Happy New Year! Here are some things that you may want to know for 2012.
Preparers of Federal Income Tax Returns face a series of new and more stringent requirements and risks. Among other things, all preparers must obtain a Preparer Tax Identification Number “PTIN”. Those preparers that already had a PTIN must apply for a new one. Further, every year, the government places additional burdens upon tax preparers that result in additional effort and risks.
Key Filing Deadlines:
Here are the key filing deadlines for Income Tax Returns:
- Individual taxpayers are generally required to file their Form 1040’s (and pay the balance of the tax due) by the 15th day of the 4th month following the end of their tax year. For calendar year Individual taxpayers, this is April 15th. However, the deadline for filing (and paying the balance of the tax due) 2011 Individual Federal and Illinois Tax Returns is April 17, 2012. (This is not a permanent change. April 15, 2012 is a Sunday and April 16, 2012 is the Emancipation Day holiday in the District of Columbia. Accordingly, they pushed the deadline to the next business day.)
- Partnerships and LLC’s Taxed as Partnerships. Partnerships (including LLC’s taxed as Partnerships) are generally required to file their Form 1065’s by the 15th day of the 4th month following the end of their tax year. For calendar year Partnerships, this is April 15th. However, the deadline for filing 2011 Federal and Illinois Partnership Returns is April 17, 2012 (for the same reason as mentioned above for Individuals).
- Corporations (whether C Corp’s or S Corps) are required to file their Form 1120’s (or 1120S’s) by the 15th day of the 3rd month following the end of their tax year. For calendar year Corporations filing 2011 Returns, this is March 15, 2012.
Payroll Tax Cut Extended:
In the long list of taxes, there are taxes collected pursuant to the Federal Insurance Contributions Act (FICA). FICA is made up of 2 components, Social Security (to fund the Social Security old-age, survivors, and disability insurance “OASDI”) and the Medicare portion (to fund Medicare hospital insurance “HI”).
- Social Security: Generally, employees have 6.2% of their wages withheld for the OASDI portion of FICA, up to the then applicable OASDI wage base. Every year or so, the Federal government increases the OASDI wage base thereby increasing the amount to which the 6.2% tax is applied.
The OASDI wage base for 2011 was $106,800 and the OASDI wage base for 2012 is $110,000. This means that for 2011, the first $106,800 was subject to Social Security Tax and for 2012 the first $110,000 is subject to Social Security Tax.
As you may know, Congress, the Senate and the President cannot seem to get along. In late December 2011, they came together (if you want to call it that) with The Temporary Payroll Tax Cut Continuation Act of 2011, which extended the 2% OASDI reduction, but only for 2 months. That is, for wages paid through February 29, 2012 (yes, 2012 is a leap year).
- While the extension is only for 2 months, the government saw fit to add several layers of additional complications:
- Employers will withhold and remit only 4.2% of OASDI wages for the period of January 1, 2012 through February 29, 2012.
- However, the 2% reduction only applies to the first $18,350 of OASDI wages (roughly 2 pro-rated months worth of the 2012 OASDI wage base of $110,000).
- If an employee has more than $18,350 of wages between January 1, 2012 and February 29, 2012 the employer does not determine the excess and have a blended OASDI calculation. Instead, employers will apply 4.2% to all OASDI wages through February 29, 2012 (and then apply the 6.2% to all OASDI wages paid thereafter). This does not mean that the employee gets to keep all of the savings. Instead, the law requires that the excess be recaptured (i.e. the IRS wants it back). The recapture will be an add-on to the employee’s tax determined and collected at the time that the taxpayer files its 2012
Form 1040, sometime in 2013.
- Based upon this, I would imagine that the 2012 Form W-2 will have to be expanded to reflect the “excess” wages over $18,350 earned by an employee between January 1, 2012 and February 29, 2012, and the resulting “excess” 2% reduction that must be recaptured.
- The recapture of the “excess” 2% reduction in Social Security Tax cannot be reduced by tax deductions or credits. So, for example, deductions and Foreign Tax Credits can reduce a person’s income tax to zero, but cannot reduce the “excess” 2% recapture by even $1.
- There is no way to guess whether the Social Security Tax reduction will be extended beyond February 29, 2012 (or if it is extended, how they will structure it). The employer’s “matching” portion of Social Security Tax was not reduced for 2011 or for the first 2 months of 2012. It was 6.2% and will remain at 6.2%.
Here is an example to illustrate how this all works:
Suppose an employee earns $500,000 annually ($41,667 evenly each monthly).
The combined January and February Social Security Tax withheld is $3,500 ($41,667 x 4.2% = $1,750 x 2 months = $3,500).
However, the employee is only entitled to a reduction for the first $18,350 for January and February combined, not the entire combined $83,334 of wages.
Accordingly, the employee will be subject to the recapture provision.
To determine the amount recaptured:
Step One: The employee must determine the “excess” OASDI Wages. To do this, the employee must subtract $18,350 from the actual combined OASDI wages for January and February. That is, $41,667 + $41,667 = $83,334 – $18,350 = $64,984.
Step Two: The employee must determine the tax to be recaptured. To do this, the employee must multiply the “excess” OASDI wages by 2%. That “excess” is $1,300 ($64,984 x 2% = $1,300). The $1,300 will be added to the employee’s 2012 Form 1040 as an additional tax.
- Medicare Portion: Employees have 1.45% of their wages withheld for the HI portion (and the employer is required to match this). HI has no wage base limits. Accordingly, all wages are subject to the 1.45% HI tax. There was no reduction of the employee (or employer) HI portion of the tax.
Briefly, income from self-employment activities is subject to Self-Employment Tax (“SE Tax”). Self-Employment income includes the net taxable income from Schedule C activities, partnerships, and LLC’s taxed as partnerships. The SE Tax is essentially the Social Security and Medicare taxes for self-employed people. Under the SE Tax laws, the self-employed people are considered to be both the “employee” and the “employer”.
Accordingly, they must pay both the employee and employer portions of OASDI and HI. The SE Tax Rate is generally 15.3% (12.4% for OASDI and 2.9% for HI), the same as it would be had the self-employed person formed a corporation and “employed” themselves.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provided for a 2% SE Tax cut which reduced the OASDI tax from 12.4% to 10.4% for 2011. This was to keep the SE Tax in line with the 2% reduction of the employee’s portion of OASDI (6.2% + 6.2% = 12.4% and 4.2% + 4.2% = 10.4%).
- As with the Social Security Tax for employee’s discussed above, the 2 month extension of the 2% SE Tax reduction comes with additional complications:
- It only applies to the first $18,350 of Self-Employment Income.
- However, unlike wages, Self-Employment Income is more difficult to identify as what was earned in the first 2 months of 2012. Accordingly, the $18,350 cap is determined based upon a proration of Self-Employment Income. For example, if a taxpayer’s Self-Employment
Income for 2012 is $60,000 then they would be entitled to a 2% savings on the first $10,000 of Self-Employment Income ($60,000 / 12 months = $5,000 x 2 months = $10,000). However, if their Self-Employment Income for 2012 is $240,000 then they would only be entitled to a 2% savings only on the first $18,350 of Self-Employment Income (not on the first $40,000).
- Since the SE Tax is calculated and paid with the filing of the taxpayers’ Form 1040, there is no “excess” reduced withholding and nothing would have to be recaptured.
- There is no way to guess whether the 2% SE Tax reduction will be extended (or if it is extended, how they will structure it).
Copyright ©, Keith B. Baker – 2012
This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations. Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.
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