Hiring Incentives to Restore Employment (HIRE) Act
A new piece of legislation, the “Jobs Bill” (Hiring Incentives to Restore Employment Act or HIRE) was just signed into law. Our firm is monitoring it for the most up-to-date information to help you stay informed and compliant with the new legislation.
President Obama has signed into law the Hiring Incentives to Restore Employment (HIRE) Act, which is focused on accelerating the hiring of unemployed workers. The cornerstone of the HIRE Act is a federal program that will provide employers with incentives to hire and retain employees.
The HIRE Act has many provisions that impact employers, including a payroll tax exemption, and increased tax credits for employers that meet certain eligibility requirements. The legislation immediately enhances employers’ cash flow by permitting employers to retain the employer portion of the Social Security tax ordinarily remitted. HIRE will exempt an employer from paying the employer portion of Social Security taxes for the remainder of the year on new hires who are currently unemployed. If those workers stay on the payroll for at least a year, the employer would also get up to a $1,000 business tax credit per employee.
Social Security Tax Exemption
- The 6.2% Employer Social Security Tax exemption applies to previously unemployed individuals hired after February 3, 2010 who have worked less than 40 hours during the 60-day period prior to employment and whose 2010 earned wages after March 18, 2010 and before January 1, 2011 do not exceed $106,800.*
- Employers can save the 6.2% Employer Social Security Tax, whether they hire a $40,000 worker, or a $90,000 worker. Employers, including nonprofit organizations, and colleges and universities, would not have to wait until 2011 to benefit from this tax relief because savings would accrue with each payroll processed.
- The legislation also encourages businesses to hire workers earlier in the year because the tax benefit will be greater. For example, a $60,000 worker hired on April 1 saves an employer about $2,800 in taxes. Delaying the hiring until June 1 would reduce savings to about $2,200.
- This exemption has no cap or limit as to the total amount of tax benefits that can be claimed by an employer. Employers can save up to $6,622 per qualifying worker, whether they hire one worker or hundreds of new workers.
- Employers will receive an income tax credit, which is either $1,000 for each qualifying worker hired after February 3, 2010, and employed for at least 52 consecutive weeks, or 6.2% of wages paid to the qualifying worker over the 52-week period, whichever is less. Wages during the last 26 weeks must be at least 80 percent of wages paid for the first 26 weeks. Only wages paid between March 19, 2010 and December 31, 2010 are eligible.
- Any new hire must certify "by signed affidavit," (W-11 Form Attached) under penalties of perjury, that he/she has "not been employed for more than 40 hours during the 60-day period ending on the date such individual begins such employment." Use the form to confirm that an employee is qualified under the HIRE Act.
- Neither the 6.2% Employer Social Security Tax exemption nor the retention tax credit is permittedif a person is hired to replace another employee "unless such other employee is separated from employment voluntarily or for cause."
The IRS is issuing guidance as quickly as possible on the many tax deposit and reporting issues created by the Act. Here is what is known SO FAR:
- The Form W-2 will be modified to include a new box 12 code of CC to report exempt wages and tips for qualified employees under the HIRE Act. The Form W-3 will also be modified to sum up the box 12 code CC totals.
- There will not be a new Schedule B Form. The first quarter credit does not reduce liability on Schedule B, and is treated as a second quarter payment.
- Seasonal employees do qualify under the HIRE Act as long as they meet the qualifications.
- For purposes of the additional Business Tax retention credit, the credit amount will be calculated on FIT taxable was still under discussion.
- The credit is for eligible employees hired after February 3, 2010, but only wages paid between March 19, 2010 and December 31, 2010 are eligible.
- A new Form 941 will be updated to account for the tax credits beginning with the second quarter form. First quarter wages and credits will also be reported on the second quarter form. The final version will be released the week of April 5.
- Employers can reduce their federal deposit amounts throughout the quarter by the eligible employer Social Security tax amount, or they can wait to claim the credit on their 941 return.
- The credit can not be claimed by household or government employers.
IRS to Conduct Employment Tax Audits
Here is the latest IRS compliance division news:
Beginning February 2010, the IRS will launch its latest National Research Program (NRP), conducting detailed employment tax examinations on randomly selected employers.
