Because the House added “pay as you go” budgetary provisions, it now goes back to the Senate for approval. But one of the main provisions made it through the House unscathed.

A payroll tax holiday

The bill would give employers that hire new workers a break from paying the 6.2% Social Security tax on new hires’ wages for 2010.

But there is one catch — to get the tax break, anyone hired must have been unemployed for 60 days or more. Plus, the new hire can’t be related to the business owner and must replace someone who leaves voluntarily or is terminated for cause.

The bill would also provide a $1,000 income tax credit in 2011 for every new employee who stays on the payroll for a least a year.

In a vote that look place largely along party lines, the bill passed by a narrow tally of 217-201. The Senate is expected to take it up again this week.

We’ll keep you posted.

First, before discussing the politics of the bill, let’s describe the key proposals. Employers who hire the unemployed will receive:

• An exemption from the 6.2% Social Security payroll tax for each worker hired through December, and
• An additional $1,000 tax credit per worker if new workers stay on the job a full year.

As they say in the late-night infomercials, “But wait — there’s more.” And that’s not necessarily good.

The current bill, at $35 billion, is a modification of one the House had passed in December with  $50-billion price tag, including a six-month extension of jobless aid.

The Senate pared that to a smaller measure. The House amended the Senate’s measure to conform with so-called pay-as-you-go budget rules requiring future spending increases or tax cuts to be paid for with either cuts to other programs or equivalent tax increases.

That tweak means the bill will have to go back to the Senate for approval — or further modification — before President Obama get his chance to sign off on the measure. All of that means we’re probably looking at a minimum of a few more days before the bill becomes law.

The details of the proposal were laid out in a New York Times article by U.S. Senators Charles Schumer (D-NY) and Orrin Hatch (R-UT). Besides bipartisan support for the plan, it has something else going for it: It’s simple.

Here’s how it would work: Starting this year, any employer that hires a worker who had been unemployed for at least 60 days will not have to pay the 6.2% Social Security payroll tax on that employee for the rest of the year. The tax exemption would be prorated for the year, depending on when the person was hired. That means the sooner someone is hired, the more the employer saves in taxes.

And it means businesses would save on taxes immediately, instead of waiting for a tax credit, which is the basis of many other similar plans.

Another bennie: There would be no cap on the plan. Theoretically, a company could hire thousands of workers and get the tax break for each one of them

Hatch and Schumer also want to add a bonus clause to the proposal:  If an employer keeps one of those new hires on payroll for at least one year, the employer would receive an additional $1,000 credit on its 2011 tax return.

Here’s a new wrinkle in the health reform debate we haven’t heard before: A federal mandate requiring individuals to purchase health insurance is unconstitutional, according to one political think tank.

The Fund for Personal Liberty (TFPL) — a group which is also sponsoring a lawsuit against Medicare challenging the rule that anyone who refuses to accept Part A must sacrifice their Social Security benefits — says it will “challenge the constitutionality of any government mandate requiring individuals to purchase health insurance” should such a decree come out of health reform legislation.

“Any mandate to purchase health insurance is an invalid exercise of the powers granted to Congress by Article I, Section 8 of the Constitution of the United States,” said Kent Masterson Brown, lead counsel for the TFPL. Translation: Such a mandate would be unconstitutional — at least according to TFPL.

TFPL was created for the purpose of “litigating for individuals’ healthcare liberty and freedom,” said Brown. It promises to challenge the constitutionality of any mandate passed down from Washington to purchase health insurance.

“A one-size-fits-all solution to our health care needs denies us our freedom to individually contract for insurance on terms acceptable to each of us — or, not at all,” said Martha de Forest, executive director of TFPL.

Currently, TFPL is providing legal counsel in Hall v. Sebelius, a lawsuit in which five senior citizens are challenging the constitutionality of Department of Health and Human Services and the Social Security Administration policies forcing citizens to enroll in Medicare Part A or lose their Social Security benefits.

Do you agree with TFPL’s stance that an individual health coverage mandate would be unconstitutional? Let us know in the Comments Box below.

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.