Year End Payroll Letter
As our year-end draws closer, it leaves us thinking about upcoming changes and filing requirements for payroll, payroll taxes, sales and use taxes, personal property taxes and other compliance information returns. This information is intended to help you understand the process and ease the burden of compliance for your business.
MICHIGAN HOURLY MINIMUM WAGE INCREASES: Starting January 1, 2017, Michigan’s minimum hourly wage rate increases from $8.50 to $8.90 and the minimum wage for tipped employees will increase from $3.23 to $3.38. However, tipped employees must make $8.90 per hour with tips and regular wages taken into account.
There are still lower hourly wage rates: employers can pay newly-employed teens between 16 and 19 at $4.25 per hour for the first 90 days of their employment. Employees ages 16 and 17 can still be paid the federal minimum wage of $7.57 per hour.
EMPLOYEE W-2 FORMS: In connection with the preparation of annual W-2 forms, we want to emphasize three key items. First, for S corporations, health and life insurance premiums paid for shareholder employees are required to be reported on W-2 forms as additional compensation. Second, personal use of company vehicles and certain other fringe benefits are required to be reported on the W-2 as compensation. Some of these items also require tax withholding. Lastly, if your company has more than 250 W-2 forms to issue, they must be sent to the IRS electronically.
Reporting of the cost of coverage under an employer-sponsored group health plan on employee W-2 forms is optional for employers issuing less than 250 W-2 forms.
We prepare these forms for many of our clients, and reconcile them with the other required payroll tax filings to avoid problems in the future. If you have been preparing the W-2's in your office and need assistance in the fringe benefit area or if this is your first year with employees and you would like to have us prepare the necessary year-end tax forms for 2016, please contact us as soon as possible. January 31st is the deadline for furnishing the forms to employees. Employers are also now required to file their copies of Form W-2 with the Social Security Administration, by January 31st. (Previously employers did not have to file their copies of Form W-2 until February 28th.)
If you need assistance with any reporting requirements, please contact our office.
AFFORDABLE CARE ACT (ACA) AND EMPLOYER SHARED RESPONSIBILITY (ESR): For calendar year 2016, there are separate rules regarding ACA and ESR reporting requirements for Small Employers (less than 50 full-time equivalent employees) and Large Employers (at least 50 full-time equivalent employees). If you offer an employer-sponsored group health plan, please contact our office for further guidance on meeting the required filing requirements and deadlines.
YEAR 2017 FICA TAX RATE AND WAGE BASE: For year 2017, the FICA rate will remain the same for employers and employees at 6.20% Social Security tax and 1.45% Medicare tax. The wage base for Social Security tax will increase from $118,500 to $127,200. There is no ceiling for Medicare tax on employee’s total wages. Employees earning wages in excess of $200,000 will be subject to an additional 0.9% tax withholding.
FORMS 1099 AND 1098: January is also the time to prepare 1099 forms and 1098 information returns. Payments to non-employees for services, rents, prizes or awards in excess of $600 are required to be reported to IRS on form 1099. Payments of interest and dividends in excess of $10 are required to be reported. Also business collections of interest income on seller financed mortgages (land contracts, etc.) are required to be reported on form 1098. Additionally, businesses required to file more than 250 of any form are required to send the data to the IRS electronically.
The 1099 and 1098 rules are frequently overlooked or ignored, but they are important for two reasons. First there are penalties for non-filing which start at $30 per return (there is also a "backup withholding" penalty of 28% of the amounts paid and not reported in certain instances). Secondly, the question of independent contractor versus employee status hinges on proper reporting of payments.
Please contact our office if you would like assistance in the preparation of these forms. January 31st is the deadline for furnishing the forms to recipients. And beginning in 2017, January 31st is also the due date for filing copies with the federal government. (Previously the government forms were required to be filed by February 28th.)
PAYROLL TAX DEPOSITS: Payroll tax deposit rules are set annually for each employer, based on the prior year's annual tax volume. IRS generally notifies each employer if their status changes from one year to the next. Based on the taxes you paid during the previous year, you will be required to make payments by electronic funds transfer (EFTPS) either once a month on the 15th, or once a week (technically dubbed "semi-weekly," based on pay date) after payment of the payroll.
Please forward any IRS notices regarding a status change to our office to ensure proper action is taken. If you are unsure of which rule applies to your business, give us a call, we will be happy to help.
UNEMPLOYMENT TAXES: One matter that frequently causes time consuming correspondence and that can be quite costly focuses on state unemployment taxes and their relationship to the federal system. Briefly, the gross federal unemployment tax is 6.0%, with a credit of 5.4% for amounts you paid into state unemployment funds. The expected FUTA rate for calendar year 2017 is 0.6%.
The federal and state governments compare the taxable wage amounts employers report for consistency. If you haven't paid your state taxes, if they were paid late, if your state employer number doesn't match, or if the state makes a mistake (also a distinct possibility), you may receive a notice of federal taxes due. If the problem goes unattended, your federal tax could increase nearly ten times (from 0.6% to 6.0%), and you will also be assessed penalty and interest charges. Be sure to forward any government notices from IRS to our office at the earliest possible time.
