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PAYROLL PROCESSING AND PAYROLL TAX GUIDE 2012 2013

Presented By - Jim Gante, Small Business Manager, Stambaugh Ness E-mail: jgante@stambaughness.com Carson Buck, Tax Advisor, Stambaugh Ness E-mail: cbuck@stambaughness.com Phone: 717.757.6999 Fax: 717.840.5985
Contact Information: www.stambaughness.com Phone 1.800.745.8233

Table of Contents
PART A - CHARTS AND PAYROLL SAVING TIPS
A A A A A A A A A A A A A A A A A A A A A A A 1 2 4 6 11 12 13 15 16 15 22 31 39 39 39 41 41 42 43 43 44 45 47 Payroll and Other Tax Data - 2012 Payroll and Other Tax Data - 2013 Taxability of Compensation and Benefits Withholding Requirements for Specific Payments Household Employment Taxes Agricultural and Household Employees List of Helpful Government Publications Essential Payroll Web Sites Essential Phone Numbers Indexed Employee Benefit Limits Independent Contractors Exempt versus Non-Exempt Employees Payroll Saving Tips Direct Deposit of Payroll Retirement & Social Security Watch Wage-Hour Exemptions Garnishments Employ Children/Spouses/Parents Reduce the Number of Payrolls Unemployment Compensation Common Paymaster Federal Business Credits Pennsylvania Business Credits

PART B - PROCESSING AND REPORTING


B B B B B B B B B B B B B B B 1 2 3 3 4 5 8 10 12 13 15 16 18 21 22 Federal Tax Deposit Requirements Form 941 Deposit Rules Same Day Payment Option Electronic Federal Tax Payment Systems (EFTPS) Form 940 Deposit Rules Pennsylvania Withholding Filing Requirements PA Electronic Funds Transfer PA e-Tides Maryland Withholding Filing Requirements Reciprocal Agreements Mandatory Postings for Employers Multi-State Reporting Bonuses and Supplemental Wages How and When to Use Cumulative Withholding Other Benefits Exempt From Taxes

Table of Contents
PART B - PROCESSING AND REPORTING - CONTINUED
B B B B B B B B B B B B B 22 24 28 31 33 39 39 39 40 43 46 47 49 Group Term Life Insurance Cafeteria Plans Heath Care: Patient Protection and Affordable Care Act Health Care: Reporting Requirements Personal Use of Company Provided Vehicle Medical and Move Related Mileage Rate Charitable Related Mileage Rate Sick Pay (Disability Income) Form 1099 - Miscellaneous Income Business Expense Reimbursements Moving Expense Reimbursements Military Spouse Residency Relief Act Stock Options

PART C - PAYROLL START UP GUIDE NEW EMPLOYERS - NEW EMPLOYEES


C C C C C C C C C C C C C C C C C C 1 2 2 3 3 4 4 6 8 9 10 12 14 15 15 18 19 20 Employer Responsibilities New Employer Packets SS-4 Instructions (Application for EIN) PA-100 Instructions MD Registration Pennsylvania Income Tax PA Reciprocal Agreements Maryland and County Income Tax MD Reciprocal Agreements Federal Unemployment Tax Pennsylvania Unemployment Tax Maryland Unemployment Tax New Hire Reporting Requirements Pennsylvania Local Earned Income Tax PA Local Tax Enabling Act 32 Local Services Tax Designing the Payroll System Maintaining Payroll Records

Table of Contents
PART D - PAYROLL REPORTING
D - 1 D - 3 D - 4 D - 5 D - 6 D - 7 D - 8 D - 9 D - 10 D - 13 D - 14 D - 15 D - 16 D - 17 Quick Links to Payroll Tax Forms PA Unemployment Compensation MD Unemployment Compensation PA Employer Withholding Tax PA Local Earned Income Tax PA Local Services Tax MD Employer Withholding Tax MD Local Withholding Reference Guide for Form W-2 MD Annual W-2 Reconciliation PA New Hire Reporting Form MD New Hire Registry Social Security Number Verification Service E-Verify

CHARTS & PAYROLL SAVINGS CHARTS

PART A - CHARTS AND PAYROLL SAVING TIPS


A A A A 1 2 4 6 Payroll and Other Tax Data - 2012 Payroll and Other Tax Data - 2013 Taxability of Compensation and Benefits Withholding Requirements for Specific Payments Household Employment Taxes Agricultural and Household Employees List of Helpful Government Publications Essential Payroll Web Sites Essential Phone Numbers Indexed Employee Benefit Limits Independent Contractors Exempt versus Non-Exempt Employees Payroll Saving Tips Direct Deposit of Payroll Retirement & Social Security Watch Wage-Hour Exemptions Garnishments Employ Children/Spouses/Parents Reduce the Number of Payrolls Unemployment Compensation Common Paymaster Federal Business Credits Pennsylvania Business Credits

A - 11 A - 12 A - 13 A - 15 A - 16 A - 20 A - 22 A - 31 A - 39 A - 39 A - 39 A - 41 A - 41 A - 42 A - 43 A - 43 A - 44 A - 45 A - 47

PAYROLL AND OTHER TAX DATA - 2012


FEDERAL FICA (Social Security)
Maximum Taxable Earnings: Employee Deduction: Employer Deduction Maximum Deduction EE/ER: Self-Employment Tax: $110,100

FICA (Medicare)
Maximum Taxable Earnings: EE / ER Deduction: Maximum Deduction: Self-Employment Tax:

No Limit 1.45% No Limit 2.9%

4.2 % 6.2 % $4,624.20 / $6,826.20 10.4%

Maximum Taxable Earnings: Percent of Taxable Wages:

FUTA (Employer-Paid)

$7,000 .6% *1

Supplemental Wage/Bonus Rate Flat rate withholding method: Pay is over $1 Million

25% 35%

PENNSYLVANIA
Minimum Wage Tipped Employees Maximum Tip Credit

MARYLAND
$7.25 $2.83 $4.42 3.07% 3.07% 3.07% $8,000 .08% on all wages/no limit 2.437 -10.5836% 3.7030% $7.25 $3.63 $3.62 Varies based on W-4 Withholding MD resident = 5.75% plus county w/h rate MD resident = 5.75% plus county w/h rate $8,500 None 2.2 - 13.5% 2.6%

Minimum Wage

State Income Tax


Wage Withholding Supplemental Wage Bonus Rate

Unemployment Insurance
Maximum Taxable Earnings Employee Deduction

Employer Tax Rates Standard New Employer Rate


1

____________________________________________________________________

Plus the applicable surcharge see page C8 or Form 940 (Schedule A) for more information.

A-1

PAYROLL AND OTHER TAX DATA - 2013


FEDERAL FICA (Social Security)
Maximum Taxable Earnings: EE & ER Deduction: Maximum Deduction EE/ER: Self-Employment Tax: $113,700 6.2 % $7,049.40 12.4%

FICA (Medicare)
Maximum Taxable Earnings: EE / ER Deduction: Maximum Deduction: Self-Employment Tax: No Limit 1.45% 1 No Limit 2.9% 1

FUTA (Employer-Paid)
Maximum Taxable Earnings: Percent of Taxable Wages: $7,000 .6%

Supplemental Wage/Bonus Rate

Flat rate withholding method: Pay is over $1 Million

25% 35%

2012 Standard Mileage Rate:


55.5 per mile

2013
56.5 per mile

The 1.45% employee rate applies to the first $200,000 of wages/self-employment earnings. Wages/selfemployment earnings beyond $200,000 are withheld at 2.35%.

A-2

PAYROLL AND OTHER TAX DATA 2013 continued


PENNSYLVANIA Minimum Wage
Minimum Wage Tipped Employees Maximum Tip Credit $7.25 $2.83 $4.42 3.07% 3.07% 3.07%

MARYLAND
$7.25 $3.63 $3.62 Varies based on MW-507 MD resident = 5.75% plus county w/h rate MD resident = 5.75% plus county w/h rate

State Income Tax


Wage Withholding Supplemental Wage Bonus Rate

Unemployment Insurance
Maximum Taxable Earnings Employee Deduction

Employer Tax Rates Standard New Employer Rate New Construction Employer Rate

$8,500 .07% on all wages/no limit 2.801 -10.8937% 3.6785% 10.1947%

$8,500 None 1.1 - 10.5% 2.6% 10.5%

A-3

TAXABILITY OF COMPENSATION AND BENEFITS


T - Taxable E - Exempt Federal & MD Income Tax PA Income Tax Medicare Local Income Tax FUTA

Social Security

State Unemployment

Company Automobile: Business Use Personal Use E T E T E T E E E E E T E T

Awards and Prizes: Employee Achievement Safety/Service (Qualified Plan) T E T E T E T E T E T E T E

Business Expense Allowance: (1) Accountable Plan Non-Accountable Plan E T E T E T E T E T E T E T

Cafeteria Plan: Pre-Tax Benefits E E E E(3) E(3) E T

Group Term Life Insurance: Up to $50,000 Excess of $50,000 E T E T E T E E E E E E E E

Retirement Plans: Elective Deferrals 401(k) - 403(b) E T T T T T T

A-4

Simplified Employee Plans (SEP) Employer Paid Salary Reduction 408(k)(6) E E E T E T E T E T E T E T

Simple Plans: Employer 2% Match Salary Reduction

E E

E T

E T

E T

E T

E T

E T

S Corp Health Insurance Premium 2% > Shareholder T E E E E E E

Sick Pay: Salary Continuation Insured-Third Party T T T T(2) T T(2) T E T E T T(2) T T

Tips: More than $20.00 per month Less than $20.00 per month

T E

T E

T E

T T

T T

T E

T T

(1) Amounts in excess of specified government rate for per diem or standard mileage is taxable. (2) Taxable only during first six months following month employee last worked. (3) Except child care benefits.

A-5

WITHHOLDING REQUIREMENTS FOR SPECIFIC PAYMENTS


Withholding Required Type of Income Adoption Assistance - Up to $13,170 expense Advances Aircraft - Personal Use Athletic Facilities (On Premises) Achievement Awards and Prizes Back Pay Awards & Damages Bonuses Business Expense Reimbursements Commissions Company Car - Personal Use Death Benefits Deceased Employee Wages - Paid after Calendar Year of Death Deceased Employee Wages - Paid in Same Calendar Year as Death Dependent Care Assistance - Up to $5,000 Directors Fees 3 Discounts (Employee) Dismissal or Severance Pay A-6 No No No No Yes Yes No No No Yes No Yes No No Yes No No No No Yes Fed I.T. No Yes Yes No Yes 1 Yes Yes No Yes Optional No No F.I.C.A. Yes Yes Yes No Yes 1 Yes Yes No Yes Yes No No PA Yes Yes No No Yes 2 Yes Yes No Yes No No No MD No Yes Yes No Yes Yes Yes No Yes Yes No No

Dividends Eating Facilities Educational Assistance - Up to $5,250 Equipment and Tool Allowances Golden Parachute Payments Group Legal Services Guaranteed Wage Payments

No No No No Yes Yes Yes

No No No No Yes Yes Yes

No No Yes No Yes Yes Yes

No No No No Yes Yes Yes

A-7

WITHHOLDING REQUIREMENTS FOR SPECIFIC PAYMENTS continued

Withholding Required Type of Income Holiday Gifts: Cash or equivalent Non-cash subject to de minimis rules Interest Free or Below Market Interest Rate Employer Loan more than $10,000 Jury Duty Pay Meals and Lodging for Employers Convenience Meeting Payments Military Pay (For Temporary Assignments) Moving Expenses - Qualified (See B-48) Moving Expenses - Non-qualified (See B-48) Parking Expense - Up to $240/month Probationary Pay Retiree Consulting Fees 3 No Yes Yes No Yes No Yes No Yes No No A-8 No Yes Yes No Yes No Yes No Yes No No No 4 Yes Yes No Yes No 4 Yes No Yes No No Yes Yes No Yes No Yes No Yes No No Fed I.T. F.I.C.A. PA MD

Yes No

Yes No

Yes No

Yes No Yes

Yes Yes

Yes Yes

Yes Yes Yes No

Retroactive Wage Increases


Royalties Scholarships 5

Standby/Idle Time Pay Supper Money Supplemental Unemployment Uniform Allowances Union Payments Vacation Pay Workers Compensation Benefits

Yes No Yes No Yes Yes No

Yes No Sometimes 6 No Yes Yes No

Yes Yes No No No Yes No

Yes No Yes No Yes Yes No

A-9

WITHHOLDING REQUIREMENTS FOR SPECIFIC PAYMENTS continued

1. Exempt from withholding up to $1,600 per employee per year for qualified plans ($400 per employee, per year under a non-qualified plan). S-Corp shareholders do not qualify for this benefit. 2. Exempt from withholding unless the winner is required to render any substantial services as a condition to receiving the prize or award. Amounts over the federal limits listed in 1 above are subject to withholding.
3. Fees in excess of $600 are required to be reported on 1099-MISC. 4. The employee must not have the choice between the benefit and cash, reduce their salary to receive the benefit, or be reimbursed for the expense. 5. Any portion which represents payment for teaching, research, or other services by the student as a condition for receiving the scholarship is considered compensation and may be subject to withholding. See publication 15 for further details. 6. Supplemental unemployment benefits are subject to specific rules to be eligible for FICA exemption. See publication 15-A for more information. See Circular E for more complete information at http://www.irs.gov/pub/irs-pdf/p15.pdf.

