IRS TO LAUNCH COMPLIANCE INITIATIVE AIMED AT EMPLOYER REPORTING OF EMPLOYMENT TAXES ON UNREPORTED TIP INCOME

The IRS is initiating a new compliance program geared towards employers who may have failed to report their share of employment taxes on unreported employee tips. In an unprecedented ruling from the IRS, Form 4137: Social Security and Medicare Tax on Unreported Tip Income will now be closely reviewed by the IRS to ascertain what Social Security, Medicare, and FICA taxes should have been paid by the employer on unreported tips in excess of $20.00.

According to IRS representative John Tuzynski, in remarks made at the American Payroll Association’s (APA) 2010 Capitol Summit in Washington, D.C. on March 12, the IRS “has never looked to see if employers are paying their share of” these taxes on tip income that the employee has reported on Form 4137 to their employers. The employers will be sent a Code Sec. 3121(q) notice and demand for taxes owed. If employers cooperate with the program, no penalties or interest will be assessed on the amounts owed. The employer will also have the right to challenge the IRS evaluation, Mr. Tuzynski added.

Form 4137 is used to compute an employee’s liability for Medicare and Social Security taxes on monthly tips in excess of $20.00 that were not reported to the employer or on tips allocated by a large food and beverage establishment.

A news release will be issued in the coming weeks from the IRS to inform those who are not aware of the program and answer frequently asked questions about the initiative.

LISA HASTINGS NAMED HONORARY COMMANDER AT DOVER AIR FORCE BASE

On February 5th, Lisa S. Hastings of Faw, Casson & Co., LLP was inducted as an Honorary Commander of the Comptroller Squadron of the 436th Airlift Wing at Dover Air Force Base, Delaware. The Comptroller Squadron is currently under the command of Major Fernando Waldron.

The Honorary Commander Program first began at Dover in 1992, matching civic leaders with military commanders, both active duty and reserve. The program provides an opportunity for community members to partner with commanders, to better understand each others’ programs and roles, and to support one another. Community members are educated about the base and the important role of today’s military.

This program builds relationships, provides opportunities for information to be exchanged, and strengthens the partnership between DAFB and the community which makes TEAM DOVER.

Pictured: Lisa S. Hastings, CPA and Lt Col Richard Pues, 436th Airlift Wing Director of Staff

PROFIT SHARING & 401(K) TRENDS

The profit sharing/401k Council of America (PSCA), a national nonprofit association committed to retirement savings through employee-sponsored defined contribution programs, has released its 52nd Annual Survey of Profit Sharing and 401(k) Plans, which provides the most up-to-date information available on current practices and trends in profit sharing and 401(k) plans.

The survey of 2008 plan years covers a wide variety of topics relevant to plan sponsors and the industry at large. Below are some of the highlights from the survey:

• Automatic Enrollment: 40% of all plans and more than half of large plans currently use automatic enrollment.

• Asset Allocation: The typical plan has approximately 60% of assets invested in equities.

• Company Contributions: Company contributions average 4% of payroll, the same as in 2007. They are highest in profit sharing plans (9% of pay) and lowest in 401(k) plans (3% of pay). Only 1% of respondents indicated that they suspended their employer match. Among profit sharing plans, the most common type of company contribution is a discretionary profit sharing contribution, which is present in 65.

• Employee Participation: 82% of eligible employees have balances in their 401(k) plans.

• Investment Options: Plans offer an average of 18 funds for participant contributions.

• Roth 401(k): 37% of plans permit Roth 401(k) contributions.

• Target-Date Funds: The availability and use of target-date funds continues to grow. 58% of plans now offer them.

• Vesting: Immediate vesting is present for matching contributions in 37% of plans and for non-matching contributions in 26% of plans. Among plans that do not have immediate vesting, graduated vesting tends to be the most common arrangement for all plan types.

President of PSCA, David Wray, states “Even in this economic period, plan sponsors remain committed to improving their plans. Participants continue to invest and save for the long-term.”

FOUR WAYS TO MINIMIZE UNEMPLOYMENT COSTS

In these days of rampant unemployment, employees are not the only ones who are suffering. Employers also have a burden to bear in the form of rising unemployment costs.

