or print from website www.dol.gov/compliance.

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ESSENTIAL PAYROLL WEB SITESWhether youre an expert on the Web or a novice, there are some sites that you should visit regularly to see whats new.

Federal SitesEFTPS: Internal Revenue Service (homepage): Social Security Administration: U.S. Department of Labor employment law site: www.eftps.gov www.irs.gov www.ssa.gov www.dol.gov

New-hire reporting: www.acf.hhs.gov/programs/cse/newhire/employer/private/newhire.htm

State & Local SitesPA Department of Revenue: PA Department of Revenue Business Tax Registration: PA Department of Labor & Industry: PA Department of Community and Economic Development: PA e-TIDES: Maryland Webpage: Comptroller of Maryland: MD Dept. of Labor, Licensing & Regulation: www.newpa.com www.etides.state.pa.us www.maryland.gov/ www.comp.state.md.us/ www.dllr.state.md.us www.pa100.state.pa.us www.dli.state.pa.us www.revenue.state.pa.us

Professional Organizations

American Payroll Association (APA):

www.americanpayroll.org

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Essential Phone NumbersName Phone Number

Internal Revenue Service

Business and Specialty Tax Line

1-800-829-4933

Exempt Organizations and Government Entities

1-877-829-5500 (toll free)

Electronic Federal Tax Payment System (EFTPS) Hotline

1-800-555-4477

Retirement Plans Taxpayer Assistance Telephone ServiceEmployer Identification Number (EIN) Request Number

1-877-829-5500 (toll free)800-829-4933 Form SS-4 may be faxed to: EIN Operation, Cincinnati, OH at 859-669-5760

Form 941 and Form 940 On-Line Filling Program / Austin Submission Center

New Toll Free Number for e-Help 866-255-0654

Forms (IRS)

Forms may be ordered at: 1-800-829-3676

General IRS Tax Law Questions and Account Information

800-829-1040

Information Reporting Program Customer Service Section

866-455-7438 (toll free)

IRS Tax Fax

703-368-9694 (non-toll-free) This service offers faxed topical tax information. A - 16

National Taxpayer Advocates Help Line

1-877-777-4778 (toll free)

Taxpayer Advocacy Panel

1-888-912-1227 (toll free)

Telephone Device for the Deaf (TDD)

1-800-829-4059

Tele-Tax System

800-829-4477

Social Security Administration

Copy A / Form W-2 Reporting SSAs Employer Reporting Service 1-800-772-6270

General Social Security Benefit Questions

1-800-772-1213

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Essential Phone NumbersName Phone Number

PA Dept. of Revenue

Fact and Information Line

1-888-PATAXES (728-2937)

e-Business Tax Unit (e-Tides Technical Assistance)

717-783-6277

Taxpayer Service and Information Center

717-787-1064

Special Hearing or Speaking Needs (TTonly)

1-800-447-3020

Taxpayers' Rights Advocate

717-772-9347

MD Employer Withholding

Information Line

410-260-7980 or 1-800-638-2937

Magnetic Media Reporting

410-260-7150

PA Unemployment Compensation

UC Tax Information Line

1-866-403-6163 or 717-787-7679

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UC Employer Tax Services York and Adams Counties Cumberland County Lancaster County Dauphin County Perry County Franklin County 717-767-7620 717-787-5939 717-299-7606 717-214-2991 717-787-5939 717-264-7192

MD Unemployment Compensation

Employer Information Line

410-949-0033 or 1-800-492-5524

Experience Rate

410-767-2413

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INDEXED EMPLOYEE BENEFIT LIMITSType of Limitation Elective Deferrals (401(k) and 403(b); not including adjustments and catch-ups) 457(b)(2) and 457(c)(1) Limits (not including catch-ups) Annual Defined Benefit Plan Limit Annual Defined Contribution Plan Limit Annual Compensation Limit Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993 Highly Compensated Employee ("HCEs") Individual Retirement Accounts ("IRAs"), for individuals 49 and below SIMPLE Retirement Accounts SEP Coverage (minimum compensation) SEP Compensation (maximum) Tax Credit ESOP Maximum Balance Amount for Lengthening of 5-Year ESOP Period Excess Distribution Threshold Qualified Police and Firefighters' DB Benefit Limit Income Subject to Social Security Tax FICA Tax for employers Social Security Tax for employees Medicare Tax for employees (on up to $200,000 wages) and employers (all wages) Medicare Tax for employees on wages in excess of $200,000 2013 $17,500 $17,500 $205,000 $51,000 $255,000 $380,000 $115,000 $5,500 $12,000 $550 $255,000 $1,035,000 $205,000 N/A N/A $113,700 7.65% 6.2% 1.45% 2.35% 2012 $17,000 $17,000 $200,000 $50,000 $250,000 $375,000 $115,000 $5,000 $11,500 $550 $250,000 $1,015,000 $200,000 N/A N/A $110,100 7.65% 4.2% 1.45% 1.45%

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Type of Limitation FICA Tax for self-employed workers Social Security Tax for self-employed workers Medicare Tax for self-employed workers Health Savings Account (HSA) (Individual/family) Flexible Spending Arrangement (FSA)

2013 15.3% 12.4% 2.9% $3,250/6,450 $2,500

2012 13.3% 10.4% 2.9% $3,100/$6,250 No limit

Catch-up contributions

Individuals 50 years of age and over may make additional catch up contributions each year as follows: 2012 - 2013 ROTH, 401(k), 403(b), 457, SEP-408(k), SARSEP SIMPLE IRAs $ 5,500 $ 2,500 $ 1,000

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INDEPENDENT CONTRACTORSEmployee or Independent Contractor?When a worker performs services and receives some form of remuneration, an important question is whether the remuneration is subject to employment taxes. The answer depends on whether the worker is an employee or an independent contractor. This determination of the worker's status depends on which facts define the business and the relationship of the parties, at the time the services are rendered.

An employer must generally withhold federal income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to an employee. An employer does not generally have to withhold or pay any taxes on payments to independent contractors.

