• New withholding rates. The “Making Work Pay” tax credit will most likely be implemented by having Payroll make two withholding adjustments: one in June of this year, and another at the start of Jan. 2010. (The maximum credit each year is $400 for singles. Because the ’09 credit is effective mid-year, the weekly withholding will have to be re-adjusted in 2010.)
• COBRA coverage/reporting. Employees who are terminated between Sept. 1, 2008 and Dec. 31, 2009 are eligible for lower premiums on their COBRA coverage, starting Feb. 17, 2009. Eligible employees will now pay 35% of the premium. The rest will be paid by the employer — but you can recover the subsidy through a credit on your payroll tax deposits. (Note: The subsidy applies only to former employees whose income is less than $125,000 a year; or family income of under $250,000 a year.)
  That creates a few tasks for Accounting and Benefits pros: You’ll need to contact eligible former employees who rejected COBRA to let them know they are eligible at the new lower rate. You’ll also need to get up to speed on the reporting fast, since the first round is due for 1Q ’09.
• Monitoring COBRA reimbursements from the feds. Related to the point above, if your COBRA premium subsidy is more than your tax deposit, you’ll have to request — and wait for — reimbursement from the feds. So far, there’s no word on how quickly that will be processed.
• Transportation fringe benefits. The new monthly limit on benefits for transit passes and vanpools has been increased to $230 per month, the same as for qualified parking. It’s in effect from March 2009 through December 2010.

In addition to these changes, you can expect employees will be confused about what they’re eligible for, what forms they have to fill out, etc. Be prepared for a slew of e-mails and phone calls. In particular, you may have many more employees who want to update their W-4s due to new tax credits that were tucked into the non-business portions of the law.

Consider putting together a resource you can hand out to answer the questions you’re more likely to hear. Even an e-mail with some links to IRS information releases can go a long way toward reducing how many times your phone rings over the next few weeks.

You can see the entire text of ARRA here.

IRS’ new calendar with ’09 due dates is out. But you may not have the right version. Publication 509, Tax Calendars for 2009 was released recently. If you downloaded your copy before Nov. 26, you have a version with important mistakes.

The publication has been reissued with the following corrections:

• Page 3 — the date for observing Independence Day has been changed to July 3, and
• Page 11 — in table 2, the due date for payroll dates June 27-30 has been changed to July 6.

Publication 509 provides employers with the deadlines for filing returns and making deposits for employees’ withheld income taxes as well as Social Security, FICA, and FUTA taxes. For information on the rules regarding when you must make deposits, check out IRS’s Publication 15.

1. the store participates in the inventory information approval system, or
2. on a store-by-store basis, 90% of the store’s gross receipts for the prior taxable year were items which qualify as expenses for medical care (including nonprescription medications).

The deadline has been extended by six months to June 30, 2009.

You can get all of the details from IRS Notice 2009-104.

The process, known as TIN masking, is needed because W-2s and 1099s are usually mailed. Given the sensitive information inside – and the prominent “Important Tax Document” notice on the front — they’re particularly vulnerable to being stolen and used to facilitate identity theft.

The value of TIN masking is clear — for payees. How much it benefits Payroll and A/P is still up for debate. It would give your company some protection from con artists trying to use your data for nefarious purposes. But because there are no firm guidelines on how exactly TIN masking would be handled, it’s impossible to say how much extra time and effort it would take you to comply. But the rules would most likely apply to Forms W-2, 1099, 1098 and 5498.

IRPAC made several suggestions for IRS to include when developing TIN masking guidance for companies, including the following requirements:

1. Working with state agencies, the Social Security Administration, taxpayers and Accounting pros to define criteria for when masking would apply and how it would be handled.
2. Educating the general public about what TIN masking would mean to them, and how they can ensure accuracy of their forms and the tax returns they file using those forms.
3. Looking for other ways to prevent identity theft.

Do you think it’s time to start TIN masking– or is it not worth the effort? Are there other trouble spots that leave companies and/or their workers vulnerable to fraud? Sound off in the comments.

Here are five situations A/P and Payroll folks see just infrequently enough to make them tricky. Test yourself — or your co-workers — to see how well they know the ins and outs of IRS’ regs. Answers below, courtesy of the American Institute of Professional Bookkeepers.

1. An employee passed away during the year, and your company paid death benefits — but not under a plan. Those benefits are reported on Form ________.
2. One of your independent contractors is paid $1,000 per contracted job, plus any substantiated expenses for which he submits receipts. On the 1099-MISC, you should include the total of all payments and expenses. True or False.
3. A new employee insists he can use his W-2 as IRS notification of a change of address. True or False?
4. Last year, your company gave every employee a fruit basket (valued at $25) for the holidays. This year, everyone got a $25 gift card to the local grocery store instead. Both gifts are treated the same way for tax purposes.
5. Once a year, your company hosts a holiday party for employees. You don’t have to treat that as taxable income. True or False?

