Act 32 of 2008 is a Pennsylvania law that was passed with the intention of simplifying the way local Earned Income Tax (EIT) is paid and collected throughout the state. Although the Act was passed in 2008, the major changes recently went into effect as of January 1, 2012 (July 1, 2011 in Chester County). The new law brings two significant changes to the state. First it consolidates collection mainly along county lines by requiring all taxing jurisdictions within a specified geographic area to jointly select one tax collector to serve the entire area. Each of the areas is called a Tax Collection District (TCD). This is a welcome change to employers who have long struggled with the burden of deciphering which of the over 500 local tax collectors have jurisdiction over them and then having to deal with the inconsistencies of each authority. The second major change is that employers are now required to withhold the higher of the employee’s resident earned income tax amount (rate of EIT where they reside) vs. the employee’s municipal non-resident earned income tax amount (rate of non-resident EIT where they are employed). This will require employers to compare rates between TCDs. Employers are also required to obtain a Residency Certification Form for every employee which requires employees to certify their home address and corresponding Political Subdivision Codes (PSD). The PSD codes have been formulated to designate each of the 69 TCDs, along with the school districts and municipalities therein.

941 Payroll has extensive experience dealing with Pennsylvania local taxes. Please contact us if you have any questions and we would be happy to assist you

While Congress debates how to enact payroll tax cuts to stimulate the floundering economy, New Jersey and Pennsylvania employers are suddenly facing higher payroll taxes. Under the provisions of the Federal Unemployment Tax Act (FUTA), a Federal tax is levied on employers covered by the Unemployment Insurance (UI) program at a current rate of 6.2% on wages up to $7,000 a year paid to an employee. The law provides for a credit against that tax liability of up to 5.4% to employers who pay state taxes timely under an approved state UI program. In states meeting the specified requirements such as New Jersey and Pennsylvania, employers pay an effective Federal tax of 0.8%, or a maximum of $56 per covered employee, per year.

The credit against the federal tax may be reduced if the state has an outstanding UI loan. Since the recession many states have lacked the funds to pay unemployment insurance benefits and have exercised their ability to obtain loans from the federal government. To assure that the states repay these loans, the federal government partially recovers those monies by reducing the FUTA credit it gives to employers, which is the equivalent of an overall increase in the FUTA tax. When a state has an outstanding loan balance on Jan. 1 for two consecutive years and does not repay the full amount of the loan by Nov. 10 of the second year, the federal government will reduce the FUTA credit until the state repays the loan. The reduction schedule is 0.3 percent for the first year and an additional 0.3 percent for each succeeding year until the loan is repaid. New Jersey and Pennsylvania are both in the first of year of the reduction schedule so the credit reduction is 0.3 percent retroactive to the beginning of 2011. Adding to the confusion is that a longstanding FUTA surcharge of 0.2% expired on June 30, 2011. This means that the effective FUTA rate for employers decreased from 0.8% to 0.6% starting on July 1, 2011. The chart below illustrates that the additional tax could be up to $21 per year per employee.

Maximum Tax per Employee Before Credit Reduction January through June Rates					Maximum Tax per Employee Before Credit Reduction July through December Rates
	Wage Base	Effective Rate	Maximum Annual Tax			Wage Base	Effective Rate	Maximum Annual Tax
NJ	7,000	0.80%	56		NJ	7,000	0.60%	42
PA	7,000	0.80%	56		PA	7,000	0.60%	42
Maximum Tax per Employee After Credit Reduction January through June Rates					Maximum Tax per Employee After Credit Reduction July through December Rates
	Wage Base	Effective Rate	Maximum Annual Tax			Wage Base	Effective Rate	Maximum Annual Tax
NJ	7,000	1.10%	77		NJ	7,000	0.90%	63
PA	7,000	1.10%	77		PA	7,000	0.90%	63

Meanwhile the states are imposing increased rates, interest assessments, higher wage bases or surcharges at the state tax level in an attempt to make their plans solvent. Please contact us if you have any questions.