These audits will help the IRS more accurately gauge the extent to which businesses properly comply with employment tax laws and related reporting requirements. As a result, the IRS will audit future employment tax returns with the greatest compliance risk.
It is reported that the IRS audits will focus on the following four areas of employment-tax issues:
- Worker classification issues. Properly classifying workers as employees and independent contractors.
- Fringe benefits. Complying with the standards and documentation required for the correct taxability of certain fringe benefits (i.e., company cars).
- Reimbursed expenses. Complying with the “accountable plan” requirements to determine if expenses qualify as tax-free.
- Compensation of owner-employees. S corp clients reporting salaries for officers.
IRS FORMS 1099-MISC FILING REQUIREMENTS
Once again we would like to remind you of the requirements for filing Federal Informational Returns (Forms 1099-MISC) and the penalties for failure to do so.
If you are in a trade or business and made certain payments (listed below) to Non-Corporate payees of $600 or more, and attorneys (even if incorporated and regardless of amount paid) during the calendar year 2009, you are required to file Informational Returns (Forms 1099) and provide the recipient with a copy of the form.
This requirement includes payments of $600 or more to Non Incorporated LLC’s as well.
The recipients must receive the Form 1099 by January 31, 2010 and copies must be filed with the Internal Revenue Service (IRS) by February 28, 2010.
The IRS penalty for Failure to File Informational Returns is based on when you file the correct information return and if you qualify as a small business (you are a small business if your average annual gross receipts for the 3 most recent tax years ending before the calendar year in which the information returns were due are $5 million or less).
IRS penalties are as follows:
- If the “Failure to File” is a result of intentional disregard of IRS requirements, a penalty of not less than $100 per information return will be applied (the maximum will be disregarded in this situation). Also, failure to obtain and to report the recipient's identification number will result in a $50 penalty per failure.
- Also, strong consideration will be given to assessing Backup Withholding(in addition to the penalties mentioned above) when issues arise related to failure to file or furnish Forms 1099.
- $15 per information return if you correctly file within 30 days (by March 30 if the due date is February 28); maximum penalty $75,000 ($25,000 for small businesses).
- $30 per information return if you correctly file more than 30 days after the due if you correctly file more than 30 days after the due date but by August 1; maximum penalty $150,000 per year ($50,000 for small businesses).
- $50 per information return if you file after August 1 or you do not file required information returns; maximum penalty $250,000 per year ($100,000 for small businesses).
To ensure that you have this information for future reporting periods, obtain the recipient's social security number or federal identification number using Form W-9 (which we have attached a copy of and is also available from our office) before making your first payment to them.
Forms 1099 payments required to be reported are:
- Personal service (these payments are for anything other than a tangible commodity);
- Including any and all fees paid to attorneys (even if incorporated).
- The $600 minimum filing requirement does not apply to attorneys.
- Prizes or awards which are not for services rendered;
- Gross royalty payments (payments of $10 or more must be reported);
- Gross rents;
- Interest and dividends (payments of $10 or more must be reported);
- Entire amount of total distribution from profit-sharing, retirement plans, individual retirement accounts, and insurance contracts (not subject to the $600 minimum filing requirement); and
- Nominee distributions (i.e. anyone receiving a Form 1099 for amounts that belong to another person).
FORM 1099-MISC: Is used to report payments to non-employees (i.e. independent contractors.). If you have any questions as to the determination of employee or independent contractor status, please see below.
ATTORNEYS: This requirement includes corporations.
Employee vs. Independent Contractor
When is someone considered an employee and when should they be treated as an Independent Contractor.
When someone is an employee they are paid through the payroll system; taxes are withheld and the employer is responsible for the matching piece of Old Age, Survivors and Disability Insurance (OASDI) and Hospitalization Insurance (HI).
When someone is an independent contractor, they are not on the payroll, taxes are not withheld from their payments and their income is reported as nonemployee compensation on Form 1099-Misc (if payments exceed $600). The party making the payment is not required to pay OASDI and HI.
How do we determine if an individual is an employee or Independent Contractor?
