If you are a small employer with fewer than 25 full-time equivalent employees who earn an average wage of less than $50,000 a year and you pay at least half of employees’ health insurance premiums…then there is a tax credit that may put money in your pocket.

The Small Business Health-Care Tax Credit is specifically targeted to help small businesses and tax-exempt organizations. The credit can enable small businesses and small tax-exempt organizations to offer health insurance coverage for the first time. It also helps those that already offer health insurance maintain the coverage they currently have.

Here is what small employers need to know so they don’t miss out on the credit for tax year 2011.

• Qualifying businesses include this credit as part of the general business credit. Any unused credit on Form 3800, General Business Credit, would be included with the tax return. Any unused credit carries back one year and then forward up to 20 years.
• The minimum required number of twenty-five full-time equivalent employees is generally determined by adding up all hours worked by both full-time and part-time employees (not exceeding 2,080 hours per employee) and then dividing the total by 2,080 (rounding down to the next whole number).
• Average annual wages are determined by dividing the employer’s total FICA wages (without regard to the wage base limitation) for the tax year by the number of the employer’s equivalent full-time employees for the year (rounded down to the nearest $1,000).
• Tax-exempt organizations can also claim this credit.
• Businesses that couldn’t use the credit in 2011 may be eligible to claim it in future years. Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.

For tax years 2010 to 2013, the maximum credit for eligible small business employers is 35 percent of premiums paid; for eligible tax-exempt employers, the maximum credit is 25 percent of premiums paid. Beginning in 2014, the maximum credit will go up to 50 percent of qualifying premiums paid by eligible small business employers and 35 percent of qualifying premiums paid by eligible tax-exempt organizations.

For additional information about eligibility requirements and how this credit may apply to your small business or tax-exempt organization, please give this office a call.

The IRS has new penalty relief for the unemployed and certain self-employed individuals on failure-to-pay penalties, which are one of the biggest factors a financially distressed taxpayer faces on a tax bill.

To assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012.

The penalty relief will be available to two categories of taxpayers:

• Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
• Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Taxpayers meeting the eligibility criteria will need to complete a new Form 1127A to seek the 2011 penalty relief. The new form is available on IRS.gov.

The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until Oct. 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

Even with the new penalty relief taxpayers are strongly encouraged to file their returns on time by April 17 or file for an extension. Failure-to-file penalties applied to unpaid taxes remain in effect and are generally 5 percent per month, also with a 25 percent cap.

This office can help you minimize filing penalties. Call before April 17 to discuss your options and to obtain assistance in preparing your 2011 return and extensions if required.

Don’t get caught with your hand in the government’s pocket, especially if you are not a U.S. Citizen. Case in point: Mr. and Mrs. Kawashima have been U.S. resident aliens since 1984 and own restaurants in Southern California.

They were convicted of tax-related schemes and stipulated the tax loss to the government was $245,126. An immigration judge subsequently ruled that these crimes qualified as “aggravated felonies” and were grounds for removal (deportation). Under immigration law, an aggravated felony includes any offense that “(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or (ii) tax evasion in which the revenue loss to the government exceeds $10,000.”

The Kawashimas appealed the judge’s ruling to the Ninth Circuit Court of Appeals, arguing that filing a false return did not involve “fraud or deceit” since to secure a conviction, the government is not required to prove any intent to deceive. Their position was that lying or committing perjury is not equivalent to deceit. The Ninth Circuit upheld the lower court’s ruling, and the case ultimately ended up in the U.S. Supreme Court, which upheld both lower courts’ rulings in a 6-3 decision issued in February 2012.

This has significant implications for all aliens, both legal resident and undocumented. Tax evasion of $10,000 or more becomes an aggregated felony with potential for deportation. The dissenting justices, led by Justice Ginsberg, noted that the decision “may discourage aliens from pleading guilty to tax offenses, thereby complicating and delaying enforcement of the internal revenue laws.”

If you have any questions please give this office a call.

If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes:

• Tips are taxable – Tips are subject to federal income, social security, and Medicare taxes. The value of non-cash tips, such as tickets, passes, or other items of value, is also income and subject to taxation.
• Include tips on your tax return – You must include in gross income all cash tips received directly from customers, tips added to credit cards, and your share of any tips received under a tip-splitting arrangement with fellow employees.
• Tip-splitting and cover charges – Tips given to others under the tip-splitting arrangement are not subject to the reporting requirement by the employee who initially receives them. That employee should report to the employer only the net tips received.
  Service (cover) charges, which are arbitrarily added by the business establishment, are excluded from the tip reporting requirements. The employer should add each employee’s share of service charges to each employee’s wages.
• Report tips to your employer – If you receive $20 or more in tips in any month, you should report all of your tips to your employer. Your employer is required to withhold federal income, social security, and Medicare taxes. If the tips received are less than $20 in any month, they need not be reported to the employer. However, these tips are still taxable and must be reported on your tax return as they are subject to income and social security taxes.
• Employer allocation of tips – Tip allocation is applicable to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport.” Underreporting occurs if an employee reports tips that are less than 8% of the employee’s applicable share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8%. The allocation amount is noted on the employee’s W-2, but it does not have to be reported as additional income if the employee has adequate records to show that the amount is incorrect. Note that these allocated tips are not included in the total wages shown on the employee’s W-2. The IRS frequently issues inquiries where the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.
• Keep a running daily log of tip income Tips are a frequently audited item and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee’s Daily Record of Tips and a Report to Employer for recording your tip income.

If you are receiving tips and have any questions, please give this office a call.