How it works: Under the Federal Unemployment Tax Act (FUTA), employers are charged 6.2% of the first $7,000 of every worker’s wages, although a state unemployment tax credit of 5.4% may reduce the federal rate to 0.8%. This works out to a maximum FUTA tax of $56 per employee (0.8% of $7,000) on an annual basis. One critical factor in maintaining the 5.4% credit under state unemployment systems is to demonstrate stability.

In effect, employers with more unemployment benefit claims are generally required to pay more in state unemployment taxes. Thus, there is an extra financial incentive for keeping claims to a minimum. For instance, if an employee seeks unemployment benefits, the employer may be able to demonstrate that the employee quit voluntarily or that he or she was terminated for willful misconduct.

Short of using these two defenses, or some variation, the key to reducing unemployment costs is to avoid having claims filed in the first place. Here are four practical suggestions:

1. Hire with discretion. If an employee will be required to work unusual shifts, weekends and holidays, present this information at the outset. Even better, the employer can put such notice in a prominent place on the employment application and have the new hire sign it. In that case, if the employee leaves the job due to the work schedule, the departure should be considered voluntary and unemployment benefits may not be triggered.

2. Fire with discretion. If employment is terminated due to misconduct, such as insubordination or work rule violations, explain in writing the reasons for the dismissal. Copies of performance evaluation forms showing prior warnings should be given to the departing employee, along with a final statement showing no improvement in the deficient area.

3. Conduct an exit interview. When an employee leaves voluntarily, find out the reason. Have multiple employees interview the departing employee and retain notes from each meeting. Ask for a formal letter of resignation. This may defuse a claim for unemployment benefits. It may also alert you to a condition you want to correct to head off more departures.

4. Challenge questionable claims. This could signal the launch of a wrongful discharge lawsuit, so prepare documentation showing that the claim is groundless. You may want to involve your attorney from the outset.

By following these basic suggestions, employers may able to keep their merit rating high and their costs low. Take a proactive stance in this area.

ROTH IRA CONVERSIONS: FIGURE IN THE VARIABLES

The floodgates are finally open to high-income taxpayers: Beginning in 2010, an individual can convert a traditional IRA into a Roth IRA, regardless of his or her income level. Prior to this year, a conversion was allowed only in a year in which the individual’s modified adjusted gross income (MAGI) did not exceed $100,000.

Normally, such a conversion is taxed at ordinary income tax rates in the year of the conversion. However, for a conversion in 2010, the participant may pay the tax over the following two years—2011 and 2012.

These changes have been in the works for years. They were included in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), which was enacted in 2006.

Should a high-income taxpayer convert or not this year? The answer is not always as simple as it first appears.

Background: As with a traditional IRA, a participant may contribute up to $5,000 to a Roth IRA (less any traditional IRA contributions) for the 2009 tax year. An extra $1,000 “catch-up contribution” is allowed for someone age 50 or older. But the ability to make contributions is phased out for taxpayers with a MAGI above certain income levels.

One key benefit of Roth IRAs is that “qualified distributions” are completely exempt from income tax. To qualify, a distribution must be made from a Roth in existence for at least five years and after the participant has reached age 59½, upon the death or disability of the participant or to pay for first-time home-buyer expenses (up to a lifetime limit of $10,000). Pre-age 59½ withdrawals are also subject to a 10% tax penalty.

Furthermore, unlike a traditional IRA, minimum lifetime distributions are not required. This enables a participant to preserve a bigger nest egg for heirs.

Nevertheless, the decision to convert or not must take into account a number of variables. These include the following:


*The age of the IRA participant, his or her spouse (if married) and the ages of the beneficiaries

*The value of the assets in the traditional IRAs

*The tax year of the conversion

*The need to receive Roth IRA distributions in the future

*The projected investment rate of return

*The participant’s current income tax rate and expected tax rate in the future

*State and local tax liability on the conversion

*Amounts that were contributed to traditional IRAs on a nondeductible basis

*Whether any portion of the tax must be paid out of IRA funds


These variables will have a substantial impact on the decision. For example, if the tax must be paid out of IRA funds, it will dilute the benefit of the conversion. Other “wild cards,” such as inflation and the likelihood of future tax rate increases, should also be considered. Note that a partial conversion of funds in a participant’s traditional IRAs is permitted.

Bottom line: Do not make assumptions about Roth IRA conversions. Online calculators often do not include all the necessary variables. With professional guidance, an informed decision can be reached.