2008 payroll taxes & benefits

With the constant passage of new tax acts, there are many provisions that become effective in the year 2008. We are only able to touch upon a few highlights specific to payroll taxes and employee benefits as they relate to processing your payroll. There have been a multitude of changes in the income tax law and provisions related to pension plans. These changes are beyond the scope of this letter. For information on the changes in the income tax law and the rules related to pension plans and how those changes might affect you and your business, please do not hesitate to contact our office.

• CAFETERIA PLANS

Are your insurance premium costs rising? Do you find it necessary to have employees pay part of their premium ? Do employees pay insurance coverage for dependents or spouses? Perhaps a cafeteria plan is right for you.

A cafeteria plan is a welfare benefit plan specifically authorized by Section 125 of the Internal Revenue Code. It is a way of providing employees with valuable benefits - where both the employer and employees save a significant amount on taxes. Generally, employees are given a choice to "redirect" part of their salary. Each employee then uses the "redirected" part of his/her salary to purchase benefits from a "menu" of non-taxable benefits offered by the plan (hence the term "cafeteria"). No contributions are required by the employer, although they can decide to make a contribution on behalf of all participants, if they choose to do so.

The employer will save employment taxes by implementing a cafeteria plan. The employer will not have to pay FICA (Social Security) or FUTA (Federal unemployment) taxes on the gross amount of salary redirections made by their employees.

Employers will save considerable sums through reduced Social Security tax obligations. These savings are usually sufficient to cover most or all of the plan implementation and annual administration costs.

Cafeteria plans are gaining popularity as a new and unique method for providing employees with benefits they want and need in a cost-effective manner.
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·       PENSION PLANS

The IRS has announced the cost-of-living adjustments to the dollar limitations on qualified plan benefits for 2008. The annual defined benefit plan limitation will increase to $185,000. The limitation on the exclusion for elective deferrals (i.e., the limitation on 401(k) plan contributions) will remain at $15,500. The defined contribution plan limitation increases to $46,000. The annual compensation limit also increases to $230,000. The compensation amount requiring employers to cover employees under a SEP remains unchanged at $500. Maximum SIMPLE contribution by employee remains unchanged at $10,500.

Catch-Up Contributions: Special catch-up contributions are allowed if you are age 50 or older at the end of the tax year.

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·       COMPANY REIMBURSEMENTS

Regulations set forth requirements for non-taxable treatment of cash payments to employees. A cash payment made by an employer to an employee will not qualify as a working condition fringe benefit (non-taxable to the employee) unless the employer maintains an "accountable plan" that requires the employee to:

1. use the payment for expenses in connection with a specific activity for which a deduction is allowed as a business expense;
2. substantiate the expenditure (invoices or receipts); and
3. return to the employer any part of the payment not so used.

Failure by the employer or employee to meet these conditions will cause the cash payment to be taxable to the employee (and subject to withholding and employment taxes) and require the employee to deduct the "unreimbursed" business expenses as an itemized deduction (miscellaneous) subject to the 2% of adjusted gross income limitation.

For 2008, allowance for business mileage will increase to 50.5 cents a mile. Employers who  require employees to supply their own autos may reimburse them at 50.5 cents a mile for employment-connected business mileage, whether the autos are owned or leased.
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·       HIRE YOUR KIDS

An important exemption from Social Security taxes applies to sons and daughters under 18 years of age employed by their parents in a trade or business. Their wage must be reasonable and their hours and services carefully documented. These monies could then be contributed to retirement or education savings plans.
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·       NEW HIRE REPORTING RULES

What are the new hire reporting requirements?  Federal law requires employers to submit to their state agency information for each newly hired employee. The purpose of the law and the program is to help locate parents who are not paying child support. The law also allows other state agencies like the Department of Labor and Industries and the Employment Security Department to use new hire information to detect claim fraud.

Which employees should be reported and when should they be reported? All new and rehired employees must be reported to the Department of Social and Health Services Division of Child Support within 20 days of being hired. Failure to report could result in a penalty.

How are employees reported? Employers may submit reports in a variety of ways, including W-4 forms, diskettes, magnetic tapes, and computer printouts. Reports may be mailed to ISSD Data Control, New Hire Directory, P.O. Box 9023, Olympia, Washington 98507-9023. To report online, go to http://www.dshs.wa.gov/newhire. Telephone: 800-562-0479 (Option #3) Fax: 800-782-0624 E-mail: newhire@dshs.wa.gov
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·       FEDERAL MINIMUM WAGE INCREASES

When federal and state minimum wage rates both apply, which rate should be used? An employer paying wages must pay the higher of the state or the federal minimum wage for the state in which the wages are earned. Currently, Washington State's minimum wage is higher than Federal minimum wage. Therefore, Washington State employers must pay at state rates. Washington State's minimum wage rate will increase to $8.07 per hour as of January 1, 2008.
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·       INDEPENDENT CONTRACTORS TEST

The Washington State Employment Security Department has issued the following guidelines on the classification of workers hired as Independent Contractors or Employees:

It will not be considered employment if all six of the following tests are met:

1. The individual is free from direction and control of the business; and
2. The individual is performing services outside the usual course of your business; and
3. The individual is independently established in his /her own business; and
4. The individual is responsible for filing a schedule of expenses with the Internal Revenue Service; and
5. The individual has established an account with the Department of Revenue and other appropriate state taxing agencies; and
6. The individual is maintaining a separate set of records for the business.

It is important to keep a record of the individual's verification of independence (i.e., UBI number).