Common-Law RulesTo determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.Behavioral control Facts that show whether the business has a right to direct or control how the worker does the task for which the worker is hired include the type and degree of: Instructions that the business gives to the worker An employee is generally subject to the business' instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

When and where to do the work. What tools or equipment to use. What workers to hire or to assist with the work. Where to purchase supplies and services. What work must be performed by a specified individual. What order or sequence to follow.

The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.

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INDEPENDENT CONTRACTORS - continuedTraining that the business gives to the worker An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial control

Facts that show whether the business has a right to control the business aspects of the worker's job include:

The extent to which the worker has unreimbursed business expenses Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

The extent of the worker's investment An independent contractor often has a significant investment in the facilities or equipment he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status. The extent to which the worker makes his or her services available to the relevant market An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. How the business pays the worker An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly. The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.

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INDEPENDENT CONTRACTORS - continuedType of relationship Facts that show the parties' type of relationship include:

Written contracts describing the relationship the parties intended to create. Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. The permanency of the relationship. If you engage a worker with the expectation that the relationship

will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.

The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

IRS help. If you want the IRS to determine whether or not a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

Category of EmployeesBefore you can know how to treat payments that you make to workers for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be:

An independent contractor, A common-law employee, A statutory employee, or A statutory nonemployee.

Independent ContractorsPeople such as lawyers, contractors, subcontractors, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

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INDEPENDENT CONTRACTORS - continuedCommon-Law EmployeesUnder common-law rules, anyone who performs services for you is your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.If you have an employer-employee relationship, it makes no difference how it is labeled. The

substance of the relationship, not the label, governs the worker's status. It does not matter whether the individual is employed full time or part time. For employment tax purposes, no distinction is made between classes of employees. Superintendents, managers, and other supervisory personnel are all employees. An officer of a corporation is generally an employee; however, an officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, is not considered an employee. A director of a corporation is not an employee with respect to services performed as a director. You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees.Leased employees. Under certain circumstances, a firm furnishing workers to other firms is the employer of those workers for employment tax purposes. For example, a temporary staffing service may provide the services of secretaries, nurses, and other similarly trained workers to its clients on a temporary basis.

The staffing service enters into contracts with the clients under which the clients specify the services to be provided and a fee is paid to the staffing service for each individual furnished. The staffing service has the right to control and direct the worker's services for the client, including the right to discharge or reassign the worker. The staffing service hires the workers, controls the payment of their wages, provides them with unemployment insurance and other benefits, and is the employer for employment tax purposes.

Statutory EmployeesIf workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute, statutory employees, for certain employment tax purposes. This would happen if they fall within any one of the following four categories and meet the three conditions described under Social security and Medicare taxes below. 1. A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission. 2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.

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INDEPENDENT CONTRACTORS - continued3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done. 4. A full-time traveling or city salesperson that works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed for you must be the salesperson's principal business activity.Social security and Medicare taxes. Withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply.

The service contract states or implies that substantially all the services are to be performed personally by them. They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities). The services are performed on a continuing basis for the same payer.

Income tax. Do not withhold federal income tax from the wages of statutory employees.

Reporting payments to statutory employees. Furnish Form W-2 to a statutory employee, and check Statutory employee in box 13. Show your payments to the employee as other compensation in box 1. Also, show social security wages in box 3, social security tax withheld in box 4, Medicare wages in box 5, and Medicare tax withheld in box 6. The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. He or she reports earnings as a statutory employee on line 1 of Schedule C (Form 1040), Profit or Loss from Business, or Schedule C-EZ (Form 1040), Net Profit from Business. A statutory employee's business expenses are deductible on Schedule C (Form 1040) or C-EZ (Form 1040) and are not subject to the reduction by 2% of his or her adjusted gross income that applies to common-law employees.

Statutory NonemployeesThere are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes, if:

Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked and Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes.

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INDEPENDENT CONTRACTORS continuedDirect sellers Direct sellers include persons falling within any of the following three groups.

1. Persons engaged in selling (or soliciting the sale of) consumer products in the home or place of business other than in a permanent retail establishment. 2. Persons engaged in selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis prescribed by regulations, for resale in the home or at a place of business other than in a permanent retail establishment. 3. Persons engaged in the trade or business of delivering or distributing newspapers or shopping news (including any services directly related to such delivery or distribution).Direct selling includes activities of individuals who attempt to increase direct sales activities of their direct sellers and who earn income based on the productivity of their direct sellers. Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting.

Licensed real estate agents This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output.

Companion sitters Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. A person engaged in the trade or business of putting the sitters in touch with individuals who wish to employ them (that is, a companion sitting placement service) will not be treated as the employer of the sitters if that person does not receive or pay the salary or wages of the sitters and is compensated by the sitters or the persons who employ them on a fee basis. Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes.

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INDEPENDENT CONTRACTORS - continuedSalespersonTo determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. If a salesperson who works for you does not meet the tests for a common-law employee, discussed earlier, you do not have to withhold federal income tax from his or her pay. However, even if a salesperson is not an employee under the usual common-law rules, his or her pay may still be subject to social security, Medicare, and FUTA taxes. To determine whether a salesperson is an employee for social security, Medicare, and FUTA tax purposes, the salesperson must meet all eight elements of the statutory employee test. A salesperson is a statutory employee for social security, Medicare, and FUTA tax purposes if he or she: 1. Works full time for one person or company except, possibly, for sideline sales activities on behalf of some other person, 2. Sells on behalf of, and turns his or her orders over to, the person or company for which he or she works, 3. Sells to wholesalers, retailers, contractors, or operators of hotels, restaurants, or similar establishments, 4. Sells merchandise for resale, or supplies for use in the customer's business, 5. Agrees to do substantially all of this work personally, 6. Has no substantial investment in the facilities used to do the work, other than in facilities for transportation, 7. Maintains a continuing relationship with the person or company for which he or she works, and 8. Is not an employee under common-law rules.

ExamplesExample 1 - Building and Construction Industry Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. He uses his own tools and performs services in the order designated by the corporation and according to its specifications. The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. He does not have a place of business or hold himself out to perform similar services for others. Either party can end the services at any time. Milton Manning is an employee of the corporation.

