Knight Accounting and Technology

I spent some time with a friend yesterday who is an HR Specialist.  She opened my eyes to the complexities of HR compliance regarding I-9′s and I want to post a bit of it here (although this is not to ignore all the other regulations you need to be following when you have employees!)

ICE (Immigration and Customs Enforcement) has increased inspections since July 2009 in a “long term strategy to address and deter illegal employment”.  Employers can face stiff penalties for I-9 violations which include substantial fines and also debarment from government contracts. Penalties can be imposed for hiring unauthorized workers as well as simply for committing paperwork violations even if all workers are authorized to work.

Penalties can include $250 to $3,000 for improper completion of the I-9 form. Paperwork violations, mistakes or missing items such as a date missing, can result in a $100 penalty up to $1000 for each form. Improper completion, retention or making it available for inspection fines range from $100 to $1,100 for each I-9. Knowingly hiring or continuing to employ unauthorized workers fines range from $250 up to $11,000 per violation. Firms who show a pattern of hiring unauthorized workers are liable for criminal penalties of as much as $3,000 per employee and may be subject to six months in prison. Investigators have considerable discretion in assessing fines and will look at factors like the size of the company, the seriousness of the violations, whether the employer was trying to comply in good faith and the pattern of past violations.

Has your business had a compliance check lately?  The employment laws continue to change and I recommend to all my clients that they work with an HR Specialist occassionally…what better time than now?

Without a moment to spare, Congress has passed an $858 billion tax bill, setting rates for both 2010 and 2011.  The good news is, it’s all good news! 

The biggest relief for taxpayers is that the Alternative Minimum Tax patch is in place once again for 2010, sparing over 20 million taxpayers from facing a huge surprise bill.  If you’ve paid AMT in the past, you’ll most likely still pay it, but at least millions of new taxpayers won’t be pulled into it.  The “Bush Tax Cuts” have also been extended two years, so tax rates will be staying the same through 2012.  And, the estate tax is going to remain at 35% for amounts over $5 million through 2012.

Working American’s will see another form of tax relief in lower payroll taxes.  Each pay period, workers are forced to pay 6.2% Social Security tax on their first $106,800 of income, which is withheld from their gross pay.  For 2011, this rate drops to 4.2%, so it’s the equivalent of a 2% raise for all working American’s.  I haven’t been able to determine if this applies to self-employed workers as well, but hopefully the details will be hammered out soon.  The last form of benefits applies to the unemployed.  These individuals receive another 13-month extension on their benefits.

There is no doubt that this tax bill is highly favored by the Republican’s and goes against the Democrat’s agenda.  It will actually cost lower-income earners money because they benefited more from last year’s Making Work Pay Credit than they do from the lower taxes.  And, wealthy individuals making $500,000 and up will save almost $4,000 over their last year’s tax bill.  Since some of the provisions, such as the AMT patch, expire at the end of 2010, and others such as the tax cuts expire at the end of 2011, we still don’t have a solid picture of what the future holds.  But, we can still be thankful that our government was able to come together at the 11^th hour and prevent an across the board tax increase!

I have posted my tax season schedule at http://cpamichele.com/blog/appointments/.  Or, you can just click on the Scheduling page on my website (www.cpamichele.com)   If you would like first pick of your appointment time, please visit that page and schedule early!  There are only limited evening appointments this year, so if that is important to you, scheduling early will guarantee you a good spot!

Just this in…the Democrats are NOT backing Obama’s tax cut plan, so my post on Monday is now incorrect!  The assumption was that he could get his Democrats to back him, and while there is still a chance, it is not certain!  Another thing to keep in mind (thanks to R.B. for reminding me…i encourage everyone to ask questions and keep me on my toes!)…the AMT has still not been patched for 2010.  While about 4 million taxpayers were subject to Alternative Minimum Tax last year, that number could grow to 25 million taxpayers this year if a patch is not set by December 31st!  I don’t know about everyone else, but this is keeping me on my toes lately!

