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YEAR-END INSIGHT SEMINAR Sandra Bruno, CPA and Brooke Murphy, EA November 2013 Information and training provided by Smith Elliott Kearns & Company, LLC as part of “Year-End and Payroll Tax Update” is intended for reference only. As the information is designed solely to provide guidance to the participants, it is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations. Although Smith Elliott Kearns & Company, LLC has made every reasonable effort to ensure that the information provided is accurate, Smith Elliott Kearns & Company, LLC and its Members, managers and staff, make no warranties, expressed or implied, on the information provided. The participant accepts the information as is and assumes all responsibility for the use of such information.

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Page 1: Insight seminar year end  final

YEAR-END INSIGHT

SEMINAR

Sandra Bruno, CPA and Brooke Murphy, EA

November 2013

Information and training provided by Smith Elliott Kearns & Company, LLC as part of “Year-End and Payroll Tax Update” is intended for reference only. As the information is designed solely to provide guidance to the participants, it is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations. Although Smith Elliott Kearns & Company, LLC has made every reasonable effort to ensure that the information provided is accurate, Smith Elliott Kearns & Company, LLC and its Members, managers and staff, make no warranties, expressed or implied, on the information provided. The participant accepts the information as is and assumes all responsibility for the use of such information.

Page 2: Insight seminar year end  final

Agenda

2014 Cost of living adjustments Maryland & Pennsylvania tax updates Affordable Health Care Act (Business & Individual

provisions) Sec 125 Plans Independent Contractor vs. Employee 1099 Reporting Federal Ruling on Same-sex Marriage Online Banking Security

Page 3: Insight seminar year end  final

2014 Cost of Living Adjustments

Social Security Wage Base and Tax $117,000 - 6.2%

Medicare rate 1.45%

New Additional 0.9% Medicare Tax No employer portion

Wage excess of $200,000 (Single) and $250,000 (MFJ)

Page 4: Insight seminar year end  final

2014 Cost of Living Adjustments401(k), 403(b) and 457 Plans

$ 17,500Catch up - $ 5,500

Simple Plans$ 12,000 Catch up - $ 2,500

IRA $ 5,500 Catch up $ 1,000

Mileage Rate

Jan – Dec 2013: $ 0.565, Charity $0.14 (2014 rate not released)

Page 5: Insight seminar year end  final

Maryland Income Tax Withholding

Effective January 1, 2012

Changes to income brackets, income tax rates and personal exemption limits

No tax rate change for single filers less than $100,000 and married joint less than $150,000

Page 6: Insight seminar year end  final

Maryland Income Tax Withholding Example: Spouses filing jointly and head of household

brackets and rates:

For Maryland taxable income of $3,001 through $150,000, the rate is 4.75%;

For Maryland taxable income of $150,001 through $175,000, the rate is 5%;

For Maryland taxable income of $175,001 through $225,000, the rate is 5.25%;

For Maryland taxable income of $225,001 through $300,000, the rate is 5.5%;

For Maryland taxable income in excess of $300,000, the rate is 5.75%

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Maryland Income Tax Withholding

Taxes for counties range from 1.25% to 3.2%Washington 2.8%Frederick 2.96%Baltimore City, Howard & Montgomery 3.2%

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Pennsylvania Act 32Local Tax Changes

Highlights of Act 32

January 1, 2012

Objective – to remedy lost revenue by streamlining collection and standardizing forms

560 tax collectors reduced to no more than 69

ACT 32 does not apply to:

Businesses/employers located only in Philadelphia

Businesses/employers not located in PA, even if employing PA

residents

Self-employed individuals (unless they have employees)

Fines and Penalties

Page 9: Insight seminar year end  final

Pennsylvania Act 32Local Tax Changes

ACT 32 Requirements

Register with the tax collector in your business’s jurisdiction

Have EVERY employee fill out a Certificate of Residency Form

Withhold the higher rate of: Where the employee resides or

The nonresident tax rate for the municipality where the employee works

File quarterly and annual forms Businesses in multiple areas can elect combined filing with one tax

collector but must file and remit electronically on a monthly basis

Page 10: Insight seminar year end  final

Pennsylvania e-filing of Unemployment Compensation

Electronic filing is here! Are you ready? January 2013-Unemployment Compensation

Management System (UCMS) allows employers and third party administrators to access information and file quarterly reports online