To make this determination we must examine the relationship of the worker and the business. The main focus of this examination is control and independence. This usually falls into three categories:
Type of Relationship
Behavioral Control: Does the business have the right to direct and control how the worker does the task for which they are hired?
What is the level of instruction that the business gives the worker? The more defined these instructions are, the more likely the worker is an employee. These instructions could include, but are not limited to:
When and where to do the work
What tools or equipment to use
What workers to hire or assist with work
Where to purchase supplies and services
What work must be performed by a specified individual
What order or sequence to follow
Even if no instruction is given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. The key is whether or not the business has retained the right to control the details of a worker's performance.
Does the business provide any training to the worker? Normally an employee is trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
Financial Control: Does the business have the right to control the business aspects of the worker's job?
Does the worker have unreimbursed expenses? Independent contractors are more likely to have unreimbursed expenses than employees.
Does the worker incur fixed ongoing costs regardless of whether the work is currently being done? Yes to this question indicates the worker is an independent contractor.
Does the worker have a significant investment in the facilities he or she uses in performing services for someone else? If yes, then the worker is normally an independent contractor. However, the lack of a significant investment in facilities does not automatically mean the worker is an employee.
Does the worker make his or her services available to other businesses? This is a clear indication of independent contractor status. Often times an independent contractor will advertise, maintain a viable business location and make themselves available to other businesses.
Is the worker paid a regular wage? An employee is generally guaranteed a regular wage amount for a set period of time - hourly, weekly, monthly, etc. An independent contractor may be paid based on a per job basis, or can also be paid by the hour.
Can the worker incur a profit or loss? An independent contractor can make a profit or loss on the work/job.
Type of Relationship: What is the relationship between the business and the worker?
Is there a written contract between the business and the worker that describes the relationship intended between the two parties?
Does the business provide the worker with employee-type benefits, such as insurance, a pension plan, vacation and/or sick pay? If so, the worker has the characteristic of an employee.
What is the permanency of the relationship? If the worker is given the expectation that the relationship will continue indefinitely, rather than for a specific project or period, then it is more likely that the intent was to establish an employer/employee relationship.
Are the services performed by the worker a key aspect of the regular business of the company? If the services provided by the worker are considered a key aspect of the business' regular activities, it is more likely that the business will have the right to direct and control his or her activities. The ability to direct and control the activity is a characteristic of an employer/employee relationship.
Generally there is an employer/employee relationship when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished but also as to the details and means by which the result is accomplished. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so. The Internal Revenue Service developed 20 factors to assist the taxpayer in determining if a worker is an employee or Independent Contractor.
A "Yes" answer for the following questions indicates that the worker is an employee:
1. Does the business provide instructions to the worker about when, where and how he or she is to perform the work?
2. Does the business provide training to the worker?
3. Are the services provided by the worker integrated into the business' operations?
4. Must the services be rendered personally by the worker?
5. Does the business hire, supervise and pay assistants to the worker?
6. Is there a continuing relationship between the business and the worker?
7. Does the business set the work hours and schedule?
8. Does the worker devote substantially full time to the work of the business?
9. Is the work performed on the business' premises?
10. Is the worker required to perform the services in an order or sequence set by the business?
11. Is the worker required to submit oral or written reports to the business?
12. Is the worker paid by the hour, week or month?
13. Does the business have the right to discharge the worker at will?
14. Can the worker terminate his or her relationship with the business any time he or she wishes without incurring liability to the business?
15. Does the business pay the traveling expenses of the worker?
A "Yes" answer for the following questions indicates that the worker is an Independent Contractor:
16. Does the worker furnish significant tools, materials and equipment?
17. Does the worker have a significant investment in the facilities?
18. Can the worker realize a profit or loss as a result of his or her services?
19. Does the worker provide services for more than one firm at a time?
20. Does the worker make his or her services available to the general public?
The determination of whether or not the worker is an employee or independent contractor is the responsibility of the business. If the Internal Revenue Service challenges the classification made by the business, the burden of proof is on the taxpayer (business).
