Self-Employment Tax: This tax is still divided into two parts with separate limitations. The rate for social security is 12.4% of the first $110,100.00. This limit remains at $13,652.40. The rate for Medicare is 2.9%. There is no limit to wages on this portion of the tax. You still get an adjustment to income of one half of the social security tax due.
401K Deferrals: The limitation on the exclusion for elective deferrals has been increased to $17,000.00. Age 50 and over is $22,500.00 for 2012.
Mileage Rate: The optional mileage allowance for the year 2012 for business is 55.5 cents per mile. The optional mileage allowance is 14 cents per mile for charity and 23.5 cents per mile for medical and moving.
Minimum Wage: The California minimum wage for the year 2012 is $8.50 per hour.
Earning Affecting Social Security Benefits:Those who are eligible to receive social security benefits may have their benefits reduced because of earned income received. The limits for earned income are as follows. If you are under full retirement age, you can earn up to $14,640.00 without affecting your social security benefits. If you are full retirement age or older, you can have unlimited earned income without affecting your social security benefits.
Deadbeat Parents: In an effort to track down parents who are not paying their child support, the state has instituted a reporting requirement for new employee hiring. If you are one of seventeen industries outlined by the state and you have more than four employees, you will be required to file. You should be notified by the state if you are required to file.
Workers’
Compensation Issues
Overtime Pay: Be sure to exclude the excess overtime pay
from the wages reported to your workman’s compensation carrier. Only the excess
is excludable.
Subcontractors or Outside Contractors: The money you pay to subcontractors or outside contractors is subject to workerís compensation unless you can verify to your workmanís compensation carrier that the subcontractor or outside contractor is licensed (if his occupation is one that requires a state license) or that they carry their own workerís compensation insurance, and have their own business license. You should obtain a certificate of insurance from the subcontractor showing proof of insurance.
State Board
of Equalization Issues
Use Tax Registration – California:If your business has made out-of-state purchases without paying the California Sale or Use Tax and has used, given away, stored, or otherwise consumed the purchases in this state, you may owe California Use Tax. This is true whether the purchases were made in person, over the internet, by telephone, or by mail. All businesses with gross receipts of $100,000.00 or more will be subject to mandatory use tax filing with the Board of Equalization.
Tax variations by county: With the variations in sales tax from county to county, it is important to understand which rate you charge. Sales tax is imposed according to the county of your business sites unless you ship by your own carriers (your own trucks, as opposed to UPS or the postal service). If you use your own carriers, sales tax is imposed at the rate of the county of delivery.
Internal
Revenue Service Issues
IRS Audits: We have had an increased number of audits in the
past year for S-Corporations and sole Proprietors. If you receive a Schedule C audit letter, please contact us
as soon as possible to insure a quick response and resolution.
Note Payable/Receivable Stockholder: All amounts loaned to
or borrowed from your corporation over $10,000.00 must be substantiated by the
note stating interest rates and required payments. Terms of this note must be
met with at least yearly payments of interest. If interest and principal are
not paid they can become taxable income to you. The rate this year is 5%.
Business Travel and Entertainment: Business travel, promotion and entertainment deductions for individuals and corporations are limited to 50% of the actual expenses. Travel and convention expenses are still 100% deductible. Please separate expenses for these different categories so that you can take full advantage of all deductions. In order to claim any deductions, a taxpayer must provide adequate records showing:
1.
Amount
of each expense
2.
Time
and place of entertainment or meal
3.
Dates
and locations of travel
4.
Business
purpose
5.
Business
relationship of taxpayer to each person being entertained
6.
Identity
of all persons at meal
7.
For
amounts under $75.00 the rules are relaxed some. There must be a business
reason for the expense.
Fringe Benefits: The federal government has also become more aggressive about the reporting of taxable and non-taxable fringe benefits. Generally, these could be auto and travel expenses and uniform allowances, dependent care benefits, etc. Auto and travel expenses are not reported at all if employees submit receipts and are reimbursed based on 55.5 cents per mile for 2012 or actual expenses.
f an allowance is given, this becomes compensation to the employee and is taxable for FICA and SDI purposes. It must also be added to wages on the employeesí Form W-2. Dependent care benefits are not taxable for either FICA or income tax, but do appear on the Form W-2 separately from compensation in box 10.