Page 11: Insight seminar year end  final

Mandatory e-filing of PA Unemployment Compensation

Effective with the first quarter 2014 filing, employers will be required to electronically file quarterly UC tax and wage reports

Department of Labor & Industry will not be mailing forms to employers

www.paucemployers.state.pa.us

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PA Increase in Taxable Wage Base for UC

YearTaxable Wage Base for

Employer Contributions (per employee per year)

Maximum State Adjustment Factor

2013 $8,500 1%

2014 $8,750 1%

2015 $9,000 1%

2016 $9,500 1%

2017 $9,750 0.85%

2018 and thereafter

$10,000 0.75%

Page 13: Insight seminar year end  final

Patient Protection & Affordable Health Care Provisions

Changes for business:FSA limitsW-2 reporting Summary of benefitsMedical Loss Ratio RebateSmall Business Health Care CreditMinimum essential coverage

Page 14: Insight seminar year end  final

Reporting of Healthcare Coverage on W-2 Form

Cost of employer-sponsored health insurance must be reported on W-2 in Box 12 – Code DD

Reporting is for informational purposes only

Page 15: Insight seminar year end  final

Reporting of Healthcare Coverage on W-2 Form

Reporting Requirements

Reporting began for 2012 W-2 (filed in 2013)

Additional Relief for Small Employers

Less than 250 W-2s in prior year are not required to report until further notice

Page 16: Insight seminar year end  final

Reporting of Healthcare Coverage on W-2 Form

What to Report on Form W-2

Aggregate reportable cost of the coverage

Employee and employer portion

IRS website:

http://www.irs.gov/uac/Form-W-2-Reporting-of-Employer-Sponsored-Health-Coverage

Page 17: Insight seminar year end  final

Year End W-2 Reporting

Important W-2 Reporting Items

Health Savings Accounts

S-Corp Shareholder Health Insurance

Personal Use of Auto

Retirement Plan Withholdings

Page 18: Insight seminar year end  final

Preparing for Year End

Miscellaneous InformationElectronic Filing of Employment Returns

941 and 9402013 Forms W-2 to be filed electronically

Maryland - 25 or more

Pennsylvania - 250 or more must file electronically

Federal – 250 or more

Page 19: Insight seminar year end  final

W-2 Reporting Due Dates

Employees January 31, 2014

Paper Forms W-2 to SSA February 28, 2014

Electronic Forms W-2 to SSA March 31, 2014

Preparing for Year End

Page 20: Insight seminar year end  final

Health Insurers Summary of Benefits

Uniform summary of benefits and coverage explanations in plain language

Must be provided at plan renewal on or after 9/23/12

Revised summary of changes must be given 60 days prior to effective date

Penalty of up to $1,000 per failure to provide

Page 21: Insight seminar year end  final

Insurers required to spend so much of premiums on claims-excess refunded to employer

Employer must distribute rebates to participants in some way…Distribute to enrollees/improve benefits/reduce

future employee contributionsAllocation amongst participants must be fair

and reasonableMust be used within 3 months of receiving

Medical Loss Ratio Rebates

Page 22: Insight seminar year end  final

Healthcare Credit

2010-2013 credit is 35% of the premium cost for small business (25% for nonprofits)

Employers must cover at least 50% of the cost of single coverage

Must have fewer than 25 full-time equivalent employees

Average wages less than $50,000

Page 23: Insight seminar year end  final

Healthcare Credit

2014 & 2015-credit is available if employer purchases health insurance coverage for their employees through a health exchangeCredit is worth up to 50% of premium cost (35%

nonprofits)

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2015- employers with 50 or more employees who DO NOT offer health coverage Must offer insurance to full-time employees or

pay a penaltyFine is $2,000 per employee, but first 30

employees are not counted….so with 65 employees penalty is only paid on 35 of them

