Taxes on your profits

Most small business owners pay income tax on their share of business profits on their personal returns. Cost-of-living adjustments to federal income tax brackets for individuals mean that you can receive more income without being pushed into a higher tax bracket next year. Various other personal tax rules, including the personal and dependency exemption, the standard deduction and the deductible portion of long-term care insurance, have also been increased due to inflation.

In figuring your profits, you won’t be able to write off as much as you can this year for the purchase of equipment and machinery. Changes include:

• A decline in the Section 179 first-year expensing deduction to $139,000 (from $500,000 in 2011).
• A drop in bonus depreciation to 50 percent (down from 100 percent in 2011).

Of course, Congress continues to debate the retention of these and other tax breaks that are incentives for making purchases that help the economy, so the final word on these breaks is still out.

Payroll taxes

You may see an increase in your payroll taxes for 2012. While the tax rates for the Social Security and Medicare portions of FICA will not rise—they remain at 6.2 percent and 1.45 percent, respectively—the wage base on which the Social Security portion is figured will rise. The Social Security Administration announced a 3.6 percent increase to the wage base, setting it at $110,100 for 2012; it had been $106,800 since 2009. This amounts to about a $200 increase per employee at or above the wage base.

The FUTA tax rate remains at 6.0 percent, a decline that took effect on July 1, 2011. However, Congress is considering adding back the 0.2 percent surtax that had expired. This surtax was in place since 1976 and likely will be viewed as a benign revenue raiser if funds are needed to offset new tax breaks enacted as part of a jobs bill or other stimulus package.

If you are self-employed, the same Social Security wage base also applies for self-employment tax purposes. Thus, in 2012 the self-employment tax to cover your Social Security and Medicare tax obligation will rise about $400, one half of which will be deductible.

Benefits for employees

Most of the breaks that you currently provide to employees on a tax-advantaged basis will continue to apply for 2012. However, some may increase due to COLAs, while others may decrease because of law changes that take effect next year.

• Contributions to qualified retirement plans. Companies will be able to contribute on a tax-deductible basis up to $50,000 to profit-sharing plans and SEPs in 2012; the limit for the past several years has been $49,000. Benefits under defined benefit (pension plans) will be permissible up to $200,000 (up from $195,000 in 2011).
• Transportation assistance. If you provide certain transportation fringe benefits, changes are afoot. The limit on the value for monthly free parking will rise to $240 (up from $230), while the limit on monthly transit passes and vanpooling will drop to $125 (down from $230). Bicycling assistance will stay at $20 per month.
• Adoption assistance. Companies that pay for or reimburse employee adoption costs will be limited to $12,650 (down from $13,360 in 2011).

The bottom line

Meet now with your tax adviser to review coming changes. This will enable you to do year-end planning to save on this year’s tax bill, as well as budget more accurately for the coming year.

SOURCE: Barbara Weltman Founder & Owner, Big Ideas for Small Business, Inc.

http://www.openforum.com/articles/tax-law-changes-for-2012-what-you-need-to-know

Details:
Published on Tuesday, 10 January 2012 19:00

Sentate Bill 459 News Regarding Independent Contractors:

Effective January 1, 2012, California has a new law — Senate Bill 459 (SB 459), which significantly increases the penalties that can be assessed against employers who willfully misclassify as independent contractors individuals who should be treated as employees. If your company utilizes independent contractors, it is extremely important that you take the time now to understand the impact of this new law on your operation and to take the necessary steps to ensure appropriate compliance with this law. The highlights of the law are summarized below for your reference, although they are not meant to be all-inclusive.

SB 459 makes it unlawful for any person or employer to engage in “willful misclassification” of an individual as an independent contractor. The law also prohibits charging individuals who have been misclassified as independent contractors a fee or making deductions (e.g., for space rental, goods, equipment maintenance) from compensation if those acts would have violated the law had the individuals not been misclassified.

This new law comes on the tail of the IRS’s recent announcement regarding its new settlement initiative, the Voluntary Classification Settlement Program (VCSP), allowing employers to: 1) come forward if they are not under audit, 2) reclassify independent contractors as employees, and 3) pay a significantly reduced employment tax.

Who has authority to assess compliance and penalties?

SB 459 authorizes the Labor and Workforce Development Agency, specifically the Labor Commissioner or a court, to assess specified civil penalties on persons or employers violating the law. SB 459 also requires the agency to take other specified disciplinary actions against these individuals.

What happens if I am found to have violated the law?

The law requires employers who are found to have engaged in a misclassification “to display prominently” for one year on their websites a notice to employees and the general public announcing, among other things, that the employer “has committed a serious violation of law by engaging in willful misclassification of employees.” The notice must be signed by a corporate officer.

What are the fines and penalties?

Violation of the new statute carries exposure for a civil penalty of between $5,000 and $15,000 for each violation. If the employer is found to have engaged “in a pattern or practice of violations,” the civil penalty is increased to $10,000 and $25,000 per violation. The law does not define the term “pattern or practice.”

Where should I go for assistance and additional information if I have independent contractors?

We strongly encourage you to consult with legal counsel experienced in employment practice matters to review your independent contractor relationships, to determine the appropriateness of these classifications, and to assist you if re-classifications may be required to mitigate potential legal exposures to your business.