A - 10

HOUSEHOLD EMPLOYMENT TAXES


Who is a household employee?
You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job. Examples of household employees include babysitters, butlers, cooks, caretakers, drivers, gardeners, housekeepers, and private-duty nurses. Example: You pay Betty Shore to babysit your child and do light housework 4 days a week in your home. Betty follows your specific instructions about household and child care duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee.
Schedule H, Household Employment Taxes, is used to report cash wages paid to a person who worked in your home, and is submitted annually with Form 1040. The schedule is used to report and pay federal income taxes withheld and to calculate FICA, Medicare and federal unemployment taxes on wages paid to household employees. The wage threshold for domestic employees remains unchanged at $1,800 per year in 2012. Social security tax is not necessary for household workers under age 18. Household employers are required to include the social security and federal employment taxes in their estimated tax payments.
Household Employer's Checklist You may need to do the following things when you have a household employee. When you hire a household employee: When you pay your household employee: Find out if the person can legally work in the United States. Find out if you need to pay state taxes. Withhold social security and Medicare taxes. Withhold federal income tax. Decide how you will make tax payments. Keep records. Get employer identification number (EIN). Give your employee Copies B, C, and 2 of Form W-2, Wage and Tax Statement.

By January 31, 2013:

By February 28, 2013 (April 1, Send Copy A of Form W-2 to the Social Security 2013 if you file Form W-2 Administration (SSA). electronically): File Schedule H (Form 1040), Household Employment Taxes, with your 2011 federal income tax return (Form 1040, 1040NR, or Form 1041). If you do not have to file a return, file Schedule H by itself.

By April 15, 2013:

A - 11

AGRICULTURAL EMPLOYMENT TAXES


According to the IRS, any plot of ground or other area used primarily for the raising of an agricultural or horticultural commodity constitutes a farm for employment tax purposes. Only cash wages paid to employees are subject to FICA and federal income tax withholding. Noncash items such as lodging, food, clothing, and transportation are not subject to FICA and federal income tax withholding.
FICA and federal income tax withholding apply to cash payments if either: 1) The employee is paid $150 or more for the year, 2) The employers total payments (cash and noncash) to all employees for agricultural labor are $2,500 or more for the year.

Exceptions. The $150 and $2,500 tests do not apply to wages that you pay to a farmworker who receives less than $150 in annual cash wages and the wages are not subject to social security and Medicare taxes, or federal income tax withholding, even if you pay $2,500 or more in that year to all of your farmworkers if the farmworker:

Is employed in agriculture as a hand-harvest laborer, Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of employment, Commutes daily from his or her permanent home to the farm, and Had been employed in agriculture less than 13 weeks in the preceding calendar year.

Amounts that you pay to these seasonal farmworkers, however, count toward the $2,500-or-more test to determine whether wages that you pay to other farmworkers are subject to social security and Medicare taxes.

Agricultural wages are subject to FUTA and SUTA if: 1) Agricultural wages of $20,000 or more are paid in any quarter in the current or preceding calendar year. 2) 10 or more individuals are employed in agricultural labor for some portion of a day for 20 weeks in the current or preceding calendar year.
Agricultural employers who pay wages for both agricultural and nonagricultural labor must keep the wages separate. Agricultural wages and taxes due are reported on Form 943; other wages and taxes due are reported on Form 941.

A - 12

LIST OF HELPFUL GOVERNMENT PUBLICATIONS


The following Publications are available from the Internal Revenue Service. You may order them by calling 1-800-TAX-FORM (1-800-829-3676). You may also download some of them from www.irs.gov:

Publication Number 15

Title Circular E, Employer's Tax Guide

Description All employers receive a copy of this publication automatically. This is an annual publication that includes the current year's tax tables, FICA rate, FUTA rate, and a general explanation of rules for depositing federal tax withheld. Supplement to Circular E. Detailed information on proper way to handle fringe benefits. Same as Circular E, except this is specifically for agricultural employers. Explanation of the rules for claiming personal exemptions on the Form W-4. Excellent guide to assist employees in completing a new Form W-4. Explains which educational expenses qualify for deduction for tax purposes. This booklet may assist the payroll practitioner in understanding the taxability of various types of educational expense reimbursements paid by the employer. Essential publication for explaining the reporting and taxation of reimbursed moving expenses, both for the employer and the employee. Essential guide to understanding the taxability of wages, salaries, fringe benefits, and other compensation received for services as an employee. A guide to the reporting, withholding, record keeping.

15-A 15-B 51 505

Employer's Supplemental Tax Guide Employer's Tax Guide to Fringe Benefits Circular A, Agricultural Employers Tax Guide Tax Withholding and Estimated Tax

970

Tax Benefits for Education

521

Moving Expenses

525

Taxable and Nontaxable Income

531

Reporting Tip Income

A - 13

LIST OF HELPFUL GOVERNMENT PUBLICATIONS - continued


Publication Number 919 1494

Title How Do I Adjust My Tax Form Withholdings? Table for Figuring Amount Exempt from compensation. Levy On Wages, Salary & Other Income Per Diem Rates 2012 Instructions 1099 - ALL Household Employers Tax Guide

Description Another guide to employees for completing W-4. This is a table for figuring the amount from a levy on wages, salaries, and other

1542 -926

A table of the federal per diem rates for lodging, meals and incidental expenses. Instructions to filers of Form 1099, 1098, 5498 and W-2G. A guide to who qualifies as a household employee and instructions on figuring the tax.

Compliance assistance information is available from the U.S. Department of Labor in regards to the following:

Americans with Disabilities Act of 1990 (ADA) The Davis-Bacon and Related Acts (DBRA) The Fair Labor Standards Act (FLSA) The Family and Medical Leave Act (FMLA) Federal Employee Compensation Act (FECA) And many more

You may order by calling 1-866-4-USA-DOL or print from website www.dol.gov/compliance.

A - 14

ESSENTIAL PAYROLL WEB SITES


Whether youre an expert on the Web or a novice, there are some sites that you should visit regularly to see whats new.

Federal Sites
EFTPS: Internal Revenue Service (homepage): Social Security Administration: U.S. Department of Labor employment law site: www.eftps.gov www.irs.gov www.ssa.gov www.dol.gov

New-hire reporting: www.acf.hhs.gov/programs/cse/newhire/employer/private/newhire.htm

State & Local Sites


PA Department of Revenue: PA Department of Revenue Business Tax Registration: PA Department of Labor & Industry: PA Department of Community and Economic Development: PA e-TIDES: Maryland Webpage: Comptroller of Maryland: MD Dept. of Labor, Licensing & Regulation: www.newpa.com www.etides.state.pa.us www.maryland.gov/ www.comp.state.md.us/ www.dllr.state.md.us www.pa100.state.pa.us www.dli.state.pa.us www.revenue.state.pa.us

Professional Organizations

American Payroll Association (APA):

www.americanpayroll.org

A - 15

Essential Phone Numbers


Name Phone Number

Internal Revenue Service

Business and Specialty Tax Line

1-800-829-4933

Exempt Organizations and Government Entities

1-877-829-5500 (toll free)

Electronic Federal Tax Payment System (EFTPS) Hotline

1-800-555-4477

Retirement Plans Taxpayer Assistance Telephone Service


Employer Identification Number (EIN) Request Number

1-877-829-5500 (toll free)


800-829-4933 Form SS-4 may be faxed to: EIN Operation, Cincinnati, OH at 859-669-5760

Form 941 and Form 940 On-Line Filling Program / Austin Submission Center

New Toll Free Number for e-Help 866-255-0654

Forms (IRS)

Forms may be ordered at: 1-800-829-3676

General IRS Tax Law Questions and Account Information

800-829-1040

Information Reporting Program Customer Service Section

866-455-7438 (toll free)

IRS Tax Fax

703-368-9694 (non-toll-free) This service offers faxed topical tax information. A - 16

National Taxpayer Advocates Help Line

1-877-777-4778 (toll free)

Taxpayer Advocacy Panel

1-888-912-1227 (toll free)

Telephone Device for the Deaf (TDD)

1-800-829-4059

Tele-Tax System

800-829-4477

Social Security Administration

Copy A / Form W-2 Reporting SSAs Employer Reporting Service 1-800-772-6270

General Social Security Benefit Questions

1-800-772-1213

A - 17

Essential Phone Numbers


Name Phone Number

PA Dept. of Revenue

Fact and Information Line

1-888-PATAXES (728-2937)

e-Business Tax Unit (e-Tides Technical Assistance)

717-783-6277

Taxpayer Service and Information Center

717-787-1064

Special Hearing or Speaking Needs (TTonly)

1-800-447-3020

Taxpayers' Rights Advocate

717-772-9347

MD Employer Withholding

Information Line

410-260-7980 or 1-800-638-2937

Magnetic Media Reporting

410-260-7150

PA Unemployment Compensation

UC Tax Information Line

1-866-403-6163 or 717-787-7679

A - 18

UC Employer Tax Services York and Adams Counties Cumberland County Lancaster County Dauphin County Perry County Franklin County 717-767-7620 717-787-5939 717-299-7606 717-214-2991 717-787-5939 717-264-7192

MD Unemployment Compensation

Employer Information Line

410-949-0033 or 1-800-492-5524

Experience Rate

410-767-2413

A - 19

INDEXED EMPLOYEE BENEFIT LIMITS


Type of Limitation Elective Deferrals (401(k) and 403(b); not including adjustments and catch-ups) 457(b)(2) and 457(c)(1) Limits (not including catch-ups) Annual Defined Benefit Plan Limit Annual Defined Contribution Plan Limit Annual Compensation Limit Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993 Highly Compensated Employee ("HCEs") Individual Retirement Accounts ("IRAs"), for individuals 49 and below SIMPLE Retirement Accounts SEP Coverage (minimum compensation) SEP Compensation (maximum) Tax Credit ESOP Maximum Balance Amount for Lengthening of 5-Year ESOP Period Excess Distribution Threshold Qualified Police and Firefighters' DB Benefit Limit Income Subject to Social Security Tax FICA Tax for employers Social Security Tax for employees Medicare Tax for employees (on up to $200,000 wages) and employers (all wages) Medicare Tax for employees on wages in excess of $200,000 2013 $17,500 $17,500 $205,000 $51,000 $255,000 $380,000 $115,000 $5,500 $12,000 $550 $255,000 $1,035,000 $205,000 N/A N/A $113,700 7.65% 6.2% 1.45% 2.35% 2012 $17,000 $17,000 $200,000 $50,000 $250,000 $375,000 $115,000 $5,000 $11,500 $550 $250,000 $1,015,000 $200,000 N/A N/A $110,100 7.65% 4.2% 1.45% 1.45%

A - 20

Type of Limitation FICA Tax for self-employed workers Social Security Tax for self-employed workers Medicare Tax for self-employed workers Health Savings Account (HSA) (Individual/family) Flexible Spending Arrangement (FSA)

2013 15.3% 12.4% 2.9% $3,250/6,450 $2,500

2012 13.3% 10.4% 2.9% $3,100/$6,250 No limit

Catch-up contributions

Individuals 50 years of age and over may make additional catch up contributions each year as follows: 2012 - 2013 ROTH, 401(k), 403(b), 457, SEP-408(k), SARSEP SIMPLE IRAs $ 5,500 $ 2,500 $ 1,000

A - 21

INDEPENDENT CONTRACTORS
Employee or Independent Contractor?
When a worker performs services and receives some form of remuneration, an important question is whether the remuneration is subject to employment taxes. The answer depends on whether the worker is an employee or an independent contractor. This determination of the worker's status depends on which facts define the business and the relationship of the parties, at the time the services are rendered.

