PAA LEHIGH VALLEY CFO FORUM

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PAA LEHIGH VALLEY CFO FORUM

• Year-End Payroll Processing
• Wednesday, November 12, 2008

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1099 VS. W-2 TREATMENT

• What to File
• W-2 issued when employer/employee relationship
  exists
• 1099 issued to independent contractors paid over
  600 during calendar year

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1099 VS. W-2 TREATMENT

• IRS has issued guidance to determine whether an
  employment relationship exists.
• Factors to be considered
• Instructions
• Training
• Integration
• Services rendered personally
• Hiring, supervising and paying assistants

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1099 VS. W-2 TREATMENT

• Factors to be considered (continued)
• Continuing relationship
• Set hours of work
• Full-time required
• Work performed at employers place of business
• Order or sequence set

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1099 VS. W-2 TREATMENT

• Factors to be considered (continued)
• Oral or written reports
• Payment by hour, week, month
• Payment of business and/or traveling expenses
• Furnishing of tools or materials
• Significant investment

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1099 VS. W-2 TREATMENT

• Factors to be considered (continued)
• Realization of profit or loss
• Working for more than one firm at a time
• Making service available to general public
• Right to discharge
• Right to terminate
• Other factors

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1099 VS. W-2 TREATMENT

• IRS Reclassification
• Frequently asked questions when IRS reclassifies
  workers as employees
• What should I do now?
• How do I figure my liability for FICA tax and
  federal withholding?
• Do I qualify for any type of reduced tax rates,
  and if so, what are these rates?

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1099 VS. W-2 TREATMENT

• Frequently asked questions when IRS reclassifies
  workers as employees (continued)
• What are the reduced rates under Section 3509?
• What do I do about Form 941?
• What do I do about Forms W-2

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DEMONSTRATORSRev. Proc. 2001-56

• What is the purpose of the Revenue Procedure?
• Provides optional simplified methods for
  determining the value of the use of Demonstration
  Vehicles.
• What is the effective date?
• January 1, 2002

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DEMONSTRATORSRev. Proc. 2001-56

• The Methods Include
• Simplified Method for the Full Exclusion of
  Qualified Automobile Demonstration Use
• Simplified Partial Exclusion Method
• Simplified Inclusion Method

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DEMONSTRATORSRev. Proc. 2001-56

• Who may use the Simplified Methods?
• Available to any Automobile Dealer engaged in the
  business of Retail Sales of New or Used Vehicles
• What Vehicles Qualify as Demos?
• Vehicles currently in inventory and available for
  test drives by customers during the normal
  business hours.

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DEMONSTRATORSRev. Proc. 2001-56

• Which employees qualify for the simplified
  Methods?
• Limited to use by Full-Time Salespeople.
• Does new Rev. Proc. Describe all methods
  available?
• No - a dealer may use any other method that
  complies with the Internal Revenue Code

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DEMONSTRATORSRev. Proc. 2001-56

• Simplified Full Exclusion
• Use of vehicle in Sales Area
• Employer must have a qualified written policy
• Substantial restrictions on personal use
• Use limited to salesperson (ie spouse not
  allowed)
• Use of personal vacation trips prohibited
• Storage of personal possessions is prohibited
• Employer must reasonably believe that sales
  person is complying with written policy

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DEMONSTRATORSRev. Proc. 2001-56

• Simplified Full Exclusion Method (cont.)
• Use outside normal working hours is limited to
  commuting plus an average of 10 miles per day on
  a monthly basis.
• Mileage records must be maintained such as
  recording the mileage at the time of arrival and
  departure at the sales office each day. Some
  verification is necessary

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DEMONSTRATORSRev. Proc. 2001-56

• Simplified Partial Inclusion Method
• Written Policy required
• Prohibited use includes personal vacations,
  storage of personal possessions and use by anyone
  other than the full-time salesperson
• Unlimited miles
• No record keeping requirement

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DEMONSTRATORSRev. Proc. 2001-56

• Simplified Partial Inclusion Meth. (cont.)
• Salesperson taxed on 6 per day for vehicles
  valued at 15,000 - 30,000 (determined on the
  dealership average sales price basis).
• Can be used for any month a full-time salesperson
  does not qualify for the simplified exclusion
  method

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DEMONSTRATORSRev. Proc. 2001-56

• Simplified Inclusion Method
• Can be used for any month a full-time salesperson
  does not qualify for the simplified full or
  partial exclusion methods.
• Simplified method of determining value of demo
  used by employee (dealership average sales price
  basis).
• Must be used on a monthly basis.