2011 FUTA Tax Rate Summary of State's with a Credit Reduction
State	Credit Reduction	Effective Rate Jan - Jun	Effective Rate Jul - Dec
Arkansas	0.30%	1.10%	0.90%
California	0.30%	1.10%	0.90%
Connecticut	0.30%	1.10%	0.90%
Florida	0.30%	1.10%	0.90%
Georgia	0.30%	1.10%	0.90%
Illinois	0.30%	1.10%	0.90%
Indiana	0.60%	1.40%	1.20%
Kentucky	0.30%	1.10%	0.90%
Michigan	0.90%	1.70%	1.50%
Minnesota	0.30%	1.10%	0.90%
Missouri	0.30%	1.10%	0.90%
Nevada	0.30%	1.10%	0.90%
New Jersey	0.30%	1.10%	0.90%
New York	0.30%	1.10%	0.90%
North Carolina	0.30%	1.10%	0.90%
Ohio	0.30%	1.10%	0.90%
Pennsylvania	0.30%	1.10%	0.90%
Rhode Island	0.30%	1.10%	0.90%
Virginia	0.30%	1.10%	0.90%
Wisconsin	0.30%	1.10%	0.90%

In a recent IRS news release (IR-2011-95), the service launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

For an example of how this might work assume a company has 5 workers making $50,000 each for the past years. There are three potential outcomes and they are summarized below. The first column includes all 3 years and a 40% tax due to a willful misreporting. The second column assumes an audit and a determination of non willful misreporting. The third column shows the cost under the new program.

	Wilful Misreporting	Non-Wilful Misreporting	New IRS Settlement Program
Wages subject to tax	$750,000	$250,000	$250,000
Tax Liability	$300,000	$ 26,700	$ 2,670

This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an applicant must:
• Consistently have treated the workers in the past as nonemployees,
• Have filed all required Forms 1099 for the workers for the previous three years
• Not currently be under audit by the IRS
• Not currently be under audit by the Department of Labor or a state agency concerning the
classification of these workers

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.
Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

This is a good time for businesses to review any 1099’s issued over the past three years and determine if the worker who performed services should have been properly treated as employee. The answer can sometimes be more of a grey area as the overall facts and circumstances of the relationship should be considered. The most relevant factor is whether the business has the right to direct and control the worker as to how to perform the services.
As of now there is no time limit or expiration on the program. The VCSP program piggybacks on an existing Classification Settlement Program (CSP) that is only for taxpayers already under examination. It looks as if both programs will have some staying power. The application can be filed at anytime, however it should be filed 60 days before the business wants to begin treating the applicable workers as employees.

There could some pitfalls to consider as there is no safe haven provided for overtime payments or for benefits the workers may have been entitled to as employees. I recommend consulting a tax professional before applying. Please contact us if you would like a referral to an accountant or labor law attorney to help you with this program. Or if you need a payroll service to help you with those newly classified employees please contact us for that too.

On October 19th, 2011 The Social Security Administration (SSA) announced there will be a $3,300 increase in the Social Security and Disability Insurance taxable wage base for 2012. This is the first increase since 2009. In addition, there will be a 3.6% cost of living increase for the more than 55 million people collecting Social Security benefits.

With the Social Security wage base increase to $110,100 for 2012, the maximum 2012 OASDI tax payable by each employee is $6,826.20, or 6.2 percent of the wage base. In 2011 each employee is paying 4.2% but this rate is set to expire at the end of the year unless Congress passes legislation to extend the 4.2% rate. Currently the employer pays 6.2 of gross pay as well.

The Medicare portion of the Federal Insurance Contributions Act tax continues to apply to all taxable wages earned, and the rate remains at 1.45 percent.

The Social Security Administration will announce the 2012 Social Security wage base on Wednesday. They will also announce the 2012 cost of living adjustment. Please come back to our website on Wednesday for the details when available.