An employer must generally withhold federal income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to an employee. An employer does not generally have to withhold or pay any taxes on payments to independent contractors.

Common-Law Rules
To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.
Behavioral control Facts that show whether the business has a right to direct or control how the worker does the task for which the worker is hired include the type and degree of: Instructions that the business gives to the worker An employee is generally subject to the business' instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

When and where to do the work. What tools or equipment to use. What workers to hire or to assist with the work. Where to purchase supplies and services. What work must be performed by a specified individual. What order or sequence to follow.

The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.

A - 22

INDEPENDENT CONTRACTORS - continued


Training that the business gives to the worker An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial control

Facts that show whether the business has a right to control the business aspects of the worker's job include:

The extent to which the worker has unreimbursed business expenses Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

The extent of the worker's investment An independent contractor often has a significant investment in the facilities or equipment he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status. The extent to which the worker makes his or her services available to the relevant market An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. How the business pays the worker An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly. The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.

A - 23

INDEPENDENT CONTRACTORS - continued


Type of relationship Facts that show the parties' type of relationship include:

Written contracts describing the relationship the parties intended to create. Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. The permanency of the relationship. If you engage a worker with the expectation that the relationship

will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.

The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

IRS help. If you want the IRS to determine whether or not a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

Category of Employees
Before you can know how to treat payments that you make to workers for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be:

An independent contractor, A common-law employee, A statutory employee, or A statutory nonemployee.

Independent Contractors
People such as lawyers, contractors, subcontractors, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

A - 24

INDEPENDENT CONTRACTORS - continued


Common-Law Employees
Under common-law rules, anyone who performs services for you is your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
If you have an employer-employee relationship, it makes no difference how it is labeled. The

substance of the relationship, not the label, governs the worker's status. It does not matter whether the individual is employed full time or part time. For employment tax purposes, no distinction is made between classes of employees. Superintendents, managers, and other supervisory personnel are all employees. An officer of a corporation is generally an employee; however, an officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, is not considered an employee. A director of a corporation is not an employee with respect to services performed as a director. You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees.
Leased employees. Under certain circumstances, a firm furnishing workers to other firms is the employer of those workers for employment tax purposes. For example, a temporary staffing service may provide the services of secretaries, nurses, and other similarly trained workers to its clients on a temporary basis.

The staffing service enters into contracts with the clients under which the clients specify the services to be provided and a fee is paid to the staffing service for each individual furnished. The staffing service has the right to control and direct the worker's services for the client, including the right to discharge or reassign the worker. The staffing service hires the workers, controls the payment of their wages, provides them with unemployment insurance and other benefits, and is the employer for employment tax purposes.

Statutory Employees
If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute, statutory employees, for certain employment tax purposes. This would happen if they fall within any one of the following four categories and meet the three conditions described under Social security and Medicare taxes below. 1. A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission. 2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.

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3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done. 4. A full-time traveling or city salesperson that works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed for you must be the salesperson's principal business activity.
Social security and Medicare taxes. Withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply.

The service contract states or implies that substantially all the services are to be performed personally by them. They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities). The services are performed on a continuing basis for the same payer.

Income tax. Do not withhold federal income tax from the wages of statutory employees.

Reporting payments to statutory employees. Furnish Form W-2 to a statutory employee, and check Statutory employee in box 13. Show your payments to the employee as other compensation in box 1. Also, show social security wages in box 3, social security tax withheld in box 4, Medicare wages in box 5, and Medicare tax withheld in box 6. The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. He or she reports earnings as a statutory employee on line 1 of Schedule C (Form 1040), Profit or Loss from Business, or Schedule C-EZ (Form 1040), Net Profit from Business. A statutory employee's business expenses are deductible on Schedule C (Form 1040) or C-EZ (Form 1040) and are not subject to the reduction by 2% of his or her adjusted gross income that applies to common-law employees.

Statutory Nonemployees
There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes, if:

Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked and Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes.

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Direct sellers Direct sellers include persons falling within any of the following three groups.

1. Persons engaged in selling (or soliciting the sale of) consumer products in the home or place of business other than in a permanent retail establishment. 2. Persons engaged in selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis prescribed by regulations, for resale in the home or at a place of business other than in a permanent retail establishment. 3. Persons engaged in the trade or business of delivering or distributing newspapers or shopping news (including any services directly related to such delivery or distribution).
Direct selling includes activities of individuals who attempt to increase direct sales activities of their direct sellers and who earn income based on the productivity of their direct sellers. Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting.

Licensed real estate agents This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output.

Companion sitters Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. A person engaged in the trade or business of putting the sitters in touch with individuals who wish to employ them (that is, a companion sitting placement service) will not be treated as the employer of the sitters if that person does not receive or pay the salary or wages of the sitters and is compensated by the sitters or the persons who employ them on a fee basis. Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes.

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INDEPENDENT CONTRACTORS - continued


Salesperson
To determine whether salespersons are employees under the usual common-law rules, you must evaluate each individual case. If a salesperson who works for you does not meet the tests for a common-law employee, discussed earlier, you do not have to withhold federal income tax from his or her pay. However, even if a salesperson is not an employee under the usual common-law rules, his or her pay may still be subject to social security, Medicare, and FUTA taxes. To determine whether a salesperson is an employee for social security, Medicare, and FUTA tax purposes, the salesperson must meet all eight elements of the statutory employee test. A salesperson is a statutory employee for social security, Medicare, and FUTA tax purposes if he or she: 1. Works full time for one person or company except, possibly, for sideline sales activities on behalf of some other person, 2. Sells on behalf of, and turns his or her orders over to, the person or company for which he or she works, 3. Sells to wholesalers, retailers, contractors, or operators of hotels, restaurants, or similar establishments, 4. Sells merchandise for resale, or supplies for use in the customer's business, 5. Agrees to do substantially all of this work personally, 6. Has no substantial investment in the facilities used to do the work, other than in facilities for transportation, 7. Maintains a continuing relationship with the person or company for which he or she works, and 8. Is not an employee under common-law rules.

Examples
Example 1 - Building and Construction Industry Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. He uses his own tools and performs services in the order designated by the corporation and according to its specifications. The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. He does not have a place of business or hold himself out to perform similar services for others. Either party can end the services at any time. Milton Manning is an employee of the corporation.

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Example 2 - Building and Construction Industry Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. A signed contract established a flat amount for the services rendered by Bill Plum. Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. He hires his own roofers who are treated as employees for federal employment tax purposes. If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs. Bill Plum, doing business as Plum Roofing, is an independent contractor. Example 3 - Building and Construction Industry Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies that she obtained through advertisements. Vera is an independent contractor. Example 4 - Trucking Industry Rose Trucking contracts to deliver material for Forest, Inc., at $140 per ton. Rose Trucking is not paid for any articles that are not delivered. At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. All operating expenses, including insurance coverage, are paid by Jan Rose. All equipment is owned or rented by Jan and she is responsible for all maintenance. None of the drivers are provided by Forest, Inc. Jan Rose, operating as Rose Trucking, is an independent contractor. Example 5 - Computer Industry Steve Smith, a computer programmer, is laid off when Megabyte, Inc. downsizes. Megabyte agrees to pay Steve a flat amount to complete a one-time project to create a certain product. It is not clear how long that it will take to complete the project, and Steve is not guaranteed any minimum payment for the hours spent on the program. Megabyte provides Steve with no instructions beyond the specifications for the product itself. Steve and Megabyte have a written contract, which provides that Steve is considered to be an independent contractor, is required to pay federal and state taxes, and receives no benefits from Megabyte. Megabyte will file Form 1099-MISC, Miscellaneous Income, to report the amount paid to Steve. Steve works at home and is not expected or allowed to attend meetings of the software development group. Steve is an independent contractor.

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INDEPENDENT CONTRACTORS - PA
Pennsylvania-Construction Workplace Misclassification Act. The Commonwealth of Pennsylvania has enacted legislation providing for the criteria independent contractors in the construction industry need to follow and imposing penalties for those employers that fail to do so. Independent contractors. For purposes of unemployment compensation, workers' compensation and improper classification of employees, an individual who performs services in the construction industry for remuneration is an independent contractor only if: (1) The individual has a written contract to perform the services; (2) The individual is free from control or direction over the performance of the services both under the contract of service and in fact; and (3) As to such services, the individual is customarily engaged in an independently established trade, occupation, profession or business. Violation. An employer, or an officer or agent of an employer, will be in violation of the act and subject to its penalties, remedies and actions if the employer, officer or agent: (1) fails to properly classify an individual as an employee for purposes of the Unemployment Compensation Law and fails to pay contributions, reimbursements or other amounts required to be paid under that law; or (2) fails to properly classify an individual as an employee for purposes of the Workers' Compensation Act and fails to provide the coverage required under that act. Separate offenses. Each individual who is not properly classified as an employee will be the basis of a separate violation. In addition, note that both civil and criminal penalties may be imposed for violations of the act.

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EXEMPT VERSUS NON-EXEMPT EMPLOYEES


Coverage under the Federal Fair Labor Standards Act (FLSA)
Most jobs are governed by the FLSA. Some are not. Some jobs are excluded from FLSA coverage by statute. Other jobs, while governed by the FLSA, are considered "exempt" from the FLSA overtime rules. Exclusions from FLSA coverage Particular jobs may be completely excluded from coverage under the FLSA overtime rules. There are two general types of complete exclusion. Some jobs are specifically excluded in the statute itself. For example, employees of movie theaters and many agricultural workers are not governed by the FLSA overtime rules. Another type of exclusion is for jobs which are governed by some other specific federal labor law. As a general rule, if a job is governed by some other federal labor law, the FLSA does not apply. For example, most railroad workers are governed by the Railway Labor Act, and many truck drivers are governed by the Motor Carriers Act, and not the FLSA. Many of FLSA exclusions are found in 213 of the FLSA. Exempt or Nonexempt Employees whose jobs are governed by the FLSA are either "exempt" or "nonexempt." Nonexempt employees are entitled to overtime pay. Exempt employees are not. Most employees covered by the FLSA are nonexempt. Some are not. Some jobs are classified as exempt by definition. For example, "outside sales" employees are exempt ("inside sales" employees are nonexempt). For most employees, however, whether they are exempt or nonexempt depends on (a) how much they are paid, (b) how they are paid, and (c) what kind of work they do. With few exceptions, to be exempt an employee must (a) be paid at least $23,600 per year ($455 per week), and (b) be paid on a salary basis, and also (c) perform exempt job duties. These requirements are outlined in the FLSA Regulations (promulgated by the U.S. Department of Labor). Most employees must meet all three "tests" to be exempt. Salary level test Employees who are paid less than $23,600 per year ($455 per week) are nonexempt. (Employees who earn more than $100,000 per year are almost certainly exempt.)