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DEMONSTRATORSRev. Proc. 2001-56

• Summary of Methods available for full-time
  salespersons
• Full exclusion
• Keep records, limit personal use to commuting
  plus 10 miles per day and other restrictions
  apply. Taxable amount-zero

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DEMONSTRATORSRev. Proc. 2001-56

• Summary of Methods available for full-time
  salespersons (Continued)
• Partial exclusion
• No records, no mileage limit to personal use,
  some other restrictions. Taxable amount - about
  6 per day.

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DEMONSTRATORSRev. Proc. 2001-56

• Summary of Methods available for full-time
  salespersons (Continued)
• Inclusion Method
• Available if does not qualify for Full or Partial
  Inclusion Method. Taxable amount - simplified
  method of determining value of demo used by
  employee

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DEMONSTRATORSRev. Proc. 2001-56

• Summary of Methods available for full-time
  salespersons (Continued)
• Commuting and de minimis
• No record keeping if the employer reasonably
  believed that there was no personal use except
  for de minimis and no amount would be includible
  in income for the value of commuting (may have to
  maintain some evidence of this). Taxable
  amount-Zero

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DEMONSTRATORSRev. Proc. 2001-56

• Method available for all dealership employees
• Full inclusion at annual lease value amount based
  on average dealership vehicle sales price, no
  record keeping. Taxable amount-17 per day
  average.

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GROUP TERM-LIFE INSURANCE (GTL)

• Premiums for coverage over 50,000
• Amount of such excess premiums must be reported
  through payroll
• Non-taxable jurisdictions
• Federal unemployment
• PA income tax
• PA unemployment tax
• NJ unemployment tax

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THIRD PARTY SICK PAY

• What is reportable?
• Taxable AND
• Non-taxable sick pay made to employees from a
  third party
• W-2 Requirements
• Sick pay MUST be included on the employees W-2
  or on a separate form provided by the third party

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THIRD PARTY SICK PAY

• Non-taxable jurisdiction determination
• First six months
• New Jersey income tax
• New Jersey unemployment tax
• Delaware unemployment tax
• After six months
• PA unemployment tax
• New Jersey unemployment tax
• Delaware unemployment tax
• Social Security and Medicare
• Federal Unemployment

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S-CORP MEDICAL INSURANCE

• Shareholders of an S-Corp may not participate in
  Section 125 plans (cafeteria plans)
• Medical insurance premiums paid by the employer
  on behalf of ?2 shareholder are taxable to the
  shareholder

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S-CORP MEDICAL INSURANCE

• Non-taxable jurisdictions
• Social security tax
• Medicare tax
• Federal unemployment tax
• PA income tax
• PA unemployment tax

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S-CORP MEDICAL INSURANCE

• Non-taxable jurisdictions (continued)
• Philadelphia wage tax
• New Jersey income tax
• New Jersey unemployment tax
• Delaware unemployment tax

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CAFETERIA PLANS

• Plan under which certain qualified benefits, paid
  for by the employees are not taxable under
  certain jurisdictions
• Non-taxable jurisdictions
• Federal
• Social security tax
• Medicare tax

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CAFETERIA PLANS

• Non-taxable jurisdictions (continued)
• Federal unemployment tax
• PA income tax
• Delaware income tax
• Must have a formal plan in place

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CAFETERIA PLANS

• Employees must agree to pay for their benefits
  under the plan
• Form 5500 must be filed annually for the plan
  (due seven months after the end of the plan year)

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401(k) PLAN

• Maximum amounts that an employee can defer per
  federal regulations
• 15,500
• Refer to plan documents for restrictions
• Non-taxable jurisdictions
• Federal income tax
• New Jersey income tax
• Delaware income tax

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401(k) PLAN

• Employees must authorize salary deferrals
• Form 5500 must be filed annually for the plan
  (due seven months after the end of the plan year)

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SERVICE TECHNICIAN TOOL REIMBURSEMENTS

• Issue
• Are amounts paid to technicians as reimbursements
  for the use of the technicians tools paid under
  an accountable plan?

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SERVICE TECHNICIAN TOOL REIMBURSEMENTS

• IRS conclusion
• Effective date - July 21, 2000
• Generally, amounts paid to technicians as tool
  reimbursements will not meet the accountable plan
  requirements. Therefore, amounts paid under a
  non-accountable plan are included in the
  employees gross income, must be reported to the
  employee on Form W-2 and are subject to the
  withholding and payment of federal employment
  taxes.