If requested, the IRS will make a determination of whether a worker is an employee or independent contractor. This request is done by filing Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Lately, there have been a lot of concerns/questions from clients regarding whether a new hire is considered an Employee or Independent Contractor. Below is an excerpt from IRS’ website regarding classification on new hires:
Employee vs. Independent Contractor – Tips for Business Owners
If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.
Here are the top things every business owner should know about hiring people as independent contractors versus hiring them as employees.
- Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.
- Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
- Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- The Type of Relationship factor relates to how the workers and the business owner perceive their relationship. Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
- If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
- If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.
- Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
- Workers can avoid higher tax bills and lost benefits if they know their proper status.
- Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.
- You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
Independent Contractor Checklist
Mistakenly classifying an employee as an independent contractor can result in significant fines and penalties. There are 20 factors used by the IRS to determine whether you have enough control over a worker to be an employer. Though these rules are intended only as a guide-the IRS says the importance of each factor depends on the individual circumstances-they should be helpful in determining whether you wield enough control to show an employer-employee relationship. If you answer “Yes” to all of the first four questions, you’re probably dealing with an independent contractor; “Yes” to any of questions 5 through 20 means your worker is probably an employee.
- 1. Profit or loss. Can the worker make a profit or suffer a loss as a result of the work, aside from the money earned from the project? (This should involve real economic risk-not just the risk of not getting paid.)
2. Investment. Does the worker have an investment in the equipment and facilities used to do the work? (The greater the investment, the more likely independent contractor status.)
3. Works for more than one firm. Does the person work for more than one company at a time? (This tends to indicate independent contractor status, but isn’t conclusive since employees can also work for more than one employer.)
4. Services offered to the general public. Does the worker offer services to the general public?
5. Instructions. Do you have the right to give the worker instructions about when, where, and how to work? (This shows control over the worker.)
6. Training. Do you train the worker to do the job in a particular way? (Independent contractors are already trained.)
7. Integration. Are the worker’s services so important to your business that they have become a necessary part of the business? (This may show that the worker is subject to your control.)
8. Services rendered personally. Must the worker provide the services personally, as opposed to delegating tasks to someone else? (This indicates that you are interested in the methods employed, and not just the results.)
9. Hiring assistants. Do you hire, supervise, and pay the worker’s assistants? (Independent contractors hire and pay their own staff.)
10. Continuing relationship. Is there an ongoing relationship between the worker and yourself? (A relationship can be considered ongoing if services are performed frequently, but irregularly.)
11. Work hours. Do you set the worker’s hours? (Independent contractors are masters of their own time.)
12. Full-time work. Must the worker spend all of his or her time on your job? (Independent contractors choose when and where they will work.)
13. Work done on premises. Must the individual work on your premises, or do you control the route or location where the work must be performed? (Answering no doesn’t by itself mean independent contractor status.)
14. Sequence. Do you have the right to determine the order in which services are performed? (This shows control over the worker)
- 15. Reports. Must the worker give you reports accounting for his or her actions? (This may show lack of independence)
16. Pay Schedules. Do you pay the worker by hour, week, or month? (Independent contractors are generally paid by the job or commission, although by industry practice, some are paid by the hour.)
17. Expenses. Do you pay the worker’s business or travel costs? (This tends to show control.)
18. Tools and materials. Do you provide the worker with equipment, tools, or materials? (Independent contractors generally supply the materials for the job and use their own tools and equipment.)
19. Right to fire. Can you fire the worker? (An independent contractor can’t be fired without subjecting you to the risk of breach of contract lawsuit.)
20. Worker’s right to quit. Can the worker quit at any time, without incurring liability? (An independent contractor has a legal obligation to complete the contract.)
IRS Issues Regulations on 10-Percent Tax on Tanning Services Effective July 1
IR-2010-73, June 11, 2010
WASHINGTON — The Internal Revenue Service today issued regulations outlining the administration of a 10-percent excise tax on indoor tanning services that goes into effect on July 1.
The regulations were published in the Federal Register.
In general, providers of indoor tanning services will collect the tax at the time the purchaser pays for the tanning services. The provider then pays over these amounts to the government, quarterly, along with IRS Form 720, Quarterly Federal Excise Tax Return.
The tax does not apply to phototherapy services performed by a licensed medical professional on his or her premises. The regulations also provide an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.