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Salary basis test Generally, an employee is paid on a salary basis if s/he has a "guaranteed minimum" amount of money s/he can count on receiving for any work week in which s/he performs "any" work. This amount need not be the entire compensation received, but there must be some amount of pay the employee can count on receiving in any work week in which s/he performs any work. Some "rules of thumb" indicating that an employee is paid on a salary basis include whether an employee's base pay is computed from an annual figure divided by the number of paydays in a year, or whether an employee's actual pay is lower in work periods when s/he works fewer than the normal number of hours. However, whether an employee is paid on a salary basis is a "fact," and thus specific evaluation of particular circumstances is necessary. Whether an employee is paid on a salary basis is not affected by whether pay is expressed in hourly terms (as this is a fairly common requirement of many payroll computer programs), but whether the employee in fact has a "guaranteed minimum" amount of pay s/he can count on. The FLSA salary basis test applies only to reductions in monetary amounts. Requiring an employee to charge absences from work to leave accruals is not a reduction in "pay," because the monetary amount of the employee's paycheck remains the same. Similarly, paying an employee more than the guaranteed salary amount is not normally inconsistent with salary basis status, because this does not result in any reduction in the base pay. With some exceptions, the base pay of a salary basis employee may not be reduced based on the "quality or quantity" of work performed (provided that the employee does "some" work in the work period). This usually means that the base pay of a salary basis employee may not be reduced if s/he performs less work than normal, if the reason for that is determined by the employer. For example, a salary basis pay employee's base pay may not be reduced if there is "no work" to be performed (such as for a plant closing or slow period), and a salary basis employee's base pay may not be reduced for partial day absences. However, employers may "dock" the base pay of salary basis employees in full day increments, for disciplinary suspensions, or for personal leave, or for sickness under a bona fide sick leave plan (as for example if the employee has run out of accrued sick leave). Thus, there can be "permissible" and "impermissible" reductions in salary basis pay. Permissible reductions have no effect on the employee's exempt status. Impermissible reductions may, in that the general rule is that an employee who is subjected to impermissible reductions in salary is no longer paid on a salary basis, and is therefore nonexempt. However, employers have several avenues by which they can "cure" impermissible reductions in salary basis pay, and as a practical matter these make it unlikely that an otherwise exempt employee would become nonexempt because of salary basis pay problems. The salary basis pay requirement for exempt status does not apply to some jobs (for example, doctors, lawyers and schoolteachers are exempt even if the employees are paid hourly).

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The duties tests An employee who meets the salary level tests and also the salary basis tests is exempt only if s/he also performs exempt job duties. These FLSA exemptions are limited to employees who perform relatively highlevel work. Whether the duties of a particular job qualify as exempt depends on what they are. Job titles or position descriptions are of limited usefulness in this determination. (A secretary is still a secretary even if s/he is called an "administrative assistant," and the chief executive officer is still the CEO even if s/he is called a janitor.) It is the actual job tasks that must be evaluated, along with how the particular job tasks "fit" into the employer's overall operations. There are three typical categories of exempt job duties, called "executive," "professional," and "administrative." Exempt executive job duties Job duties are exempt executive job duties if the employee
1. regularly supervises two or more other employees, and also 2. has management as the primary duty of the position, and also, 3. has some genuine input into the job status of other employees (such as hiring, firing, promotions, or assignments).

Supervision means what it implies. The supervision must be a regular part of the employee's job, and must be of other employees. Supervision of non-employees does not meet the standard. The "two employees" requirement may be met by supervising two full-time employees or the equivalent number of part-time employees. (Two half-time employees equal one full-time employee.)

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"Mere supervision" is not sufficient. In addition, the supervisory employee must have "management" as the "primary duty" of the job. The FLSA Regulations contain a list of typical management duties. These include (in addition to supervision):

interviewing, selecting, and training employees; setting rates of pay and hours of work; maintaining production or sales records (beyond the merely clerical); appraising productivity; handling employee grievances or complaints, or disciplining employees; determining work techniques; planning the work; apportioning work among employees; determining the types of equipment to be used in performing work, or materials needed; planning budgets for work; monitoring work for legal or regulatory compliance; providing for safety and security of the workplace.

Determining whether an employee has management as the primary duty of the position requires case-bycase evaluation. A "rule of thumb" is to determine if the employee is "in charge" of a department or subdivision of the enterprise (such as a shift). One handy clue might be to ask who a telephone inquiry would be directed to if the called asked for "the boss." Typically, only one employee is "in charge" at any particular time. Thus, for example, if a "sergeant" and a "lieutenant" are each at work at the same time (in the same unit or subunit of the organization), only the lieutenant is "in charge" during that time. An employee may qualify as performing executive job duties even if s/he performs a variety of "regular" job duties as well. For example, the night manager at a fast food restaurant may in reality spend most of the shift preparing food and serving customers. S/he is, however, still "the boss" even when not actually engaged in "active" bossing duties. In the event that some "executive" decisions are required, s/he is there to make them, and this is sufficient. The final requirement for the executive exemption is that the employee has genuine input into personnel matters. This does not require that the employee be the final decision maker on such matters, but rather that the employee's input is given "particular weight." Usually, it will mean that making personnel recommendations is part of the employee's normal job duties, that the employee makes these kinds of recommendations frequently enough to be a "real" part of the job, and that higher management takes the employee's personnel suggestions or recommendations seriously.

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Exempt professional job duties The job duties of the traditional "learned professions" are exempt. These include lawyers, doctors, dentists, teachers, architects, and clergy. Also included are registered nurses (but not LPNs), accountants (but not bookkeepers), engineers (who have engineering degrees or the equivalent and perform work of the sort usually performed by licensed professional engineers), actuaries, scientists (but not technicians), pharmacists, and other employees who perform work requiring "advanced knowledge" similar to that historically associated with the traditional learned professions. Professionally exempt work means work which is predominantly intellectual, requires specialized education, and involves the exercise of discretion and judgment. Professionally exempt workers must have education beyond high school, and usually beyond college, in fields that are distinguished from (more "academic" than) the mechanical arts or skilled trades. Advanced degrees are the most common measure of this, but are not absolutely necessary if an employee has attained a similar level of advanced education through other means (and perform essentially the same kind of work as similar employees who do have advanced degrees). Some employees may also perform "creative professional" job duties which are exempt. This classification applies to jobs such as actors, musicians, composers, writers, cartoonists, and some journalists. It is meant to cover employees in these kinds of jobs whose work requires invention, imagination, originality or talent; who contribute a unique interpretation or analysis. Identifying most professionally exempt employees is usually pretty straightforward and uncontroversial, but this is not always the case. Whether a journalist is professionally exempt, for example, or a commercial artist, will likely require careful analysis of just what the employee actually does. Exempt Administrative job duties The most elusive and imprecise of the definitions of exempt job duties is for exempt "administrative" job duties. The Regulatory definition provides that exempt administrative job duties are (a) office or non-manual work, which is directly related to management or general business operations of the employer or the employer's customers, and (b) a primary component of which involves the exercise of independent judgment and discretion about matters of significance.

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Exempt professional job duties - continued The administrative exemption is designed for relatively high-level employees whose main job is to "keep the business running." A useful rule of thumb is to distinguish administrative employees from "operational" or "production" employees. Employees who make what the business sells are not administrative employees. Administrative employees provide "support" to the operational or production employees. They are "staff" rather than "line" employees. Examples of administrative functions include labor relations and personnel (human resources employees), payroll and finance (including budgeting and benefits management), records maintenance, accounting and tax, marketing and advertising (as differentiated from direct sales), quality control, public relations (including shareholder or investment relations, and government relations), legal and regulatory compliance, and some computer-related jobs (such as network, internet and database administration).

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To be exempt under the administrative exemption, the "staff" or "support" work must be office or nonmanual, and must be for matters of significance. Clerical employees perform office or nonmanual support work but are not administratively exempt. Nor is administrative work exempt just because it is financially important, in the sense that the employer would experience financial losses if the employee fails to perform competently. Administratively exempt work typically involves the exercise of discretion and judgment, with the authority to make independent decisions on matters which affect the business as a whole or a significant part of it. Questions to ask might include whether the employee has the authority to formulate or interpret company policies; how major the employee's assignments are in relation to the overall business operations of the enterprise (buying paper clips versus buying a fleet of delivery vehicles, for example); whether the employee has the authority to commit the employer in matters which have significant financial impact; whether the employee has the authority to deviate from company policy without prior approval. An example of administratively exempt work could be the buyer for a department store. S/he performs office or nonmanual work and is not engaged in production or sales. The job involves work which is necessary to the overall operation of the store -- selecting merchandize to be ordered as inventory. It is important work, since having the right inventory (and the right amount of inventory) is crucial to the overall well-being of the store's business. It involves the exercise of a good deal of important judgment and discretion, since it is up to the buyer to select items which will sell in sufficient quantity and at sufficient margins to be profitable. Other examples of administratively exempt employees might be planners and true administrative assistants (as differentiated from secretaries with fancy titles). Bookkeepers, "gal Fridays," and most employees who operate machines are not administratively exempt. Merely clerical work may be administrative, but it is not exempt. Most secretaries, for example, may accurately be said to be performing administrative work, but their jobs are not usually exempt. Similarly, filing, filling out forms and preparing routine reports, answering telephones, making travel arrangements, working on customer "help desks," and similar jobs are not likely to be high-level enough to be administratively exempt. Many clerical workers do in fact exercise some discretion and judgment in their jobs. However, to "count" the exercise of judgment and discretion must be about matters of considerable importance to the operation of the enterprise as a whole. Routinely ordering supplies (and even selecting which vendor to buy supplies from) is not likely to be considered high- enough to qualify the employee for administratively exempt status. There is no "bright line." Some secretaries may indeed be high-level, administratively exempt employees (for example, the secretary to the CEO who really does "run his life"), while some employees with fancy titles (e.g., "administrative assistant") may really be performing nonexempt clerical duties.

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Rights of exempt employees An exempt employee has virtually "no rights at all" under the FLSA overtime rules. About all an exempt employee is entitled to under the FLSA is to receive the full amount of the base salary in any work period during which s/he performs any work (less any permissible deductions). Nothing in the FLSA prohibits an employer from requiring exempt employees to "punch a clock," or work a particular schedule, or "make up" time lost due to absences. Nor does the FLSA limit the amount of work time an employer may require or expect from any employee, on any schedule. ("Mandatory overtime" is not restricted by the FLSA.) Keep in mind that this discussion is limited to rights under the FLSA. Exempt employees may have rights under other laws or by way of employment policies or contracts. Rights of non-exempt employees Nonexempt employees are entitled under the FLSA to time and one-half their "regular rate" of pay for each hour they actually work over the applicable FLSA overtime threshold in the applicable FLSA work period.

KEEP UP-TO-DATE ON "TAXABLE WAGES" AND "EXEMPT EMPLOYEES"


Two of the most important potential tax-savings areas of which a payroll manager must be aware involve payments that may not be subject to one or more of the federal or state employment taxes and employees who may not be subject to them.

Keep in mind in this regard that direct tax savings will generally result only in relation to the "social security" type employment taxes--that is, the taxes imposed under the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and the various state unemployment and disability insurance laws. This is because these are the laws that impose a tax directly on an employer, and actual tax dollars can be saved by knowing that a particular type of payment or employee is exempt from a particular tax. This is not to say that the subject of taxable wages and exempt employees is unimportant where federal and state income taxes are involved. Even though employers have no general out-of-pocket tax liability where such taxes are concerned, knowing what types of payments and employees are subject to withholding can save needless bookkeeping time and the expenses of correcting situations where tax is withheld when it should not have been, to say nothing of avoiding the penalties that may be imposed where an uninformed payroll manager fails to withhold from a payment or employee from whom tax should have been withheld.

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PAYROLL SAVING TIPS DIRECT DEPOSIT OF PAYROLL


Direct deposit of payroll can save time and money for the employer and employee. On the employer side, direct deposit means that each employees paycheck is deposited right into the employees personal account, eliminating costly steps in the payroll process, including the need to stop payment on and reissue lost or stolen checks. Direct deposit means fewer check processing charges and reconcilement maintenance fees from the employer's financial institution. On the employee side, there is no chance of lost or stolen checks, no two to four day waiting period for the paycheck to clear, and employees still receive a pay receipt detailing their gross and net pay and deductions made.