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INDEPENDENT CONTRACTORS - continued

Example 2 - Building and Construction Industry Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. A signed contract established a flat amount for the services rendered by Bill Plum. Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. He hires his own roofers who are treated as employees for federal employment tax purposes. If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. Bill Plum, doing business as Plum Roofing, is an independent contractor. Example 3 - Building and Construction Industry Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies that she obtained through advertisements. Vera is an independent contractor. Example 4 - Trucking Industry Rose Trucking contracts to deliver material for Forest, Inc., at $140 per ton. Rose Trucking is not paid for any articles that are not delivered. At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. All operating expenses, including insurance coverage, are paid by Jan Rose. All equipment is owned or rented by Jan and she is responsible for all maintenance. None of the drivers are provided by Forest, Inc. Jan Rose, operating as Rose Trucking, is an independent contractor. Example 5 - Computer Industry Steve Smith, a computer programmer, is laid off when Megabyte, Inc. downsizes. Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. It is not clear how long that it will take to complete the project, and Steve is not guaranteed any minimum payment for the hours spent on the program. Megabyte provides Steve with no instructions beyond the specifications for the product itself. Steve and Megabyte have a written contract, which provides that Steve is considered to be an independent contractor, is required to pay federal and state taxes, and receives no benefits from Megabyte. Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. Steve works at home and is not expected or allowed to attend meetings of the software development group. Steve is an independent contractor.

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INDEPENDENT CONTRACTORS - continued

INDEPENDENT CONTRACTORS - PAPennsylvania-Construction Workplace Misclassification Act. The Commonwealth of Pennsylvania has enacted legislation providing for the criteria independent contractors in the construction industry need to follow and imposing penalties for those employers that fail to do so. Independent contractors. For purposes of unemployment compensation, workers' compensation and improper classification of employees, an individual who performs services in the construction industry for remuneration is an independent contractor only if: (1) The individual has a written contract to perform the services; (2) The individual is free from control or direction over the performance of the services both under the contract of service and in fact; and (3) As to such services, the individual is customarily engaged in an independently established trade, occupation, profession or business. Violation. An employer, or an officer or agent of an employer, will be in violation of the act and subject to its penalties, remedies and actions if the employer, officer or agent: (1) fails to properly classify an individual as an employee for purposes of the Unemployment Compensation Law and fails to pay contributions, reimbursements or other amounts required to be paid under that law; or (2) fails to properly classify an individual as an employee for purposes of the Workers' Compensation Act and fails to provide the coverage required under that act. Separate offenses. Each individual who is not properly classified as an employee will be the basis of a separate violation. In addition, note that both civil and criminal penalties may be imposed for violations of the act.

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EXEMPT VERSUS NON-EXEMPT EMPLOYEESCoverage under the Federal Fair Labor Standards Act (FLSA)Most jobs are governed by the FLSA. Some are not. Some jobs are excluded from FLSA coverage by statute. Other jobs, while governed by the FLSA, are considered "exempt" from the FLSA overtime rules. Exclusions from FLSA coverage Particular jobs may be completely excluded from coverage under the FLSA overtime rules. There are two general types of complete exclusion. Some jobs are specifically excluded in the statute itself. For example, employees of movie theaters and many agricultural workers are not governed by the FLSA overtime rules. Another type of exclusion is for jobs which are governed by some other specific federal labor law. As a general rule, if a job is governed by some other federal labor law, the FLSA does not apply. For example, most railroad workers are governed by the Railway Labor Act, and many truck drivers are governed by the Motor Carriers Act, and not the FLSA. Many of FLSA exclusions are found in 213 of the FLSA. Exempt or Nonexempt Employees whose jobs are governed by the FLSA are either "exempt" or "nonexempt." Nonexempt employees are entitled to overtime pay. Exempt employees are not. Most employees covered by the FLSA are nonexempt. Some are not. Some jobs are classified as exempt by definition. For example, "outside sales" employees are exempt ("inside sales" employees are nonexempt). For most employees, however, whether they are exempt or nonexempt depends on (a) how much they are paid, (b) how they are paid, and (c) what kind of work they do. With few exceptions, to be exempt an employee must (a) be paid at least $23,600 per year ($455 per week), and (b) be paid on a salary basis, and also (c) perform exempt job duties. These requirements are outlined in the FLSA Regulations (promulgated by the U.S. Department of Labor). Most employees must meet all three "tests" to be exempt. Salary level test Employees who are paid less than $23,600 per year ($455 per week) are nonexempt. (Employees who earn more than $100,000 per year are almost certainly exempt.)

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EXEMPT VERSUS NON-EXEMPT EMPLOYEES - continuedSalary basis test Generally, an employee is paid on a salary basis if s/he has a "guaranteed minimum" amount of money s/he can count on receiving for any work week in which s/he performs "any" work. This amount need not be the entire compensation received, but there must be some amount of pay the employee can count on receiving in any work week in which s/he performs any work. Some "rules of thumb" indicating that an employee is paid on a salary basis include whether an employee's base pay is computed from an annual figure divided by the number of paydays in a year, or whether an employee's actual pay is lower in work periods when s/he works fewer than the normal number of hours. However, whether an employee is paid on a salary basis is a "fact," and thus specific evaluation of particular circumstances is necessary. Whether an employee is paid on a salary basis is not affected by whether pay is expressed in hourly terms (as this is a fairly common requirement of many payroll computer programs), but whether the employee in fact has a "guaranteed minimum" amount of pay s/he can count on. The FLSA salary basis test applies only to reductions in monetary amounts. Requiring an employee to charge absences from work to leave accruals is not a reduction in "pay," because the monetary amount of the employee's paycheck remains the same. Similarly, paying an employee more than the guaranteed salary amount is not normally inconsistent with salary basis status, because this does not result in any reduction in the base pay. With some exceptions, the base pay of a salary basis employee may not be reduced based on the "quality or quantity" of work performed (provided that the employee does "some" work in the work period). This usually means that the base pay of a salary basis employee may not be reduced if s/he performs less work than normal, if the reason for that is determined by the employer. For example, a salary basis pay employee's base pay may not be reduced if there is "no work" to be performed (such as for a plant closing or slow period), and a salary basis employee's base pay may not be reduced for partial day absences. However, employers may "dock" the base pay of salary basis employees in full day increments, for disciplinary suspensions, or for personal leave, or for sickness under a bona fide sick leave plan (as for example if the employee has run out of accrued sick leave). Thus, there can be "permissible" and "impermissible" reductions in salary basis pay. Permissible reductions have no effect on the employee's exempt status. Impermissible reductions may, in that the general rule is that an employee who is subjected to impermissible reductions in salary is no longer paid on a salary basis, and is therefore nonexempt. However, employers have several avenues by which they can "cure" impermissible reductions in salary basis pay, and as a practical matter these make it unlikely that an otherwise exempt employee would become nonexempt because of salary basis pay problems. The salary basis pay requirement for exempt status does not apply to some jobs (for example, doctors, lawyers and schoolteachers are exempt even if the employees are paid hourly).

