Vision Payroll

A North Dartmouth, Massachusetts woman was sentenced to 6½ years in federal prison for paying her employees under the table, thereby avoiding approximately $10 million in tax payments and $7 million in workers compensation insurance premiums. Aimee J. King McElroy also received three years probation and was ordered to pay more than $9 million in restitution. McElroy and her husband, Daniel W. McElroy, had been convicted of operating temporary employment agencies that paid their employees in cash in violation of a previous court order. Furthermore, they filed false tax returns and provided false payroll records to the insurances companies to conceal the cash payments.

This week’s question comes from Mark, owner of an import company. I receive the same salary every week. All year, my Massachusetts income tax withholding has been the same. Now it’s gone up two weeks in a row. Why did this happen? Answer: In Massachusetts, a deduction of up to $2,000 is allowed on the state income tax return for social security and Medicare tax (also known as FICA). Therefore, in calculating the amount of income tax to be withheld, a deduction is allowed for these taxes. Once the combined social security and Medicare tax equals $2,000, the deduction is no longer allowed. Vision Payroll will automatically make this change for you once the limit is reached. The reason the amount changed twice is that on the first check the deduction may be partially allowed. For example, if the combined social security and Medicare was $1,980 and the current withholding was $50, $20 ($2,000 – $1,980) would be allowed as a deduction and $30 ($50 – $20) would be over the limit and not allowed as a deduction for state purposes. In the next week, the entire $50 would be considered excess and none allowed as a deduction. Since the deduction decreased two weeks in a row, the tax withheld must increase each week. Contact Vision Payroll if you have any questions.

In Rev. Proc. 2008-25, the IRS provided a safe harbor method of accounting for accrual-basis taxpayers to use to account for FICA and FUTA taxes. It also established procedures for taxpayers to use to change their method of accounting to this safe harbor method. Under Rev. Proc. 2008-25, taxpayers who use the safe harbor method may deduct FUTA and the employer’s portion of FICA in the same year in which the all-events test has been met for the related compensation and the IRS will not challenge such use. This is true even if the amount of the tax liability is not fixed at the time of accrual of the compensation because, for example, the taxpayer does not know if a particular employee will have reached an applicable payroll tax ceiling when the liability is paid. Examples are provided in Rev. Proc. 2008-25 to further clarify the IRS position. Because the change in accounting method requires the filing of Form 3115, taxpayers are advised to consult their tax advisors for further information.