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4 New Small Business Tax Surprises

Here are two words small business owners seldom like to see together: “taxes” and “surprise!”  Trying to cope with overwhelming complex tax laws is hard enough without the occasional grenade the IRS tosses across the moat.  But BizBest figures you’d rather know now, before getting a notice in the mail.  Here, then, are tips on four recent or impending tax changes that you’ll want to know about (and one of them is actually good news!):

1)      If your employees earn tips, the IRS has you in its sights (again). The tax agency has launched a new effort to bill employers for Social Security (FICA) and Medicare taxes on tip income reported by employees to the IRS, but not to you.  The genesis of this is an IRS form you probably never heard of:  Form 4137: Social Security and Medicare Tax on Unreported Tip Income.  This is how tip-earning employees tell the IRS about tips they earned but did not report to an employer – including any “unallocated” tips shown on their W-2. And the threshold is low:  Any employee who received cash and charge tips of $20 or more in calendar month and didn’t report that income to you (the employer) must file a 4137. In past years, the IRS didn’t have an easy way to match that income to an employer.  But the form was changed and now requires the employee to include your tax ID number. This, of course, creates a new tax event for you (never mind you didn’t know about it), since you are responsible for paying the employer portion of FICA and Medicare taxes on this income.   IRS is collecting the information from the new 4137 forms it receives, and is sending tax bills or letters to employers telling them how much they owe.  Employers who pay up quickly – usually with the next scheduled payroll tax deposit – are not charged any penalty or interest.

2)      S-Corp business owners who pay themselves extremely low salaries in order to take more profits as lower-taxed dividends are also in the IRS crosshairs these days.  Be aware the IRS might argue that your pay is unreasonably low if it doesn’t come close to standards in your business or profession, and will seek back taxes on the income that it says should have been classified as salary.

3)      And here’s a reason to question the health insurance tax credit for small business that’s received such great fanfare since passage of health insurance form:  If you receive such a credit, it will also count against you by reducing the amount your small business can deduct for health insurance premiums.  Be sure to factor this in when calculating the value of the credit toward purchasing health insurance for your employees.

4)      And finally the good news:  Thanks to 2011 100% bonus depreciation, if your business buys a new heavy (gross vehicle weight over 6,000 pounds) SUV this year, you’ll qualify for a much larger tax break than before.  As long as the SUV is used 100 percent for business purposes, your company can write off the entire cost immediately under the bonus depreciation rule now in place.  Forget the old $25,000 maximum you may have seen as a lid on the amount of an SUV purchase that can be expensed. That doesn’t apply under 2011 bonus depreciation rules.  Both new and used heavy pickup trucks also qualify for full write-off.

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Claim Your Small Business Health Care Tax Credit

If you’re a small employer with a health insurance plan and pay at least half of employee premiums, you probably qualify for a new health care tax credit worth thousands or even tens of thousands of dollars.  Contrary to rumors and media reports, most small businesses do in fact qualify for substantial tax credits, and SBA Administrator Karen Mills issued a letter today saying just that.

Generally, tax credits are available for small business owners who:

  • Started or continued health insurance coverage for employees in 2010
  • Contribute at least 50% of employee premiums at the single coverage rate
  • Have fewer than 25 full-time employees (part-time employees are counted proportionately)
  • Pay their employees an average of less than $50,000

The IRS has a simple three-step worksheet (at www.irs.gov/pub/irs-utl/3_simple_steps.pdf) to help determine your eligibility.

Here’s an example.  An auto repair shop with 10 employees whose earnings average $25,000 can get what amounts to a 35% “rebate” on its health insurance premiums. Based on typical costs, that would be a credit of $24,500, according to IRS estimates. Not bad. And that’s a credit – which directly lowers your tax dollar-for-dollar – not merely a deduction.

Here’s what you need to know…

Because the eligibility formula is based in part on the number of FTEs, not the number of employees, employers that have more than 25 individual workers may also qualify if some workers are part-time. For eligible businesses the credit could provide a welcome boost.  Here are the four key health care credit eligibility standards:

1)    Your business provides and pays for health coverage. To clear the first hurdle, you must cover at least half of the cost of health care coverage for your employees.

2)    Your business is small. You cannot have more than the equivalent of 25 full-time workers. Eight half-time employees count as four “full-time equivalent” (FTE) workers. Thus, an employer with fewer than 50 half-time workers can still qualify.

3)    Your wages aren’t too generous. A qualifying employer must pay average annual wages below $50,000 to get even a partial credit.  For the full credit, the average must be under $25,000.

4)    Both taxable (for-profit) and tax-exempt (non-profit) firms qualify.

The credit is worth up to 35 percent of your premium costs in 2010 (25 percent for non-profits). In 2014 that jumps to 50 percent (35 percent for non-profits).  A ruling just issued by the IRS also confirms that the credit applies to premiums you pay for dental and vision coverage.  And your business can still qualify for the federal credit even if you receive a separate state credit.

Businesses with 10 or fewer workers and average annual wages less than $25,000 will qualify for the full credit. The credit starts to phase out as you move above those limits.  Businesses with average payrolls over $50,000 will not qualify for the credit at all.

Also be aware that if your business pays only a portion of health insurance premiums, with employees paying the rest, you can only count the premiums you pay when calculating the credit.

Another example: Downtown Diner, a restaurant with 40 part-time employees (the equivalent of 20 full-time workers), pays total wages of $500,000, or an average of $25,000 per full-time equivalent worker. Health insurance premiums paid by the business this year total $240,000, and the business would qualify for a 2010 credit $28,000, after applying “phase-out” provisions.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011.

Small Business Tax Credit Calculator is a new web-based tool that computes precise (not estimates) small business health care reform tax credit calculations for filing actual small business tax returns based upon each state’s allowances and up-to-the-minute legal requirements.  As the regulations regarding the small business health care reform tax credit continue to evolve it is critical to have a calculator that updates with the changes as they occur.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved.