Vision Payroll

This week’s question comes from Cliff, a sole proprietor. I am forming a corporation and will be converting from a sole proprietorship to a corporation. Do I need a separate EIN for my corporation? Answer: The new corporation is a distinct entity from the sole proprietorship and will require the corporation to apply for a new employer identification number (EIN). Taxpayers may use Form SS-4, Application for Employer Identification Number, to apply for a new EIN or visit the IRS website to apply online. Contact Vision Payroll if you have any further questions on the payroll tax implications of forming a corporation.

This week’s question comes from Scott, a small-business owner. I own a business in Michigan. I’ve heard that for 2009, Michigan is a credit reduction state. What is a credit reduction state? Answer: For 2009, Michigan is the only “credit reduction state”. This means that employers in Michigan are not allowed the full credit against the federal unemployment tax act (FUTA) tax. Wages paid that are subject to the unemployment compensation laws of the state of Michigan do not receive the full credit of 5.4%; a credit reduction of 0.3% applies so that such wages receive a credit of 5.1% for 2009. Employers that have wages that are subject to the unemployment compensation laws of the state of Michigan must use Schedule A of Form 940 to calculate the FUTA due. Contact Vision Payroll if you have any further questions on credit reduction states.

This week’s question comes from Kevin, a sole proprietor. I am forming an LLC and will be converting from a sole proprietorship to a single member LLC, but still taxed as a sole proprietor. Do I need a separate EIN for my single member LLC? Answer: As explained earlier, in TD 9356, the IRS announced that single member LLCs would be treated as corporations for employment tax purposes, but that the single member would still be treated as self-employed and not an employee of the LLC. Therefore, sole proprietors forming an LLC should apply for and obtain a new Employer Identification Number (EIN) using Form SS-4, Application for Employer Identification Number. Contact Vision Payroll if you have any further questions on single member LLCs.

This week’s question comes from Debbie, a sole proprietor. I read that children under age 18 are not subject to federal employment taxes. My children are now in college and work part-time year-round. I know they are now subject to FICA taxes. Do FUTA taxes apply to children of sole proprietor who are age 18 or older? Answer: Sole proprietors who hire their own children under age 21 are not required to pay Federal Unemployment Tax Act (FUTA) tax on those children’s wages. Once the children reach age 21, the exemption no longer applies. Contact Vision Payroll if you have any questions on payroll taxes on children.

This week’s question comes from Brad, a sole proprietor. My 16-year-old daughter will be out of school soon and I’d like to hire her for the summer in my sole proprietorship. Does a sole proprietor have to pay payroll taxes on children’s wages? Answer: Sole proprietors who hire their own children under age 18 do not have to pay federal employment taxes on the children’s wages. The children are exempt from having to pay social security and Medicare taxes on their wages. These taxes are sometimes known as FICA (Federal Insurance Contributions Act) or OASDI (Old-Age, Survivors, and Disability Insurance). The employer is also exempt from paying the matching portion of these taxes. Additionally, the employer is not required to pay FUTA (Federal Unemployment Tax Act) tax on these wages. Most states also exempt such wages from state unemployment tax (SUTA). Depending on their expected income, children of sole proprietors may be subject to federal and state income tax withholding. Contact Vision Payroll if you have any questions on payroll taxes on children.

This week’s question comes from Rocco, a plant manager. We pay employees on active military duty a differential wage that makes up for wages that they would have earned had they not been on active military duty. Which payroll taxes do we need to pay on differential pay to active military duty employees? Answer: Under the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), differential wage payments are now subject to income tax withholding. The Internal Revenue Service recently released an advance copy of Revenue Ruling 2009-11, covering §3401(h) of the Internal Revenue Code of 1986, Differential Wage Payments to Active Duty Members of the Uniformed Services and is effective for differential wage payments made after December 31, 2008. The holdings of Rev. Rul. 2009-11 are:

1. Differential wage payments made to an individual while on active duty in the United States uniformed services for more than 30 days are subject to income tax withholding, but are not subject to FICA or FUTA taxes.
2. Employers may use either the aggregate method or optional flat rate withholding to calculate the amount of income tax required to be withheld on differential wage payments which do not exceed $1,000,000 when added to all other supplemental wages paid by the same employer to the individual during the calendar year.
3. The amounts of the differential wage payments must be reported by the employer on the employee’s Form W-2.

Contact Vision Payroll if you have any questions on Rev. Rul. 2009-11.

This week’s question comes from Carolyn, a business owner. I read recently about statutory employees and would like to find out if some of our new hires would qualify as statutory employees. Can you tell me more about statutory employees? Answer: Common law considers some workers employees and some independent contractors. By statute, some independent contractors are treated as employees for employment tax purposes.

There are four categories of independent contractors that might be statutory employees:

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.
3. 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 who 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.

