Payroll Tax Break Extended – Tennessee Employers Affected

Congress passes payroll tax cut extension through 2012

On February 17, Congress passed H.R. 3630, the “Middle Class Tax Relief and Job Creation Act of 2012” (the Act) and the President has signed it into law. The Act extends the 2-percentage-point payroll tax cut through the end of 2012, and also repeals a number of estimated tax shifts for large corporations. Employers will now be able to better plan for payroll tax compliance

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax). For remuneration received during 2011 the “payroll tax holiday period,” namely calendar-year 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010  reduced the employee OASDI tax rate under the FICA tax by two percentage points from 6.2% to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduced the OASDI tax rate under the SECA tax by two percentage points from 12.4% to 10.4%.

In December of 2011, when Congress couldn’t agree on how to fund a full-year extension of the payroll tax cut that applied for 2011, it passed the “Temporary Payroll Tax Cut Continuation Act of 2011” providing for a two-month extension of the payroll tax cut that applied for 2011, and a parallel extension of a lower SECA tax rate on self-employment income. More specifically, under the TTCA, the reduced employee OASDI tax rate of 4.2% under the FICA tax, and the equivalent employee portion of the RRTA tax, was extended to apply to covered wages paid in the first two months of 2012. The TTCA also provided for recapture of any benefit a taxpayer may have received from the reduction in the OASDI tax rate, and the equivalent employee portion of the RRTA tax, for remuneration received during the first two months of 2012 in excess of $18,350 (i.e., two-twelfths of the 2012 wage base of $110,100). The recapture would have been accomplished by a tax equal to 2% of the amount of wages (and railroad compensation) received during the first two months of 2012 that exceed $18,350. The recapture provision would have applied only if the temporary payroll tax cut terminated on Feb. 29, 2012.

For tax years beginning in 2012, the TTCA also provided that the OASDI rate for a self-employed individual remained at 10.4%, for self-employment income of up to $18,350 (reduced by wages subject to the lower OASDI rate for 2012).

The new law provides that the “payroll tax holiday period” is now extended for  calendar years 2011 and 2012.  Thus, the 2-percentage point payroll tax reduction and the 2-percentage point reduction in the OASDI tax under the SECA tax for the self-employed will apply through Dec. 31, 2012. As a result, for 2012, employees see a reduction in their payroll taxes to 4.2% on wages up to $110,100 (wage base for 2012) and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $110,100.  This will result in the maximum savings for 2012 will be $2,202 (2% of $110,100) per taxpayer. If both spouses earn at least as much as the wage base, the maximum savings will be $4,404.

As a result of this new law, the Act repeals the TTCA recapture provisions applying to taxpayers with wages exceeding $18,350 over the first two months of 2012. The IRS has issued new 941 forms for the year 2012 as well as working on releasing the 2012 W-2 with language that will reflect this tax cut.

The new law also extended unemployment benefits for those who have been unemployed for more than the standard 28 weeks.


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Tennessee Unemployment Ins. Rates to Remain Same….For Now!

Tennessee employers, take note: State Unemployment Insurance rates will not be adjusted at the beginning of this year as a result of the Unemployment Insurance Trust Fund  balance.

At the beginning of the new year, Tennessee adjusts emloyer’s unemployment insurance rates based on the balance of the state’s Unemployment Insurance Trust Fund. If the fund balance shows an increase, to a certain mandated level, UI rates can be reduced. If the fund balance decreases, UI rates can be increased to help increase the fund balance. According to the state, rate calculations will remain under table 1, the table indicating the highest that rates can be adjusted due to low trust fund balances.

Rates range from .5% to 4.5% for employers who have a positive balance in their individual unemployment insurance accounts, 5% to 10% for those businesses who have a negative balance.

Tennessee is the only state that adjusts a business’s unemployment insurance tax rate two times a year. In the beginning of the year, UI tax rates are adjusted based on state’s UI Trust Fund balances. Mid year  (July 1), UI tax rates can be adjusted again due to the claim “experience” (the value of claims for benefits by former employees) of the individual business. In both instances, businesses are notified of rate changes retroactively, usually in February and August. This is important information for payroll service bureaus like Time & Pay who concentrate on payroll tax compliance.

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E-Verify Implemented in Tennessee

Many private Tennessee employers and all governmental entities are now required by law to demonstrate that they are hiring and maintaining a legal workforce according to a new Tennessee Lawful Employment Act law signed by Governor Bill Haslam. Tennessee entities must verify employee eligibility either by utlizing the E-Verify program or by requesting all newly hired employees to provide one of the following identity and employment authorization documents:

> A valid Tennessee driver’s license or photo identification
> A valid driver’s license or photo identification from another state where the license requirements are at least as strict as those in Tennessee
> A birth certificate issued by a U.S. state, jurisdiction or territory
> A U.S. government issued certified birth certificate
> A valid, unexpired U.S. passport
> A U.S. certificate of birth abroad
> A certificate of citizenship
> A certificate of naturalization
> A U.S. citizen identification card
> A lawful permanent resident card

Other proof of employee’s immigration status and authorization to work in the United States

The implementation dates for the new law are structured to occur in phases:
> January 1, 2012 – All state and local government entities and private employers with 500 or more employees must enroll and participate in E-Verify or request and maintain an identity / employment authorization document from a newly hired employee.
> July 1, 2012 – All private employers with 200 to 499 employees must enroll and participate in E-Verify or request and maintain an identity / employment authorization document from a newly hired employee.
> July 1, 2013 – All private employers with 6 to 199 employees must register and utilize E-Verify or request and maintain an identity / employment authorization document from a newly hired employee

Private employers with 5 or less employees are exempt from these new provisions. However, private employers with six or more employees to whom this law applies to must also collect one of the employment authorization documents types listed above for “non-employees” as well. The law defines “non-employee” as “any individual other than an employee, paid directly by the employer in exchange for the individual’s labor or services.”

