With the SSA announcement that there will be no change over the prior year – almost unheard of in recent memory – there’s sure to be plenty of confusion. The higher-ups will want to confirm that they won’t pay more in Social Security taxes next year, while retirees may ask why they’re not getting a cost-of-living increase in their monthly checks. The latter may also have questions about the Obama Administration’s proposal to send those receiving Social Security benefits a one-time $250 check to help stimulate the economy.

Here’s what you might want to tell them:

• Higher-ups – Indeed, those earning more than $106,800 won’t pay more in FICA taxes in 2010. This tax is the combined Social Security tax rate of 6.2% plus the Medicare tax rate of 1.45%. So, the maximum Social Security tax employees making $106,800 or more will pay is $6,621.60 in 2010. Employers must pay an equal share on each worker. You may want to explain to these employees, though, that as always, there’s no limit to the wages subject to the Medicare tax – so all covered wages are still subject to this 1.45% withholding.
• Retirees – This is the first time there will be no cost-of-living increase since 1975, when the agency began adjusting the amounts based on inflation. The Department of Labor announced this week that consumer prices fell 2.1% since the third quarter of 2008. SSA actuaries base the cost-of-living adjustment on the change in consumer prices from the third quarter of one year to the same period the following year. Since prices are falling, retirees actually have more spending power because the agency never decreases benefits. As for the $250 “supplement,” you may want to suggest that retirees not go spending any potential windfall just yet. Right now, it’s just one idea the Administration has suggested to further stimulate the economy.

A few other updates

The wage bases for the following also remain unchanged in 2010:

• Self-employed individuals – $106,800. There’s no limit for the Medicare tax for these workers, either. The self-employment tax rate remains 15.3%, which is the combined Social Security tax rate of 12.4% plus the Medicare rate of 2.9%. The maximum Social Security tax for those self-employed will be $13,243.20.
• Domestic employees – $1,700.
• Election workers – $1,500.

DHS formally withdrew its Social Security no-match regulation — first presented in 2007 — as of October 7.

The no-match regulation was the source of  “safe harbor”  rules for employers who received letters from the Social Security Administration stating that an employee’s Social Security Number didn’t match the agency’s records. The safe harbor rule required employers to follow procedures and three-month deadlines to resolve the discrepancy, or face legal penalties.

Shortly after being issued in 2007, the regulation was challenged in a federal district court in San Francisco and was held up by an injunction. The reg never was implemented, and DHS and the White House finally decided to drop it altogether.

A DHS statement announcing the rescission of the rule said the agency will “focus its enforcement efforts relating to the employment of aliens not authorized to work in the United States on increased compliance through improved verification, including participation in E-Verify, ICE Mutual Agreement Between Government and Employers (IMAGE), and other programs.”

Expect the Obama administration to make an especially strong push for mandatory E-Verify for all employers, not just for the federal contractors it covers now. Also, the Social Security Administration will maintain some of its processes for checking SSNs.

It’s likely some version of the newest healthcare reform proposal to come out of Washington will not only become law, but also change the way you do your job — as early as Jan. 1 — particularly in five areas.

The Senate Finance Committee just released its 10-year, $856-billion proposal, which would extend health coverage to 29 million uninsured Americans.

The package, authored by Chair Max Baucus (D-MT) and referred to as a “Chairman’s Mark” because there’s no legislative language drafted yet, is considered a compilation of the most popular (i.e., effective, but conservative and least expensive) ideas presented thus far. It’s likely that some version of this plan will pass after the typical party revisions and compromises.

Here are some key stipulations and  proposed effective dates where appropriate:

1. Additional information reporting duties. Under current law, Payroll isn’t required to report the value of employer-provided health insurance benefits to IRS on the Form W-2. However, some employers voluntarily report in Box 14 the salary reduction amount under a cafeteria plan resulting in tax-free employee benefits.

The Mark proposes requiring companies to report on the W-2 the value of the employer-provided benefit for each person’s health insurance

If someone received coverage under multiple plans (e.g., medical, dental, vision), Payroll would report the aggregate value. Generally, use the same value for all similarly situated employees with the same category of coverage (e.g., single or family health insurance).