Form 945, ‘Annual Return of Withheld Federal Income Tax’:Beginning January 1, 1994, taxpayers who withhold income tax (including backup withholding) from non-payroll payments made must file Form 945, ëAnnual Return of Withheld Federal Income Taxí. For 2011 Form 945 must be filed by January 31, 2012. This return must be filed annually.
Non-payroll payments include the following: Pensions, annuities, IRAs, military retirement, gambling winnings, and backup withholdings. Taxpayers may no longer report non-payroll payments Form 941 or 941E. Separate deposits are required for non-payroll (Form 945) income tax withholding on payments made after 2000. Taxpayers should not combine deposits from Form 941 and Form 945 tax liabilities. Although payroll and non-payroll liabilities must be reported and deposited separately, the rules on how and when to deposit remain basically the same.
W-2 Forms: W-2 filing requirements change for defunct businesses. Businesses that close their doors after 12/31/00 must file W-2ís sooner. Final regulations require that the employer send W-2ís to the employees by the date that the final Form 941 is due, which is the end of the month after the calendar quarter in which operations end. Form W-3 must be filed with the Social Security Administration (SSA) on or before the last day of the second calendar month after the period covered by the employerís final Form 941.
W-4 Forms: Employees should fill out new W-4 forms each year. If 11 or more allowances are claimed, a copy should be sent to the IRS. If no W-4 is submitted you should withhold as if the employee were single with zero allowances.
State of
California Issues
Outside Services and/or Subcontractors: You must maintain a record of amounts you pay each individual or company. A federal Form 1099 must be prepared for each person or company you paid $600.00 or more to during the year. One copy must be sent to the IRS with a Form 1096. A penalty of $50.00 will be assessed by the IRS for failure to file or failure to furnish a correct taxpayerís ID number. You will also be subject to imposing backup withholding on those companies or individuals you use who have been identified by the IRS as having an incorrect or suspect ID number. To avoid any penalties, make sure you provide your service providers with a W-9 form, which can be found at www.irs.gov. By filling out a W-9 form they are certifying that the information they are providing to you, such as their name, address and social security number, or if they have a separate business entity, their business name and Employer Identification Number (EIN).
If you would like our office to prepare the 1099ís for you, please provide us with a copy of the W-9 form. The one time set-up fee is $25.00, unless you have used us before. The processing fee for each 1099 form is $30.00 if received at our office by January 13th. If received after January 20th the fee will increase to $35.00. Just a reminder, the recipients of the 1099ís must receive their copy no later than January 31st. If you would like us to gather the information from your accounting records, there will be an additional hourly accounting fee charged. The 1099ís will be filed by magnetic media with the IRS.
Form DE 542: Any business or government entity (defined as a ìservice-recipientî) that is required to file a Form 1099-Misc for services performed by an independent contractor (defined as ìnon-employee compensationî) must report to the Employment Development Department (EDD) within twenty days of either making payments of $600.00 or more or entering into a contract for $600.00 or more with an independent contractor in a calendar year, whichever is earlier. This information is used to assist state and county agencies in locating parents who are delinquent in their child support obligations. This is an annual requirement, so even if you reported the independent contractor in 2011, you must report them again in 2012.The reporting must include the following information.
Service-recipient (business or
government entity):
- Federal employer identification number
-
California employer account number
- Social security number
- Service-recipient name/ business name, address
and telephone number
Service Provider (independent
contractor):
-
First name, middle initial, and last name
- Social security number
- Address
-
Start date of contract (if no contract , date
payments equal $600.00 or more)
-
Amount of contract including cents (if
applicable)
- Contract expiration date (if applicable)
- Ongoing contract (if applicable)
The IRS will assess a penalty of $50.00 and the EDD may assess a penalty equal to $24.00 for failure to report this information, unless a failure is due to good cause. In cases where the failure to supply the required report or to supplying a false or incomplete report is the result of conspiracy between an employer and an employee, the EDD may assess a penalty equal to $490.00.