PLANNING AHEAD - RETIREMENT & SOCIAL SECURITY


If you have employees who are planning to retire, now is a good time for them to contact the Social Security Administration to see which month is best for them to claim benefits. In some cases, the choice of retirement month could mean additional benefits for the employee and his or her family. Depending on the person's earnings, age, and benefit amount, it may be possible for him or her to start collecting benefits while continuing to work. If your employees want more information about social security, or want to arrange for an appointment to talk with a social security representative, the Social Security Administration advises that they should call 1800-772-1213. The government has a web site located at http://www.ssa.gov. Individuals may apply for social security benefits online by using the website www.ssa.gov/retireonline/, or they may apply by telephone by calling 1-800-772-1213.
The SSA website contains a Retirement Planner. The Planner and online calculators give estimates for disability and survivors benefits as well as your retirement benefit estimate. An Earnings Limit Calculator assists workers in computing the effect of earnings on their social security retirement benefits.

Workers who have reached full retirement age (age 66 in 2012 and 2013) may work without their benefits being reduced because of the amount of their annual earnings. Annual earnings affect the amount of Social Security benefits only until full retirement age. After that, you can receive full benefits no matter how much you earn. Full retirement age will gradually increase to age 67, as shown below.
The Social Security Administration has developed a unique educational tool to help Americans understand their social security benefits so they can undertake adequate financial planning for their future. This SSA tool is a Social Security Statement that gives workers of all ages their own personal historical data and future benefit estimates. These Statements are mailed to workers age 25 and older. The 4-page Social Security Statement provides information for retirement, disability, and survivors benefits that they could be eligible for now and in the future.

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Payrolls Role: The social security earnings record provided on the Social Security Statement is based on Form W2 information supplied by an individual's employers. Discrepancies in wage record information - such as name/SSN mismatches - preclude wages being credited to an individual's account. Such earnings will be placed in a suspense file and will not appear on the Social Security Statement. Since uncredited earnings will affect an individual's future entitlement, employees who get a Social Security Statement with earnings totals lower than they expect are going to - and should - have questions. The most likely place for an employee to turn with a question is, of course, the payroll department, so practitioners need to be prepared.

AGE TO RECEIVE FULL SOCIAL SECURITY BENEFITS


Note: Persons born on January 1 of any year should refer to the previous year. Full Retirement Year of Birth 1937 or earlier 1938 1939 1940 1941 1942 1943-1954 1955 1956 1957 1958 1959 1960 and later 65 65 and 2 months 65 and 4 months 65 and 6 months 65 and 8 months 65 and 10 months 66 66 and 2 months 66 and 4 months 66 and 6 months 66 and 8 months 66 and 10 months 67 Age

The earliest a person can start receiving Social Security retirement benefits remains age 62.

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CUT LABOR COSTS BY WATCHING WAGE-HOUR EXEMPTIONS
For most employers the largest single statutory source of labor costs is the Fair Labor Standards Act with its minimum wage and overtime pay requirements. Effective August 23, 2004 the Department of Labor reformed 50-year old overtime regulations and introduced new overtime rules. In many cases, however, labor costs may be cut by knowing exactly what it is the Fair Labor Standards Act requires, and what it does not require. For example, there are any number of exemptions--total or partial--from the minimum wage requirements. The Department of Labor (www.dol.gov) website provides additional information.
Of utmost significance to most employers is the complete minimum wage and overtime exemption extended to socalled white collar workers--administrative, executive and professional employees. Keep in mind that federal wage-hour rules are not the only ones with which you should be concerned. States also have legislated in this area, and although the state laws may cover employees who are not covered by the federal law, the states, too, provide exemptions with which employers must be familiar. Knowledge of these will prevent payment of overtime rates when straight-time pay will suffice under the law and from paying a straight-time wage rate that is higher than that required under the law. Effective July 24, 2009, the federal minimum wage increased to $7.25 per hour. This change reflects the third and final federal minimum wage increase as amended under the Fair Labor Standards Act (FLSA).

Many states also have minimum wage laws. Where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages. Please see page A-1 for the minimum wage amounts for Maryland and Pennsylvania. Various minimum wage exceptions apply under specific circumstances to workers with disabilities, full-time students, youth under age 20 in their first 90 consecutive calendar days of employment, tipped employees and student-learners. For a complete listing of state minimum wage laws, please visit the US Department of Labor website at http://www.dol.gov/whd/minwage/america.htm.

GARNISHMENT PROBLEMS SMOOTHLY


A busy payroll manager has never been fond of garnishment proceedings. But with the job protection offered an employee-debtor under the Consumer Credit Protection Act, the payroll manager is going to have to live with the problem. Thus, the methods by which garnishments are handled must be made as simple, efficient and economical as possible. The U.S. Department of Labor website at http://www.dol.gov/dol/topic/wages/garnishments.htm has very useful information on this topic.

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PAYROLL SAVING TIPS - continued


EMPLOY CHILDREN/SPOUSES/PARENTS
Taxability of Children/Spouses Wages for Sole Proprietorship

Federal Income Tax

Social Security

MD & PA Income Tax Medicare

PA Local Income Tax FUTA

PA Unemployment

MD Unemployment

Spouse

Child under 18

Child 18 - 20

T*

T*

Child 21 and Over

Parents

T*

T*

* Payments for domestic services, outside of a trade or business, are generally not subject to withholding. See Publication 15 for further information.

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SAVE BY REDUCING THE NUMBER OF PAYROLLS


One often overlooked way to save payroll costs is to have fewer payrolls. Many employers pay their employees every week. By switching to bi-weekly payment these employers use half the amount of time spent computing and processing the payroll. Additional savings result from reducing the supplies required.

UNEMPLOYMENT COMPENSATION
Check the computation of your unemployment compensation "experience rating." Experience ratings are mailed at the beginning of the calendar year and are calculated based on prior years unemployment benefits paid. Better experience ratings result in smaller employer contributions. Inaccurate information reported on your experience rating calculation can adversely affect your employers rate. If inaccurate information is reported, employers can appeal their assigned rate. Review and respond to any charges against your unemployment account. Charges are benefits paid to employees or former employees.

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PAYROLL SAVING TIPS - continued

COMMON PAYMASTER
A company organized as a corporation can take advantage of the common paymaster rule to avoid paying extra taxes. Under this concept, a parent company can calculate payroll taxes for employees being paid by multiple subsidiaries as though they were being paid by a single organization for the entire year. This means that the parent company designates a single entity within the group of controlled companies to pay those employees who are employed by more than one subsidiary. This "common paymaster" is also responsible for maintaining the payroll records for those employees. The common paymaster can pay concurrently employed individuals with one paycheck, or with separate paychecks. The common paymaster also has primary responsibility for remitting payroll taxes to the government, which the common paymaster computes as though it were the sole employer of those individuals who are concurrently employed. Also, all other subsidiaries using the common paymaster are jointly and severally liable for their shares of payroll taxes to be remitted. The following conditions must be met for the Common Paymaster rule to apply:

The paying parties must be related, where either (1) a single company owns at least the stock of the other related companies, (2) at least 30% of the employees of one corporation must be concurrently employed by the other corporation, or (3) at least half of the officers of one corporation must be officers of the other corporation. If a company is a non-stock corporation, at least the board of directors of one corporation must also serve on the board of the other corporation. All payments made to employees must be through a single legal entity; thus, the employee cannot be paid separately by multiple payroll departments within the same company.

The last condition is key all payments must be made from a single entity, which calls for the consolidation of payroll departments in order to achieve the available savings under this best practice.
Each corporation must pay its own part of the employment taxes and may deduct only its own part of the wages. The deductions will not be allowed unless the corporation reimburses the common paymaster for the wage and tax payments. See Regulations section 31.3121(s)-1 for more information. The common paymaster is responsible for filing information and tax returns and issuing Forms W-2 with respect to wages it is considered to have paid as a common paymaster. States treat common paymasters differently with respect to the unemployment laws.

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PAYROLL SAVING TIPS - continued


FEDERAL BUSINESS CREDITS
1. Work Opportunity Tax Credit - Hire employees from a "Targeted" group and they may qualify the employer for certain credits. Under the federal Work Opportunity Tax Credit, which has been extended to cover employees from a targeted group who begin work before 1/1/2012, employers receive a federal tax credit for hiring selected targeted groups. Qualified veterans who began work before 1/1/2013 also qualify for this credit.

Wages qualifying for the credit generally have the same meaning as wages subject to the Federal Unemployment Tax Act (FUTA).
Form 8850, Pre-Screening Notice and Certification Request for Work Opportunity Tax Credit, is used by employers to both pre-screen prospective employees and to request certification from the States Employment Security Agency. This form is not filed with the IRS.

2. Credit For Employer-Provided Child Care Facilities - Employers can claim a tax credit for 25% of qualified expenses for employee child care. Qualified expenses include costs to acquire, construct, rehabilitate, or expand a facility for child care, operational costs for the facility, and amounts incurred under a contract with a child care facility to provide service to employees. A 10% credit can also be claimed for the costs incurred under a contract to provide child care resource and referral services to employees. The maximum credit in any year is $150,000. This credit is scheduled to expire for tax years beginning after December 31, 2012. 3. Small Business Credit For New Retirement Plan Expenses - A nonrefundable credit is available for expenses associated with establishing a new qualified retirement plan. The credit is equal to 50% of the first $1,000 in administrative and retirement-education expenses for the plan for each of the first three years of the plan. A small business is defined as one with no more than 100 employees having compensation in excess of $5,000 in the preceding year, and with at least one non-highly compensated employee. 4. Health Care Reform Act Credit - The Small Business Health Care Tax Credit helps small businesses and small tax- exempt organizations afford the cost of covering their employees. Eligibility Rules - A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate. Additionally, the qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible). Lastly, the qualifying employer must pay average annual wages below $50,000. Both taxable (for profit) and tax-exempt firms qualify. Amount of Credit - The credit is worth up to 35 percent of a small business' premium costs in 2011 through 2013. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers). The credit phases out gradually for employers with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

A - 45

PAYROLL SAVING TIPS - continued


FEDERAL BUSINESS CREDITS - continued
4. Health Care Reform Act Credit (continued) Claiming the Credit - Both small businesses and tax-exempt organizations will use Form 8941 to calculate the small business health care tax credit. Small businesses will include the amount of the credit as part of the general business credit on its income tax return. Exempt organizations will instead claim the small business health care tax credit on Form 990-T. Form 990-T was revised for the 2011 filing season to enable eligible tax-exempt organizations even those that owe no tax on unrelated business income also to claim the small business health care tax credit. 5. FICA Tip Credit- In food and beverage establishments where tipping is customary, employers are allowed an income tax credit equal to their FICA tax obligation (7.65%) on reported tips in excess of the amount of tips treated as wages for purposes of the Fair Labor Standards Act (FLSA). Although the federal minimum wage has been increased, the Small Business and Work Opportunity Tax Act of 2007 allows food and beverage establishments to continue to compute the amount of the tip credit based on the federal minimum wage previously in effect on January 1, 2007 ($5.15 per hour).

A - 46

PAYROLL SAVING TIPS - continued


PENNSYLVANIA BUSINESS CREDITS
1. Jobs Creation Tax Credit- Employers are required to submit an application to the Department of Community and Economic Development (DCED) where they agree to create at least 25 new jobs or increase the number of its employees by at least 20% within three years of the start date. Upon approval, employers could claim a credit of $1,000 per new job created (up to an amount specified in the DCED Acceptance Letter). 2. PA Job Promotion Credit- Pennsylvania has enacted legislation that allows qualified companies to retain withholding taxes for individuals employed in new jobs. A qualified company is a for-profit corporation, partnership or other entity that agrees to create at least 250 new jobs in the state within five years and provide health insurance coverage to its full-time employees. Further, qualified companies must be located in the state and create 100 new jobs in the state within two years of entering into an agreement with the Department of Community and Economic Development (DCED). Qualified companies will be able to retain 95% of withholding taxes for individuals for one of the following periods: 7 years, if the individuals are compensated at a rate equal to at least 100% of the county average wage. 8 years, if the individuals are compensated at a rate equal to at least 110% of the county average wage. 9 years, if the individuals are compensated at a rate equal to at least 120% of the county average wage 10 years, if the individuals are compensated at a rate equal to at least 140% of the county average wage.