My heart goes out for the fire and natural disaster victims around the country, especially those close to home in Colorado.  I just want to share a thought on my mind as I am glued to the news lately…have you protected your vital tax records?  To help protect your family, please consider the following:

1) Take an hour to walk through your house with a digital camera.  Take detailed pictures of each room.  In the event of a loss, these pictures will be very helpful in filing a claim for loss with your insurance company.

2) Scan important documents into your computer, and also store the hard copies in a folder that is easy to grab in the event of a quick exit.  In our family, those important documents include our wills, life insurance paperwork, a photocopy of the contents of our wallets (front and back for credit cards, etc, so that the customer service numbers are visible), and special photos of our parents, grandparents, etc that were taken before the digital age.

3) Once you have everything scanned in, BURN IT TO DISK or STORE IT ON A THUMB DRIVE, and then store those files offsite!  This is the most important step…all too often, people keep great records, but if they aren’t able to get to those records in their time of need, their work is lost.  By sending your disk or drive to a relative or friend’s house, they will be available for you when you need them.

Now that April 15^th has come and gone, it’s time to start thinking about your 2010 taxes.  If you’re like most taxpayers, you want to put off thinking about taxes until next year, but I am a firm believer that the best way to save money on taxes is to make tax planning a year-round effort.  I would love to fill this column with tips for 2010, but unfortunately Congress has yet to finalize many important tax laws that are hanging in the balance and tax planning is more challenging than ever right now. 

Let’s back up a bit.  At the end of each year, Congress is expected to vote on several tax laws that expire from year to year, or require dollar amount adjustments.  Tax geeks like me wait anxiously for the news before Congress takes their holiday break, the figures are published, and we all move forward with advice for our clients.  But, with the push for health insurance passage this year Congress never got around to voting on the necessary issues before year end, and we’re now at the end of April and still anxiously awaiting decisions.  What hangs in the balance, and how does it affect you? 

For starters, over 50 tax provisions expired on 12/31/09.  The most commonly seen provisions from this package include the standard deduction for real estate taxes, the option to deduct sales tax instead of state and local taxes, tuition deductions, and the $250 deduction for educators.  These provisions were expected to be renewed at the end of 2009 for 2010, but that never happened.  

The Alternative Minimum Tax, a tricky tax penalty on high income earners with big deductions, is also set to strike if Congress doesn’t take action.  While I would need to write a book to fully explain the AMT, it was basically a tax penalty put into place decades ago to prevent uber-wealthy individuals from taking so many deductions that they didn’t have to pay a fair share of taxes.  When taxpayers with high incomes also had large itemized deductions, the AMT was an additional tax added to their bottom line to force them to pay the tax they would’ve paid without the benefit of the large deductions. 

The problem is, when the AMT was first put into place, uber-wealthy meant income above $150,000.  Each year, Congress passed patches to effectively increase the income level considered subject to AMT.  But, without a patch passed in December of 2009, the AMT is set to affect almost 40% of married couples in the US.  To put it in perspective, in 2009 several million taxpayers will be forced to pay higher taxes due to the AMT, but according to the Congressional Budget Office this figure jumps to over 30 million taxpayers in 2010 if a patch is not put into place.

As if the 50 tax provisions and AMT aren’t enough, the elephant in the room is the Estate Tax.  To summarize a highly complex issue, as of January 1^st, the estate tax disappeared.  If your loved one died on December 31^st, 2009, their estate would owe 45% tax on any assets greater than $3.5 million.  If that same loved one passed away on January 1^st, 2010, their estate wouldn’t owe a penny of estate tax.  While the leading proposals in Washington range from a 35% to 45% tax on any assets great then $3.5 to $5 million, no legislation has been passed at this point.

It’s hard to believe the first quarter of the year has come and gone with no resolution on these issues.  For now, the best advice I can give is to make sure that your 2009 returns are filed correctly, and to hang on tight for 2010!  Will all 3 be passed and made retroactive to January 1^st?  Will these provisions be passed with a July 1 effective date, causing unimaginable complications for 2010 tax returns?  Or, will Congress avoid making any big tax cuts during an election year and allow these taxes to remain unchanged until 2011?  As tax laws are determined for the year, I will make every effort to publish them in this column, but until the new tax rates and tax laws are set, the best you can do is keep paying your taxes and keeping an eye on the news as it comes out of Washington.