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EXEMPT VERSUS NON-EXEMPT EMPLOYEES - continuedThe duties tests An employee who meets the salary level tests and also the salary basis tests is exempt only if s/he also performs exempt job duties. These FLSA exemptions are limited to employees who perform relatively highlevel work. Whether the duties of a particular job qualify as exempt depends on what they are. Job titles or position descriptions are of limited usefulness in this determination. (A secretary is still a secretary even if s/he is called an "administrative assistant," and the chief executive officer is still the CEO even if s/he is called a janitor.) It is the actual job tasks that must be evaluated, along with how the particular job tasks "fit" into the employer's overall operations. There are three typical categories of exempt job duties, called "executive," "professional," and "administrative." Exempt executive job duties Job duties are exempt executive job duties if the employee1. regularly supervises two or more other employees, and also 2. has management as the primary duty of the position, and also, 3. has some genuine input into the job status of other employees (such as hiring, firing, promotions, or assignments).

Supervision means what it implies. The supervision must be a regular part of the employee's job, and must be of other employees. Supervision of non-employees does not meet the standard. The "two employees" requirement may be met by supervising two full-time employees or the equivalent number of part-time employees. (Two half-time employees equal one full-time employee.)

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EXEMPT VERSUS NON-EXEMPT EMPLOYEES - continued"Mere supervision" is not sufficient. In addition, the supervisory employee must have "management" as the "primary duty" of the job. The FLSA Regulations contain a list of typical management duties. These include (in addition to supervision):

interviewing, selecting, and training employees; setting rates of pay and hours of work; maintaining production or sales records (beyond the merely clerical); appraising productivity; handling employee grievances or complaints, or disciplining employees; determining work techniques; planning the work; apportioning work among employees; determining the types of equipment to be used in performing work, or materials needed; planning budgets for work; monitoring work for legal or regulatory compliance; providing for safety and security of the workplace.

Determining whether an employee has management as the primary duty of the position requires case-bycase evaluation. A "rule of thumb" is to determine if the employee is "in charge" of a department or subdivision of the enterprise (such as a shift). One handy clue might be to ask who a telephone inquiry would be directed to if the called asked for "the boss." Typically, only one employee is "in charge" at any particular time. Thus, for example, if a "sergeant" and a "lieutenant" are each at work at the same time (in the same unit or subunit of the organization), only the lieutenant is "in charge" during that time. An employee may qualify as performing executive job duties even if s/he performs a variety of "regular" job duties as well. For example, the night manager at a fast food restaurant may in reality spend most of the shift preparing food and serving customers. S/he is, however, still "the boss" even when not actually engaged in "active" bossing duties. In the event that some "executive" decisions are required, s/he is there to make them, and this is sufficient. The final requirement for the executive exemption is that the employee has genuine input into personnel matters. This does not require that the employee be the final decision maker on such matters, but rather that the employee's input is given "particular weight." Usually, it will mean that making personnel recommendations is part of the employee's normal job duties, that the employee makes these kinds of recommendations frequently enough to be a "real" part of the job, and that higher management takes the employee's personnel suggestions or recommendations seriously.

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EXEMPT VERSUS NON-EXEMPT EMPLOYEES - continuedExempt professional job duties The job duties of the traditional "learned professions" are exempt. These include lawyers, doctors, dentists, teachers, architects, and clergy. Also included are registered nurses (but not LPNs), accountants (but not bookkeepers), engineers (who have engineering degrees or the equivalent and perform work of the sort usually performed by licensed professional engineers), actuaries, scientists (but not technicians), pharmacists, and other employees who perform work requiring "advanced knowledge" similar to that historically associated with the traditional learned professions. Professionally exempt work means work which is predominantly intellectual, requires specialized education, and involves the exercise of discretion and judgment. Professionally exempt workers must have education beyond high school, and usually beyond college, in fields that are distinguished from (more "academic" than) the mechanical arts or skilled trades. Advanced degrees are the most common measure of this, but are not absolutely necessary if an employee has attained a similar level of advanced education through other means (and perform essentially the same kind of work as similar employees who do have advanced degrees). Some employees may also perform "creative professional" job duties which are exempt. This classification applies to jobs such as actors, musicians, composers, writers, cartoonists, and some journalists. It is meant to cover employees in these kinds of jobs whose work requires invention, imagination, originality or talent; who contribute a unique interpretation or analysis. Identifying most professionally exempt employees is usually pretty straightforward and uncontroversial, but this is not always the case. Whether a journalist is professionally exempt, for example, or a commercial artist, will likely require careful analysis of just what the employee actually does. Exempt Administrative job duties The most elusive and imprecise of the definitions of exempt job duties is for exempt "administrative" job duties. The Regulatory definition provides that exempt administrative job duties are (a) office or non-manual work, which is directly related to management or general business operations of the employer or the employer's customers, and (b) a primary component of which involves the exercise of independent judgment and discretion about matters of significance.

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EXEMPT VERSUS NON-EXEMPT EMPLOYEES - continuedExempt professional job duties - continued The administrative exemption is designed for relatively high-level employees whose main job is to "keep the business running." A useful rule of thumb is to distinguish administrative employees from "operational" or "production" employees. Employees who make what the business sells are not administrative employees. Administrative employees provide "support" to the operational or production employees. They are "staff" rather than "line" employees. Examples of administrative functions include labor relations and personnel (human resources employees), payroll and finance (including budgeting and benefits management), records maintenance, accounting and tax, marketing and advertising (as differentiated from direct sales), quality control, public relations (including shareholder or investment relations, and government relations), legal and regulatory compliance, and some computer-related jobs (such as network, internet and database administration).

