While it’s true that IRS will soon begin conducting its annual telephone survey of small business and self-employed taxpayers, callers will not ask for any personal or financial info. That includes Social Security or Employer Identification Numbers, or banking or credit card data. If a caller asks for any of that info, hang up and call your local IRS office and/or police immediately – it’s probably an identity thief.

Here’s how else you can tell if a request to participate is legit:

1. Taxpayers selected at random to participate in the survey will receive an advance letter from the survey contractor, Pacific Market Research (PMR).

2. The PMR letter will also include a note from Small Business/Self-Employed Commissioner Christopher Wagner, explaining the purpose and importance of the survey.

3. PMR will conduct the surveys by telephone only, with each interview typically lasting about 15 to 18 minutes.

The official survey is for taxpayers filing certain forms, including 1120, 1120S, 1065 and 1040 with Schedules C, E or F. Participation is voluntary, and all responses remain anonymous to IRS. The agency expects to continue the surveys through mid-April.

Get more info here.

The Internal Revenue Service (IRS) says it’ll finally launch its National Research Program (NRP) in February — three months after it was originally scheduled to begin.

The NPR is an intense audit process, where examiners will go line-by-line through tax returns to gather info on the impact of employment tax noncompliance on the tax gap.

How many employers will be hit? Nearly 2,000 will be randomly selected for audits each of the next three years, according to the IRS.

Should your company be one of the unlucky ones chosen for an audit, here are some of the typical targets you’ll have to provide records for:

• fringe benefits
• company officers’ compensation
• expense reimbursements, and
• worker classification.

IRS says taking a credit in the wrong quarter for a subsidy the employee received in 2009 but paid for in 2010 could create a big paperwork hassle. Say a former worker pays his 35% share of the COBRA premium for 2009 coverage on 1/20/10. You may claim the credit for the related premium subsidy on Form 941 for either:

• the quarter in 2010 in which you receive the individual’s 35% premium payment, or
• a later quarter in 2010.

The credit can’t be claimed for a quarter in 2009, regardless of the fact that the premium is for coverage during 2009.

In all cases, however, if an employer chooses to reduce its payroll tax deposits during the quarter based on the receipt of the individual’s 35% premium payment, the company must claim the credit for the related subsidy amount on Form 941 for the quarter during which its payroll tax deposits were reduced. In addition, of course, an employer may only claim credit for the subsidy amount once.

1. Double-check you’ve entered into your system items such as group-term life insurance, personal use of company cars, educational assistance, YTD corrections and manual checks.

Why: If you don’t enter these adjustments for processing during the last regular payroll run, you may not withhold any applicable taxes. (And who wants to fix those errors?)

2. Check paper W-2s when they arrive (if you’re printing in-house and haven’t already) to make sure employee instructions meet IRS’ requirements. Double-check that the Earned Income Credit Notification appears on the back of Copy B or C.

Why: You won’t be scrambling to get your vendor to send new forms (or print them yourself) at the 11th hour. IRS requires employers to give workers this notification, and printing on the reverse side of the W-2 is usually the easiest and most cost-effective measure.

3. Inform the mailroom of when you plan to mail W-2s.

Why: Staff there will need to know what to do with undeliverable or returned forms. Plus, if you’re mailing in-house, you’ll ensure there’s enough postage available on your mail date.

4. Design and print a report listing employees with no Social Security Number or address, so you can investigate and make corrections.

Why: You may face no-match letters or other compliance problems if you don’t clear up problems.

5. Ask your Accounts Payable people about payments made to employees that require W-2 reporting (e.g., nonaccountable plan reimbursements, taxable company-paid travel such as management retreats, etc.).

Why: These amounts may require income and employment tax withholding when processed, or even gross-up if your employer’s paying the employee’s taxes.

Source: American Payroll Association’s “Preparing for Year-End” seminar.

Under the American Recovery and Reinvestment Act of 2009, most employers report the 65% subsidy for COBRA continuation health insurance premiums, and most do so on Form 941. However, IRS just clarified in its Q&A (question FP-1) that certain companies not required to file a 941 still must report this data elsewhere. Specifically:

• Small employers that file Form 944, Employer’s Annual Federal Tax Return – generally those with an estimated employment tax liability of $1,000 or less in the calendar year – may claim their COBRA credit on Form 944 (line 11a), and
• Agricultural employers may claim the COBRA credit on Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees (line13a).

Employees who are involuntarily terminated between 9/1/09 and 2/28/10 may receive these subsidies for up to 15 months (previously nine months).

You’ll find more COBRA questions and answers here.

Unless you control the message the right way, telling people that IRS’ mileage rate will fall from 55 cents/mile to 50 cents/mile could mean a big public relations problem for your company. Here’s why:

1. Companies that drop their reimbursements the five cents/mile to keep in line with IRS guidelines may be seen as taking money out of workers’ pockets – at the time they need it the most. Five cents a mile may not seem like much, but for people living paycheck to paycheck, every cent often counts.

