Payroll Tax Changes Effective January 1, 2011

FORMS W-2 AND 1099

For those who are planning to have RCHA prepare year-end W-2 and 1099 reporting forms, please have all information in our office at your earliest convenience.

Forms W-2 and 1099 must be provided to:

• Employees and independent contractors by January 31, 2011.
• Social Security Administration and IRS by February 28, 2011 (March 31, 2011, if filing electronically).

Form 1099 must be used to report payments of $600 or more to non-corporate vendors of services, including rents. In addition, all payments made to law firms, whether incorporated or not, must be reported on Form 1099.

FEDERAL INCOME TAX WITHHOLDING

The new withholding tables listed in the Circular E “Employer’s Tax Guide” (IRS Publication 15) for 2011 should be used to compute federal income tax withholding. Also, you should urge employees to review their withholding early in the year to determine if they need to file a revised Form W-4.

FICA TAX WITHHOLDING

For Social Security taxes, the 2011 employee tax rate is reduced to 4.2% while the employer tax rate remains at 6.2%. The taxable wage base for Social Security taxes also remains unchanged at $106,800. The tax rate (for both employee and employer) and the taxable wage base for the Medicare taxes remain unchanged at 1.45 % and unlimited wages, respectively.

Employers with total annual tax liability of $1,000 or less will continue to report their tax liability on the annual Form 944, rather than filing the quarterly Form 941. Only employers who have been notified by the IRS should file Form 944. Both the 2010 Forms 941 and 944 must be filed by January 31, 2011 and must be signed by any preparer who was paid to prepare the forms.

ELECTRONIC FEDERAL TAX PAYMENT SYSTEM (EFTPS)

Beginning January 1, 2011, the IRS has mandated the use of the EFTPS. Federal Tax Deposit coupons can no longer be used for submitting employers’ depository taxes. All employer federal tax deposits must now be made electronically through EFTPS. We can assist you in the enrollment process.

Please refer to the Circular E (IRS Publica
tion 15) to confirm the timing of your federal tax deposits.

FEDERAL UNEMPLOYMENT TAX (FUTA)

Continuing for 2011, the minimum threshold for depositing FUTA taxes remains at $500. Employers are required to make a quarterly deposit of FUTA taxes only when their accumulated tax liability exceeds $500.

PENNSYLVANIA UNEMPLOYMENT TAX

Employer Contributions
Each employer is assigned its contribution rate by the state in its annual Contribution Rate Notice (Form UC-657), which includes a basic rate, a surcharge, and an additional employer contribution tax assessed on taxable state unemployment wages of up to $8,000 per employee.

Employee Contributions

The employees’ portion of the PA Unemployment Compensation Tax Withholding will be withheld at the new rate of 0.08% (.0008) of all compensation for 2011. For an employee earning $1,000 in a pay period, $0.80 will be withheld from the employee’s pay.

PENNSYLVANIA STATE INCOME TAX WITHHOLDING

The state withholding tax rate of 3.07% of gross wages remains unchanged for 2011.

Continuing for 2011, PA employers are required to remit their employer withholding taxes by either of two electronic filing methods:

1. File over the Internet, using the ETIDES system,
2. File by telephone, using the PA toll-free telephone filing system, TELEFILE, or
3. File using certain approved Third-Party software.

PENNSYLVANIA STATE SALES TAX

Continuing in 2011, PA Sales Taxes must be remitted by any of three electronic filing options:

1. File over the Internet, using the ETIDES system,
2. File by telephone, using TELEFILE, or
3. File using certain approved Third-Party Software.

Payments and reports are due to the state on one of the three filing methods, based on tax liability level:

• Monthly returns, for a tax liability greater than $600, are due by the 20th day of the following month.
• Quarterly returns, for a tax liability less than $600, are due by the 20th day of April, July, October, and January.
• Semi-annual returns, for an annual tax liability of $75 or less, are due by August 20th and February 20th.

Taxpayers can set up accounts to file and pay Sales Tax online by accessing the sales tax section at www.revenue.state.pa.us

STATE SALES TAX IMPACT ON FEDERAL FORM 1040 – SCHEDULE A

The Form 1040 election to deduct state and local sales taxes, in lieu of state and local income taxes, has been extended through 2011. Refer to IRS Publication 600 for guidance.

