FICA Increase, FUTA Credit Reduction, & Federal Withholding Tables

We'd like to let you know about some federal tax changes that will affect you in the next several weeks.

FICA Tax
Employee FICA is scheduled to revert to pre 2011 rates - i.e. employee FICA will be 6.2% (up from 4.2%) on a base of $113,700. Medicare remains at 1.45% with an unlimited base. The employee portion of Medicare will be increased by .9% for wages over $200,000 in 2013.

Federal Withholding Tables
The IRS is intending to issue guidance on 2013 tax tables in the next week. You should continue to use 2012 tables until new tables are released. This is consistent with the recommendation of the American Payroll Association.

FUTA Tax
In November of 2012, the U.S. Department of Labor announced the final list of states that have outstanding federal loans for 2012. The states involved have not paid their Title XII loans in full, the conditions of which require all employers in those states to lose a portion of the credit against the full FUTA tax for 2012. Eighteen states plus the U.S. Virgin Islands failed to pay their loans in full in 2012 and as a result their FUTA credit has been reduced, subjecting employers in those states to higher unemployment taxes retroactive to January 1, 2012.

• Employers in the U.S. Virgin Islands must pay an additional 1.5% in FUTA taxes.
• Indiana employers must pay an additional 0.9%(max $63 per employee) in FUTA taxes.
• Employers in the following 14 states are required to pay an additional 0.6% (max $42 per employee) in FUTA taxes: Arkansas, California, Connecticut, Florida, Georgia, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island and Wisconsin.
• Arizona, Delaware and Vermont employers must pay an additional 0.3% (max $21 per employee) in FUTA taxes.

You should pay the additional FUTA tax due with your 2012 Form 940. To quickly calculate the additional amount of FUTA tax owed, review the your Company Totals for YTD Taxable Wages for FUTA and multiply the wages by the additional percentage:

• For IN, multiply those wages by .9% (max $63.00 for employees over the $7000.00 limit).
• For AR, CA, CT, FL, GA, KY, MO, NV, NJ, NY, NC, OH, RI, and WI multiply those wages by .6% (max $42.00 for employees over the $7000.00 limit).
• For AZ, DE and VT, multiply FUTA wages by .3% (max $21.00 for employees

Splitting Inherited IRAs before Year's End

If you or others were the beneficiaries of an inherited IRA whose owner died in 2011, December 31, 2012 is an important deadline.

Tax law requires a non-spouse beneficiary of an inherited IRA who wishes to spread distributions from the IRA over his or her lifetime to begin taking distributions from an inherited IRA account by the end of the year after the year of the IRA owner's death. These distributions are based upon the life expectancy of the beneficiary and are called required minimum distributions (RMDs).

Example - Leslie is the beneficiary of her father's IRA account. Her father, Thomas, passed away in 2011. If Leslie wishes to defer taking distributions from her inherited IRA over her remaining lifetime, she must begin taking RMDs by December 31, 2012.

However, where there are multiple beneficiaries, the life expectancy used to determine the RMDs from the IRA is based upon the age of the oldest beneficiary. Thus, younger beneficiaries would be required to take their RMDs over a shorter period of time than their life expectancy would otherwise require.

Example - Assume that Leslie, from our previous example, whose life expectancy is 32.3 years using the single life table that the IRS provides, has a younger brother, Robert, who is a co-beneficiary of their father's IRA account. Based on his age, and from the single life table, Robert's life expectancy is 42.7 years. However, Robert must use the shorter distribution period of his older sister because the distributions are from their father's IRA account and the RMDs must be based on Leslie's life expectancy of 32.3 years.

This oldest beneficiary rule can be overcome by splitting the inherited IRA into multiple IRA accounts, equally divided among the beneficiaries, before December 31 of the year following the year of the IRA owner's death. Where an IRA is divided into separate accounts (i.e., subaccounts), the RMD rules separately apply to each separate account, effective for years after the year in which the separate accounts were created or the IRA owner's date of death, if later.

Example - If Leslie and Robert, from our prior example, split the IRA into separate accounts prior to December 31, 2012, each can base his or her RMDs on his or her own life expectancy (32.3 years for Leslie and 42.7 years for Robert) and once the accounts are split, make his or her own investment decisions.

Additionally, a separate accounting must allocate all post-death investment gains and losses for the period before the separate accounts were established on a pro rata basis in a reasonable and consistent manner among the separate accounts. However, once the separate accounts are actually established, each beneficiary can make his or her own investment decisions from that point on.

If you have questions related to this RMD requirement, please give this office a call.

Are You Required to File 1099s?

If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099-MISC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2012 must be provided to the independent contractor no later than January 31 of 2013.

It is not uncommon to, say, have a repairman out early in the year, pay him less than $600, and then use his services again later and have the total for the year exceed the $600 limit. As a result, you overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9s for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

IRS Form W-9 is provided by the government as a means for you to obtain the data required to file the 1099s for your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen and then printed out. A Spanish-language version is also available. The W-9 is for your use only and is not submitted to the IRS.

To avoid a penalty, copies of the 1099s must to be sent to the IRS by February 28, 2013. They must be submitted on magnetic media or on optically scannable forms.

This firm provides 1099 preparation services. If you need assistance or have questions, please give this office a call.