2. Employers that generously continue reimbursing people at 2009’s 55 cents/mile will have to warn employees that they’re receiving five cents/mile in taxable income – which means they could end up owing Uncle Sam more in taxes on April 15th the following year.

Whatever your company decides, it’s important you inform employees about the new rate and why your firm is taking that path. For instance, you might include something like this on a paycheck stuffer: “Effective 1/1/10, our mileage rate will drop from 2009’s 55 cents/mile to IRS’ new standard rate of 50 cents/mile, keeping in line with lower transportation costs.”

Other key rates
The IRS standard mileage rates for the use of a car (also vans, pickups or panel trucks) also includes:

• 16.5 cents per mile for medical or moving purposes, and

• 14 cents per mile driven in service of charitable organizations. (This latter rate is set by statute and therefore hasn’t changed in a long time.)

All these rates take effect 1/1/10.

As previously reported, the Internal Revenue Service was gearing up for the audits to uncover unpaid business and payroll taxes. IRS is still planning the nationwide audit, but is pushing it back to February.

Here’s what auditors will be looking at:

• Three federal taxes collected, paid and/or remitted by employers — employee income taxes deducted by the employer, FICA and FUTA.
• Employment taxes related to four areas — worker classification, fringe benefits, reimbursed expenses and compensation of owner employees.

The audits have been triggered by an IRS study that shows a “tax gap” in the billions of dollars for unpaid business and payroll taxes.

ICs generally mean a good deal for employers, including savings on:

• federal and state income tax withholdings,
• unemployment insurance
• workers compensation
• benefits,
• overtime, vacation and sick pay, and
• no union eligibility.

A budget-squeezed employer has to love the idea. Here’s the problem: Federal and state governments are getting squeezed, too, in today’s economy, and they see questionable use of ICs as one of the sources of the squeeze, since the practice generally results in lower tax revenue.

One study by the General Accountability Office, says misuse of ICs lowers income tax revenues by about $4.7 billion annually. And the  University of Missouri–Kansas City Department of Economics estimates that from 2001 through 2005, Illinois lost $124.7 million a year in income taxes as a result of IC misclassification by employers.

You probably can figure out what’s coming.

In August, Congress began reviewing several bills that tighten restrictions on the use of ICs and exact tougher penalties on employers who bend the rules.

Further, states such as Illinois, Massachusetts, New Hampshire, New Jersey and New Mexico already have enacted new laws targeting IC misclassification. The IRS recently announced plans to audit more than 6,000 randomly selected businesses in the next three years to, among other goals, curtail IC abuse and its effect on tax revenues.

That’s a double-whammy, since state and federal governments share info on violations: Get caught by one and you’ll probably pay both.

IRS regs say Payroll must remind employees by 12/1/09 to file an amended Form W-4, Employee’s Withholding Allowance Certificate, if their filing status, exemption allowances or exempt status has changed since they last filed the form. A simple e-mail or paycheck stuffer will do the job. [IRS Regulations Section 31-3402(f)(2)-(1)(c)(3).]

For the procrastinators, there’s a grace period. Exemptions for 2009 don’t expire until 2/15/10. That means, though, that anyone who claimed “exempt” on the W-4 last year but didn’t provide an updated W-4 must be withheld from at the single marital status with zero withholding allowances, starting on 2/16/10. Changing the withholding is usually enough to get an employee’s attention – and have the person provide a new form, pronto.

To cut down on the number of employee questions, it may be useful to provide a copy of Publication 919, How Do I Adjust My Tax Withholding? That’ll help them decide whether the amount they’re having withheld compares to their projected total for the year. This will be especially important for those with earnings exceeding $130,000 (single) or $180,000 (married), so they can make sure they’re not underwithheld.

Note that employees can’t claim exempt if:

• Their income exceeds $950 and includes more than $300 of unearned income (e.g., interest, dividends), and

• Another person can claim them as a dependent on his or her tax return.

While it’s not Payroll’s job to police who claims exempt and who doesn’t, you may keep some people out of trouble with IRS if they’re aware of the guidelines.

Here are three pitfalls to watch out for:

1. You get what you pay for

By and large, the cost savings from a wellness program will be driven by how much you’re willing to spend. Generally, you get what you put into them — both in time and money.

In addition, the program has to be tailored to your specific needs. What works at another company may be a giant flop with your workforce.

2. Tough to administer alone

Most employers find that it’s more effective to outsource wellness. Three reasons:

• Experience. Outsourced vendors have the expertise. They’ve been there, done that — and vendors that’ve been around for a while know how get results.
• Employees’ trust. Many employees are more involved in wellness programs when there’s no fear their employer is looking over their shoulders.
• Legal protection. Outsourcing helps insulate you from later claims that the company fired an employee because of his or her health risks.

3. Tax problems

Some of the most popular incentives offered to employees in wellness plans (think subsidized gym memberships) are taxable as compensation.

If you offer wellness participants discounts on their premiums, the Internal Revenue Service (IRS) caps the incentive at 20% of the total cost of coverage. Beyond that, Payroll has to withhold taxes or you could run afoul of the IRS.