Tax Relief Act

Signed December 2010, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 includes multiple items that can affect payroll, such as:

• A one-year, 2 percent reduction in the employee portion of Social Security tax from the current 6.2 percent to 4.2 percent – a "payroll tax holiday."
• A two-year extension of all of the current Bush tax rates. President Obama's "Making Work Pay" provision is being dropped in favor of the 2 percent payroll tax holiday.

Other items include:

• A temporary, 13-month extension of unemployment benefits.
• A 100 percent deduction for business capital improvements.
• A two-year extension of current capital gains tax rates.
• A two-year estate tax rate set at 35 percent with an exemption for estates valued at up to $5 million.
• Extension of the Research and Development tax credit.

HIRE Act/Jobs Bill

In March 2010, the president signed into law the Hiring Incentives to Restore Employment (HIRE) Act (also known as the "jobs bill"), a federal program that provides employers with incentives to hire and retain employees.

The provision that currently provides these incentives is the Business Credit for Retention. (The Social Security Tax Forgiveness provision expired December 2010.)

Business Credit for Retention

A one-time additional business tax credit has been instituted to encourage the retention of qualified new hires under the HIRE Act. The employer can claim a credit for each qualified employee for the Social Security payroll tax exemption who remains an employee for 52 consecutive weeks, provided that the employee's pay does not decrease significantly in the second half of the year.

To be eligible, the employee's pay in the second 26-week period must be at least 80 percent of the pay in the first 26-week period. The amount of the credit allowed is the lesser of $1,000 or 6.2 percent of federal income taxable wages paid by the employer to the retained qualified employee during the 52 consecutive week period.

The employee's start date must be after February 3, but before January 1, 2011, so the employee's wages will span over 2010 and 2011. This credit will be claimed on the employer's 2011 business tax return. If the full credit can not be taken in 2011, the credit can be carried to future years.

The Work Opportunity Tax Credit (WOTC) and the HIRE Act Business Retention Credit allow an employer to take both credits on a qualified individual.

Credits and Professional Employer Organizations (PEOs)

Tax credits under the Act will be retained by the client of a PEO.

Regulatory Changes Every Business Needs to Know in 2011

2011's top regulatory, compliance, and legislative changes could affect businesses nationwide:

1. Tax Changes

   Businesses are dealing with increasing complexity of the tax environment, including a partial payroll tax holiday, the ability to expense 100 percent of their capital investments, and the retroactive extension of many temporary business tax incentives that expired last year.

2. Health Care Reform

   A key aspect for 2011 is the provision providing business tax credits for small employers that purchase health insurance, which is effective for tax year 2010 and carries into next year.

3. Flexible Spending Account (FSA) Plans

   As of January 2011, over-the-counter medicines and drugs other than insulin are no longer eligible for reimbursement from a FSA unless a medical practitioner prescribes it.

4. Unemployment Insurance (UI) Rates

   UI funds in many states are at critically low levels due to the large numbers of unemployed people. Many employers will see a trend that promises to send state employer UI contribution rates higher in 2011 to replenish depleted UI trust funds.

5. Employment Law

   The United States Department of Labor is considering measures to provide greater transparency to workers on the wages they are owed, especially in key areas such as minimum wage and overtime requirements, and to increase penalties on those who fail to rightfully pay their workers.

6. State Budgetary Challenges

   Many states are facing critical budget shortfalls, and may issue tax/fee increases or filing changes to raise needed revenue.

7. Federal Trade Commission Requirements

   The Federal Trade Commission has issued regulatory guidance around advertising such as endorsements and misleading or dishonest product reviews. A "Do Not Track" tool for the Internet has also been proposed.

8. IRS Enforcement

   The IRS continues its employment-tax audit program. The focus is on employee misclassification, executive compensation, fringe benefits, and general employment tax filing requirements.

9. Privacy

   Most states have instituted laws requiring businesses to notify customers (and, in some states, governmental authorities) about the breach of sensitive data. Some states have enacted laws that require businesses to have processes that adequately safeguard sensitive client data.

10. Employment Verification/Immigration

    U.S. Immigration and Customs Enforcement will continue to crack down on companies knowingly hiring undocumented aliens.