If the company fails to comply with the terms and conditions of the agreement with the department, the company will be required to repay an amount equal to the aggregate withholding taxes retained by the company. The total amount of the benefits retained cannot exceed $5,000,000, and no agreements can be entered into after January 1, 2018.

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PROCESSING & REPORTING

PART B - PROCESSING AND REPORTING


B B B B B 1 2 3 3 4 Federal Tax Deposit Requirements Form 941 Deposit Rules Same Day Payment Option Electronic Federal Tax Payment Systems (EFTPS) Form 940 Deposit Rules Pennsylvania Withholding Filing Requirements PA Electronic Funds Transfer PA e-Tides Maryland Withholding Filing Requirements Reciprocal Agreements Mandatory Postings for Employers Multi-State Reporting Bonuses and Supplemental Wages How and When to Use Cumulative Withholding Other Benefits Exempt From Taxes Group Term Life Insurance Cafeteria Plans Heath Care: Patient Protection and Affordable Care Act Health Care: Reporting Requirements Personal Use of Company Provided Vehicle Medical and Move Related Mileage Rate Charitable Related Mileage Rate Sick Pay (Disability Income) Form 1099 - Miscellaneous Income Business Expense Reimbursements Moving Expense Reimbursements Military Spouse Residency Relief Act Stock Options

B - 5 B - 8 B - 10 B - 12 B - 13 B - 15 B - 16 B - 18 B - 21 B - 22 B - 22 B - 24 B - 28 B - 31 B - 33 B - 38 B - 38 B - 39 B - 40 B - 43 B - 46 B - 47 B - 49

FEDERAL TAX DEPOSITS FORM 941 - FEDERAL TAX DEPOSITS


Calculation of the Deposit Tax Year 2013 (do not use for 2012)
1. Social Security taxes withheld 2. Ordinary Medicare taxes withheld 1 3. Total FICA taxes withheld (Line 1 + Line 2) 4. Multiply by 2 5. Subtotal 6. Additional Medicare withholding (if applicable) 7. Add federal income taxes withheld 8. Required payroll tax deposit (Line 5 + Line 6 + Line 7) x $ 868.00 203.00 1,071.00 2 2,142.00 100.00 532.25 $ 2,774.25

Deposit Due Dates


Summary of Steps to Determine Your Deposit Schedule 1. Identify your lookback period (see Lookback period below). 2. Add the total taxes from line 10, Form 941 you reported during the lookback period. 3. Determine if you are a monthly or semiweekly schedule depositor: Then you are a: If the total taxes you reported in the lookback period were: $50,000 or less Monthly Schedule Depositor More than $50,000 Semiweekly Schedule Depositor

An employer is either a monthly depositor or a semiweekly depositor. This determination is made based on the aggregate amount of employment taxes reported during a "lookback" period. The regulations define a look back period as the twelve-month period ending on the preceding June 30th and this determination is made by the IRS prior to the beginning of each calendar year.

1 Ordinary Medicare taxes withheld do not include the 0.9% Additional Medicare Withholding on individuals with earnings greater than $200,000.

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FEDERAL TAX RETURN DEPOSITS - continued


Lookback Period Example:
2011 Lookback Period rd 3 Quarter 2009 th 4 Quarter 2009 st 1 Quarter 2010 nd 2 Quarter 2010 Total Taxes Deposited 12,000 12,000 12,000 12,000 $48,000 2012 Lookback Period rd 3 Quarter 2010 th 4 Quarter 2010 st 1 Quarter 2011 nd 2 Quarter 2011 Total Taxes Deposited 12,000 12,000 12,000 12,000 $48,000

Monthly deposit ($50,000 or less) An employer is a monthly depositor if the total taxes you reported in the lookback period were $50,000 or less. A monthly depositor must deposit employment taxes for payments made during a calendar month via EFTPS by the 15th day of the following month. If the 15th day of the following month is not a banking day, taxes will be treated as timely deposited on the next following banking day. Semiweekly deposit (greater than $50,000) An employer is a semi-weekly depositor if the total amount of employment taxes reported for the look back period is more than $50,000. Under the semi-weekly deposit rule a monthly depositor must deposit employment taxes one day before they are due via EFTPS by: If the payday falls on a.. Wednesday, Thursday or Friday Saturday, Sunday, Monday, or Tuesday Then deposit taxes by the following Wednesday Friday

If any of the three weekdays following the close of a semiweekly period is a bank holiday, employers will be given an additional banking day to make the deposit. $100,000 Next-day deposit rule The semiweekly or monthly deposit rules will not apply if an employer has accumulated $100,000 or more of employment taxes. These taxes must be deposited via EFTPS. To determine whether the $100,000 threshold is met, (1) a monthly depositor takes into account only those employment taxes accumulated in the calendar month in which the day occurs; and (2) a semiweekly depositor takes into account only those employment taxes accumulated in the Wednesday - Friday or Saturday - Tuesday semiweekly period in which the day occurs. Note: Regardless of whether you are a monthly depositor or a semiweekly schedule depositor, if you accumulate taxes of $100,000 or more on any day during a deposit period, you must deposit them on the next banking day. If this happens, you become a semiweekly depositor for the remainder of the calendar year and for the following calendar year.

B-2

FEDERAL TAX RETURN DEPOSITS - continued


Accuracy of deposits rules Employers are required to deposit 100% of their tax liability on or before the deposit due date. Penalties will not be applied for deposits less than 100% if both of the following conditions are met: Deposit shortfall does not exceed the greater of $100 or 2% of the required tax deposit. Deposit shortfall is made up in a timely manner. Monthly Depositor- Deposit or pay the shortfall by the due date of your return for the return period where the shortfall occurred. Semiweekly Depositor- Deposit the shortfall by the earlier of the first Wednesday or Friday (whichever is earlier) falling on or after the 15th day of the month in which the deposit was due OR the due date of the return. Same day payment option If you fail to initiate a deposit transaction on EFTPS at least 1 business day before the deposit due date, you can still make deposit on time by using the Federal Tax Application (FTA). Please check with your financial institution regarding availability, deadlines, and cost. If the total tax liability for the current or preceding quarter is less than $2,500 and you did not incur a $100,000 next-day deposit obligation, a payment can be made with the return and no penalties will be incurred. Employers who have been notified to file Form 944 (Employers Annual Federal Tax Return) can pay their fourth quarter tax liability with Form 944 if their fourth quarter liability is less than $2,500. All other quarters must be deposited according to the previously discussed deposit rules. Remember! Deposit rules are based on when wages are paid, not earned. For example, Monthly Schedule Depositors with wages earned in June but paid in July, deposit August 15. If the due date for a deposit falls on a federal or state bank holiday or on a Saturday or Sunday, the deposit is considered timely if it is made by the close of the next banking day.

Forms of Deposit
ELECTRONIC FEDERAL TAX PAYMENT SYSTEMS (EFTPS)
EFTPS Online - EFTPS is a service offered free by the U.S. Department of the Treasury for people to pay federal taxes electronically. https://www.eftps.gov/eftps/ EFTPS Phone - You may make your tax deposit payments by calling the EFTPS Voice Response System at 1-800-555-3453. EFTPS is available 24 hours a day, seven days a week. Payment must be initiated by 8:00 p.m. one business day prior to date due.

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FEDERAL TAX RETURN DEPOSITS - continued


Enrollment
Employers that receive a new EIN (Employer Identification Number) and have a federal tax obligation will automatically be pre-enrolled in the EFTPS. After receiving their EIN, employers will receive a separate mailing containing an EFTPS Personal Identification Number (PIN) with instructions for activating their enrollment. New employers can then activate their enrollment by calling 1-800-555-3453. Employers need their EIN, PIN, banking information, and contact phone number to complete the enrollment. For more information call: EFTPS Customer Service at 1-800-555-4477 or visit the IRS website at www.eftps.gov

FEDERAL UNEMPLOYMENT DEPOSIT RULES


If your FUTA tax liability for a quarter is $500 or less, you do not have to deposit the tax. Instead, you may carry it forward and add it to the liability figured in the next quarter to see if you must make a deposit. If your FUTA tax liability for any calendar quarter is over $500 (including any FUTA tax carried forward from an earlier quarter), you must deposit the tax by EFTPS. For deposit purposes, your FUTA liability is calculated by multiplying the amount of taxable wages by 0.6%. However, your actual FUTA liability may be higher if you pay wages subject to the unemployment laws in a credit reduction state or if you do not pay your state unemployment tax timely. Credit reduction states are states that have not repaid money borrowed from the federal government to pay unemployment benefits. Since the state has not repaid the money borrowed, employers pay a higher amount of federal unemployment taxes. When to deposit Deposit the FUTA tax by the last day of the first month that follows the end of the quarter.

B-4

LATE PAYMENT PENALTIES & INTEREST


You may be subject to penalties for failure to deposit timely, failure to deposit the required amount, or failure to use EFTPS as required. For amounts not properly or timely deposited, the penalty rates are:

2% - Deposits made 1 to 5 days late. 5% - Deposits made 6 to 15 days late. 10% - Deposits made 16 or more days late. Also applies to amounts paid within 10 days of the date of the first notice the IRS sent asking for the tax due. 10% - Amounts subject to electronic deposit requirements but not deposited using EFTPS.
15% - Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you receive notice and demand for immediate payment, whichever is earlier.

PENNSYLVANIA WITHHOLDING FILING REQUIREMENTS


PA Tax Rate The amount of Pennsylvania withholding tax to be remitted is the higher of: - Gross Wages X 3.07% or current PA tax rate, or - Amount actually withheld. ** Tax payments of $10,000 or more per payment are required to be deposited via electronic funds transfer.

Filing PA Returns and Remitting Tax


Employers can file returns and remit employer withholding for free using e-TIDES, the department's Internet business tax filing system, or TeleFile, a toll-free telephone filing system. Employers may also file and pay through approved third party software vendors named on the department's website. The department accepts electronic payments using ACH debit, ACH credit and credit/debit cards. Employers remitting payments under $10,000 may also pay by check, using an e-TIDES voucher or writing all appropriate information on the check if using TeleFile. To learn more about electronic filing, visit www.etides.state.pa.us to register and begin filing and paying business taxes online.

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PA WITHHOLDING FILING REQUIREMENTS - continued


PA Withholding Frequency and Due Dates
The withholding tax must be remitted to the Department of Revenue quarterly, monthly or semi-monthly. The frequency is determined by the following:
Tax Withheld $0.00 299.99 $300 999.99. $1,000 4,999.99.. $5,000 or more.. Quarterly Monthly Semimonthly Semiweekly Payment Frequency

IMPORTANT **
1. W-2s are required to be furnished to employees no later than 1/31. Even if you have no wages for the quarter, you still must file reporting zero compensation for the quarter.

2.

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PA WITHHOLDING FILING REQUIREMENTS - continued


Depending on what frequency you fall in, following are the due dates:

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PA WITHHOLDING FILING REQUIREMENTS - continued


Interest
If any amount of tax required to be withheld is not reported and paid in full on or before the due date, simple interest will be charged daily from the date the tax is due and payable to date of payment. The rate of interest will be announced annually by the PA Department of Revenue. This interest rate will continue for the calendar year regardless of subsequent change in the federal interest rate in such calendar year. Interest is computed by multiplying the late paid or unpaid tax x day's delinquent x daily interest rate. The daily interest date equals annual interest rate divided by 365.

Penalties
Failure to file a quarterly return may result in the imposition of additional tax of five (5) percent per month of the underpayment for each month or fraction thereof (maximum penalty of 25 percent). Failure to pay withheld tax to the PA Department of Revenue on or before the due date for filing the quarterly reconciliation return will result in an additional tax of five (5) percent per month of the underpayment for each month or fraction thereof (maximum penalty of 50 percent). If any part of any underpayment of tax that is later proved to be the result of fraud, an amount equal to 50 percent of the underpayment will be added to the tax.