Employee Status: The state of California has become more aggressive regarding employee status. This means some people you have been treating as independent contractors will have to be considered employees, with appropriate employment taxes being withheld from their pay. A person is generally considered to be an employee if you as the employer control their work environment (i.e. provide work tools, control when and where they work). Two other tests that are used to determine employee status are risk of loss (if the person being paid makes mistakes resulting in a financial loss, who would pay), and whether the payments were made for personal services (a true independent contractor would be able to send someone in his place to do the work). Also, some people are employees by definition. These include stockholders of the corporation. IRS Form SS-8 will help you determine employee status. If you are paying these types of people as subcontractors or by commission, you need to begin treating them as employees. Contact our office if you are not sure what to do.
EDD Audits: We have had an increased number of payroll
audits in the past year. Please
make sure you are complying with the state of California rules regarding
employees.
Posting Notices:
All California employers must post the following notices. The law requires all
employers to post the notices in a prominent location, easily seen by
employees.
Emergency
Numbers – Cal/OSHA requires that emergency numbers be posted
Workers’ Compensation
– A notice must be posted explaining workers’ compensation, what is
covered and not covered and how to reach the employer’s carrier
U.S. Department
of Labor Employment Standards Administration
and California Industrial Welfare Commission – Employers must post
current minimum wage standards
California
Labor Code Payday Notice – Employers must post a notice explaining
the company paydays
U.S. Department
of Labor Employee Polygraph Protection Act – This poster explains
employee rights concerning polygraph tests as a condition of employment and
after employment
Equal Employment
Opportunity Commission (EEOC) – Employers must post EEOC-P/E-1, an
explanation of EEOC rules for hiring employees
California
Department of Fair Employment and Housing (DFEH 162) – This poster
delineates California law regarding discrimination or harassment in employment
situations
Notice to
Employee (DE-35) – Informs employees that their employers are
required to send copies of withholding allowance certification (Form W-4) to
the IRS if the certificate meets certain conditions
CAL/OSHA
– Provides an explanation of employee’s rights for safety and health
in the work environment
Notice to
Employees (DE 1857A) – Informs employees of their unemployment insurance
(UI) and disability insurance (DI)
rights
Time Off
for Voting Notice – Must be posted at least ten days before every
statewide election
New Hiring Reporting: All employers must report the hiring
of all new workers within twenty days of hire to the Employment Development Department
(EDD) (AB67 CH. 97-606). Go to www.edd.ca.gov.
Employers must report the
employee’s name, address and social security number; the employer’s name,
address, federal and state identification number; and the first date the
employee worked. Employers may use Form DE-34, ‘Report of New Employee(s)’, or
send a copy of the employee’s Form W-4, ‘Employee Withholding Allowance Certificate’,
to the EDD. Employers must transmit the report by first class mail,
magnetically or electronically to the EDD. Employers who file magnetically must
file reports by two monthly transmissions not less than twelve days and no more
than sixteen days apart. Multi-state employers who file magnetically may select one state in
which they have employees to report all new hires. The EDD may assess a penalty equal to $24.00, unless a
failure is due to good cause. In
cases where the failure to supply the required report or to supply a false or
incomplete report is the result of a conspiracy between an employer and an
employee, the EDD may assess a penalty equal to $490.00.
Form 571 –L: If you have any personal property
(computer, office furniture and equipment, etc.) in your business, you are
required by the county where your business is located to file a Form 571-L by
April 1st of each year.
City Business Tax: Every business entity that operates
within certain city limits is required to file city business tax based on gross
receipts for the prior calendar year. You may be required to file in several
cities that you might operate in. The city business tax return needs to be filed
by February or March depending on the city.
Norman
Rockwell Calendars
We hope that 2011 was a successful year for you. If you have experienced any changes in your business or anticipate any changes, we would like to consult with you to discuss the ramifications of those changes and make goals for the future. We would also like to consult with you regarding tax planning, estate planning, business management or any other concerns you might have regarding your business. As always, if you know of anyone who is in need of accounting or business consulting services, we would appreciate a referral and recommendation.
Please be aware that there are
important dates marked in some of the calendars as a friendly reminder. Please
let us know if you find this helpful.
Happy
Holidays and Happy New Year!
Best Regards,
Storm-Larsen and Company, Inc.
Adrica
Aggie
Connie
Fan
Jean
Lanching
Malia
Mary Helen
Nancy
Ragnar
Richard
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