Outsourcing Payroll Duties Can Be a Sound Business Practice, But... Know Your Tax Responsibilities as an Employer

(irs.gov) - Many employers outsource some or all of their payroll and related tax duties (i.e., withholding, reporting, and paying social security, Medicare, and income taxes) to third-party payroll service providers. Third-party payroll service providers can help assure filing deadlines and deposit requirements are met and greatly streamline business operations. Some of the services they provide are:

• Administering payroll and employment taxes on behalf of the employer, where the employer provides the funds initially to the third-party.
• Reporting, collecting and depositing employment taxes with state and federal authorities.

Employers who outsource some or all of their payroll responsibilities should consider the following:

• The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though the employer may forward the tax amounts to the third-party to make the tax deposits, the employer is the responsible party. If the third-party fails to make the federal tax payments, the IRS may assess penalties and interest on the employer’s account. The employer is liable for all taxes, penalties and interest due. The employer may also be held personally liable for certain unpaid federal taxes.
• If there are any issues with an account, the IRS will send correspondence to the employer at the address of record. The IRS strongly suggests that the employer does not change their address of record to that of the payroll service provider as it may significantly limit the employer’s ability to be informed of tax matters involving their business.
• Employers should ensure their payroll service providers are using EFTPS (Electronic Federal Tax Payment System) so the employers can confirm that payments are being made on their behalf. Everyone should use EFTPS and Treasury regulations require electronic payment for payroll taxes over $200,000 in a calendar year. Employers should register on the EFTPS system to get their own PIN and use this PIN to periodically verify payments. A red flag should go up the first time a service provider misses or makes a late payment. When an employer registers on EFTPS they will have on-line access to their payment history for 16 months. In addition, EFTPS allows employers to make any additional tax payments that their third-party provider is not making on their behalf such as estimated tax payments.
  
  EFTPS is secure, accurate, easy to use and provides an immediate confirmation for each transaction. The service is offered free of charge from the U.S. Department of Treasury and enables employers to make and verify federal tax payments electronically 24 hours a day, 7 days a week through the Internet, or by phone. For more information, employers can enroll online at EFTPS.gov, or call EFTPS Customer Service at (800) 555-4477 for an enrollment form.

IRS Lowers Standard Mileage Rates...

The Internal Revenue Service has issued its 2010 optional standard mileage rates for calculating the deductible costs of operating an automobile for business, charitable, medical or moving purposes. The rates for business, medical and moving purposes are slightly lower than last year’s rates, reflecting generally lower transportation costs.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car, van, pickup truck or panel truck will be:
• 50 cents per mile for business purposes;
• 16.5 cents per mile for medical or moving purposes; and,
• 14 cents per mile in service of charitable organizations.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers also have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. Revenue Procedure 2009-54 contains additional details on the standard mileage rates. - (Source: webcpa.com)

CT business tax changes...

These changes would apply to taxable years beginning on or after January 1, 2009.

Corporate Business Tax ("C" Corporations)

The legislation imposes a 10% corporate tax surcharge for income years beginning
in 2009, 2010, and 2011 for companies that have more than $100 million in annual
gross revenues for all of these years.

A company must calculate its 10% surcharge based on its tax liability excluding any tax credits. This applies to companies that pay the tax on their net income and
those that pay on their capital base (but not for the minimum $250 tax).

The law also increases the maximum “preference tax” for groups of companies filing combined corporation business tax returns from $250,000 to $500,000. This
preference tax reduces the ability for loss companies to offset income from related
companies that file combined tax returns.

Sales Taxes

Starting January 1, 2010, the law may reduce the sales and use tax rates
applicable to most taxable items and services from 6% to 5.5%. The reduction does
not take effect if, before January 1, 2010, the state comptroller determines that
certain projected state revenue targets are not met.

The law does not reduce rates for items and services that are currently taxable at rates other than 6%, such as hotel room rentals (12%), motor vehicle sales to outof-state residents on full-time active military duty in the state (4.5%), and
computer and data processing services (1%).

Also, the law does not make changes to the goods and services that are currently
subject to sales tax.

All Business Taxpayers
The law establishes an “economic nexus standard" as the basis for determining
whether an out-of-state business would be subject to the corporation business tax,
or whether nonresident partners or members of a partnership or S corporation
would be subject to the personal income tax on income from their business. The
change would be effective for taxable years beginning on or after January 1, 2010.
The old law required a "physical presence" standard in Connecticut for businesses
to pay tax here. This new change will subject a business (and/or its owners) to
Connecticut taxation if it had a “substantial economic presence” in Connecticut or if
it derived income from sources in the state.

A company would now have substantial economic presence in Connecticut if it
purposefully directed business towards Connecticut. A company's purpose would be
determined by such measures as the frequency, quantity, and systematic nature of
its economic contact with the state. This new law may extend Connecticut tax
liability to out-of-state financial services companies, credit card companies,
mortgage lenders, online finance companies, and many other out-of-state
businesses.

Estate/Gift Taxes

Starting with deaths occurring and gifts made on or after January 1, 2010, the law
(1) increases, from $2 million to $3.5 million, the threshold for the value of an
estate or gift subject to the estate and gift tax; (2) reduces marginal tax rates on
estates and gifts by 25%; and (3) eliminates the tax “cliff.”

The bill also reduces the time an executor has to file an estate tax return by making the filing deadline six (rather than nine) months after the date of death, starting with deaths on or after July 1, 2009.

Other Tax Items

Connecticut law will now decouple from the federal domestic production activities
deduction (IRC Sec. 199) for taxable years beginning on or after January 1, 2009. Previously, businesses and their owners were able to claim this federal tax deduction for Connecticut tax purposes.

