taxation

Top 10 Thursday – News From Around the Web 1/12/12

Published January 12, 2012 | By Nancy Smyth

Top 10 Thursday features 10 of the most interesting articles that I found the previous week. There is so much news and information available on the web – it’s difficult to read everything and stay up to date. As I read articles on the web – I’ll share some that I feel are important.

General Business:

6 Secrets to Overcoming Burnout

Bookkeeping, Accounting, Payroll & Taxes:

Construction:

Marketing & Social Media:

Well, there’s our Top 10 most interesting articles for last week – do you have some interesting news that you’d like to share?

FREE Webinar on New 3% Contractor Withholding Requirements

Published June 22, 2011 | By Nancy Smyth

From the June 22, 2011 Issue of the Federal, State & Local Governments Newsletter published by the IRS.

The office of Federal, State and Local Governments will hold a free, one-hour webinar on July 14, 2011, to discuss the required 3 percent income tax withholding on certain payments made by government entities, to take effect in 2013. The webinar is recommended for any Federal, state or local government entities as well as tax professionals.

Participants can get answers to these questions:

What is Section 3402(t) ?

The Legislative history on Section 3402(t)

Who must perform Section 3402(t) withholding?

What payments are subject to Section 3402(t) withholding?

Exceptions to Section 3402(t) withholding?

Section 3402(t) deposit and reporting mechanics?

You can register for the webinar by clicking here.

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Additional information from the IRS Website, current as of 6/6/2011; be sure to check this page for updates.

On May 6, 2011, the Internal Revenue Service released final regulations on section 3402(t) of the Internal Revenue Code (IRC). This provision provides that, for payments after Dec. 31, 2012, federal, state, and other units of government with annual payments for goods and services of $100 million or more must withhold income tax of 3% of the total payment for goods and services.

IRC 3402(t) was created by the Tax Increase Prevention and Reconciliation Act of 2005, and originally required withholding for covered payments after Dec. 31, 2010. The implementation was delayed one year by a later statute. The final regulations delay it one additional year, to payments made after Dec. 31, 2012.

Government Entities Required To Withhold Under IRC 3402(t)

The following are subject to the new requirement:

The entire U.S. government, including all federal agencies, the executive branch, the legislative branch and the judicial branch.
All states including the District of Columbia (but not including Indian tribal governments).
All political subdivisions of a state government or every instrumentality of such subdivisions unless the instrumentality makes annual payments for property or services of less than $100 million.

Exception for Small Entities

Subdivisions of a state, or instrumentalities of a subdivision of a state, are exempt from the withholding requirement if its total annual payments for property and services (not including wages) are less than $100 million. The proposed regulations provide a simple rule for determining whether an entity makes annual payments less than $100 million. In general the entity looks to its accounting year ending with or within the second preceding calendar year For example, if total payments for the entity’s 2011 accounting year exceed $100 million, the withholding requirement will apply in 2013.

Under an optional rule, an entity may average payments made during any four of the previous five accounting years ending with the accounting year ending with or within the second preceding calendar year.

Payments Subject to Section 3402(t) Withholding

Generally, withholding is required on all payments to all persons providing property or services to the government, including individuals, trusts, estates, partnerships, associations, and corporations. Withholding is required at the time of payment. If the government entity fails to withhold the tax required under section 3402(t), it becomes liable for the payment of the tax.

Payment Threshold

The proposed regulations create a payment threshold of $10,000 and provide that payments below the threshold are not subject to withholding. The regulations also include an anti-abuse rule that payments of $10,000 or more may not be divided into payments of less than $10,000 solely for the purpose of avoiding the withholding requirements.

Exceptions

The regulations provide the following exceptions from the withholding requirements:

Payments otherwise subject to withholding, such as wages.
Payments for retirement benefits, unemployment compensation, or social security.
Payments subject to backup withholding, if the required backup withholding is actually performed.
Payments for real property, including land or completed buildings.
Payment of interest.
Payments to other government entities, foreign governments, tax exempt organizations, or Indian tribes.
Payments made under confidential or classified contracts, as described in IRC 6050M(e)(3).
Payments made by a political subdivision of a state, or instrumentalities of a political subdivision of a state that make annual payments for property of services of less than $100 million.
Public assistance payments made on the basis of need or income. However, assistance programs based solely on age, such as Medicare, are subject to the requirements.
Payments made under a government grant principally for a public purpose.
Payments to employees in connection with service, such as retirement plan contributions, fringe benefits, and expense reimbursements under an accountable plan.
Payments received by certain nonresident aliens and foreign corporations.
Payments in emergency or disaster situations.
Certain payment card transactions reportable under section 6050W.

