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Tag Archives: IRS

State Taxation of Benefit Coverage for Adult Children

The tax treatment of the value of benefit coverage for adult children varies by state. The states listed below have recently provided guidance or clarification on this issue. If you have employees with health care coverage for adult children in any of the states listed below, you should make sure that your payroll system is handling the taxation correctly.

California: The Franchise Tax Board confirmed that the value of health coverage for adult children is considered state taxable income to the employee and should be included in Box 16 of Form W-2.

Maine: The governor signed legislation conforming to the Internal Revenue Code (IRC) effective December 31, 2010, thereby adopting conformity to the federal tax treatment and excluding the benefit value from state taxable income.

Mississippi: The Department of Revenue explained that although no guidance has been published, the state will conform to the federal tax treatment and exclude the benefit value from state taxable income.

Pennsylvania: The state conforms to the current IRC and therefore excludes the benefit value from state taxable income.

Virginia: The Department of Taxation determined that until this issue is addressed by the General Assembly, the state will conform to the federal tax treatment and exclude the benefit value from state taxable income.

West Virginia: The State Tax Department explained that the state will conform to the federal tax treatment and exclude the benefit value from state taxable income.

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Small Business Health Care Tax Credit Help From the IRS

The Internal Revenue Service released final guidance for small employers eligible to claim the new small business health care tax credit for the 2010 tax year. The release includes a one-page form and instructions small employers will use to claim the credit for the 2010 tax year.

What is the small business health care tax credit?
Included in the Affordable Care Act enacted in March, the small business health care tax credit is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

Small businesses can claim the credit for 2010 through 2013 and for any two years after that.

  • For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations.
  • Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.

The maximum credit goes to smaller employers – those with 10 or fewer full-time equivalent (FTE) employees – paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

What information does the new guidance include?
The new guidance addresses small business questions about which firms qualify for the credit by clarifying that a broad range of employers meet the eligibility requirements, including religious institutions that provide coverage through denominational organizations, small employers that cover their workers through insured multiemployer health and welfare plans, and employers that subsidize their employees’ health care costs through a broad range of contribution arrangements.

How does a company claim the tax credit?

  • Eligible small businesses will first use Form 8941 to figure the credit and then include the amount of the credit as part of the general business credit on their income tax return.
  • Tax-exempt organizations will first use Form 8941 to figure their refundable credit, and then claim the credit on Line 44f of Form 990-T. Though primarily filed by those organizations liable for the tax on unrelated business income, Form 990-T will also be used by any eligible tax-exempt organization to claim the credit, regardless of whether they are subject to this tax.

Additional information

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Taking the Headache Out Of a Corporate Tax Audit

In November of 2009 the IRS announced the Employment Tax National Research Project (ET NRP), which is the first study of its kind in 25 years related to payroll and employment tax issues.  The IRS plans to randomly audit up to 6,000 companies in the next three years, with a direct focus on employment tax, worker classification, officer compensation, benefits and expense reimbursement.  The IRS has already sent out of first batch of alert letters, letting companies know that they have been selected for an audit. This short video from Pillsbury, a national full-service law firm, briefly outlines for its clients some of the major issues involved.

If your business has been audited by the IRS, you’re not alone.  According to IRS statistics, anywhere from .38% to 14.55% of businesses are audited annually (see data grid below). The government’s exact method for choosing who is audited remains a well-kept secret. However, the IRS boldly warned in a 2007 report that some business types are more likely to be audited than others. The IRS report states that “While large corporate audits are down slightly, we have increased our focus on mid-market those with assets between $10 million and $50 million dollars.”  See specific IRS service and enforcement tables here. Into what category does your business fall, and how likely are you to be audited?  What’s your worst fear in an audit? Are you prepared for it?

The burden of proof during an audit lies with you, the business owner, and the depth of records required by the IRS can be time-consuming and onerous at best.  AllBusiness.com posted an aptly titled article, “To Hell and Back: Different Types of Tax Audits”, which documents the extensive information that the IRS requires during a business audit. The IRS provides their auditors with specific guidelines to follow during a business audit that is industry specific. Do you know what your potential future auditor may ask of you? Become more prepared and look for your guide here.

Don’t be another IRS statistic

Audits are costly. The expense to your business will be massive, and the strain on your valuable employees even more so. Regardless of the kind of audit you may experience, it’s always helpful to have the information you need at your fingertips. Ascentis online payroll and HR software (HRIS) offers robust core functionality that supports the electronic documentation of most, if not all, employment and payroll related data you will need during an audit. Ascentis integrated systems include standard and customized reporting engines so HR and payroll teams can provide the specific and detailed data that audits often require.

Learn more

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Small Businesses May Qualify for a Tax Credit in 2010

Certain small businesses and tax-exempt organizations that provide health insurance coverage to their employees may qualify for a special tax credit in 2010, according to the Internal Revenue Service. Included in the recently enacted health care reform legislation, the Patient Protection and Affordable Care Act, is a tax credit designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. The following are eligibility rules and the amount of credit as explained by the IRS.

ELIGIBILITY RULES

Providing Health Care Coverage
A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.

Firm Size
A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).

Average Annual Wage
A qualifying employer must pay average annual wages below $50,000. Both taxable (for profit) and tax-exempt firms qualify.

AMOUNT OF CREDIT

Maximum Amount
The credit is worth up to 35 percent of a small business’ premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).

Phase-Out
The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

Three Simple Steps for Employers to Qualify
If you are a small employer (business or tax-exempt) that provides health insurance coverage to your employees, determine if you may qualify for the Small Business Health Care Tax Credit by following the three simple steps featured here.

Frequently Asked Questions
The IRS has issued 22 FAQs for employers on the Small Business Health Care Tax Credit, including the following topics:

  • Employer eligibility
  • Claiming the credit
  • Determining average annual wages
  • Calculating expenses
  • Tax-exempt organizations
  • Relief in 2010

To view this detailed FAQ page from the IRS, please click here.

Examples
The IRS has also provided several employer scenarios for the credit, including numbers of workers, part-time employees and non-profit groups. To view the scenarios, please click here.

For additional information on the credit, please visit the IRS site here.

LEARN MORE

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