Also on the subject of unemployment taxes, be sure to check your Tax Rate Determination Notice for 2017 which is scheduled to be mailed to each employer from the State of Michigan near the end of December 2016. The statement recaps the dollar amount of benefits and taxes paid during the previous fiscal year. It also determines your tax rate for the next calendar year. This information is critical to you. If there is any error or irregularity indicated on the statement, you have a very short period of time to correct the errors in order to have your tax rate corrected. If you miss this deadline, it doesn't matter whether the error is your fault or that of the state, the rate will be set for the year! Be sure to check for your rate determination notice, review its contents and provide us with a copy.
The Michigan Unemployment Insurance Agency has implemented the Michigan Web Account Manager (MiWAM) for employers to use in filing and paying taxes as well as specific employer account information. We encourage employers to use this system to monitor their accounts and to keep up to date on any correspondence pertaining to their account, including checking your rate determination notice referred to above. If you need any help in accessing your account or have questions, please contact our office.
PERSONAL PROPERTY TAXES: In the near future you will most likely be receiving your local city or township personal property statement. These statements are to be completed and returned with your report of property physically located within the taxing jurisdiction (your city or township) on December 31, 2016. The municipalities generally set arbitrary deadlines of February 1. However the true deadline (set by state statute) is actually February 20 each year. The key is to be sure that the municipality receives the statement, and that the subsequent assessment computations are correct.
For owners with personal property with a True Cash Value of less than $80,000 on December 31, 2016, there is an “Affidavit of Owner of Eligible Personal Property Claiming Exemption from Collection of Taxes” (Form 5076) that must be filed no later than February 10, 2017 that will allow the owner exemption from collection of tax. This form must be filed with the taxing authority or personal property taxes will be assessed.
You will receive an assessment statement around March 1 citing the annual board of review schedule to make corrections if necessary. The Board of Review process is fairly routine for personal property errors. It is usually a matter of getting the proper statements to the board by the deadline dates. However, just like real property assessments, board of review is a must. If you miss it, you will lose all chance to change the assessment.
If you would like our firm to assist in the preparation of these forms, please drop off the preprinted blank form as soon as you receive it or give our office a call.
SALES AND USE TAX: Sales and use taxes are usually discussed in detail at the time the business begins operation, or when it first begins dealing in this new tax area. Once the ground rules are set up, administration of these taxes becomes fairly routine. However the amount of dollars involved is often much greater than income and other business taxes combined. A review of your office personnel's familiarity with those ground rules may be in order, especially if you have experienced turnover in those positions, or if your business operation has changed with respect to wholesale and retail status.
Additionally, watch for "use" tax on out of state purchases for consumption rather than resale. The tax on these purchases is to be reported and paid on your regular sales and use tax returns. If your business routinely purchases supply items from out of state (e.g. mail orders), you may want to double check your compliance in this area.
Another concern is for contractors who purchase goods which they install and affix to real estate. The tax exempt status of these purchases is limited to an extremely narrow list of customers and special steps need to be taken to document any exemption for sales or use tax in this area. If this applies to your business you should take special note and inform us of such. Also, watch for sales to exempt purchasers, as they require documentation of the exemption information.
There is a four year statute of limitations for state taxes, and audits are ordinarily conducted for all four years at one time.
CASH TRANSACTIONS: A somewhat uncommon type of transaction can spell big trouble for the business caught unaware. The receipt of more than $10,000 in cash in one transaction, or in two or more related transactions, in the course of your trade or business must be reported on an information return to IRS. This rule applies whether or not the receipt is income in your trade or business. The information return must be filed with IRS within 15 days after receipt of the cash. Multiple (installment) payments may need to be reported also if they exceed $10,000. The business is also required to verify the identity of the person making the cash payment. The penalties for non-reporting can be severe. We would suggest that you check with our office for additional information if you think there is any likelihood of dealing with cash transactions in this amount.
PENALTIES: Lastly is a subject that rarely comes up at the beginning of a business start up, that of what to do if there isn't enough money to go around. In the tax area, we have occasionally found that people delay filing returns if the money due isn't available. There are separate sets of penalties (both federal and state) for non-filing and non-payment of taxes. Non-filing penalties are generally much more severe than those for non-payment. Due to the staggered penalty structure, it is important that your returns be signed and mailed on a timely basis even if full payment cannot accompany it.
Additionally, letting tax payments go delinquent due to inadequate business cash flow comes with ominous consequences. Funds withheld from payrolls and sales taxes collected from customers are classified as “trust” funds, which bring a fiduciary (or trustee) duty to pay those taxes to the proper governmental jurisdiction. Individuals held responsible for non-payment can and are held personally responsible, jointly and severally, for such liabilities (even non-owners). These liabilities can be assessed and collected from any one responsible party, without any consideration of proportion or equity, leaving that individual to look to the other parties for reimbursement, if possible.
If you find yourself in a situation where you are unable to pay your tax liabilities as they are coming due, be sure to let us know. In certain instances, there are alternative courses of action you can take, and it is important to consider all options.