Minimum Essential Coverage “Pay or Play”

Page 25: Insight seminar year end  final

2015- employer with 50 or more employees who DOES offer health coverage…but has at least one full time employee receiving a tax credit in the exchange will pay the lesser of….$3,000 for each employee receiving a credit or

$2,000 for each full time employee

Minimum Essential Coverage “Pay or Play”

Page 26: Insight seminar year end  final

How can an employee receive a tax credit in the exchange?Family income up to 400% of federal poverty

level is eligible for credit if:Value of employer coverage is less than a minimum

standard (does not cover 60% of costs)Employer requires employee to contribute more than

9.5% of employee’s family toward coverage

Minimum Essential Coverage “Pay or Play”

Page 27: Insight seminar year end  final

Patient Protection & Affordable Health Care Provisions

Changes for individuals:Additional Medicare withholdingMedicare Surtax or Net Investment IncomeMedical expense deductionFailure to maintain health insurancePremium Assistance Credit

Page 28: Insight seminar year end  final

Additional Medicare Tax Withholding

Effective January 1, 2013

Withholding requirement commences in the pay period where paid wages exceed $200,000 regardless of filing status

0.9% Withholding

No employer match

Form 1040-Earnings over $200,000 for single, head of household, married filing separately, & Qualified Widow(er) with Dependent Child

Form 1040-Earnings over $250,000 for married filing joint

Page 29: Insight seminar year end  final

New 3.8% surtax on individual investment income

Calculated on the lesser of: Net investment income OR the Excess of taxpayers’ modified AGI over $200,000

($250,000 for MFJ)

Medicare Surtax or Net Investment Income (NII)

Page 30: Insight seminar year end  final

Medicare Surtax

What is included as net investment income?InterestDividendsAnnuitiesRoyaltiesRentCapital GainsPassive income from business (limited

participation)

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Example

Barack & Michelle, MFJ Salaries $280,000 + net interest income

$20,000 = AGI $300,000 Taxes on lesser of

1. Net investment = $20,000 OR

2. Excess of AGI over $250,000 = $50,000

Result:

$760= 3.8% surtax on $20,000

Page 32: Insight seminar year end  final

Medical Expense Deduction

2013, medical expenses allowable if greater than 10% of AGI

Exception- Taxpayer or Spouse is or turns 65 during 2013-2016, 10% threshold is not effective until 2017

Page 33: Insight seminar year end  final

Failure to Maintain Health Insurance

2014 & 2015 phase in period-penalty on individuals who fail to maintain “minimum essential coverage”

Penalty: 2014 = greater of 1% of household income OR $95 per uninsured

2015 = greater of 2% of household income OR $325 per uninsured

Page 34: Insight seminar year end  final

Penalty on Health Insurance

Penalty included on 1040 IRS may not impose interest on late payment Not subject to criminal prosecution or assessment IRS may not file lien or levy property

May reduce refund owed to taxpayer

Supreme Court ruled this is a tax

Page 35: Insight seminar year end  final

Premium Assistance Credit

2014- refundable credit to cover cost for health insurance purchased through a state health exchange

Credit based on income Low income individuals

Page 36: Insight seminar year end  final

Section 125 Plans (Cafeteria Plans)

Types of Plans

Premium Only Plans (POP)

Dependent Care Assistance Program (DCAP)

Flexible Spending Accounts (FSA)

Health Reimbursement Accounts (HRA)

Benefits to both employee & employer

Page 37: Insight seminar year end  final

Section 125 Plans (Cafeteria Plans)

Dependent care limit: $5,000

No limitation related to health insurance premiums portion.

FSA Deferral limit: $2,500

May be adjusted in future years for cost of living

New for 2013: $500 Carryover Option

Allowed grace period or carryover, but not both

No effect on $2,500 limit

Plan must be amended to adopt this change

Page 38: Insight seminar year end  final

Employee vs. Independent Contractor

Employee or Independent Contractor?