If the independent contractor must perform the services personally as an explicit or implicit clause of the service contract, if the independent contractor does not have a substantial investment in the non-transportation facilities property and equipment, and the services are performed for the same payer on a continuing basis, then the payer must withhold social security and Medicare tax from payments to contractors.

For workers in categories 1 and 4 above who have payments subject to social security and Medicare tax under these rules, the payments are also considered wages for federal unemployment (FUTA) purposes. Payments to workers in categories 2 and 3 above are never considered wages for FUTA purposes.

Payments to statutory employees are never subject to federal income tax withholding.

Report payments to statutory employees on Form W-2, box 1, box 3 (to the wage limit), and box 5. Be sure to check the box 13 “Statutory employee” checkbox on the Form W-2. Statutory employees report the amount from Form W-2, box 1 on Form 1040, Schedule C, line 1 and complete the checkbox on that line. They may also deduct related business expenses on Schedule C, to the extent allowable by law.

Contact Vision Payroll if you have any questions on statutory employees.

This week’s question comes from Rachel, a business owner. I have been running payroll with almost the exact same hours every week for the last few months. In the last few weeks, the payroll cost was several thousand dollars more each week than a month ago. Why did my payroll cost increase? Answer: There are at least three employer taxes with wage caps that are often fully paid by the end of the calendar year for some or all employees. They are the social security portion of FICA or OASDI tax, federal unemployment tax (FUTA), and state unemployment tax (SUTA). Social security had a wage limit of $102,000 ($106,800 in 2009), FUTA has a $7,000 limit in each year, and the SUTA limit varies by state from a low of $7,000 to more than $35,000. At the start of a new calendar year those taxes must again be paid by the employer. With a combined tax rate of over 7% at a minimum, a $100,000 weekly payroll could easily have an increase of between $5,000 and $10,000 in employer payroll tax liability at the start of a new calendar year. Vision Payroll can work with you to find ways to legally minimize your employer tax liability. Contact Vision Payroll today for more information.

This week’s question comes from Rick, a corporate controller. We received a notification from our state unemployment agency that we may want to make a voluntary payment toward SUTA. Should we make a voluntary additional payment?

Answer: For employers that are in states that use a system that includes contributions made by employers in calculating the unemployment rate, it may be beneficial to make such a contribution. Many such states, but not all, allow employers to make voluntary contributions. Employers should estimate their taxable state unemployment wages for 2009 and multiply that by the difference between the higher rate and the lower rate. That sum should be compared to the required payment. The greater the sum is over the required payment, the more beneficial it is to make the voluntary payment.

For example, assume that taxable SUTA wages (not gross SUTA wages) will be $1,000,000 and that the employer’s rate will decrease by 0.15% if the voluntary payment is made. The estimated savings for 2009 would be $1,500 ($1,000,000 X 0.15%). Any payment greater than $1,500 would not be beneficial for 2009 since the cost would exceed the estimated benefit. Payments significantly less than $1,500 should almost always be made due to the anticipated savings for 2009. As the payment amount approaches $1,500 it becomes less valuable to make the payment because the required outlay must generally be made early in the year.

Voluntary payments are not allowed for FUTA purposes.

Contact Vision Payroll if you have any questions on voluntary additional SUTA payments.

This week’s question comes from Rob, a business owner. I paid all my federal and state unemployment taxes and didn’t lay anyone off. Why is my unemployment rate going up? Answer: Generally, your state unemployment rate is determined by the ratio of your account balance to your covered employment wages for the measurement period.

For example, if the measurement period runs from October 1 to September 30, your account balance as of September 30 is the numerator and the taxable payroll during the year from October 1 to September 30 is the denominator. The resulting fraction is the reserve percentage or ratio. Some states use longer base periods or use an average over a period of years for the denominator.

The account balance generally increases by contributions the employer has paid into SUTA and decreases by benefit claims paid against the employer’s account and solvency assessments, if necessary. The solvency assessment is used to pay benefit claims that are not charged to an employer.

Taxable wages are generally wages paid to covered employees up to the SUTA limit. They should equal the wages on which SUTA taxes were calculated.

Many states use multiple schedules to determine the employer’s unemployment rate. The reserve percentage or ratio is located on the appropriate schedule and an unemployment tax rate it assigned. The higher the reserve percentage or ratio within the parameters of the schedule, the lower the unemployment rate for the upcoming year. Many states have moved to a schedule with higher overall rates for 2009 since their overall statewide reserve percentage or ratio is lower. Therefore, even employers with lower reserve percentages or ratios can have higher tax rates because of the higher rate schedule.

We recommend you forward Vision Payroll the notice with your 2009 rate as soon as you receive it. Contact Vision Payroll if you have any questions on the determination of your unemployment rate.