Archive for February, 2012

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Feb

Payroll Tax Cut Extended to the End of 2012

Categories: Business, Individuals

Tags: middle class tax relief act, payroll tax cut, payroll tax form

No change is required in your current payroll software for FICA withholding. As we noted in a previous correspondence the FICA rate was to return to 6.2% for employee withholding on March 1^st unless congress did something. They did, the rate reduction is extended till 12-31-12. Official release is below.

Payroll Tax Cut Extended to the End of 2012; Revised Payroll Tax Form Now Available to Employers

IR-2012-27, Feb. 23, 2012

WASHINGTON – The Internal Revenue Service today released revised Form 941 enabling employers to properly report the newly-extended payroll tax cut benefiting nearly 160 million workers.

Under the Middle Class Tax Relief and Job Creation Act of 2012, enacted February 22, 2012, workers will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2 percent, which is two percentage points less than the 6.2 percent rate in effect prior to 2011. The reduced rate, originally in effect for all of 2011, was extended through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011, enacted December 23, 2011.

Self-employed individuals will also benefit from a comparable rate reduction in the social security portion of the self-employment tax from 12.4% to 10.4%. For 2012, the social security tax applies to the first $110,100 of wages and net self-employment income received by an individual.

The new law also repeals the two-percent recapture tax included in the December legislation that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut. As a result, the now repealed recapture tax does not apply. The IRS will issue additional guidance, as needed, to implement the newly-extended payroll tax cut, and any further updates will be posted on IRS.gov.

Feb

A Perspective on Michigan’s Tax Overhaul

Categories: Business, Michigan Business Tax, Point of View

Tags: business tax, Corporate Tax, MBT, Michigan Tax Overhaul

Comments: No

Written by: Keith O. Frame, CPA

It seems I continually still see newspaper articles, editorials and letters to the editor in various publications referring to the Michigan tax overhaul as a “$1.8 billion dollar give-a-way to business”. Let’s investigate this claim.

If you work in Michigan as an employee of a business in Michigan, you pay State of Michigan income tax on your wages. It doesn’t matter if you make minimum wage or $1,000,000 per year, you pay tax at the statutory rate on the Michigan Form MI-1040 (currently 4.35%).

However, if you start your own business, grow it into a success, hire others and otherwise prosper, you have had the privilege of paying extra tax to the State of Michigan. The Michigan Business Tax (MBT) is (was) calculated in two different ways, generally applying a more favorable calculation to smaller businesses, but having an absolute cliff for larger or more profitable businesses where the tax liability, depending on several factors, could increase exponentially for a small increase in income. The more favorable calculation is a 1.8% tax on the taxable income of the business plus all wages and benefits paid on behalf of the owner and his family members.

Here is where businesses have been getting double taxed for years: most small businesses are organized as pass-through entities (S corporations, partnerships, LLC’s). These entities pay no tax at the federal level – their income is passed through and taxed on the tax returns of their owners. This treatment at the federal level has effectively been ignored in Michigan. These businesses still had to prepare an MBT return and pay any applicable tax.

These pass-through entities prepare their federal tax return, passing the income through to their owners who include it on their federal tax returns. These same owners prepare their Michigan MI-1040 by starting with Adjusted Gross Income on their federal return which, of course, includes the income from the pass-through entity.

So, the unsuspecting business owner, perhaps in the same economic circumstances of someone in a similar field working as an employee for someone else, has had the privilege of paying a significantly higher tax rate. Two taxes on the same income – seems like that should be unconstitutional!

The tax overhaul eliminates the filing requirement for most pass-through entities and no longer results in double taxation in the State of Michigan. Only C corporations are subject to the new corporate income tax – all pass-through entities and individuals will pay tax at the Michigan individual income tax rate only. This creates basic fairness in the tax system that has not existed for 35 years.

Michigan has recently vaulted from near the bottom to near the top of best places to do business in the U.S. as a result of these changes according to the Tax Foundation. This is obviously great news for the State and will ultimately result in more revenue flowing into the State Treasury.

Basic economics still rule – if you want more of something – tax it less.

Feb

Additional Payroll Tax Changes

Categories: Business, Tax Tips & Alerts

Tags: michigan employment, payroll tax changes, unemployment tax rate determination, unemployment wage base

Comments: No

Written by: Heather Graham, CPA, CVA

Changes to the Michigan Employment Security Act, Effective for 2012

On December 19, 2011 the State of Michigan made several changes to the Michigan Employment Security Act.

The State issued $3.323 billion in revenue bonds and retired the debt due to the federal government for funds used to pay Michigan unemployment benefits. The bonds are scheduled for a 10 year repayment.
The repayment of the debt to the federal government will remove the credit reduction tax from the Federal Unemployment Tax computation. (Previously this was expected to be 1.2% on the first $7,000 of each employee’s wages.)
Michigan unemployment wage base has been increased from $9,000 per employee to $9,500 for 2012. The $9,500 wage base will continue until the Unemployment Insurance Trust Fund reaches a positive balance of $2.5 billion.
There is a new component to the Michigan Unemployment Tax Rate Determination this year. It is called the Obligation Assessment (OA). The OA will be applied to all contributing employers until the revenue bonds are repaid. According to the Department of Licensing and Regulatory Affairs, “the OA is structured to incorporate your experience rate and a base assessment of $42 per employee for 2012, and is currently estimated to be $63 per employee for 2013 and beyond.” At this time, we have not yet seen this “calculation”.

It will be very important that you provide your payroll preparer with a copy of your annual Tax Rate Determination. It is expected that your new state unemployment rate will be significantly higher than last year.