Update – New Law Repeals 3% Contractor Withholding:

On Nov. 21, 2011, the 3% Withholding Repeal and Job Creation Act of 2011 was signed into law, repealing section 3402(t) of the Internal Revenue Code (IRC). This legislation eliminates the withholding and reporting requirements established under IRC section 3402(t) and the accompanying regulations.

IRC section 3402(t) would have required all Federal and state government entities, and some local government entities, to withhold 3% on certain payments to contractors, beginning on Jan. 1, 2013. The regulations under section 3402(t) also required the government entity to report the amount of the payment and the amount withheld on Form 1099-MISC.

Payroll Tip – The IRS May Hold You Liable For 941 Payments

Published June 9, 2011 | By Jo Ellen Peters

A payroll tip about who the IRS may hold liable for 941 tax payments.

Are you the bookkeeper or accountant for your company? Are you a signer on any of the company bank accounts? What about your client’s accounts? Do you sign on any of them? If so, you may be held responsible by the IRS for underpaid 941 liabilities. Sounds scary, but it can be true.

How is it possible that can be true? The IRS says the federal income tax and the employee’s portion of social security and medicare taxes withheld is a trust fund. It is to be deposited according to the schedule they have determined for your company. The IRS cannot collect this tax from the employee, even if the employer does not pay the tax to the government.

To protect the government when the tax has not been paid, Internal Revenue Service Code 6672 subjects “all responsible persons” for withholding and payment of taxes to a penalty equal to the amount of taxes due. The penalty is imposed on anyone who is required to collect, administer and pay over the tax and who willfully fails to so.

Two requirements must be met. First you must be a “responsible person”. The IRS considers a responsible person anyone who has authority to make business decisions for the company, not just owners of companies. If you pay the company bills and sign the checks, then you are making business decisions. You process payroll and sign checks, make the 941 tax deposits and file the 941 quarterly returns, you are making business decisions.

The second requirement for the penalty to be imposed would be if you willfully failed to pay the tax due. You withheld the money from the pay checks that you signed, but rather than paying the tax liability, you decided to pay a supplier, or a utility, or another vendor. Once you have done that, you have met both requirements and are subject to the penalty imposed by I.R.S. Code 6672.

Once the IRS determines that a tax is due, forms 4180 and 4183 are completed by an agent, which identifies the responsible person in the company. In 1993 the IRS determined that secretaries, bookkeepers (nonaccountants), and charitable volunteers are not subject to I.R.S. Code 6672. Accountants, however, are still held accountable.

What can you do as an employee? Advise your employer of the penalties he will face for not paying the taxes due. If possible, don’t be a signer on any accounts. You don’t want to be personally responsible for the company you are working for.

What can you do as an owner? Pay your taxes on time. Pay them before you pay your other vendors. It’s not your money once you have paid your employees.

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QuickBooks Creating a More Meaningful Payroll Expenses Section

Published May 23, 2011 | By Nancy Smyth

QuickBooks, by default, offers a single account called Payroll Expenses in your Chart of Accounts and all of the pre-programmed Payroll Items for wages and taxes are assigned to that one single account. When a business owner runs a Profit & Loss Report, when QuickBooks is set up in this manner, the report doesn’t really provide him with any real idea of how much he paid in wages vs. taxes because it’s all just lumped together in a single amount.

Right click on the image to enlarge it

I find this to be very frustrating because it means that you have to run additional reports and perform additional calculations in order to determine very basic information.

Previously, we covered creating a more functional Payroll Liabilities section on your Chart of Accounts, so that you could quickly and easily see not only the total of your payroll liabilities; but also the individual amounts that you owed for each specific payroll liability at a glance.

Today, we are going to discuss creating a more meaningful Payroll Expenses section, so that you can see how much you paid in wages vs. taxes; without having to run additional reports or perform additional calculations.

Before we begin to get to work, I will recommend that you contact your accountant or tax preparer before you start this process, they may want to help you to take this one step further – such as dividing wages and taxes between Cost of Goods Sold for your field workers and Payroll Expenses for your in-house office staff, which we are not going to cover in this post.

NOTE: Always make a backup of your QuickBooks file before making any changes to your file!

Step 1 – Determine What New Accounts to Create in Your Chart of Accounts

Start by looking at your current Payroll Item List {Lists menu –> Payroll Item List} to see how things are currently setup and to plan how you want to set up the Payroll Expenses section of your Chart of Accounts.

Right click on the image to enlarge it.

