The clock is ticking to process the new payroll tax cut for employees

Happy New Year, HR Forum readers! I hope you weathered every HR storm in 2010 with wisdom and finesse - and that 2011 brings you and your business continued growth and success. Check back here often for insight and guidance with the biggest challenges the new year throws our way. It's bound to be an interesting 12 months, with many twists and turns in the worlds of labor law, people management and HR. Together, we can tackle the toughest issues and map out the smartest solutions.

Now for the first topic this year ... taxes!

Thanks to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, millions of employees will see a bump in their take-home pay this year. That’s because the recently passed Act provides a tax cut that reduces the Social Security (FICA) tax withholding rate from 6.2% to 4.2% of wages paid. For an employee earning up to the $106,800 taxable earnings cap, this 2% reduction amounts to a tax savings of $2,136.

While this is good news for employees, the change is putting employers in a bit of a bind to quickly implement the changes. The IRS is instructing employers to process the new withholding “as soon as possible in 2011 but not later than Jan 31, 2011.” If you accidentally process the payroll tax withholding at the higher 6.2% rate, you must reimburse employees the difference by March 31, 2011.

In addition to the reduced Social Security withholding, the IRS released new income-tax withholding tables for 2011. (The new law maintains the income-tax rates from recent years.)

Because employers and payroll companies must handle the withholding changes, employees won’t be required to take any additional action, such as filling out a new Form W-4

Please note: As soon as it is released by the federal government (usually in January of the new year), we will update the Form W-4 required by every employee to claim (or makes changes to) their tax withholdings.

The clock is ticking to process the new payroll tax cut for employees

Gearing up for the 1099 onslaught

Businesses need to anticipate a flurry of 1099s in 2012. Hidden deep within the recently enacted healthcare reform bill are new 1099 reporting requirements that will place significant demands on your time and resources. With this one tax change, you could find yourself filing hundreds more 1099s just to comply.

Under current law, you are required to record the income payments you make each year to non-employees on a 1099-MISC form. When the total payments to independent contractors, consultants, attorneys, vendors, healthcare professionals, trainers, freelancers and other non-employees exceed $600 in a calendar year, you issue a 1099 to the individual and file it with the IRS.

Beginning next year, many more payments will be subject to the expanded 1099 rules. For the first time, you’ll also issue 1099s to corporations - and for virtually all goods that exceed $600 in a calendar year.

When you consider all the payments you make in the course of running your business – from computer equipment and office supplies to janitorial services and overnight package delivery – you realize just how many 1099s this will entail.

Why the health care reform bill contains a 1099 change ...

The obvious question for most businesses is, “How did this sweeping tax change end up in the health care reform bill?”

Blame it on the burgeoning federal deficit. The tax change is expected to help the IRS capture an estimated $345 billion in new tax revenues, as well as offset the cost of the historic health care legislation. The reporting requirements have been on the IRS’ radar for a long time, and they finally made it in the health care reform bill.

Plan ahead so you're fully prepared

While we won’t know the ultimate impact of the new law until the IRS issues its final regulations, we do know it’s not too soon to plan for how you’ll manage the spike in 1099 filings. Stay tuned for more details on the new requirements, as well as tips for easing the paperwork burden.

Gearing up for the 1099 onslaught