Archives for April 2010

When you hire someone, you and the employee each pay 6.2% Social Security tax on that employee’s wages (up to wages of $106,800 for 2010).  Under the new tax law, wages paid to a qualified new employee for employment between March 19, 2010 and December 31, 2010 are exempt from the 6.2% employer portion of the Social Security tax. 

Qualified New Employees are full-time or part-time workers who start work between February 4, 2010 and December 31, 2010 and who were not employed more than 40 hours during the 60-day period ending on their start dates.  However, the new worker cannot replace another worker unless that person quits voluntarily or was discharged for cause (i.e., you can’t fire and then rehire all your employees to qualify for the exclusion).

If you have qualifying wages during March, you didn’t claim the exclusion on your 1st quarter Form 941s (because the law passed on March 18, and the tax forms weren’t revised to include the exclusion).  You can claim the exclusion for Social Security taxes on qualifying new employees on your 2nd quarter Form 941.

The employee certifies on Form W-11 that he/she was not employed more than 40 hours during the 60-day period ending on his/her start date. 

Example:  On March 30, 2010 ABC Corp hires Joe, who has been unemployed for 70 days.  ABC Corp pays Joe $15,000 wages between March 30, 2010 and December 31, 2010.  Joe pays $930 Social Security tax on his wages.  Normally, ABC Corp would match Joe’s Social Security tax, but under the new exclusion, ABC Corp does not have to match Joe’s $930 Social Security tax payment.

Credit for Retaining Qualified New Employees

Above and beyond the above credit, employers can also claim a temporary tax credit of up to $1,000 for wages paid to each qualified new employee (same definition as above).  The worker must be kept on payroll for at least 52 consecutive weeks, and wages during the second 26 weeks must equal at least 80% of wages paid during the first 26 weeks.  In other words, you can’t hire employees and then dramatically lower their hours/wages after a few months. 

The credit equals the lesser of $1,000 or 6.2% of wages during the 52 weeks.  The credit will be claimed on a business’ income tax return, and not its payroll tax return.  Since the credit is not available until the tax year that a qualified employee has been on payroll for 52 weeks, the earliest you can claim the credit is on your 2011 income tax return.

Example:  XYZ Corp hires Jane (a qualified new employee) on April 1, 2010 and Jane  works until April 1, 2011.  Jane has wages of $30,000 between April 1, 2010 and December 31, 2010.  Jane has additional wages of $10,000 between January 1, 2011 and April 1, 2011. 

XYZ Corp can claim a Social Security tax exemption on Jane’s $30,000 wages between April 1, 2010 and December 31, 2010.  The exclusion amount is $1,860 ($30,000 * 6.2%). 

Additionally, since Jane has been employed for more than 52 consecutive weeks, XYZ Corp is also entitled to a credit of $1,000 (equal to 6.2% of the wages during the 52 weeks ($30,000 plus $10,000, but limited to a maximum credit of $1,000 per qualified employee).  Jane’s 52 week employment period ends in 2011, and XYZ Corp will claim the $1,000 tax credit on its 2011 tax return filed in early 2012.

Fine Print: This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

A value added tax (VAT) is a consumption tax, meaning that the tax is levied on the purchase of goods AND services.  The difference between a VAT and a sales tax is that the sales tax is imposed on the final sale price to the consumer.  The VAT is imposed on businesses throughout the production process and is based on the value added during each step in the production process ending with the final sale to the consumer.

Sales Tax Example:  A farmer produces wheat and sells wheat to a baker for $10.  The baker uses the wheat to make bread and sells bread to a deli for $25.  The deli uses the bread to make sandwiches and sells sandwiches to the public for $50.  Under a sales tax, purchases for resale are exempt from sales tax.  Therefore, the sales from the farmer to the baker and from the baker to the deli are exempt from sales tax.  The sales tax is imposed on the final sales price ($50) from the deli to the consumer.

VAT Example:  Under a VAT, the farmer would pay VAT on the $10 of added value.  The baker would pay VAT on its value added of $15 ($25 sales price minus $10 value added by farmer).  The deli would pay VAT on its value added of $25 ($50 sales price minus value added by farmer and baker of $25). 

Farmer’s VAT base is $10

Baker’s VAT base is $15

Deli’s VAT base is $25

Total VAT base is $50 (which is equal to the sales tax base of $50 in the first example).

There are 3 ways to calculate the value added through each step in the production process:

• Subtraction Method:  Value added equals the difference between the firm’s sales and the firm’s purchases from other businesses.  (This is the method used in the above example)
• Addition Method:  Value added equals the sum of a firm’s payments to its owners, to its lenders, and to its employees (the Michigan SBT was an addition method VAT)
• Credit Invoice Method:  Each firm is subject to the VAT based on its total gross receipts, but is allowed a VAT credit for the amount of VAT paid by firms it purchases from.

Credit Invoice Method Example:  The farmer in the above example would pay VAT on its $10 of gross receipts.  The farmer gets no VAT credit because it had no purchases from other firms.  The baker pays VAT on its $25 of gross receipts.  The baker gets a VAT credit for $10 of value added by the farmer.  The deli pays VAT on its $50 of gross receipts.  The deli gets a VAT credit for the $25 value added by the baker.

Firm	Gross VAT Base	VAT Base Credit	Net VAT Base
Farmer	$10	$0	$10
Baker	$25	$10	$15
Deli	$50	$25	$25

Notice that the total net VAT base by the firms is, once again, $50.  The credit invoice VAT is the most popular VAT in Europe.  It is popular because it forces businesses to keep records documenting the taxes they have paid on their purchases—no VAT credit is allowed unless properly substantiated.  It also allows governments to cross-check records of sellers and purchases to verify the correct VAT amounts are paid.

For those of you who miss the Michigan SBT…

The Michigan SBT was an addition method VAT.  Let’s work through an example between a subtraction method VAT and an addition method VAT (Michigan SBT).

Deli Corp Income Statement

Revenues:                                $250,000

Payments to other Businesses:   $190,000

Wages:                                     $  75,000

Interest to Lenders                     $ 15,000

Net Loss                                   ($30,000)

Under a subtraction method VAT, the VAT base is equal to:

Gross receipts                             $250,000

Less purchases from other firms ($190,000)

for a VAT base of $60,000.  If there is a 10% VAT tax, the business’ VAT tax liability is $6,000.

Under an addition method VAT, the VAT base equals the payments to owners, lenders, and employees. 

The VAT base is the sum of:

Payments to owners              ($30,000)

Interest to Lenders                 $15,000

Wages                                   $75,000

for a VAT base of $60,000 (same as under a subtraction method VAT).

For those of you who filed SBT returns, the addition method should look familiar—notice starting off with business income/loss and adding wages and interest.  Of course, there were several other additions and subtractions, which is why the complication of the SBT lead to its demise.  It was replace by the much simpler MBT [sarcasm]—composed of a modified gross receipts tax, a business income tax, a surcharge, a small business credit, and dozens of other targeted tax breaks. 

Fine Print: This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.