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EXEMPT VERSUS NON-EXEMPT EMPLOYEES - continuedTo be exempt under the administrative exemption, the "staff" or "support" work must be office or nonmanual, and must be for matters of significance. Clerical employees perform office or nonmanual support work but are not administratively exempt. Nor is administrative work exempt just because it is financially important, in the sense that the employer would experience financial losses if the employee fails to perform competently. Administratively exempt work typically involves the exercise of discretion and judgment, with the authority to make independent decisions on matters which affect the business as a whole or a significant part of it. Questions to ask might include whether the employee has the authority to formulate or interpret company policies; how major the employee's assignments are in relation to the overall business operations of the enterprise (buying paper clips versus buying a fleet of delivery vehicles, for example); whether the employee has the authority to commit the employer in matters which have significant financial impact; whether the employee has the authority to deviate from company policy without prior approval. An example of administratively exempt work could be the buyer for a department store. S/he performs office or nonmanual work and is not engaged in production or sales. The job involves work which is necessary to the overall operation of the store -- selecting merchandize to be ordered as inventory. It is important work, since having the right inventory (and the right amount of inventory) is crucial to the overall well-being of the store's business. It involves the exercise of a good deal of important judgment and discretion, since it is up to the buyer to select items which will sell in sufficient quantity and at sufficient margins to be profitable. Other examples of administratively exempt employees might be planners and true administrative assistants (as differentiated from secretaries with fancy titles). Bookkeepers, "gal Fridays," and most employees who operate machines are not administratively exempt. Merely clerical work may be administrative, but it is not exempt. Most secretaries, for example, may accurately be said to be performing administrative work, but their jobs are not usually exempt. Similarly, filing, filling out forms and preparing routine reports, answering telephones, making travel arrangements, working on customer "help desks," and similar jobs are not likely to be high-level enough to be administratively exempt. Many clerical workers do in fact exercise some discretion and judgment in their jobs. However, to "count" the exercise of judgment and discretion must be about matters of considerable importance to the operation of the enterprise as a whole. Routinely ordering supplies (and even selecting which vendor to buy supplies from) is not likely to be considered high- enough to qualify the employee for administratively exempt status. There is no "bright line." Some secretaries may indeed be high-level, administratively exempt employees (for example, the secretary to the CEO who really does "run his life"), while some employees with fancy titles (e.g., "administrative assistant") may really be performing nonexempt clerical duties.

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EXEMPT VERSUS NON-EXEMPT EMPLOYEES - continuedRights of exempt employees An exempt employee has virtually "no rights at all" under the FLSA overtime rules. About all an exempt employee is entitled to under the FLSA is to receive the full amount of the base salary in any work period during which s/he performs any work (less any permissible deductions). Nothing in the FLSA prohibits an employer from requiring exempt employees to "punch a clock," or work a particular schedule, or "make up" time lost due to absences. Nor does the FLSA limit the amount of work time an employer may require or expect from any employee, on any schedule. ("Mandatory overtime" is not restricted by the FLSA.) Keep in mind that this discussion is limited to rights under the FLSA. Exempt employees may have rights under other laws or by way of employment policies or contracts. Rights of non-exempt employees Nonexempt employees are entitled under the FLSA to time and one-half their "regular rate" of pay for each hour they actually work over the applicable FLSA overtime threshold in the applicable FLSA work period.

KEEP UP-TO-DATE ON "TAXABLE WAGES" AND "EXEMPT EMPLOYEES"Two of the most important potential tax-savings areas of which a payroll manager must be aware involve payments that may not be subject to one or more of the federal or state employment taxes and employees who may not be subject to them.

Keep in mind in this regard that direct tax savings will generally result only in relation to the "social security" type employment taxes--that is, the taxes imposed under the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and the various state unemployment and disability insurance laws. This is because these are the laws that impose a tax directly on an employer, and actual tax dollars can be saved by knowing that a particular type of payment or employee is exempt from a particular tax. This is not to say that the subject of taxable wages and exempt employees is unimportant where federal and state income taxes are involved. Even though employers have no general out-of-pocket tax liability where such taxes are concerned, knowing what types of payments and employees are subject to withholding can save needless bookkeeping time and the expenses of correcting situations where tax is withheld when it should not have been, to say nothing of avoiding the penalties that may be imposed where an uninformed payroll manager fails to withhold from a payment or employee from whom tax should have been withheld.

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PAYROLL SAVING TIPS DIRECT DEPOSIT OF PAYROLLDirect deposit of payroll can save time and money for the employer and employee. On the employer side, direct deposit means that each employees paycheck is deposited right into the employees personal account, eliminating costly steps in the payroll process, including the need to stop payment on and reissue lost or stolen checks. Direct deposit means fewer check processing charges and reconcilement maintenance fees from the employer's financial institution. On the employee side, there is no chance of lost or stolen checks, no two to four day waiting period for the paycheck to clear, and employees still receive a pay receipt detailing their gross and net pay and deductions made.

PLANNING AHEAD - RETIREMENT & SOCIAL SECURITYIf you have employees who are planning to retire, now is a good time for them to contact the Social Security Administration to see which month is best for them to claim benefits. In some cases, the choice of retirement month could mean additional benefits for the employee and his or her family. Depending on the person's earnings, age, and benefit amount, it may be possible for him or her to start collecting benefits while continuing to work. If your employees want more information about social security, or want to arrange for an appointment to talk with a social security representative, the Social Security Administration advises that they should call 1800-772-1213. The government has a web site located at http://www.ssa.gov. Individuals may apply for social security benefits online by using the website www.ssa.gov/retireonline/, or they may apply by telephone by calling 1-800-772-1213.The SSA website contains a Retirement Planner. The Planner and online calculators give estimates for disability and survivors benefits as well as your retirement benefit estimate. An Earnings Limit Calculator assists workers in computing the effect of earnings on their social security retirement benefits.

