Payroll Tax Issues
In November, you should have received “Your Year 2005 Federal Tax Deposit Requirements” from the IRS. This notice lets you know whether youll be a monthly or bi-weekly depositor. In December, you should also receive your annual Unemployment Compensation Tax Rate Notice for 2005. In addition, you may receive notification from Florida that you are required to file unemployment forms and taxes electronically. These notices should be forwarded to your payroll preparer. IRS maintains a zero tolerance for incorrect W-2s. Penalties will be assessed against employers whose W-2s have mismatched names and social security numbers. The penalty is $50 per incorrect W-2. You can verify up to five names and numbers by calling the SSA at 1-800-772-6270 or visit their website at www.ssa.gov/employer for larger groups. Bonus checks are considered salary income and are subject to payroll taxes. Any individual independent contractor receiving compensation over $600 for the year must be issued a 1099-MISC. In addition, ALL attorneys who received ANY amount of payment must be issued a 1099-MISC as well. The taxable wage base for Social Security in 2005 has been increased to $90,000, making the maximum social security tax $5,580 (6.2%). Medicare wages are taxed at 1.45% with no limit. SUTA Dumping Prevention Act of 2004 requires each state to establish legislation to prevent employers from evading state unemployment taxes to be eligible for federal unemployment insurance administrative grants. Among other things, the law provides that an employer that transfers its business to another employer must also transfer its unemployment experience if both employers are under substantially common ownership, management, or control, and unemployment experience shall be transferred. Qualified Pension Plan Contribution Limits for 2005 There are several employer-sponsored tax-deferred retirements plans that were affected by 2001 legislation, all of which have increased contribution limits. The most common is the 401(k) having an increase contribution limit of $14,000 in 2005 from $13,000 in 2004. Many of the plans also have “catch-up” contributions for employees age 50 or older. Company Provided Vehicles Employees should be taxed for the personal use of any employer provided vehicle. Specifically, the employees gross income on Form W-2 is increased to the extent the fair market value of this benefit exceeds the amount paid, if any, by the employee. This fringe benefit is subject to payroll taxes and should be withheld from the employees salary by year end. To make the calculation more timely you are allowed to base the mileage information on a November 1st to October 31st fiscal year, even though the W-2s are prepared on a calendar year. 2005 Standard Mileage Rates Set For the business use of a car, van or truck will be 40.5 cents per mile, up from 37.5 cents in 2004. When computing deductible medical or moving expenses, use 15 cents per mile, up from 14 cents in 2004. In addition, 14 cents per mile will be used when giving services to a charitable organization. Employee versus Independent Contractor Under common-law rules, an individual generally is an employee if the company he works for has the right to control and direct him regarding the job he is to do and how he is to do it. Otherwise, he is an independent contractor. Individuals who are statutory independent contractors are not employees for purposes of wage withholding, FICA or FUTA, and the income tax rules in general. These individuals are qualified real estate agents and certain direct sellers. Tax Aspects of Employee Terminations Although severance pay is taxable and is subject to federal income tax withholding, some elements of a severance package may be specially treated. For example, selling stock acquired through an ISO, may be lightly taxed as long-term gain; a golden parachute payment may be subject to a 20% excise tax on an “excess” portion. You should also be aware if COBRA rules apply to your group health coverage. How the 2004 Jobs Act Affects Individuals Individuals who itemize will be able to deduct either state and local income taxes or state sales taxes on their 2004 and 2005 federal tax returns. If the sales tax option is chosen, individuals may deduct either their actual sales taxes or use IRS-published tables. Tougher rules will apply to the charitable deduction for autos, boats and planes donated to charity after 2004 if the vehicle has a claimed value of more than $500. Youll probably wind up with a bigger deduction if you make the gift in 2004 rather than next year. Statutory stock options are officially free of FICA and FUTA when exercised. This term refers to an incentive stock option or an option to purchase stock under an employee stock purchase plan. For years beginning after 2004, amounts deferred under a nonqualified deferred compensation plan will not be subject to a substantial risk of forfeiture (and thus will not produce income tax deferral) if distributions from the plan can be made for any reason other than passage of a certain period of time, termination of employment, death, disability or unforeseeable emergency, or change of control in the employer. Questions About Inflation Adjustments to 2005 Tax Figures Q. Do the tax rates go down in 2005?A. No. Even though the individual rates remain the same, there is some tax relief in the form of inflation adjustments to the tax brackets and other items. Q. How do the inflation adjustments work?
A. The point at which each of the top five tax brackets begins in increased for inflation; therefore, in 2005 more income will be taxed at the 10%, 15%, 25%, 28% and 33% rates than in 2004. Q. Are other income tax items adjusted for inflation?
A. Yes. For example, the personal exemption amount will be $3,200 ($3,100 in 2004) and the standard deduction for a married couple filing jointly will be $10,000 ($9,700 in 2004). Q. What kind of tax savings will be realized in 2005 from the adjustments?
A. Lets look at a two-wage-earner couple with two children. For 2004, they have gross income of $120,400, $30,000 of itemized deductions, and taxable income of $78,000, after taking into account their four $3,100 personal exemptions. Their tax (before any allowable credits) for 2004 comes to $12,975. If their income stays at exactly the same level for 2005, their tax will go down to $12,730, for a savings of $245. Q. What do the adjustments all mean for individuals?
A. The inflation increases are low and thus the tax savings from the adjusted figures are low. However, there are several steps that individuals can take to reduce their tax bill this year and next year, including the following:
- Shift investments that produce ordinary income into stock or mutual funds to take advantage of 15% max rate.
- Place up to $2,000 in a Coverdell education savings account for a child or grandchild.
- Take advantage of the above-the-line deduction for higher education expenses.
- Make an annual $3,000 contribution to an IRA ($,4000 in 2005).
- Make the maximum contribution that you can afford to a company 401(k) plan.
- Take advantage of the maximum lifetime learning credit, now at $2,000.
- If you are a self-employed individual, you can deduct 100% of the amount you pay for medical care insurance for yourself, your spouse and your dependents.
- Take advantage of the new choice of taking an itemized deduction for either state income or state sales taxes.
Please keep in mind that Ive described only the highlights of the most important changes in the new law. There are many more questions and opportunities for proper tax planning.