From this list, we can see that we have Salary and Hourly Wage items, bonuses, Worker’s Compensation, and taxes – perhaps we want our Payroll Expenses section to contain Sub-Items for:

Salary
Wages
Bonuses
Vacation
Sick
Taxes

Federal Unemployment {FUTA}

Medicare Company {M-CARE}

Social Security Company {FICA}

State Unemployment {SUI}

Employee Training Tax

Workers Compensation

Step 2 – Create New Sub-Accounts of Payroll Expenses

The first thing we want to do is add Sub-Accounts to our Payroll Expenses section for Salary, Wages, Bonuses, Vacation, Sick, Taxes & Workers Compensation. To do this:

from the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left corner –> choose New –> click into the radio button next to Expenses and then click the Continue button.

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In the Account Name field, type in Salary
Click into the box in front of Sub-account of, to select it, and then from the drop down list choose Payroll Expenses. Click the Save & New button.

create a sub-account of payroll expenses for Salary

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Create sub-accounts for Wages, Bonuses, Vacation, Sick, Taxes & Workers Compensation.

Step 3 – Create Sub-Accounts for Taxes

Once you have the Sub-Account created for Taxes, next you create additional sub-accounts to track specific payroll taxes that your company pays; Federal Unemployment, Medicare, Social Security, State Unemployment, and Employee Training Tax. To do this:

from the Lists menu –> choose Chart of Accounts –> click the Account button at the lower left corner –> choose New –> click into the radio button next to Expenses and then click the Continue button.
In the Account Name field, type in Federal Unemployment
Click into the box in front of Subaccount of, to select it, and then from the drop down list choose the Taxes subaccount below Payroll Expenses.

Right click on the image to enlarge it.

Click the Save & New button
Create accounts for Medicare, Social Security, State Unemployment, and Employee Training Tax.
Click Save & Close when you finish creating the last account.

When you are finished, your Chart of Accounts Payroll Expenses section should look similar to the screenshot below:

a more detailed payroll expenses chart of accounts

Right click on the image to enlarge it.

Step 4 – Map Existing Payroll Items to the New Payroll Expense accounts

Go back to your Payroll Item List {Lists menu –> Payroll Items List} and beginning with the first item in the list, edit it {usually double-clicking on the item will open the Edit window}, click the Next button until you reach the Expense Account window and then from the dropdown menu, select the correct Payroll Expenses sub-account. For example, I chose to edit the Salary – Designer item and then chose the Salary sub-account of Payroll Expenses. See the screen shot below.

assign your payroll items to the new expense accounts

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When you have finished, review the Expense Account column in the Payroll Item List to make sure that you have accurately assigned your payroll items to the proper sub-accounts. Do not skip this step!

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Your more detailed Profit & Loss Payroll Expenses section

Now when you run a Profit & Loss Report, you can easily see the details that make up your total payroll expenses without having to drill down or run additional reports and perform additional calculations.

Right click the image to enlarge it.

A note to accounting professionals. I realize that many of you don’t want to see all of the details that your clients may want and/or need to see when you run the same reports – don’t forget that QuickBooks provides a Collapse button at the top of the Profit & Loss as well as the Balance Sheet Report which allows you to see just the totals for the main or parent accounts in these reports.

Right click on the image to enlarge it.

We hope that you find this post – and other related posts; to be helpful.

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Company Short on Cash? This is the bill to pay FIRST!

Published March 14, 2011 | By Nancy Smyth

Is your company short on cash and wondering which bill to pay first? That bill should be your payroll taxes!

At one point or another, every business is going to be short on cash and will be faced with the challenge of figuring out which bill they should pay first. The first bill that you absolutely have to pay first is your is your payroll tax bill – otherwise it is going to cost you dearly in the long run!

Below is a real example, taken from the March edition of The General Ledger, a monthly newsletter from the American Institute of Professional Bookkeepers.

To deal with its financial problems T Corporation decided to pay several creditors, putting off for two quarters paying employment (payroll) taxes and filing related returns. T Corporation finally paid the taxes and over $30,000.00 in penalties and interest, then asked for a refund of the penalties, claiming that it had been “teetering on the brink of bankruptcy.”

The case then went to court and the IRS won.

An employer must pay federal employment taxes when it has the cash flow to make the payments. Spending the money for other purposes is considered to be “willful failure” to pay taxes.

If necessary, a taxpayer must make an effort to borrow the funds or delay payment of loans or obligations so it can pay the taxes. Failure to pay employment taxes may be excused when payment would cause “undue hardship,” defined as a substantial financial loss, such as losing business or contracts, facing actions against the company by creditors that would damage the business, or having to sell property at a sacrifice price to pay the taxes by the due date.

But T Corporation provided no proof of any hardship(s).

Moral of the story — pay your payroll taxes; if you can’t contact your tax advisor for help in working with the IRS to delay payment AND be prepared to show proof. Don’t just make the decision to not pay them or pay them late; it is too costly in the long run.