Gov. Perry: Qualifying Employers Get Tax Credit and Additional Savings Thanks to Strong Economy

AUSTIN - Governor Rick Perry announced in October that 370,000 Texas employers will receive an estimated $170 million in surplus tax credits next year.  Thanks to Texas' strong economy, the Unemployment Compensation Trust Fund has reached an estimated $376.7 million surplus.<"Thanks to a robust economy Texas has exceeded our trust fund ceiling for the second year in a row, and get to return the excess taxes back to employers," said Perry."With steady job growth and declining unemployment, I am confident these credits and savings will amount to a further boost for our economic fortitude and workforce expansion."

The tax surplus allows the Texas Workforce Commission to retire all outstanding bond debt a year ahead of schedule, providing an estimated $270 million in future tax savings to Texas employers in 2008 alone.The innovative bond sale in 2003 allowed Texas employers to avoid a deficit tax in 2004 and kept an estimated $1billion circulating in the Texas economy for job creation and expansion.

"Texas will continue to work to create more economic prosperity for all our citizens, helping our businesses generate more jobs and hire more Texans," said Perry.

Eligible Texas employers filing quarterly unemployment tax reports will receive a tax credit beginning with their first quarter 2008 tax return. To receive the credit, employers must meet certain eligibility requirements, including having payroll during 2007 and having paid all taxes due.

Source: Press Release – IRS – October, 2007

An employer who knowingly fails to report employee information according to the federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 may be liable for a civil penalty.  The penalty may not exceed $25 for each occurrence in which an employer fails to report an employee, or $500 for each occurrence in which the employer conspired with the employee to not submit a required report or supplied a false or incomplete report. 

Employers should report their newly hired or rehired employees within twenty (20) calendar days to the State Directory of New Hires, which in Texas is operated by the Child Support Division of the Office of the Attorney General.

Federal Employer Identification Number

Employer Name

Employer Address (Payroll)

Employee Social Security Number

Employee Full Name

Employee Address

Addition information requested (optional) includes: State Employer ID Number (SEIN), Employee Date of Birth, Date of Hire (First Day of Work), State of Hire, Salary/Wages, Pay Frequency, Employer Contact Phone and Fax Number, and Employer DBA (Doing Business As). 

The information can be filed online at http://employer.oag.state,tx.us.  Additionally, an employer can complete verification of employee forms, report terminations of employees subject to wage withholding orders, submit payments electronically, and enroll employee dependents in health insurance on the website. 

Source: The Office of the Attorney General of Texas - Gregg Abbott

New Form for Misclassified Workers

The IRS has developed a new form for an employee who has been misclassified as Independent Contractors by an employer.  Uncollected Social Security and Medicare Tax on Wages, Form 8919, will now be used to figure and report the employee’s share of uncollected social security and Medicare taxes due on his/her compensation. 

The worker must meet one of the following criteria indicating he/she was an employee while performing the services:

      Filed Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating he/she is an employee of the firm.

      Designated as a section 530 employee by his/her employer or by the IRS prior to January 1, 1997.

      Received other correspondence from the IRS that states he/she is an employee.

      Previously treated as an employee by the firm and he/she is performing services in a similar capacity and under similar direction and control.

      Co-workers are performing similar services under similar direction and are treated as employees.

      Co-workers are performing similar services under similar direction and control and filed Form SS-8 for the firm and received a determination that they were employees.

      Filed Form SS-8 with the IRS and has not yet received a reply.

The IRS will electronically share Form 8919 data with the Social Security Administration to facilitate crediting the worker’s social security and Medicare taxes to his/her social security record.

 Source: IRS News Release IR-2007-2003, Dec. 20, 2007

The Internal Revenue Service is joining with more than two dozen states in an intensified effort to crack down on employment-tax violations. Among the key issues is whether a worker should be classified as an employee or an "independent contractor" -- a difference with significant tax implications for both businesses and workers.The IRS recently signed information-sharing agreements with state labor or work-force agencies in 29 states, including California, New York, Michigan and Ohio. Combining resources will help the IRS and the states "reduce fraudulent filings, uncover employment tax avoidance schemes and ensure proper worker classification," said Kathy Petronchak, head of the IRS's small business/self-employed division. 

Employers generally must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. But they generally don't have to withhold or pay taxes on payments to independent contractors, the IRS says. If an employer incorrectly classifies an employee as an independent contractor, it can be held liable for employment taxes for that worker, plus a penalty, the IRS warns. 

Figuring out the difference between an employee and an independent contractor can be very tricky. The IRS provides this rule of thumb: Anyone who performs a service for you is your employee "if you can control what will be done and how it will be done." That's the case "even when you give the employee freedom of action," the IRS says. "What matters is that you have the right to control the details of how the services are performed." 

The complexity of worker classification "has long caused headaches for many businesses," says Elizabeth Milito, a lawyer for the legal foundation for the National Federation of Independent Business. She says Congress should be focusing on developing a "clearer and simpler" definition of an independent contractor. But despite some lawmakers' proposals to overhaul the law, Congress hasn't acted. 

The IRS-state initiative goes well beyond worker-classification issues. It aims to detect businesses attempting to avoid employment-tax obligations "by operating in the underground economy and making cash payments to workers and not reporting those payments to the IRS and to the states," says Robert Affleck, deputy director, tax branch, of the California Employment Development Department. 

That could be an important factor in narrowing the nation's "tax gap," or taxes that are owed each year but not paid. IRS officials have estimated the overall tax gap at about $290 billion.State officials say they have high hopes for the new initiative. California's Employment Development Department said the "memorandum of understanding" with the IRS "provides, for the first time a centralized and uniform mechanism" for the two agencies to swap employment-tax data. 

Michigan has "already begun to forge a much closer working relationship" with the IRS, which has "significantly increased the sharing of tax and audit information between the IRS and our unemployment insurance program," says Keith W. Cooley, director of Michigan's department of labor and economic growth. 

The states that have joined so far are: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin. 

As federal and state agencies share more information, "businesses are going to be held to a higher standard, and that's going to have an impact" on both employers and workers, says Scott Mezistrano, senior manager of government relations at the American Payroll Association in Washington.

Source: Paul Axelson
Internal Revenue Service

Could you face an audit in 2008? 

Your chances have increased.  The payoff for the IRS?  $59.2 billion in enforcement revenue, compared to $48.7 billion in 2006 and $34.1 billion in 2002.  The IRS filed 3.8 million levies and almost 700,000 liens during 2007, an increase from 2006. 

Individuals audited in 2007 compared to 2006: 

 This totals 1,384,563 individuals audited in 2007, up from 1,296,681 in 2006, an increase of 7% overall.    

The IRS focused it’s business audits on mid-market corporations with assets between $10 million and $50 million.  Audits in 2007 compared to 2006: 

 Large corporation audits dipped slightly in 2007 to 9,644, although this is up 14% from 2002.  This totals 59,516 businesses audited in 2007, up from 52,223 in 2006, and increase of almost 14% overall. 

Source: WebCPA 1/18/2007 edition