REMITTANCE OF PA TAX PAYMENTS


Overview
By regulation, the PA Departments of Treasury and Revenue have implemented a program enabling taxpayers to remit tax payments through Electronic Funds Transfer (EFT). This regulation requires participation of taxpayers remitting a payment of $10,000 or more. Failure to comply with the EFT remittance requirements may result in an assessment of a penalty equal to three (3) percent of the total tax due, not to exceed $500. The penalty may be imposed on all payments of $10,000 or more that are not presented to the Department of Revenue by an approved payment method. If a business does not meet the $10,000 threshold, it may voluntarily request participation in the program. The Pennsylvania Department of Revenue requires taxpayers remitting a payment of $10,000 or more for any of the following taxes to make payment by Electronic Funds Transfer (EFT): Sales and Use Employer Withholding Corporate Net Income Capital Stock/Franchise Mutual Thrift Institutions Bank Shares, Title Insurance, and Trust Company Gross Receipts Insurance Premiums Little Cigar
B-8

Public Utility Realty Motor Carrier Road Utility Gross Receipts Bank Loans Liquid Fuels and Fuels Malt Beverage Corporate Loans Cigarette Stamp Agents Marine Insurance Premiums Pari-Mutuel

REMITTANCE OF PA TAX PAYMENTS - continued


Requirements for Enrollment in the EFT Program
An EFT Authorization Agreement must be completed for each type of tax. The required forms should be received automatically from the Commonwealth. If you are required to use EFT and do not receive the required forms, go to the website at www.revenue.state.pa.us., Businesses, Business Tax e-Services Center.

Payment Methods
The EFT program offers four payment methods to satisfy the $10,000 approved EFT method: 1. Automated Clearing House Debit (ACH Debit) Transaction in which the Commonwealth, through its designated depository bank originates an ACH transaction debiting the taxpayer's bank account and crediting the Department's bank account for the amount of the payment due. Automated Clearing House Credit (ACH Credit) Before selecting this method verify that your financial institution can properly handle this type of transaction and the approximate costs. Transaction in which the taxpayer, through its own bank, originates an entry crediting the Commonwealth's bank account and debiting its own bank account for the amount of the payment due. You are required to perform a pre-notification test through your financial institution against the Commonwealth's bank account established for EFT payment deposits. The Department's bank account number and transit routing number, to perform this test, will be provided upon receipt of your EFT Authorization Agreement. Please keep in mind that for ACH debit and credit transfers, there is a 1-day lag between the date on which payment is authorized and the date on which the transfer is executed. So, all ACH transactions must be initiated at least one business day before the applicable due date. 3. Credit/Debit Cards A taxpayer can use their American Express, Discover/NOVUS, Mastercard, or Visa credit card to pay PA Taxes. You may also use a Mastercard or Visa debit card to make payments. A taxpayer can pay Sales & Use Tax, Employer Withholding Tax, Liquid Fuels and Fuels Tax, and Corporation and Specialty Tax using a credit/debit card. The taxes can be paid via phone or over the Internet by using the service provider listed below: Official Payments Corp. Phone: 1-800-2PAYTAX (1-800-272-9829) Internet: www.officialpayments.com Official Payments Corp. charges a 2.49% convenience fee ($1 minimum charge) for processing the credit card transaction. Debit card convenience fees start at $3.95 per transaction. If you want to confirm your transaction, or if you have any questions, please call: Official Payments Corp. - Customer Service: 1-800-487-4567
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2.

REMITTANCE OF PA TAX PAYMENTS continued


Payment Methods
4. Certified/Cashier's Check Payment Method A taxpayer must remit a certified/cashiers check via an express mail delivery service or in personal along with the tax documents on or before 4:00 PM to the following address. Department of Revenue Bureau of Business Trust Fund Taxes, EFT Unit Strawberry Square, 9th Floor Fourth and Walnut Streets Harrisburg, PA 17128-0908

PA e-TIDES
e-TIDES is an Internet-based filing system available free of charge from the PA Department of Revenue at www.etides.state.pa.us . e-TIDES currently allows for the filing of returns and payments for Sales, Use, and Hotel Occupancy Tax, Employer Withholding Tax.

** e-TIDES will no longer accept Unemployment Compensation tax reports and payments. New registrants must use the paper Form UC-2A to file until the new Unemployment Compensation Management System (UCMS) is available. e-TIDES users who were able to file unemployment returns will be receiving information regarding the UCMS before the end of the year. The fourth quarter of 2012 will be filed using the new system.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

The site and your data are secured. Register online to activate your e-TIDES account. Simultaneously file your return and payment. Pay electronically using either ACH Debit, ACH Credit, or by Credit Card. If you will be using e-TIDES to transmit your tax returns and payments together electronically, the system will create your payment. You can opt to have returns and payments filed separately. Allow multiple filers within your business or outside your business (i.e. accountant, etc.) to file returns and/or payments for your business. The Multi-Import feature allows you to submit multiple returns or payments by uploading a single file. You control the level of access of your filers. You can dictate if a filer can file a return, make payments, and/or view your Internet filing history. View your Internet filing history online. The system will keep a record of your returns and any payments made electronically by ACH Debit. Your return and payment will be assigned an ID number for future reference. Links to Labor & Industry, PA Open for Business, Revenue Homepage & Commonwealth Homepage.

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PA e-TIDES continued
Filer Registration Instructions
In order to use e-TIDES, you must complete two types of registrations: Filer Registration and Enterprise Registration. NOTE: In order to use e-TIDES electronic filing options you must first be registered with the Department of Revenue to collect Sales, Use, Hotel Occupancy Tax, and Employer Withholding Tax. If you are a new business and need to obtain a tax account number(s), use the PA100 Pennsylvania Enterprise Registration form or register using the Online PA100 at www.pa100.state.pa.us. Log into www.etides.state.pa.us To obtain a complete overview of the e-TIDES registration requirement, click on Registration Requirements. Step 1. Click on Enter e-TIDES. Step 2. Register Options in e-TIDES - The PA Department of Revenue announced the following options: W-2 Transmittal/W-2 Wage Statements/1099-R - The ability to file the W-2 Transmittal/1099R/Rev.-1667. Click on W-2 Transmittal/W-2 Wage Statement/1099R for more information. Amended Returns - You may file amended returns for Sales Tax and Employer Withholding Tax. You can access this in two ways. Click on Amended Return for more information. Enterprise Maintenance - The ability to change/update Sales and Employer Withholding Taxes electronically. Click on Enterprise Maintenance for more information.

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MARYLAND WITHHOLDING FILING REQUIREMENTS


Maryland law provides that the Comptroller develop withholding tax schedules to approximate the tax on wages, without considering the tax rates in effect that are less than 4.75%. In the 2013 Maryland Withholding Guide, you will find the appropriate percentage for the computation of the amount of Maryland income tax to be withheld. The rates are divided into two main groups as described below: The SINGLE rate is used by single employees; employees who are dependents on another person's tax return, or employees who are married planning to file separately. The JOINT rate is used by married taxpayers who plan to file joint returns, employees who qualify for head of household status on their tax return, or for employees who qualify as widow or widower with a dependent child.

For employees who are residents of Maryland, use the rate corresponding to the area where the employee lives. Since each county sets their local income tax rate, there is the possibility of having 24 different local income tax rates. To reduce the number of local income tax rates, Maryland has established 14 local income tax rates. Use the rate that equals or slightly exceeds the actual local income tax rate to ensure that sufficient tax is withheld. For employees who are not residents of Maryland use the Nonresident rate, which includes no local tax; but does include the Special 1.25% Nonresident rate. Withholding is a combination of the state income tax rate and local taxes. When using the percentage method of withholding, the employer must follow these four steps: 1. Subtract an allowance for Standard Deduction (15 percent of wages for the payroll period with a minimum and maximum as set forth for the particular payroll) from the employees wages. 2. Multiply the amount of one withholding exemption for the payroll period by the number of exemptions claimed on the employees Form MW507. 3. Subtract the amount determined in Step 2 from the employees wages. 4. Apply the appropriate percentage rate table to the resulting figure to determine the amount of withholding, based on the employees county of residence. If the employee is a resident of a nonreciprocal state, use the special nonresident tax rate. How to File For filing purposes employers will fall into one of five types of filing categories: Accelerated those employers who were required to withhold $15,000 or more for the preceding calendar year and who have $700 or more of accumulated withholding are required to remit the withholding payment within three business days following that payroll (pay date). You may request a waiver allowing monthly returns. A renewal of the waiver is also available if eligibility to file federal withholding tax returns on a monthly basis is unchanged. Pay date is defined as the date the paychecks are made available to employees. Quarterly those employers with less than $700 of withholding per quarter who are required to remit the tax withheld on a quarterly basis. Monthly those employers with more than $700 of withholding in any one quarter who are required to remit the tax withheld on a monthly basis.

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MARYLAND WITHHOLDING FILING REQUIREMENTS continued


Seasonal those employers who operate only during certain months. You must obtain prior approval to file on a seasonal basis. If approval is granted, you would only be required to file reports during the period your business is in operation. Annual those employers with less than $250 withholding per calendar year are required to remit the tax withheld on an annual basis.

bFile is an online service used to file and pay Employers Return of Income Tax Withheld (MW506). A valid FEIN or Social Security number (SSN) and Maryland CRN (this is your eight-digit Maryland tax account number) are required. If you have not registered to file Maryland business taxes or do not have a CRN, you may register on bFiles Web site. When to File The due date for monthly employers is the 15th of the following month (e.g. Januarys return is due before February 15th). The due date for quarterly returns is the last day of the following month (e.g. 1st quarter return is due on April 30th). The due date for the annual return is January 31st. If a due date falls on a Saturday, Sunday or holiday, the return is due on the next business day.

STATE RECIPROCAL AGREEMENTS


Employers are ordinarily required to withhold their states personal income tax, which may not necessarily be the employees state of residence. Some states have made agreements among one another that allow employers to withhold the state personal income taxes of the employees residence. These agreements are called state reciprocal agreements. If you agree not to withhold your states personal income tax because your employee is a resident of a reciprocal state, you must withhold that state's tax. However, the employer may choose to withhold the other state's tax if the employee is a resident of a reciprocal state and the employee requests the employer to withhold the reciprocal state's tax. Additionally, there is also an exemption from the requirement to withhold for nonresident spouses of military service members.