NOTE: The Internal Revenue Service does not have a list of criteria that need to be met to determine employee versus independent contractor status, but the service has issued a description of 20 factors that are used to indicate circumstances under which employee or independent contractor status is indicated:

These factors are used to determine if the employer has a sufficient degree of control over the worker to render the worker is an employee. No single factor is necessarily the controlling factor.
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·       1099-MISC

The IRS requires that you file Form 1099-MISC, Miscellaneous Income, for the following:

Reporting payments made to corporations is exempt from 1099-MISC (except for attorneys).

·       ACCIDENT PREVENTION PROGRAM

Every employer in the state of Washington, regardless of the number of employees, is required to have a safety and health committee plan. Additionally, Washington Industrial Safety and Health Act (WISHA) rules require each employer to establish an accident prevention program outlined in a written format. You may contact our office if you need information on implementing this program.
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·       SOCIAL SECURITY

As in prior years, the wage base for the two parts of the Social Security tax (old-age, survivors, and disability insurance [OASDI], and hospital insurance [HI]) are different. Forms 941 and W-2 for 2008 require employers to separately report the withholding for Social Security and Medicare.

For self-employed persons, the self-employment tax for 2008 is as follows:

Full retirement age in 2008 is being raised to 66 years old.  The amount of wages a worker may earn without a loss of Social Security benefits increases in 2008.  Persons under full retirement age can earn up to $13,560.00 without a reduction in benefits; for each $2 earned above that, they lose $1 of benefits. For persons reaching full retirement age in 2008, if earnings prior to the month they attain full retirement age exceed $36,120.00, then for each $3 over that, benefits drop by $1. There is no limit on earnings beginning the month a person attains full retirement age. If you are already full retirement age or older, there is also no limit on earnings.  It is important to note that eligibility for Medicare remains at age 65.
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·       DEPOSIT REQUIREMENTS

If you are not making regular tax deposits through the Electronic Federal Tax Payment System, Federal Tax Deposit Coupon Book, Form 8109-B, contains the tax deposit forms for withheld income tax, FICA, and FUTA deposits as well as corporate Federal income tax. It is very important to mark clearly the correct type of tax and tax period on each deposit coupon. This information is used by the Internal Revenue Service to credit your account.

Monthly Deposit Schedule: For monthly depositors, the deposit amount is always due on the 15th day of the month after the wages are paid.

Semiweekly Deposit Schedule:

·       FEDERAL UNEMPLOYMENT TAX (FUTA)

For 2008, the FUTA rate and taxable earnings remain at 6.20% and $7,000, respectively. An employer may receive credit for state unemployment taxes up to 5.4% of the wages; the net Federal Unemployment Tax liability may be as low as .8% of taxable wages.

Do not use any workforce training fund payments when calculating credit for state unemployment tax.

Deposit Requirements (FUTA)
The deposit requirements have changed, if at the end of any calendar quarter, the accumulated un-deposited tax totals $500 or more, the tax must be deposited before the end of the following month. Interest and penalty charges are the same as for FICA and withholding tax.
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·       FORM 945, ANNUAL RETURN OF WITHHELD FEDERAL INCOME TAX

This form will be due on January 31, 2008 for the year ended December 31, 2007. This form is used to report non-payroll tax liabilities, including backup withholding, income tax withheld from gambling winnings, pensions, annuities, and IRAs. You cannot combine deposits for Form 941 and Form 945. Generally, the deposit rules that apply to Form 941 also apply to Form 945.
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·       WASHINGTON STATE UNEMPLOYMENT INSURANCE TAX

The Unemployment Insurance Tax is administered by the Washington State Employment Security Department and is based on an experience rating system with a taxable wage base of $34,000 for 2008. You should have received notice of your new rate in December.

This tax is paid quarterly on a form provided by the Department. Hours reportable are all hours paid including holidays, sick leave, and vacation. The maximum hours reportable for salaried employees is 520 hours per quarter. The tax, however, is computed on the dollar amount of the wages paid.  You can also file the tax reports electronically at http://www.wa.gov/esd/uifasttax/default.htm.

·       HEALTH SAVINGS ACCOUNTS (HSAs)

A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.

To be an individual eligible to qualify for an HSA, you must meet the following requirements:

• You have a high deductible health plan (HDHP), on the first day of the month. A high deductible health plan is one that has an annual deductible of at least $1,100 for self-coverage, or $2,200 for family coverage. Additionally, your annual out-of-pocket expenses  cannot exceed $5,600 for self-coverage or $11,200 for family coverage.

• You have no other health coverage except what is permitted under other health coverage.

• You are not enrolled in Medicare

• You cannot be claimed as a dependent on someone else's tax return.

The annual contribution limit on deductions is as follows:

If you have questions regarding coverage of corporate officers, please check with our office.
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·       WORKER'S COMPENSATION PREMIUM (INDUSTRIAL INSURANCE)

You will receive a notice from the Department of Labor and Industries indicating your composite rate for 2008. This composite rate also includes amounts for Medical Aid and Supplemental Pension Assessment. The law allows employers to withhold one-half of the Medical Aid and Supplemental Pension Assessment from the employee. The amounts withheld from an employee's wages should be reported on Form W-2 at the end of the year.

For hourly employees, report hours actually worked. Do not include vacation, holidays, or sick leave. For salaried employees, use either 40 hours per week or 160 hours per month. Sole proprietors, partners and their spouses are exempt from industrial insurance, but these persons can elect to be covered. Please note that corporate officers will not be covered under Industrial Insurance unless they file an election to be covered.

If you have any other questions regarding payroll taxes and their application, please do not hesitate to contact us.
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