Vision Payroll

The IRS recently issued guidance for reporting wages paid in 2008 (including accrued wages and vacation pay) on behalf of deceased employees. Although state law generally controls who receives the unpaid wages, the reporting follows the same rules even if the check is reissued in the name of the employee’s estate or beneficiary. If the employee died in 2008, the employer withholds social security and Medicare taxes and reports the payments in boxes 3 and 5 of the 2008 Form W-2. The wages are not to be reported in box 1 of the 2008 Form W-2 and no income tax is to be withheld. Instead, the amount of the payment must be reported in box 3 of the 2008 Form 1099-MISC using the name and taxpayer identification number of the recipient of the payment. If the employee died in 2007 or before, there is no reporting on the 2008 Form W-2 and no withholding of social security and Medicare taxes. The payment must still be reported in box 3 of the 2008 Form 1099-MISC using the name and taxpayer identification number of the recipient of the payment. Contact Vision Payroll to ensure proper reporting for payments of wages made on behalf of your deceased employees.

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.

In Private Letter Ruling 200825043, the IRS concluded that employers who receive a determination letter from the IRS that someone previously classified as an independent contractor should be classified as a employee may use §3509 to reduce the amount of employee FICA tax and federal income tax payable. The federal withholding in such cases is reduced to 1.5% of wages regardless of what the employee claims on a Form W-4. The FICA tax rate is reduced from 7.65% to 1.53% on the employee’s portion. The employer’s rate remains at 7.65%. If the employer did not file Form 1099-MISC for payments made to the newly-classified employee, the employee withholding rates are doubled. Furthermore, no interest is charged on the late payment of the employee’s portion of the tax.

In Revenue Ruling 2008-29, the IRS clarified the amount of federal income tax to be withheld on certain supplemental wages. Situations covered include sales commissions, draws, signing bonuses, severance pay, annual leave, vacation and sick pay, and sick pay paid at a different rate. Contact Vision Payroll if you have any questions on this ruling.

The IRS recently issued Notice 2008-59 on Health Savings Accounts (HSA), which are available to taxpayers enrolled in a High Deductible Health Plan. Qualified contributions to an HSA are not subject to federal income tax and distributions from an HSA for qualified medical expenses may also be made tax-free. The guidance is in the form of 42 questions and answers and the topics covered are: Eligible Individuals, High Deductible Health Plans, Contributions, Distributions, Prohibited Transactions, Establishing an HSA, and Administration. Vision Payroll can work with you and your benefits broker to determine if an HSA is right for you and, if so, to ensure that your HSA is properly established. Vision Payroll will also ensure that your deductions are properly calculated and reported for federal and state tax purposes. An HSA can be a cost-effective alternative to traditional health plans—shouldn’t you find out more today?

The standard mileage rates for the use of automobiles beginning July 1, 2008 will be 58.5 cents per mile for business miles driven and 27 cents per mile driven for medical or moving purposes, the Internal Revenue Service announced June 23 (IR-2008-82; Announcement 2008-63; Revenue Procedure 2007-70 is modified). The new rates are changed from 50.5 cents per mile for business travel and 19 cents per mile for moving and medical travel for the first half of 2008. The rate for miles driven in service of charitable organizations has remained the same at 14 cents per mile.