The new law also requires the Department of Revenue Services Commissioner to
establish a tax settlement initiative program for anyone who owes Connecticut state
taxes.

Cigarette Taxes
The law will increase the cigarette tax from $2 to $3 per pack of 20 (from 10 cents
to 15 cents per cigarette), starting October 1, 2009.
It also imposes a $1 “floor tax” on each pack of cigarettes that dealers and
distributors have in their inventories at the close of business on September 30,
2009.

Donation of Open Space Tax Credit (C Corporations only)
This legislation will increase the period for which a company can carry forward
unused credits for the donation of open space land from 15 to 25 years on or after
January 1, 2009

Film Tax Credits (C Corporations only)
After January 1, 2010, the legislation would make numerous changes to the film
production, film production infrastructure, and digital animation production credits.
The changes include, among other things:
• increasing the minimum expenditure for the film and animation production
credits to from $50,000 to $100,000, production companies incurring
production expenses or costs (1) between $100,000 and $500,000 would be
eligible for a 10% credit, (2) between $500,000 and $1 million would be
eligible for a 15% credit, and (3) over $1 million continue to be eligible for a
30% credit;
• making the infrastructure credit a flat 20% and increasing the minimum
qualifying expenditure from $15,000 to $3 million, and requiring that a
project be 100% complete (rather than at least 60%) before it can receive a
tax credit voucher;
• requiring a production company to conduct at least 50% of its principal
photography days in Connecticut to be eligible for the film production credit;
• moving up the phase-out date after which no out-of-state expenses count
towards the film production credit from January 1, 2012, to January 1, 2010;
• limiting credit-eligible compensation for all "star talent" featured in a film or
digital media production to $20 million in the aggregate and requiring that
the compensation be subject to Connecticut personal income tax;
• making infomercials ineligible for the film production credit;
• transferring the administration of the credits from the Commission on Culture
and Tourism to the Department of Economic and Community Development
(DECD);
• excluding any costs related to an independent audit of film or digital
animation production project costs and expenses that the DECD requires
before certification;
• eliminating a company's ability to obtain an interim film production tax
credit;
• requiring a production company to use an audit professional, chosen from a
list the DECD compiles,
• allowing the recovery of credit amounts from any entity that committed fraud
or misrepresentation in claiming a credit.

Other Items
The law requires the state treasurer and the OPM secretary to establish a plan to
sell state assets to raise up to $15 million of net general revenue for fiscal year
2010 and up to $ 45 million for Fiscal Year 2011. The new law will increase most of the fees paid to Connecticut including professional licenses, permits, and business registration fees.


* Information provided by the CSCPA State Taxation Committee, based on
information released by CCH.

Independent contractors vs. employees issue...

FedEx drivers win $14.4 mln in pay row: L.A.Times

(Reuters) – A court-appointed official has awarded about 200 California drivers for FedEx Corp $14.4 million in a dispute over whether the package delivery company illegally classified them as independent contractors instead of employees, the Los Angeles Times reported. The award, which is for job-related expenses and interest, is about $9 million more than was awarded to the drivers by a trial court in 2005, the paper said, quoting lawyers of the drivers.

FedEx told the Times it would review the recommendation and contest any disputed items. The Memphis, Tennessee-based company did not immediately return calls made by Reuters seeking comment.

Small businesses...

IRS business provisions of the economic stimulus payments - find information here.

QuickBooks Opens to iPhone and BlackBerry (WebCPA)
Intuit has added mobile access to its QuickBooks Online service via the Apple iPhone and RIM BlackBerry. The Web-based version of the company's small business accounting software now has more than 130,000 small businesses as subscribers. The iPhone and BlackBerry applications were developed by Intuit Labs. The applications allow smartphone users to check their current bank and credit card balances, track accounts receivable and accounts payable, find vendor, employee and customer contact information, locate addresses via Google Maps, and run balance-sheet and profit-and-loss reports. QuickBooks Online costs $9.95 per month, but the iPhone and BlackBerry applications are free. For more information, visit intuitlabs.com .

Non- profits...

Updated IRS Publication for Churches and Religious Organizations Issued here

All Saints Episcopal Church in Pasadena risks losing its tax-exempt status because of a former rector's remarks in 2004.

By Patricia Ward Biederman and Jason Felch, LA Times Staff Writers

The Internal Revenue Service has warned one of Southern California's largest and most liberal churches that it is at risk of losing its tax-exempt status because of an antiwar sermon two days before the 2004 presidential election. Rector J. Edwin Bacon of All Saints Episcopal Church in Pasadena told many congregants during morning services Sunday that a guest sermon by the church's former rector, the Rev. George F. Regas, on Oct. 31, 2004, had prompted a letter from the IRS.

In his sermon, Regas, who from the pulpit opposed both the Vietnam War and 1991's Gulf War, imagined Jesus participating in a political debate with then-candidates George W. Bush and John Kerry. Regas said that "good people of profound faith" could vote for either man, and did not tell parishioners whom to support. But he criticized the war in Iraq, saying that Jesus would have told Bush, "Mr. President, your doctrine of preemptive war is a failed doctrine. Forcibly changing the regime of an enemy that posed no imminent threat has led to disaster."

On June 9, the church received a letter from the IRS stating that "a reasonable belief exists that you may not be tax-exempt as a church … " The federal tax code prohibits tax-exempt organizations, including churches, from intervening in political campaigns and elections. The letter went on to say that "our concerns are based on a Nov. 1, 2004, newspaper article in the Los Angeles Times and a sermon presented at the All Saints Church discussed in the article." - complete article