Small Business Tax

Small Business Payroll Taxes Update – 2011 2% Employee Cut

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I am posting this as reference for small business owners regarding 2011 payroll.  As part of the Job Creation Act of 2010 the employees’ social security withholding rate was reduced from 6.2% to 4.2%.  Please be aware that the Employer’s rate remains at 6.2%, so don’t just double your employee withholding amount when calculating your 941 payroll tax deposits.

Employee SS Withholding Rate:  4.2%
Employer SS Expense Rate:  6.2%

For those companies that process payroll internally please be sure to implement these changes by January 31.  Any extra amounts withheld from employee checks due to late implementation must be reimbursed to employees by March 31, 2011.

IRS Notice 1036 contains important information for employers to review.  I have provided links below both for Notice 1036 and Publication 15 (aka Circular E), the Employers Tax Guide. 

Notice 1036
IRS Publication 15 – Employers Tax Guide

Record Retention for Tax Purposes

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I’m asked this question every year. The IRS provides some general guidance on their website as discussed below:

The length of time you should keep a document depends on the action, expense, or event the document records. Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out.

The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax. The below information contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

  1. You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
  2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
  3. You file a fraudulent return; keep records indefinitely.
  4. You do not file a return; keep records indefinitely.
  5. You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
  6. You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
  7. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away:

Are the records connected to assets?
Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition.  You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.

What should I do with my records for nontax purposes?
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes.  For example, your insurance company or creditors may require you to keep them longer than the IRS does.

Burdensome 1099 Requirements

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While catching up on my daily news I read today that the Senate was unable to rally enough votes to end debate on two amendments that would have eased the burdensome 1099 filing requirements imposed on all businesses.  In case you didn’t notice this law was passed as part of the health care reform bill in an effort to increase  tax collections.  Unfortunately, few lawmakers in Washington had considered the effort and cost required by small business owners to track and report this additional information.

The new Patient Protection and Affordable Care Act requires businesses to report any purchase of $600 or more from a vendor for goods or services  during a calendar year.  The law is scheduled to take effect for purchases made in 2012, which would be reported on the 1099 form filed in 2013.  For those unfamiliar with 1099s, this form is sent to each vendor and likewise sent to the IRS for matching purposes.  The apparent intent behind this law is to reduce the tax gap, or taxes on unreported income.  New, higher fines are imposed per form on small businesses who neglect to file these forms.

Unfortunately, no one considered the amount of work and extra responsibility this requirement places on the backs of the small business.  The AICPA and other small business advocacy groups have been pushing our friends in Washington to fix this problem since the new law was passed.  Currently, the new form not only requires reporting the amounts, but it also includes boxes for each month of the year.  That’s right, in order to complete the currently proposed form one would need to track purchase amounts for these vendors by month and include them on the form.

Let’s hope our representatives in Washington hear the people and fix this soon!