CITY OF PITTSBURGH WAGE TAX

The 2011 tax rate remains at 1.0% for the City and 2.0% for the School District, for a combined rate of 3.0%. Employers located in the City of Pittsburgh must withhold both City and School earned income tax from their resident employees. Employers located in the State of Pennsylvania, but not in the City of Pittsburgh, who employ residents of the City or Mt. Oliver Borough, must withhold the School District portion of the tax (withholding the City tax portion is optional).

OTHER CITY OF PITTSBURGH TAXES

The following City of Pittsburgh taxes are in effect for 2011:

• Local Services Tax (formerly Emergency & Municipal Services Tax ) of $52 per person.
• Employer Payroll Expense Tax of 0.55% assessed on City of Pittsburgh employers’ gross payroll.
• Business Privilege Tax has been eliminated for 2010 and forward.

CORPORATIONS

For year-end reporting, certain benefits paid on behalf of or to an employee must be reported on the employee’s Form W-2, including:

1. the value of life insurance coverage over $50,000,
2. personal use of autos,
3. country club dues, and
4. tickets to sporting events.

Also, health and life insurance premiums by an S-Corporation on behalf of its more than 2% shareholder(s) must be reported on the shareholder employee’s Form W2.

ESTIMATED TAX PAYMENTS ON BEHALF OF SHAREHOLDERS AND PARTNERS

Pennsylvania S-Corporations, partnerships, and limited liability companies are required to withhold and remit Pennsylvania quarterly estimated tax payments for nonresident owners if the aggregate amount of tax liability is estimated to be greater than $500. For aggregate tax of less than $500, the amount must be paid within 30 days of the close of the taxable year.

EARNED INCOME TAX (EIT)

The new PA EIT collection system, signed in July, 2008, becomes effective in January, 2012. The law provides a streamlined method for collecting local EIT. The number of EIT collectors will be reduced from 560 to 69, aligning with restructured tax collection districts, which are generally assigned along county lines. Allegheny County will be divided into four tax collection districts.

PENSION CONTRIBUTIONS

Maximum contributions and benefits allowable

Traditional or Roth IRA:
2011 Regular Limits = $5,000
2011 “Catch Up” Contributions = $1,000

2010 Regular Limits = $5,000
2010 “Catch Up” Contributions = $1,000

Defined Benefit Plan:
2011 Regular Limits = $195,000
2010 Regular Limits = $195,000

Defined Contribution Plan:
– Money Purchase Plan, Profit Sharing Plan, SEP-IRA
2011 Regular Limits = $49,000
2010 Regular Limits = $49,000

401(k) Plan & 403(b) Plan:
2011 Regular Limits = $16,500
2011 “Catch Up” Contributions = $5,500

2010 Regular Limits = $16,500
2010 “Catch Up” Contributions = $5,500

SIMPLE 401(k) and IRA Plans:
2011 Regular Limits = $11,500
2011 “Catch Up” Contributions = $2,500

2010 Regular Limits = $11,500
2010 “Catch Up” Contributions = $2,500

Compensation limit for calculating contributions to qualified plans:
2011 Limit = $245,000
2010 Limit = $245,000

Additional “catch up” contributions are available to employees aged 50 and over. These employees can make additional contributions to “catch up” on their contributions. These additional contributions are not subject to anti-discrimination rules or other limitations, except that contributions cannot exceed earnings.
STANDARD MILEAGE RATES

        
                            Year 2011   Year 2010   
Per Business Mile              $.51      $.50       
Per Medical & Moving Mile      $.19      $.165      
Per Charitable Mile            $.14      $.14       

— We recommend any reader consult with their business and tax advisor as to the specific application of this information to their particular facts and circumstances. This article is based on authorities which are subject to change, and accordingly, should not be relied upon. Any tax advice included in this article was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency –

Please see the RCHA website at rchaCPA.com for further information.
If you have any questions, please contact your RCHA tax advisor at (724) 934-4880.
(The previous article was general in nature, and we recommend any reader consult with their business and tax advisor as to the specific application of this information to their particular facts and circumstances. This article is based on authorities which are subject to change, and accordingly, should not be relied upon. Any tax advice included in this article was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.)

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