There are some huge changes in the works.  I just wrote this article for the Summit Daily News and thought I’d repost it here for all to see.

If you own a small business, there are a number of drastic changes to your business operations included in the recently approved HIRE Act, and many more on the way as a result of the healthcare bill and a tax extenders package currently working its way out of committee.

The HIRE Act is a positive step for businesses.  While you should consult your own CPA, HR or payroll expert regarding the details, the Hiring Incentives to Restore Employment Act was passed on March 18^th, 2010 and provides tax breaks to companies who hire the unemployed.  Simply put, if you hire an employee between February 3^rd, 2010 and January 1, 2011 and that employee has not been employed for more than 40 hours during the previous 60 days, the employer does not have to pay the usual 6.2% of Social Security tax on that employee’s wages through the end of the year.  The employer can also receive a credit up to $1,000 if the individual remains employed for a full year. 

If you believe you have employees that meet this criteria (family members don’t count, nor can you terminate an existing employee without cause just to replace them with a formerly unemployed employee!), you should work with your payroll provider immediately.  Employees will need to sign an affidavit certifying their previous work status, and the credit can be claimed on the 2^nd Quarter Form 941 which is due July 31^st.

The healthcare bill also offers a few benefits for small businesses, but many of these are phased in over the next eight years.  The only change we’ve seen so far in 2010 is a credit available on the 2010 tax return for small businesses with fewer than 25 employees who offer health benefits to their works.  If your company fits this scenario, you and your tax advisor should work through the formulas available at www.irs.gov.  

Other small business changes lurking on the horizon are not nearly as favorable to businesses, and will cost businesses thousands of dollars in additional taxes and administrative work. Two changes on the horizon for 2011 are limits to FSA and HSA contributions, and a new employer requirement to report the aggregate value of benefits they provide for health coverage on their employees’ W-2’s.  The latter has sparked rumors across the internet that health benefits will become taxable and that’s not the case, they will just be reported as additional information.  Unfortunately, details aren’t available yet, so we’ll all have to stay tuned towards year end.

The most dramatic change to small businesses is buried deep in the healthcare bill.  Beginning in 2012, businesses will have to issue 1099-MISC forms to all vendors they pay more than $600 to for goods or services.  Under current law, you don’t have to issue 1099’s to corporations and you don’t have to issue 1099’s for the purchase of goods, only services.  Beginning 2012, if your business buys a $600 computer from Office Max, they will need to collect Office Max’s address and tax ID# at the time of purchase and send them a 1099 at year end.  I predict that even the smallest businesses will need to send dozens more 1099 forms a year, while larger businesses will be sending hundreds or thousands of additional forms.  This will increase costs for small businesses both on the front end to collect and track the information, and at year-end to issue the 1099’s.  In my opinion, this is the costliest nightmare to face small businesses in decades!

The last notable change applies only to S Corporations.  Currently, S Corp owners are allowed to pay themselves a reasonable salary and take the rest of the company profit as distributions, which are not subject to the 15.3% Social Security and Medicare tax paid on the owner’s salary.  This saves many S Corporations tens of thousands each year.  If the tax extenders package is passed, this benefit will no longer exists for those S Corporations in service fields such as accounting, law, health, engineering, architecture, consulting, and investment management.

As always, I will do my best to keep small businesses in the loop on these upcoming changes through my blog at www.cpamichele.com.  In my 10 years as a CPA, I’ve never seen so many changes in such a short amount of time, and who knows what surprises lie ahead!

New this year, the IRS is adding yet another option for getting your tax refund.  In addition to a paper check (which I NEVER recommend), direct deposit to a checking or savings account, and making an IRA contribution, this year you will also be allowed to purchase U.S. Savings Bonds.  These Series I Savings Bond can be purchased in increments of $50, $100, $200, $500, and $1,000, but cannot be redeemed for 12 months after you receive them.  And, if redeemed within the first five years, the three most recent months’ interest will be forfeited.  While you can only have Savings Bonds issued in your own name during the 2010 filing system, you will be able to add co-owners, such as child and grandchildren in the future.