Monthly Employment Tax Return Option Eliminated by the IRS

The IRS will no longer give Taxpayers that are continually noncompliant with timely filing tax returns the ability to make their tax deposits on a monthly basis. Rather, the employer must use the regular Form 941. The Form 941M is being discontinued. The internal memorandum instructs revenue officers to consider pursuing the Civil Injunction process for noncompliant taxpayers.

President Obama’s Business Tax Reform Plan

President Obama has recently released his Framework for Business Tax Reform.

The President proposes to lower the statutory Corporate rate from 35% to 28%.

The President's Five Elements of his Business Tax Reform:

PRESIDENT OBAMA'S FIVE ELEMENTS OF BUSINESS TAX REFORM

I.     Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America: The Framework would eliminate dozens of different tax expenditures and fundamentally reform the business tax base to reduce distortions that hurt productivity and growth. It would reinvest these savings to lower the corporate tax rate to 28 percent, putting the United States in line with major competitor countries and encouraging greater investment in America.

II.    Strengthen American manufacturing and innovation: The Framework would refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.

III.    Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment: Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the U.S. tax base. Introducing a minimum tax on foreign earnings would help address these problems and discourage a global race to the bottom in tax rates.

IV.    Simplify and cut taxes for America's small businesses: Tax reform should make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns.

V.    Restore fiscal responsibility and not add a dime to the deficit: Business tax reform should be fully paid for and lead to greater fiscal responsibility than our current business tax system by either eliminating or making permanent and fully paying for temporary tax provisions now in the tax code.

Update on Friday, February 24, 2012 at 11:31AM by Jess Monnette

Tax Foundation commentary can be found here and here and here.

S-Corporation Payroll Tax Dodge

The Eighth Circuit held yesterday that an experienced accountant must treat $91,044 as wages rather than the $24,000 that he claimed. In 2002, the accountant wage income of $24,000 but took home $203,651 in Subchapter S Dividends.

By setting his "wage" compensation, he only paid FICA employment taxes (combined rate of 15.3%) on the $24,000 wage and not on any of the additional $203,651 he took home as a "dividend." He was the corporation's sole shareholder/director/employee.

The court held that the $24,000 wage was exceedingly low and imputed to him a reasonable wage of $91,044 for the years in question.

Wages, to which FICA is applicable, are defined as "all remuneration for employment" IRC § 3121(a). The Court stated that special scrutiny is given to salaries paid to employees that control a corporation. The Court applied a substance over form analysis and determined that the taxpayer's experience, education and business revenue necessitated at least a $91,044 reasonable wage. Courts look beyond a business's tax reporting and looks at the entirety of the business's transaction with that employee to determine whether or not dividend income should be recharacterized as wage and FICA applied to it.

Conclusion: At the end of the day, a corporation should its service employees wage income that is reasonable remuneration for services performed. A service Corporation that has only one shareholder/director/employee cannot get away with paying its sole employee a wage that is far below reasonable.

President Obama’s 2013 budget: Dividend Rate to be 44.8%

According to the WSJ, President Obama's 2013 budget includes a proposal that will raise dividend tax rates to 44.8%. The plan itself raises the dividend tax rate to 39.6%, which when combined with a phase-out of deductions and exemptions, and Obamacare's 3.8% investment tax surcharge, results in a total tax on dividends of 44.8%. The capital gains rate will stay at its current 15% but the 3.8% Obamacare tax will apply to increase the total capital gains rate to 18.8%. The above analysis applies to individuals making over $200,000 per year and couples making over $250,000 per year.

Although the full implications of this tax increase will keep commentators busy for months, it is sufficient to note at this point that the disparity created between the tax rate on dividends (44.8%), and the tax rate on capital gains (18.8%), will create an incentive for businesses to favor the reinvestment of profits rather than the payment of dividends to shareholders. For more analysis, see the WSJ article.

Washington Average State & Local Tax Rate: 8.80% (4th highest in the nation)

The Tax Foundation has recently completed a study which determined a per state average for combined state and local sales taxes. Most states impose a sales tax and many allow local entities to impose their own sales tax.

Washington imposes a State sales tax at 6.5%. Including average locality tax rates brings Washington to an average of 8.80%

In Wenatchee, the combined State and Local rate is 8.1%. However, this could jump to 8.3% if the Legislature allows the City of Wenatchee to increase its sales tax without a public vote.

The Tax Foundation's full map is below.