Effective: first taxable year after 12/31/09.

2. More payroll deductions. The proposal creates a refundable tax credit for eligible individuals and families who purchase health insurance through proposed new state cooperatives (i.e., “exchanges”). Those opting for this coverage would pay premiums through payroll deductions.

There’d be a fall enrollment period, during which applicants would have to provide info from their previous year’s tax return to qualify for coverage during the next calendar year.

Employers who don’t offer such coverage will have to repay the credit amounts. The assessment may be capped at $400 per worker (all workers, not just those who qualify for tax credits). Note that employees who are offered affordable coverage through their employer can’t get the tax credit – so in those cases, the employer assessment shouldn’t apply.

Illegal immigrants wouldn’t be eligible for the credit. To prevent them from participating, personal data (i.e., name, Social Security Number and date of birth) would have to be verified against SSA’s database. Those in the U.S. legally but whose status is expected to expire in less than a year aren’t allowed to take the credit.

Effective: not specified.

3. Stricter reimbursement rules for qualified medical expenses. The Mark proposes no longer allowing the cost of over-the-counter (OTC) medicines (except those prescribed by a doctor) to be reimbursed through a health flexible spending account or health reimbursement account. In addition, the cost of these medicines couldn’t be reimbursed on a tax-free basis through a health spending account or an Archer medical spending account.

Effective: taxable years beginning after 12/31/09.

4. Creation of a Simple Cafeteria Plan. This change eases the participation restrictions, allowing more small businesses to offer tax-free benefits to employees. The proposal exempts employers who make contributions for employees under a simple cafeteria plan from pension plan nondiscrimination requirements applicable to highly compensated and key employees.

The safe harbor also applies to the nondiscrimination requirements for specific qualified benefits offered under the cafeteria plan, including group term life insurance, coverage under a self-insured group health plan and benefits under a dependent care assistance program.

This provision would apply to employers with an average of 100 or fewer employees during either of the two preceding years.

Effective: taxable years beginning after 12/31/10.

5. Loosening of long-term care insurance restrictions. Under current law, employees participating in a cafeteria plan can’t pay premiums for long-term care insurance not otherwise paid for by their employers on a pre-tax basis through salary reduction. That’s because any product advertised, marketed and offered as long-term care is a nonqualified benefit specifically not permitted under a cafeteria plan.

The Chairman’s Mark, however, would allow reimbursement for employee-paid premiums for a qualified long-term care insurance contract through a flexible spending arrangement (whether or not under a cafeteria plan) and therefore be excluded from gross income.

Effective: taxable years beginning after 12/31/10.

The reason: Fraudulent income tax returns and and annual wage reports are costing the federal and state treasuries millions annually.

In theory, more frequent reporting would allow the IRS and states to match wage and withholding data to workers’ tax returns – a difficult, if not impossible, task right now.

Think about it: Companies submit W-2s to SSA and the states mid-tax season. So, by the time their file arrives at the agency, identity thieves have had weeks to create false W-2s and tax refund requests – plenty of time to file, collect and spend a fraudulent tax refund.

Two problems with the current structure:

• Even states with updated processing technology don’t have time to cross-check the data before the tax season begins, and
• Many states require electronic filing, but not all do. Specifically, about 63% of states with income taxes require electronic W-2 filing.

States have been including ever-smaller employers under such mandates, but these numbers still leave a lot of room for paper filing.

For this proposal to work, far more employers would have to e-file their data, or the SSA would need to share electronic W-2 data sooner.

Should the idea move forward, “The Administration will work with the states so that the overall reporting burden … is not increased,” the Administration’s May 2009 Budget Overview suggests.

The U.S. Bureau of Labor Statistics just released these figures:

• Average per-hour amount employers paid in March to cover pay and benefits: $29.39. Of that, $8.90, or 30.3 %, went to pay for benefits.
• The average amount spent for legally required benefits — Social Security, Medicare, unemployment insurance, and workers’ compensation — was $2.28 an hour, or 7.8% of total compensation.
• Employer-paid life, health and disability insurance averaged $2.52 an hour, or 8.6% of total costs.
• Cost of other discretionary benefits such as  paid holidays and leave: $2.08, or 7.1%.
• Retirement and savings benefits: $1.31, or 4.5%.