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SERVICE TECHNICIAN TOOL REIMBURSEMENTS

• Corrective procedures
• Do not exclude for 2001

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1099 REPORTING REQUIREMENTS

• Due date to workers/independent contractors
• Due date to federal government
• Penalty for failure to file
• 50 per return (non-filing or filed after August
  1)
• Maximum penalty 250,000 per year

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1099 REPORTING REQUIREMENTS

• Penalties also apply if
• File on paper when you should have filed on
  magnetic media ( ?250 forms)
• You report on incorrect taxpayer ID
• You fail to report a taxpayer ID
• You fail to use forms that are machine readable

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1099 REPORTING REQUIREMENTS

• Use your computer system to accumulate data
• Use your computer system to print returns
• ADP
• Set up all unincorporated vendors to have
  computer accumulate and print 1099s
• Use ADV function to properly set up vendors

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1099 REPORTING REQUIREMENTS

• ADP (continued)
• Make sure that all on demand checks are coded
  as Type 2 - vendor for proper accumulation
• Run 1099 report
• Check amounts to vendor files
• Correct any errors
• Re-run 1099 report
• Print 1099s

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1099 REPORTING REQUIREMENTS

• Reynolds Reynolds
• Utilize Function O551 to set-up unincorporated
  vendors and change vendors to collect data for
  1099 purposes
• Utilize Function 0794 to run the 1099 balance
  report and check amounts to vendor files
• Utilize Function 0792 to adjust 1099 balances and
  correct any errors

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1099 REPORTING REQUIREMENTS

• Reynolds Reynolds (continued)
• Utilize Function 0794 to re-run 1099 balance
  report
• Utilize Function 0414 to print 1099 forms

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DEALERS SAFEHARBOR BONUS

• Getting this amount?
• This should be calculated by the shareholders
  CPA
• Why are we paying the federal withholding at year
  end?
• Withholding is pro-rated as if paid evenly
  throughout the year
• Think time value of money

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DEALERS SAFEHARBOR BONUS

• Example - 1,000,000 due in the year
• If estimates paid, payments paid on . . .
• April 15 250,000
• June 15 250,000
• September 15 250,000
• January 15
  250,000
• 1,000,000

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DEALERS SAFEHARBOR BONUS

• Example - 1,000,000 due in the year (continued)
• If paid 1,000,000 through withholding at
  December 30th
• Interest at 8.5 on money kept until December
  30th . . . 17,000

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DEALERS SAFEHARBOR BONUS

• Remember . . . .
• Federal tax liabilities in excess of 100,000
  must be deposited by the NEXT banking day after
  the check date.

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FEDERAL PAYROLL TAX DEPOSIT RULES

• Determination status
• Based on annual determination
• Types of status
• Monthly
• If aggregate amount reported for lookback period
  is 50,000 or less

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FEDERAL PAYROLL TAX DEPOSIT RULES

• Semi-weekly
• If aggregate amount reported for lookback period
  is 50,000 or more
• Lookback period
• Lookback period for each calendar year is twelve
  month period ended the preceding June 30th.

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FEDERAL PAYROLL TAX DEPOSIT RULES

• Deposit dates
• Monthly rule
• Must deposit employment taxes on or before the
  15th day of the following month

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FEDERAL PAYROLL TAX DEPOSIT RULES

• Deposit dates (continued)
• Semi-weekly rule

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FEDERAL PAYROLL TAX DEPOSIT RULES

• Deposit dates (continued)
• One day rule
• If on any day within a deposit period an employer
  has accumulated 100,000 or more of employment
  taxes, those taxes must be deposited by the close
  of the next banking day.

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FEDERAL PAYROLL TAX DEPOSIT RULES

• Tax deposits by electronic funds transfer
• Aggregate annual taxes exceed 200,000

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FEDERAL PAYROLL TAX DEPOSIT RULES

• Penalties and interest

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FEDERAL PAYROLL TAX DEPOSIT RULES

• Penalties and interest (continued)

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THE ENTITIES ARE CHANGING

• LLP
• LP
• Forms of partnerships
• LLC
• Members are treated like partners in
  partnerships

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TAX TREATMENT OF PARTNERS

• Payments to partners do not go on form W-2
• Payments to partners do not get reported on
  quarterly payroll tax returns
• All taxes are paid by the individual through
  their personal tax return

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TAX TREATMENT OF PARTNERS

• What do you do?
• Follow the partnership agreement
• Payments will take on different characteristics
• Guaranteed payments
• Draws

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TAX TREATMENT OF PARTNERS

• What do you do?
• Personal use of company auto
• Medical insurance premiums
• 401K contributions

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THE END