Workers who have reached full retirement age (age 66 in 2012 and 2013) may work without their benefits being reduced because of the amount of their annual earnings. Annual earnings affect the amount of Social Security benefits only until full retirement age. After that, you can receive full benefits no matter how much you earn. Full retirement age will gradually increase to age 67, as shown below.The Social Security Administration has developed a unique educational tool to help Americans understand their social security benefits so they can undertake adequate financial planning for their future. This SSA tool is a Social Security Statement that gives workers of all ages their own personal historical data and future benefit estimates. These Statements are mailed to workers age 25 and older. The 4-page Social Security Statement provides information for retirement, disability, and survivors benefits that they could be eligible for now and in the future.

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PAYROLL SAVING TIPS - continuedPayrolls Role: The social security earnings record provided on the Social Security Statement is based on Form W2 information supplied by an individual's employers. Discrepancies in wage record information - such as name/SSN mismatches - preclude wages being credited to an individual's account. Such earnings will be placed in a suspense file and will not appear on the Social Security Statement. Since uncredited earnings will affect an individual's future entitlement, employees who get a Social Security Statement with earnings totals lower than they expect are going to - and should - have questions. The most likely place for an employee to turn with a question is, of course, the payroll department, so practitioners need to be prepared.

AGE TO RECEIVE FULL SOCIAL SECURITY BENEFITSNote: Persons born on January 1 of any year should refer to the previous year. Full Retirement Year of Birth 1937 or earlier 1938 1939 1940 1941 1942 1943-1954 1955 1956 1957 1958 1959 1960 and later 65 65 and 2 months 65 and 4 months 65 and 6 months 65 and 8 months 65 and 10 months 66 66 and 2 months 66 and 4 months 66 and 6 months 66 and 8 months 66 and 10 months 67 Age

The earliest a person can start receiving Social Security retirement benefits remains age 62.

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PAYROLL SAVING TIPS - continuedCUT LABOR COSTS BY WATCHING WAGE-HOUR EXEMPTIONSFor most employers the largest single statutory source of labor costs is the Fair Labor Standards Act with its minimum wage and overtime pay requirements. Effective August 23, 2004 the Department of Labor reformed 50-year old overtime regulations and introduced new overtime rules. In many cases, however, labor costs may be cut by knowing exactly what it is the Fair Labor Standards Act requires, and what it does not require. For example, there are any number of exemptions--total or partial--from the minimum wage requirements. The Department of Labor (www.dol.gov) website provides additional information.Of utmost significance to most employers is the complete minimum wage and overtime exemption extended to socalled white collar workers--administrative, executive and professional employees. Keep in mind that federal wage-hour rules are not the only ones with which you should be concerned. States also have legislated in this area, and although the state laws may cover employees who are not covered by the federal law, the states, too, provide exemptions with which employers must be familiar. Knowledge of these will prevent payment of overtime rates when straight-time pay will suffice under the law and from paying a straight-time wage rate that is higher than that required under the law. Effective July 24, 2009, the federal minimum wage increased to $7.25 per hour. This change reflects the third and final federal minimum wage increase as amended under the Fair Labor Standards Act (FLSA).

Many states also have minimum wage laws. Where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages. Please see page A-1 for the minimum wage amounts for Maryland and Pennsylvania. Various minimum wage exceptions apply under specific circumstances to workers with disabilities, full-time students, youth under age 20 in their first 90 consecutive calendar days of employment, tipped employees and student-learners. For a complete listing of state minimum wage laws, please visit the US Department of Labor website at http://www.dol.gov/whd/minwage/america.htm.

GARNISHMENT PROBLEMS SMOOTHLYA busy payroll manager has never been fond of garnishment proceedings. But with the job protection offered an employee-debtor under the Consumer Credit Protection Act, the payroll manager is going to have to live with the problem. Thus, the methods by which garnishments are handled must be made as simple, efficient and economical as possible. The U.S. Department of Labor website at http://www.dol.gov/dol/topic/wages/garnishments.htm has very useful information on this topic.

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PAYROLL SAVING TIPS - continuedEMPLOY CHILDREN/SPOUSES/PARENTSTaxability of Children/Spouses Wages for Sole Proprietorship

Federal Income Tax

Social Security

MD & PA Income Tax Medicare

PA Local Income Tax FUTA

PA Unemployment

MD Unemployment

Spouse

T

T

T

T

T

E

E

E

Child under 18

T

E

E

T

T

E

E

E

Child 18 - 20

T

T*

T*

T

T

E

T

E

Child 21 and Over

T

T

T

T

T

T

T

T

Parents

T

T*

T*

T

T

E

E

E

* Payments for domestic services, outside of a trade or business, are generally not subject to withholding. See Publication 15 for further information.

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SAVE BY REDUCING THE NUMBER OF PAYROLLSOne often overlooked way to save payroll costs is to have fewer payrolls. Many employers pay their employees every week. By switching to bi-weekly payment these employers use half the amount of time spent computing and processing the payroll. Additional savings result from reducing the supplies required.

UNEMPLOYMENT COMPENSATION Check the computation of your unemployment compensation "experience rating." Experience ratings are mailed at the beginning of the calendar year and are calculated based on prior years unemployment benefits paid. Better experience ratings result in smaller employer contributions. Inaccurate information reported on your experience rating calculation can adversely affect your employers rate. If inaccurate information is reported, employers can appeal their assigned rate. Review and respond to any charges against your unemployment account. Charges are benefits paid to employees or former employees.

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PAYROLL SAVING TIPS - continued

COMMON PAYMASTERA company organized as a corporation can take advantage of the common paymaster rule to avoid paying extra taxes. Under this concept, a parent company can calculate payroll taxes for employees being paid by multiple subsidiaries as though they were being paid by a single organization for the entire year. This means that the parent company designates a single entity within the group of controlled companies to pay those employees who are employed by more than one subsidiary. This "common paymaster" is also responsible for maintaining the payroll records for those employees. The common paymaster can pay concurrently employed individuals with one paycheck, or with separate paychecks. The common paymaster also has primary responsibility for remitting payroll taxes to the government, which the common paymaster computes as though it were the sole employer of those individuals who are concurrently employed. Also, all other subsidiaries using the common paymaster are jointly and severally liable for their shares of payroll taxes to be remitted. The following conditions must be met for the Common Paymaster rule to apply:

The paying parties must be related, where either (1) a single company owns at least the stock of the other related companies, (2) at least 30% of the employees of one corporation must be concurrently employed by the other corporation, or (3) at least half of the officers of one corporation must be officers of the other corporation. If a company is a non-stock corporation, at least the board of directors of one corporation must also serve on the board of the other corporation. All payments made to employees must be through a single legal entity; thus, the employee cannot be paid separately by multiple payroll departments within the same company.

