You may not have caught the news that the rate used to calculate Social Security withholding taxes from your employees has been reduced for 2011. It goes back up on January 1, 2012. The rate is now 4.2% rather than 6.2%. So, in effect, your employees are getting a raise and you are not paying for it. The Medicare tax rate has not changed.

The rate that a company contributes for Social Security taxes has not changed. It is still 6.2%. You should take this into account when you calculate the payment of taxes each month. You should multiply the gross payroll by 13.3% to calculate the Social Security and Medicare payment that you make.

You don’t need to worry about this if you are using a payroll service. They should take care of it.

The IRS is also changing the rules for paying the taxes. Starting January 1, 2011 you are required to pay the taxes using the Electronic Federal Tax Payment System (EFTPS). See my blog posted on December 21, 2011 for more details. http://www.thomstaxtalk.com

IRS Requirement to pay your business taxes electronically

If you are in business you probably got a notice from the IRS recently telling you that you must pay your taxes electronically. This new rule takes effect January 1, 2011.

Up to now, businesses could pay most of their taxes by completing Form 8109 and paying their taxes at their bank. This system has been in effect for decades and worked well. The Internet has changed all that. It is now easier, and cheaper, for the government to have you use the Electronic Federal Tax Payment System (EFTPS) than to have you go to your bank to make the payments.

Use of the EFTPS system is required for business taxes. So if you must remit payroll taxes, income taxes, and various excise taxes, this system must be used starting January 1, 2011. Individuals may use the system to pay their federal income taxes and estimates.

Here is a link to some basic information about the system:

https://www.eftps.gov/eftps/direct/HelpAboutMain.page


The system is fairly easy to sign up for and to use. Here is the link to sign up:

https://www.eftps.gov/eftps/enrollment/new-enrollment-flow?execution=e1s1

You can always go to the IRS website at http://www.irs.ustreas.gov/ and search for information.

Massachusetts has required businesses to remit taxes electronically for several years. Information can be found at:

https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx

These systems are reasonably easy to use and will save you the time of driving off to the bank when you have to make these payments.

Health Insurance and Our S Corporation

Health insurance is a benefit that most companies offer. It is a great way to attract and keep good employees, and it provides some tax benefits as well. Even the share of the premiums that the employee pays can be treated as a pre-tax deduction and save the employee and the company significant money. What becomes a little more complicated is if you are the owner of an S Corporation and you participate in the health insurance program.

IRS regulations require that you report the company paid portion of health insurance as compensation for anyone who owns more than 2% of the company stock. This is the case for more than 99% of owners of S Corporations. Massachusetts also follows this rule.

Here is an example: Suppose your salary is $50,000 and you also paid $10,000 for your health insurance. (I know, you wish it were only $10,000.) Your W-2 should show federal taxable wages of $60,000. It also should show this amount as state wages in Massachusetts and probably others states as well. The Social Security and Medicare wages should only be $50,000. This add back to your income is not subject to Social Security or Medicare taxes.

You might be about to panic because you think you will be paying more in income taxes because of this adjustment. I have good news. It is true that you will report $60,000 on line 7 of your personal tax return. But you will get to deduct the $10,000 on line 29 of your return and thus pay tax only on the $50,000 of salary.

If it does not have any impact, why do it? Reason one: The IRS requires it. Why challenge them? Reason two: If you do not put the health insurance on your W-2, you will have to report it as income anyway and then you can deduct it as a medical expense on Schedule A of your return. Medical expenses are subject to a 7.5% of income floor and you may lose some or all of the deduction. It could cost as much as 40% of the cost of the health insurance in additional taxes. Now that’s a great reason to do it.

I’d be happy to talk with anyone who has any questions about this.