Answers & explanations

1. Form 1099-R
2. False. Substantiated, reimbursed expenses aren’t considered income and shouldn’t be included on the 1099.
3. False.
4. False. A gift card is considered a cash equivalent. Any gift of cash — or a cash equivalent — is taxable.
5. True.

A quick glance at what IRS has up its sleeves can clue you in to changes that may make your job easier — or make you more likely to get audited.

The info comes to us courtesy of IRS’ 2008-2009 Priority Guidance. The list isn’t neccessarily inclusive of everything IRS will do over the coming year, but it gives you a good idea of what you can expect between now and June 2009.

The highlights include final regs and/or guidance on the following key topics that affect Payroll, A/P and Benefits pros:

• automatic enrollment into 401(k) plans
• cafeteria plans
• qualified nonpersonal use vehicles
• treatment of differential military pay as wages under the Heroes Earnings Assistance and Relief Act (HEART)
• reporting and income tax withholding under Sec. 409A
• employee stock purchase plans
• comparable employer contributions to employee HSAs
• reporting FUTA taxes for home health care recipients
• information reporting on stock transfers
• employment tax adjustments and refund claims
• deductibility of lodging expenses not incurred in traveling away from home
• substantiation requirements for cell phones 
• meal expenses deduction limitations in third-party arrangements
• cross-border information reporting
• simplification of the tax extension filing process. 

Don’t forget: DST officially ends at 2 a.m. on Nov. 2. Arizona, Hawaii, American Samoa, Guam, Puerto Rico, and the Virgin Islands don’t observe DST.

To head off questions, make sure you explain how the calculations work to any affected workers – and their managers. Otherwise, you could have to deal with a lot of grumbling from misinformed workers who think they’re going to get “cheated” out of extra pay.

Many companies do reimburse that (knowingly or otherwise) as part of the traveler’s room charges. But if you do reimburse those fees, it’s taxable as income to the employee. 

IRS’ reasoning: Using the gym is a personal expense and the gym isn’t on the employer’s property.

If your company is willing to foot the bill anyway, you’ll need to either:

• warn the employee about the tax complications, or
• encourage managers to have traveling employees book hotels where the use of the gym is covered by the standard room rate. 

Help for a thorny employee payment/reimbursement issue regarding cell phones may be closer than you thought.

Under current IRS regs, if you pay for any employees’ cell phones, your company should require the workers to document whether each phone call was for business or personal use. If you don’t have that documentation, the value of the use of the phone is technically income to the employee, and should be taxed accordingly.

A “business use only” policy isn’t enough — IRS knows it’s far too easy for employees to get around it.

But substantiating business use of a cell phone is a huge burden for companies and their workers — which is why many don’t do it (and also don’t bother to include the value as income.)

Fortunately, IRS has gotten the message that the rules haven’t kept up with the importance of cell phones to day-to-day business.

Right now, a bill is in progress through the Senate that would remove the requirement that you substantiate cell phone use. (The bill has already passed the House.) Several key senators support the bill, and they’re getting support from a variety of companies and business associations. A recent letter, signed by organizations ranging from the American Institute of Certified Public Accountants to the United States Chamber of Commerce, pointed out that the law was first put in place when cell phones were a near-luxury.

These days, they’re ubiquitous. And the cost of complying with the law is far greater than the fringe benefit to employees.

With any luck, the bill will pass the Senate soon — especially in an election year when politicians are looking for ways to benefit the voters.

We’ll keep you posted on the bill’s progress. But in the meantime, let us know how you handle cell phone reimbursements by leaving a comment.

Of course, if they aren’t ICs, they’re employees — in either event, it means Payroll and A/P need to be in constant commuication about who handles payments, tax reporting, etc.

Among other changes, the bill (H.R. 5804) would shift the burden of proof so that companies like yours would have to proveworkers were actually ICs — that’s a change from the current system where IRS has to prove that they aren’t ICs.

Worse, to prove your case, you’d have fewer “reasonable causes” to rely on. Under this bill, your company would have to show it relied on a prior judicial ruling, technical advice from IRS, prior audit findings or similar information. Classifying a worker as an IC because it’s standard practice in your field would no longer cut it.

In addition, the bill would increase the penalties for misclassifications.

Do you have experience with misclassified workers (or suspect you have some on the books that haven’t been uncovered yet)? Tell us about it in the comments