Go here for a full breakdown of costs by categories such as industry and occupation.

You’ll be able to mask all but the last four digits of Taxpayer Identification Numbers (TIN) on 1099s that go from payer to payee. In addition to a Social Security Number, the number on Forms 1099 could be an employer ID or individual taxpayer ID number (ITIN).

Employers that choose to mask the numbers on workers’ 1099s will still have to include the full nine-digit number on the copy filed with IRS.

When the change comes, TIN-masking would be optional for 2009 and beyond, Deborah Wolf, director, IRS Office of Privacy, Information Protection and Data Security told attendees of the American Payroll Association’s (APA) Capital Summit.

The idea’s not being widely embraced, however. Only 37% of respondents in a recent APA survey said they’d adopt the practice for 2009 forms. Another 37% said they would begin masking in Tax Year 2010.

Those on the other side of the coin – the 26% who don’t plan to adopt TIN-masking – fear there’ll be no other way for the payee to verify that the payer has the correct number.

What about W-2s?
Don’t count on seeing a similar option for Forms W-2 any time soon. TIN-masking on them would have to be authorized by Congress because the Internal Revenue Code is clear that all nine digits are required on the W-2, says Wolf.

Sixty-seven percent of APA survey respondents said they’d mask SSNs on the W-2s, with many others again citing fear of using incorrect numbers as the biggest drawback.

The Social Security Administration just announced it’ll discontinue its operator-assisted hotline in favor of an automated system that works like voice-mail jail, where you have to either continually punch numbers or speak clearly into the phone.

The agency’s calling the overhauled system the Telephone Number Employer Verification (TNEV) system, and it’s available beginning 9/21/09. TNEV allows you to verify up to 10 employee names and SSNs (currently five) at one time through a voice response system, without speaking to an agent.

But you can get the same results – faster, and for more SSNs than if you call the agency – by going online. The Social Security Number Verification Service (SSNVS), a pre-existing system, allows you to:

• verify up to 10 names and SSNs online and receive immediate results. There’s no limit to the number of times the SSN verification Web page may be used within a session
• upload electronic files of up to 250,000 names and SSNs and usually receive results the next government business day.

You must register with SSA’s Business Services Online to use both SSNVS and TNEV. (So, since you’re online anyway, why bother to use the phone system?)

How do I use these systems?
Whatever your preference, using either SSNVS or TNEV couldn’t be easier. Here’s what to do:
1. SSNVS – After registering for BSO, go to www.socialsecurity.gov/employer to enter the necessary info.

2. TNEV – Call either of these two numbers:
• 800-772-1213 – SSA’s National 800 number. When prompted say, “Employer SSN Verification.”
• 800-772-6270 – SSA’s Employer Reporting Service Center. When prompted say or press “1″ to verify an SSN.

Who can use these systems?
Employers and third parties acting on behalf of an employer (e.g., payroll service providers, CPAs, etc.) can access both TNEV and SSNVS. However, the systems may only be used for wage reporting purposes, and after the employer/employee relationship is established.

Note: To verify SSNs for non-wage reporting purposes, you can use SSA’s Consent Based SSN Verification Service (CBSV) at www.socialsecurity.gov/cbsv.

To verify your personal SSN, you need proof of identity when visiting your local Social Security field office

The Social Security taxable wage base is expected to be $106,800 in 2010 and 2011 – the same as 2009, which means anyone bringing home a bigger paycheck won’t have to pay more into the Social Security system.

That’s according to SSA’s Office of the Chief Actuary, which makes these estimates every spring. SSA won’t officially determine the parameters until October, and only then by following formulas set by law. Having a good estimate, though, will help your CFO with budgeting in the coming months.