The last condition is key all payments must be made from a single entity, which calls for the consolidation of payroll departments in order to achieve the available savings under this best practice.Each corporation must pay its own part of the employment taxes and may deduct only its own part of the wages. The deductions will not be allowed unless the corporation reimburses the common paymaster for the wage and tax payments. See Regulations section 31.3121(s)-1 for more information. The common paymaster is responsible for filing information and tax returns and issuing Forms W-2 with respect to wages it is considered to have paid as a common paymaster. States treat common paymasters differently with respect to the unemployment laws.

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PAYROLL SAVING TIPS - continuedFEDERAL BUSINESS CREDITS1. Work Opportunity Tax Credit - Hire employees from a "Targeted" group and they may qualify the employer for certain credits. Under the federal Work Opportunity Tax Credit, which has been extended to cover employees from a targeted group who begin work before 1/1/2012, employers receive a federal tax credit for hiring selected targeted groups. Qualified veterans who began work before 1/1/2013 also qualify for this credit.

Wages qualifying for the credit generally have the same meaning as wages subject to the Federal Unemployment Tax Act (FUTA).Form 8850, Pre-Screening Notice and Certification Request for Work Opportunity Tax Credit, is used by employers to both pre-screen prospective employees and to request certification from the States Employment Security Agency. This form is not filed with the IRS.

2. Credit For Employer-Provided Child Care Facilities - Employers can claim a tax credit for 25% of qualified expenses for employee child care. Qualified expenses include costs to acquire, construct, rehabilitate, or expand a facility for child care, operational costs for the facility, and amounts incurred under a contract with a child care facility to provide service to employees. A 10% credit can also be claimed for the costs incurred under a contract to provide child care resource and referral services to employees. The maximum credit in any year is $150,000. This credit is scheduled to expire for tax years beginning after December 31, 2012. 3. Small Business Credit For New Retirement Plan Expenses - A nonrefundable credit is available for expenses associated with establishing a new qualified retirement plan. The credit is equal to 50% of the first $1,000 in administrative and retirement-education expenses for the plan for each of the first three years of the plan. A small business is defined as one with no more than 100 employees having compensation in excess of $5,000 in the preceding year, and with at least one non-highly compensated employee. 4. Health Care Reform Act Credit - The Small Business Health Care Tax Credit helps small businesses and small tax- exempt organizations afford the cost of covering their employees. Eligibility Rules - A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate. Additionally, the qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible). Lastly, the qualifying employer must pay average annual wages below $50,000. Both taxable (for profit) and tax-exempt firms qualify. Amount of Credit - The credit is worth up to 35 percent of a small business' premium costs in 2011 through 2013. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers). The credit phases out gradually for employers with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

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PAYROLL SAVING TIPS - continuedFEDERAL BUSINESS CREDITS - continued4. Health Care Reform Act Credit (continued) Claiming the Credit - Both small businesses and tax-exempt organizations will use Form 8941 to calculate the small business health care tax credit. Small businesses will include the amount of the credit as part of the general business credit on its income tax return. Exempt organizations will instead claim the small business health care tax credit on Form 990-T. Form 990-T was revised for the 2011 filing season to enable eligible tax-exempt organizations even those that owe no tax on unrelated business income also to claim the small business health care tax credit. 5. FICA Tip Credit- In food and beverage establishments where tipping is customary, employers are allowed an income tax credit equal to their FICA tax obligation (7.65%) on reported tips in excess of the amount of tips treated as wages for purposes of the Fair Labor Standards Act (FLSA). Although the federal minimum wage has been increased, the Small Business and Work Opportunity Tax Act of 2007 allows food and beverage establishments to continue to compute the amount of the tip credit based on the federal minimum wage previously in effect on January 1, 2007 ($5.15 per hour).

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PAYROLL SAVING TIPS - continuedPENNSYLVANIA BUSINESS CREDITS1. Jobs Creation Tax Credit- Employers are required to submit an application to the Department of Community and Economic Development (DCED) where they agree to create at least 25 new jobs or increase the number of its employees by at least 20% within three years of the start date. Upon approval, employers could claim a credit of $1,000 per new job created (up to an amount specified in the DCED Acceptance Letter). 2. PA Job Promotion Credit- Pennsylvania has enacted legislation that allows qualified companies to retain withholding taxes for individuals employed in new jobs. A qualified company is a for-profit corporation, partnership or other entity that agrees to create at least 250 new jobs in the state within five years and provide health insurance coverage to its full-time employees. Further, qualified companies must be located in the state and create 100 new jobs in the state within two years of entering into an agreement with the Department of Community and Economic Development (DCED). Qualified companies will be able to retain 95% of withholding taxes for individuals for one of the following periods: 7 years, if the individuals are compensated at a rate equal to at least 100% of the county average wage. 8 years, if the individuals are compensated at a rate equal to at least 110% of the county average wage. 9 years, if the individuals are compensated at a rate equal to at least 120% of the county average wage 10 years, if the individuals are compensated at a rate equal to at least 140% of the county average wage.

If the company fails to comply with the terms and conditions of the agreement with the department, the company will be required to repay an amount equal to the aggregate withholding taxes retained by the company. The total amount of the benefits retained cannot exceed $5,000,000, and no agreements can be entered into after January 1, 2018.