Employee – Job to be completed under the control of employer, collects paycheck, employer pays payroll taxes related to individual

Independent contractor – self employed or non incorporated business

Common-Law Rules

Behavioral control

Financial control

Type of relationship

Page 39: Insight seminar year end  final

1099 Reporting Federal Reporting of 1099

Filing requirements (Both IRS & State)

$600 or more paid for rents or services

$10 or more paid in interest, dividends, or royalties

Due dates

Due to the contractor by January 31

Due to the IRS & State by February 28, unless filing electronically then

due by March 31

Penalties

Ranges from $30 - $100 per return with a max of $250,000 - $1,500,000

Small business max ranges from $75,000 - $500,000

Intentional disregard of filing penalty is at least $250 per return, with no

max

Page 40: Insight seminar year end  final

1099 Reporting

PA 1099 Reporting

Required for PA-based work & PA-source oil/gas lease payments

Federal form may be used, unless the entity is required to file electronically using e-TIDES

Due dates are the same for PA as for Federal forms

Penalties

$50 penalty for each occurrence of failure to file, or providing fraudulent or false information

Page 41: Insight seminar year end  final

1099 Reporting

IRS NoticesContact vendors to verify correct information

Full legal nameCorrect EIN or SSNIf incorrect information may be required to

withhold federal tax (28%) from future payments.May want to send Form W-9 to each vendor for

them to completeForm I-9 & W-9 have been updated

Page 42: Insight seminar year end  final

QuickBooks

Consolidated backup of QuickBooks Files Subpoena of QuickBooks files or IRS audits Contact an SEK employee for additional help with

consolidating your QuickBooks files

Sunset Rules/Support QuickBooks should be upgraded every 3 years, since that is

the amount of time Intuit will support each version After the 3 years, key features may not be available or may not

work properly including: Payroll Online Banking Merchant Service Credit Card Download

Page 43: Insight seminar year end  final

IRS Ruling on Same-Sex Marriage For federal purposes, same-sex couples, legally married in a jurisdiction

that recognizes the marriage, will be considered married. Will be treated as married for federal income tax, gift, & estate tax purposes Must file either a married filing joint or married filing separate return for 2013 Can possibly amend their 2010, 2011, & 2012 federal income tax returns to file

a married return If they were married during the tax year being amended

Employment related items Employees who purchased same-sex spouse health insurance from their

employer on an after-tax basis may treat the premiums paid as pre-tax & exclude them from income This would be pretax for:

Federal Income Social Security Tax Medicare Tax

To claim a refund, the payroll tax returns would need to be amended

The Treasury & IRS intend to streamline procedures for employers who wish to claim a refund on previously taxed benefits & provide further details for individuals

Page 44: Insight seminar year end  final

Online Banking Security Internet risks & fraud trends

From the criminals’ point of view, Internet fraud is a high-growth, profitable industry

Organized crime has moved into the business of Internet fraud, driving a significant increase in incidents & sophistication of incidents

Personal computers rather than bank systems are typically the target of fraudsters, since they are seen as ‘the weakest link’

Fraudsters use targeted social engineering techniques in conjunction with crimeware & malware infections

Page 45: Insight seminar year end  final

Online Banking Security Corporate Account Takeover

A type of identity theft in which a criminal steals a business’s valid online banking credentials to initiate fraudulent banking transactions

Fraudsters use malware software on the User’s PC to record keystrokes & gather login information, including usernames & passwords & token values

Using stolen credentials, fraudsters perform unauthorized transactions

Page 46: Insight seminar year end  final

Online Banking Security

Examples of fraud scenarios “Phishing” emails

Many payment fraud schemes start with “phishing” emails, which correctly names the recipient & contains either an infected file or a link to an infectious website

The email recipient is generally a person within an organization who can initiate funds transfers or payments on behalf of the organization

Once the email recipient opens the attachment, or clicks the link to open the website, malware is installed on the recipient’s computer

Page 47: Insight seminar year end  final

Online Banking Security Examples of fraud scenarios

Cross-channel fraud User experiences abnormal system behavior & then receives

a call from an individual claiming to be from the Bank’s customer service unit. The caller says they noticed the User was experiencing issues & is calling to help.This is an attempt to obtain log in credentials from the User