Human Resource departments need to note that the law also specifies that employers must maintain records of results generated by the E-Verify program for three years after the date of the employee’s hire or for one year after the employee’s employment is terminated, whichever is later. Employers must also maintain records of any employment authorization documents for one (1) year after the employee or non-employee ceases to provide labor or services for the employer, whichever is later.

In the event of any alleged violations of the law, the Tennessee Department of Labor and Services is authorized to request documentation establishing the employer’s compliance with the law, and the employer is required to supply the documentation within thirty days. If the Department determines the employer has violated the new law, a final order for violation of the law shall be issued and may include fines and/or business license suspension.

Additional employment laws currently enacted in Tennessee include:

-HB 111 prohibits contractors from contracting with state agencies within one year of the discovery that the contractor employs illegal immigrants. Contractors must also attest that they do not employ illegal workers.

-HB 729 creates the criminal offenses of flagrantly employing, knowingly employing or knowingly encouraging or inducing an illegal alien to enter the state for the purpose of employing such illegal alien. Fines can amount to $50,000. Farmers are exempt from the new rule and are not required to have business licenses. Suspensions would be lifted once the company proves it no longer has any illegal immigrants as employees. Subsequent offenses occurring within three years would mandate license suspensions for one year. Employers who check identification and are misled by an illegal immigrant will not be considered to be in violation.

-SB 903 prohibits the use in the state of a federal individual taxpayer identification number as a form of identification to prove immigration status. It also provides that for purposes of an application or offer of employment, no person in this state shall accept an individual taxpayer identification number as a form of identification and any person, including any contractor, in this state who is presented with an individual taxpayer identification number by a potential employee or subcontractor as a form of identification or to prove immigration status shall reject such number and shall request the lawful resident verification information.

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Payroll Tax Cut Extended …for 2 Months

Looks like the Idiots in DC have extended the social security payroll tax cut for a period of two months! Thus employee’s social security tax rate will remain at 4.2% until Feb. 29, 2012. The employer’s share will remain at 6.2%.

The $33 billion package also provides extended federal unemployment benefits for two months, avoids a cut in payments to doctors who treat Medicare patients and compels the Obama administration to act within 60 days on a permit for the Canadian proposed Keystone XL pipeline expansion.

One difference in the final agreement is the elimination of a Senate-crafted plan that would have changed the way payroll taxes would have been deducted for higher-paid workers, a move that would have meant significantly changing payroll systems. The Senate proposed that any one earning over $110,100 (2012 max wage cap) would only be eligible for the payroll tax cut equaling 1/6 of the annual payroll tax cut (basically limiting the tax cut to the first $18,350 of earnings) … a payroll processing nightmare.  Payroll departments are breathing a sigh of relief, at least for now.

The bill’s $33 billion cost is expected to be covered by an increase in fees charged to mortgage lenders by government housing agencies Fannie Mae and Freddie Mac. The fee increase, expected to raise about $35.7 billion in revenue over 10 years, likely would be passed on to new-home buyers, raising their monthly mortgage payments by as much as $15 on mortgages of $210,000.

Experts note that, as you read this, the IRS is allocating valuable resources to design a new 941 and 944 form that takes into account a two month payroll tax break, one that  does not even occur for the entire first quarter. Payroll software engineers are also scrambling.  The same prognosticators are also predicting that the efforts will be a waste a time (but what choice do they have) as eventually the Idiots in DC will extend the credit for the entire year.

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Payroll Tax Cut to Expire…for now.

The House yesterday rejected the Senate’s proposed 2 month extension of the 2% reduction in the employee’s share of their social security taxes. According to press reports, the House passed a bill which, while not perfect, would at least prevent the looming tax hike for all working Americans, extend additional unemployment benefits and prevent cuts to Medicare providers with another “Doc Fix” for a full year.  Besides these three key policies, the House also included some policies helpful to job creation in trying to get the Obama administration to approve the Keystone oil pipeline (from Canada) project as well as an important change to fix Medicare’s finances, thus strengthening it for seniors today and tomorrow.  This change is crucial toward tackling the nation’s largest and most pressing fiscal issue — our entitlement crisis.

The Senate however decided to pass only a two-month extension of these three policies and then left for vacation.  

The Senate bill also chose to limit the amount of income that qualifies for payroll tax relief “so that upper-income earners don’t get more than their ‘fair share’ of the tax relief during this brief two-month period.” The Senate bill paid for it all by increasing fees on mortgages financed by Fannie Mae and Freddie Mac. 

From a payroll processing objective, the Advisor wishes that the idiots in DC would realize how difficult their inaction makes payroll processing. It leaves so much undone and so many people hanging. Working Americans will have no idea whether or not they’ll suffer a tax hike when the extension expires. Payroll processors will take on additional costs and have to jump through more hurdles in having to change their payroll systems to keep up with Washington’s policy “du jour” — and frankly, it will be an even more difficult for small businesses who do payroll by hand. Time & Pay is ready no matter how the idiots  in DC (who have probably never had a do payroll in their lives) behave.

The Advi$or will keep you posted, but it looks like we will all see a reduction in our net pay come Jan 1, 2012.

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