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PROCESSING & REPORTING

B

PART B - PROCESSING AND REPORTINGB B B B B 1 2 3 3 4 Federal Tax Deposit Requirements Form 941 Deposit Rules Same Day Payment Option Electronic Federal Tax Payment Systems (EFTPS) Form 940 Deposit Rules Pennsylvania Withholding Filing Requirements PA Electronic Funds Transfer PA e-Tides Maryland Withholding Filing Requirements Reciprocal Agreements Mandatory Postings for Employers Multi-State Reporting Bonuses and Supplemental Wages How and When to Use Cumulative Withholding Other Benefits Exempt From Taxes Group Term Life Insurance Cafeteria Plans Heath Care: Patient Protection and Affordable Care Act Health Care: Reporting Requirements Personal Use of Company Provided Vehicle Medical and Move Related Mileage Rate Charitable Related Mileage Rate Sick Pay (Disability Income) Form 1099 - Miscellaneous Income Business Expense Reimbursements Moving Expense Reimbursements Military Spouse Residency Relief Act Stock Options

B - 5 B - 8 B - 10 B - 12 B - 13 B - 15 B - 16 B - 18 B - 21 B - 22 B - 22 B - 24 B - 28 B - 31 B - 33 B - 38 B - 38 B - 39 B - 40 B - 43 B - 46 B - 47 B - 49

FEDERAL TAX DEPOSITS FORM 941 - FEDERAL TAX DEPOSITSCalculation of the Deposit Tax Year 2013 (do not use for 2012)1. Social Security taxes withheld 2. Ordinary Medicare taxes withheld 1 3. Total FICA taxes withheld (Line 1 + Line 2) 4. Multiply by 2 5. Subtotal 6. Additional Medicare withholding (if applicable) 7. Add federal income taxes withheld 8. Required payroll tax deposit (Line 5 + Line 6 + Line 7) x $ 868.00 203.00 1,071.00 2 2,142.00 100.00 532.25 $ 2,774.25

Deposit Due DatesSummary of Steps to Determine Your Deposit Schedule 1. Identify your lookback period (see Lookback period below). 2. Add the total taxes from line 10, Form 941 you reported during the lookback period. 3. Determine if you are a monthly or semiweekly schedule depositor: Then you are a: If the total taxes you reported in the lookback period were: $50,000 or less Monthly Schedule Depositor More than $50,000 Semiweekly Schedule Depositor

An employer is either a monthly depositor or a semiweekly depositor. This determination is made based on the aggregate amount of employment taxes reported during a "lookback" period. The regulations define a look back period as the twelve-month period ending on the preceding June 30th and this determination is made by the IRS prior to the beginning of each calendar year.

1 Ordinary Medicare taxes withheld do not include the 0.9% Additional Medicare Withholding on individuals with earnings greater than $200,000.

B-1

FEDERAL TAX RETURN DEPOSITS - continuedLookback Period Example:2011 Lookback Period rd 3 Quarter 2009 th 4 Quarter 2009 st 1 Quarter 2010 nd 2 Quarter 2010 Total Taxes Deposited 12,000 12,000 12,000 12,000 $48,000 2012 Lookback Period rd 3 Quarter 2010 th 4 Quarter 2010 st 1 Quarter 2011 nd 2 Quarter 2011 Total Taxes Deposited 12,000 12,000 12,000 12,000 $48,000

Monthly deposit ($50,000 or less) An employer is a monthly depositor if the total taxes you reported in the lookback period were $50,000 or less. A monthly depositor must deposit employment taxes for payments made during a calendar month via EFTPS by the 15th day of the following month. If the 15th day of the following month is not a banking day, taxes will be treated as timely deposited on the next following banking day. Semiweekly deposit (greater than $50,000) An employer is a semi-weekly depositor if the total amount of employment taxes reported for the look back period is more than $50,000. Under the semi-weekly deposit rule a monthly depositor must deposit employment taxes one day before they are due via EFTPS by: If the payday falls on a.. Wednesday, Thursday or Friday Saturday, Sunday, Monday, or Tuesday Then deposit taxes by the following Wednesday Friday

If any of the three weekdays following the close of a semiweekly period is a bank holiday, employers will be given an additional banking day to make the deposit. $100,000 Next-day deposit rule The semiweekly or monthly deposit rules will not apply if an employer has accumulated $100,000 or more of employment taxes. These taxes must be deposited via EFTPS. To determine whether the $100,000 threshold is met, (1) a monthly depositor takes into account only those employment taxes accumulated in the calendar month in which the day occurs; and (2) a semiweekly depositor takes into account only those employment taxes accumulated in the Wednesday - Friday or Saturday - Tuesday semiweekly period in which the day occurs. Note: Regardless of whether you are a monthly depositor or a semiweekly schedule depositor, if you accumulate taxes of $100,000 or more on any day during a deposit period, you must deposit them on the next banking day. If this happens, you become a semiweekly depositor for the remainder of the calendar year and for the following calendar year.

B-2

FEDERAL TAX RETURN DEPOSITS - continuedAccuracy of deposits rules Employers are required to deposit 100% of their tax liability on or before the deposit due date. Penalties will not be applied for deposits less than 100% if both of the following conditions are met: Deposit shortfall does not exceed the greater of $100 or 2% of the required tax deposit. Deposit shortfall is made up in a timely manner. Monthly Depositor- Deposit or pay the shortfall by the due date of your return for the return period where the shortfall occurred. Semiweekly Depositor- Deposit the shortfall by the earlier of the first Wednesday or Friday (whichever is earlier) falling on or after the 15th day of the month in which the deposit was due OR the due date of the return. Same day payment option If you fail to initiate a deposit transaction on EFTPS at least 1 business day before the deposit due date, you can still make deposit on time by using the Federal Tax Application (FTA). Please check with your financial institution regarding availability, deadlines, and cost. If the total tax liability for the current or preceding quarter is less than $2,500 and you did not incur a $100,000 next-day deposit obligation, a payment can be made with the return and no penalties will be incurred. Employers who have been notified to file Form 944 (Employers Annual Federal Tax Return) can pay their fourth quarter tax liability with Form 944 if their fourth quarter liability is less than $2,500. All other quarters must be deposited according to the previously discussed deposit rules. Remember! Deposit rules are based on when wages are paid, not earned. For example, Monthly Schedule Depositors with wages earned in June but paid in July, deposit August 15. If the due date for a deposit falls on a federal or state bank holiday or on a Saturday or Sunday, the deposit is considered timely if it is made by the close of the next banking day.

Forms of DepositELECTRONIC FEDERAL TAX PAYMENT SYSTEMS (EFTPS)EFTPS Online - EFTPS is a service offered free by the U.S. Department of the Treasury for people to pay federal taxes electronically. htt