Company receives an email request from a vendor/supplier to change payment instructions. Often times, the sender stresses a sense of urgency & a need to communicate via email instead of via phone This is an attempt to get the Company to send funds to a fraudster’s

account

Page 48: Insight seminar year end  final

Online Banking Security Examples of fraud scenarios

Infected browser Individual navigates to a website that appears to be legitimate but is, in fact,

fictitious Simply visiting the site infects the individual’s PC Once malware has been installed on a PC, the fraudster can take over the browser

to present a fake webpage to gather login credentials Individuals should be familiar with the standard look & functionality of their

bank’s webpage Potential signs of fraudulent activities include:

Lack of full branding Spelling and/or grammatical errors Non-standard log-in screen

System messages targeted to get User to wait so fraud can occur or to have another User log in so secondary set of credentials can be captured

Becoming increasingly difficult to differentiate between a legitimate webpage & a fake webpage as fraudsters improve their tactics

Page 49: Insight seminar year end  final

Online Banking Security

Indications your PC may be infected with malware PC performance problems – slowness or dramatic loss of

speed, computer locks up so that the User is unable to perform any functions

Unexplained system behavior – unexpected rebooting or restarting of computer, inability to shut down or restart, new or unexpected toolbars and/or icons, changes in the way things appear

Interruptions from pop ups or spam – unusual pop up messages, an unexpected request for a one-time password

Page 50: Insight seminar year end  final

Online Banking Security Best Practices to help reduce fraud risk

Computer network security Carry out all online banking activities from a stand-alone & dedicated

computer Regularly update the anti-virus & anti-spyware programs on each computer

used for internet banking Training your staff

Don’t respond to or open attachments or click on links in unsolicited emails Be very suspicious of emails claiming to be from a financial institution or

taxing authority requesting account information, account verification or banking access credentials

Verify that you are using a secure session (https, not http) Always end your Online Banking Internet sessions by “logging off” Verify email instructions through a different channel & do not rely upon

contact information provided in the email

Page 51: Insight seminar year end  final

Online Banking Security

Best Practices to help reduce fraud riskSystem Access

Restrict User permissions Create unique IDs for each online banking user Delegate the minimum requirements to a User to get the job done Review user access & permissions on a regular basis

Implement Dual Administration of Users Segregate permission to create/modify users & user permissions from the

permission to approve such actions

Payment Processing Segregate ACH & wire payment functions, by having one

individual initiate the transaction & a different individual approve the transaction

Establish transaction limits for Users

Page 52: Insight seminar year end  final

Online Banking Security Recommendations in the event you become a victim of fraud

Immediately cease all activity from computer systems that may be compromised Log-off & shut down PC Unplug the Ethernet or cable modem connections to isolate system from remote

access Immediately contact your bank to request that the following actions, & any

others you consider appropriate, be taken to help contain the incident: Change online banking passwords Confirm recent accounts transactions Close existing account(s) & open new account(s) as appropriate Ensure that no one has requested an address change, title change, PIN change or

ordered new cards, checks or other account documents to be sent to another address Immediately contact your organization’s security officer or security advisor to

ensure you are following your own appropriate security procedures and guidelines to help contain the situation

Page 53: Insight seminar year end  final

Online Banking Security

Examples of possible security procedures that may be offered by banks: User ID & Password Token device Anti-keystroke logging technology Dual authorization of payment profiles/templates Dual authorization of payments Control totals Verification of payments via different means of communicationEmail alerts Payment initiation/approval limits

Page 54: Insight seminar year end  final

Review Review payroll setups for employees & employer,

including Medicare, Social Security, FUTA, and SUTA changes

Be alert for updates on the Health Care Provisions

Make any necessary changes to your Cost of Living Adjustments or Sec.125 Plans

Make sure you have correct information for any 1099s to be filed

Be alert while conducting any online banking or other financial transactions

Page 55: Insight seminar year end  final

Thank you for attending our seminar!