Here are some post-2010 predictions using “intermediate” forecasting assumptions:

2011 $106,800
2012 $114,900
2013 $119,400
2014 $124,200
2015 $129,300
2016 $134,700
2017 $140,400
2018 $145,500

According to the report, Social Security trust funds will be adequately funded over the next six years. In 2016, however, tax revenues are expected to fall below program costs. That’s one year earlier than last year’s prediction.

SSA expects to pay full benefits until the trust funds become exhausted in 2037 — four years earlier than in last year’s report. Once that happens, tax revenues (at current rates) will cover just 76% of scheduled benefits.

To get a copy of the report, go to www.ssa.gov/OACT/TR/2009/index.html.

While some workers would receive fatter paychecks because, under the proposal, they wouldn’t pay Social Security or Medicare taxes for six months (and their employers wouldn’t have to make matching deposits), Payroll could get stuck with a messy, tight timetable.

The bill, sponsored by Reps. Aaron Shock (R-IL) and Walt Minnick (D-ID), would apply to employers, and employees of companies with 50 or fewer workers. Similar holidays were proposed during recessions in 2001 and 2003, but ended up on the cutting room floor.

While the idea sounds good on paper (and every proposal is just a bit different), just about all tax holidays have several potential pitfalls:

1. Employers probably wouldn’t get enough lead time. The timeframe to implement a payroll tax holiday could rival the one given for the new COBRA premium subsidy program – a few months at best, because lawmakers want to get money back into Americans’ pockets fast so they can spend, spend, spend. However, employers use a wide variety of payroll systems and while some with simpler payrolls could implement changes in a few weeks, it would take others much longer – even months.

Plus, employers that don’t process in-house would be at the mercy of others. For instance, the companies relying on off-the-shelf software would have to wait for the manufacturers to provide software updates for all different versions of their products. Those using payroll service providers would have to wait for their vendors to design, code, implement and test complex system changes to accommodate the proposal. Tax-rate changes, for example, normally require a minimum of 30 to 60 days to implement, so it’s no wonder that more complicated changes can take longer.

Bottom line: Taking all these details into consideration, employers would need a minimum of three to six months to prepare for a tax holiday. Chances are, though, that lawmakers would push to make this particular stimulus happen faster.

2. Recordkeeping and reporting requirements would change. How would Payroll report Social Security and/or Medicare wages that aren’t subject to taxes? Would IRS change both the Form W-2 and 941? The agency might have to add separate lines for things like Social Security wages paid in tax holiday period, or exempt from tax; Social Security wages subject to tax; Social Security tips paid in tax holiday period, or exempt from tax; Social Security tips subject to tax; and Medicare wages/tips paid in tax holiday period, or exempt from tax.

IRS regs require employers to provide terminating employees a Form W-2 within 30 days of their request, so most tax form changes would have to be made immediately.

3. Potential for abuse. Unless lawmakers define exactly which types of wages qualify for a tax holiday (and that seems unlikely), there’s an opportunity for employees to artificially shift income into any time-based holiday period. For instance, say a tax holiday’s in effect for the third and fourth quarters of 2009. Someone entitled to a large bonus based on business results and normally paid after the first of the year might arrange to have the check cut at the very end of the fourth quarter to take advantage of the “tax free” status. Payroll might also field requests for advance vacation pay or commissions.

Right now, the payroll tax holiday is only proposed. But, with the economy still far from recovering, it could easily gain more support. We’ll keep you posted.

Here’s why: When Payroll reduces a federal tax deposit because of a COBRA subsidy payment, there’s no place to enter the amount of the credit. So, for example, let’s say your company’s making a $5,000 FIT and $5,000 Social Security tax deposit, but you have a $1,000 COBRA subsidy payment credit. You would normally enter each $5,000 deposit in its own subcategory and enter $9,000 as a total ($5,000 FIT + $5,000 SS = $10,000 – $1,000 COBRA credit = $9,000). But the system won’t accept the deposits because the amounts shown in the subcategories are out of balance with the total.

The easy fix? Omit the subcategory data (i.e., the breakdown of each deposit amount). EFTPS doesn’t require this info, and without the data the transaction will process normally. That’s according to an IRS representative speaking during a recent payroll industry partner conference call.