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STATE RECIPROCAL AGREEMENTS - continued


State District of Columbia Illinois Indiana Iowa Kentucky Maryland Michigan States with State Tax Reciprocal Agreements All non-residents who work in DC can claim exemption from withholding for the DC income tax. Iowa, Kentucky, Michigan, Wisconsin Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin Illinois Illinois, Indiana, Michigan, Ohio, West Virginia, Wisconsin, Virginia District of Columbia, Pennsylvania, Virginia, West Virginia Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin Employers may create their own exemption form or use the line on MI-W4 for claiming exemption from withholding. Employee should write "Reciprocal Agreement" and the state name on that line. Minnesota Montana New Jersey North Dakota Ohio Pennsylvania Virginia West Virginia Wisconsin Michigan, North Dakota North Dakota Pennsylvania Minnesota, Montana Indiana, Kentucky, Michigan, Pennsylvania, West Virginia District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia Kentucky, Maryland, Ohio, Pennsylvania, Virginia Illinois, Indiana, Kentucky, Michigan IT-104 W-220 MW-R NR-2 NJ-165 NDW-R IT-4NR VA-4 MW-507 MI-W4 IL-W5NR WH-47 44-16 42A809 Exemption Form D-4A

Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia REV-419 EX

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MANDATORY POSTINGS FOR EMPLOYERS


Employers are required to post certain notices in their worksites so employees have access to and information about applicable labor laws. Most of these posters can be downloaded for free from each states website. All notices must be posted in a conspicuous place so that they can be seen and read by employees. Failure to post notices can result in stiff penalties and possible fines. In addition to the notices listed below, all government agencies and private employers with government contracts over $25,000 are required to publish and post an anti-drug policy statement in accordance with the Drug-Free Workplace Act of 1998. For other states, please see your state labor and industry website. REQUIRED EMPLOYEE NOTICES

Federal Posting Requirements: All Employers Fair Labor Standards Act (FLSA; minimum wage) Equal Employment Opportunity is the Law (Office of Federal Contract Compliance Programs) Uniformed Services Employment and Reemployment Rights Act Job Safety & Health Protection (OSHA) Employee Polygraph Protection Act Your Rights Under the Family and Medical Leave Act Employee Right for Workers with Disabilities

Federal Posting Requirements: Contractors Notice to All Employees Working on Federal or Federally Financed Construction Projects Notice to Employees Working on Government Contracts Notification of Employee Rights Under Federal Labor Laws

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MANDATORY POSTINGS FOR EMPLOYERS continued

Maryland State Posting Requirements:

Pennsylvania State Posting Requirements:


Maryland Occupation Safety and Health Act Safety and Health Protection on the Job Wage and Hour Fact Sheet Health Insurance Coverage Equal Pay For Equal Work Employee Rights Under Marylands Unemployment Insurance Law Workers' Compensation Notice & Instruction Employment of Minors Employment Discrimination is Illegal

Abstract of Pennsylvania Child Labor Law Hours of Work for Minors Under Eighteen Minimum Wage Law Poster and Fact Sheet Unemployment Compensation Unemployment Compensation for State Employees (Public Employers) Equal Opportunity & Fair Practices Notices Workers' Compensation Insurance Posting Abstract of Equal Pay Law Pennsylvania Clear Indoor Air Act Signage for No Smoking Pennsylvania Right to Know Law (Public Employers)

MULTI-STATE REPORTING
Multi-State Income Tax Withholding
Rule of Thumb Withhold income tax for the state in which services are performed. This is the default rule for employees who live and work in the same state. When thats not the case, you must consider three other factors: residency, reciprocity, and resident/ nonresident taxation policies. New Hire Reporting Employers who have employees in more than ones state can elect to transmit all new hires magnetically or electronically with only one state. The employer must notify the U.S. Health and Human Services Department which state will be receiving the reports.

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MULTI-STATE REPORTING - continued


Multi-State Unemployment Insurance
Every state sets its own unemployment insurance (UI) tax rate and taxable wage base. Fortunately, you may only have to pay state unemployment taxes to one state for each employee, even if the employee works in more than one state. The trick is making sure that you pay the correct state. If you pay unemployment taxes to the wrong state, you're still liable for paying them to the correct state, and you may have trouble getting a refund from the incorrect state. What to do - Gather the facts on where the employee in question is based, performs work, and lives. Some general guidelines are as follows: 1) Localized: The employee works basically in one state with only temporary or transitory work in another state. Pay the state where the employee normally works. 2) Base of operations: The employee works in more than one state on more than a temporary or transitory basis, but receives instructions, maintains business records, picks up mail or supplies, or has an office in one of the states where he or she works. You pay that state. 3) Place of control: The employee's work is not localized and the base of operations can't be pin-pointed. You pay the state where the control over the employee is localized, if the employee works there some of the time. 4) Residence: When all else fails, pay the state where the employee lives, if he or she works there at least some of the time. However, when an employee works in more than one state it is best to review the unemployment laws of the state(s) they are working in to determine the specific requirements of that state. There will be instances when unemployment tax is required to be paid to more than one state. For more information on your states unemployment insurance contact your states labor and industry office.

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BONUSES AND SUPPLEMENTAL WAGES


Supplemental Wages
Supplemental wages are wage payments to an employee that are not regular wages. They include, but are not limited to: bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses.

Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a non-accountable plan. How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. SPECIAL OPTIONS FOR TIPS AND OVERTIME PAY: Even though tips reported by employees and overtime pay meet the definition of supplemental wages, the regulations give employers the option of treating such payments as regular wages. The employer does not have to treat them the same for each employee. Withholding on supplemental wage payments to an employee who does not receive $1,000,000 of supplemental wages during the calendar year. If the supplemental wages paid to the employee during the calendar year are less than or equal to $1,000,000, the following rules apply in determining the amount of income tax to be withheld. A. Supplemental wages combined with regular wages If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period. B. Supplemental wages identified separately from regular wages If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages. 1. If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages. a. Withhold a flat 25% (no other percentage allowed).

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BONUSES AND SUPPLEMENTAL WAGES - continued


b. If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax. 2. If you did not withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b above. This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, FUTA, state and local taxes. Example 1. You pay John Peters a base salary on the 1st of each month. He is single and claims one withholding allowance. In January, he is paid $1,000. Using the wage bracket tables, you withhold $52 from this amount. In February, he receives salary of $1,000 plus a commission of $2,000, which you include with regular wages. You figure the normal withholding based on the total of $3,000. The correct withholding from the tables is $342. Example 2. You pay Sharon Warren a base salary on the 1st of each month. She is single and claims one allowance. Her May 1 pay is $2,000. Using the wage bracket tables, you withhold $192. On May 14, she receives a bonus of $1,000. Electing to use supplemental payment method 1-b, you: 1. Add the bonus amount to the amount of wages from the most recent pay date ($2,000 + $1,000 = $3,000). 2. Determine the amount of withholding on the combined $3,000 amount to be $342 using the wage bracket tables. 3. Subtract the amount withheld from wages on the most recent pay date from the combined withholding amount ($342 $192 = $150). 4. Withhold $150 from the bonus payment.

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BONUSES AND SUPPLEMENTAL WAGES - continued


Example 3. The facts are the same as in Example 2, except you elect to use the flat rate method of withholding on the bonus. You withhold 25% of $1,000, or $250, from Sharon's bonus payment. Withholding on supplemental wages when an employee receives more than $1,000,000 of supplemental wages from you during the calendar year. Special rules apply to the extent supplemental wages paid to any one employee during the calendar year exceed $1,000,000. If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1,000,000, the excess is subject to withholding at 35 percent (or the highest rate of income tax for the year). Withhold using the 35% rate without regard to the employee's Form W-4. In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control.

Gross up the Bonus


In cases where you want the employee to receive a specific amount without the taxes deducted, you may gross up the bonus. In order to do this, follow these steps: 1. Add the withholding tax rates: Federal withholding FICA, M/C PA state tax Local tax PA UC Tax = = = = = 25.00% 7.65% 3.07% 1.00% .08% 36.8% 2. Subtract the total of step 1 from 100%: 100.00% 36.8% 63.2% $500/63.2% = $791.14 Gross amt. $ 791.14 (197.80) (60.52) (24.28) (7.91) (.63) $ 500.00 Net bonus

3. Divide the net amount by the answer in Step 2 to arrive at the gross amount of wages: 4. Gross amount (25.00%) Federal w/h ( 7.65%) FICA/MC w/h ( 3.07%) PA w/h ( 1.00%) Local w/h ( 0.08%) PA UC tax w/h

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BONUSES AND SUPPLEMENTAL WAGES - continued


How and When to Use Cumulative Withholding
Situations can occur where the nature of the work or the duration of employment causes an employees earnings to be distorted. For example, an employee earns a great deal in one part of the year, and relatively little in the rest. The employee will be over-withheld at his or her earnings peak, and for the entire year, unless you withhold on a cumulative basis. How It Works - The employees total earnings to date are divided by the payroll periods to date to calculate average pay per pay period. You then calculate withholding on this average amount and multiply it by the number of payroll periods to date. If during the year this average amount, or more, has already been withheld, no income tax is withheld on the latest commission payment. If less has been withheld, the difference is withheld on the current payment. In any case, FICA tax is deducted as usual. Employees wishing to withhold on the cumulative basis must submit their request in writing to their employer. Part-Year Employment - Cumulative withholding can also reduce income tax withholding for so-called part-year workers. Its especially helpful for summer workers, like students, who may have no other earnings during the rest of the year. What to Do Another option to prevent over-withholding is for employees to sign a request like the one below. Keep it with the W-4. I request that federal income tax be withheld from my earnings using the part-year employment method. Under penalties of perjury, I agree to the following statements. I am a calendar-year taxpayer. My last day of any employment during the calendar year with any prior employer was ____. And I reasonably anticipate being employed by all employers for no more than 245 days in all terms of continuous employment. The part-year withholding method works on the same principle of averaging earnings over earlier periods, as in the method described previously for sales employees. Since part-year employees have no earnings in these previous periods, withholding on the average earnings is cut drastically.

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OTHER BENEFITS EXEMPT FROM TAXES


Listed below are a few examples of nontaxable benefits: Services provided to your employees at no additional cost to you (e.g. a hotel chain can allow employees to stay free). 2. Qualified employee discounts (up to 20% off the price of service offered to regular customers). 3. Working condition fringes that are property or services the employee could deduct as a business expense if they had paid for it (e.g. company car for business use and subscriptions to business magazines) 4. Certain minimum value fringes (e.g. occasional cab ride when an employee must work overtime). 5. Qualified transportation fringes subject to specified conditions and dollar limitations (including transportation in a commuter highway vehicle, transit passes, and qualified parking). 6. Qualified moving expense reimbursement. 7. The use of on-premises athletic facilities (if substantially all of the use is by employees, their spouses, and dependent children). 8. Qualified tuition reduction an educational organization provides to its employees. 9. Employer-provided cell phones provided primarily for a non-compensatory business reason. 10. Recognition awards - Employer awards for retirement or exceptional performance are federal income tax-free if they have a low fair market value. Awards of tangible personal property are tax-free up to $400 per year or $1,600 if the award is for length of service or safety achievement and it is available to all employees. Remember cash and gift certificates are taxable, no matter the value. 1.

GROUP TERM LIFE INSURANCE


Generally, employer-provided group-term life insurance with a value of $50,000 or less is a tax-free benefit to the employee if it is non-discriminatory. The value in excess of $50,000, less any employee after-tax payroll deduction, is to be treated as taxable income, also subject to social security and Medicare taxes. The employer is not required to withhold federal income tax from the employee, but the value is subject to federal taxation and must be reported on the employee's Form W-2 as "other compensation." This amount is also included in box 12, using Code C.

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GROUP TERM LIFE INSURANCE - continued


** Coverage for Spouse and Dependents The cost of employer-provided group-term life insurance on the life of an employees spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit.

The value in excess of $50,000 is not taxable for FUTA, PA income tax, local wage tax or state unemployment purposes. If the employee pays for additional coverage with cafeteria plan salary-reduction dollars, the entire amount of salary reduction premium is excluded from the employee's taxable wages. Table I must be used to calculate the taxable coverage of life insurance over $50,000, and is taxed as other compensation as stated above. If an employer-provided GTL policy provides coverage in excess of $50,000, the value of the insurance benefit to be included in the employee's income is calculated by use of the IRS "Uniform Premium Table I."

UNIFORM PREMIUM TABLE I


Cost per $1000 of protection for one month Age Under 25 25 to 29 30 to 34 35 to 39 40 to 44 45 to 49 50 to 54 55 to 59 60 to 64 65 to 69 70 and above Cost $ 0.05 0.06 0.08 0.09 0.10 0.15 0.23 0.43 0.66 1.27 2.06

The employee's age on the last day of the calendar year needs to be determined before the following formula can be used to calculate the value of GTL in excess of $50,000:

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GROUP TERM LIFE INSURANCE - continued


(GTL coverage - $50,000) x GTL cost factor x .001) - employee after-tax deduction for policy equals taxable GTL monthly premium value EXAMPLE: Employee's age at 12/31/12 Employee's GTL benefit: Employee's GTL after tax payroll deduction per month: Taxable wages on the value in excess of $50,000 2012 amount to be included in income (200,000 - 50,000) x .15 x .001 - 8.33 = $14.17/month x 12 months: 45 $200,000 $8.33

$170.04

The following are three exceptions where the excess GTL coverage would not be taxable to the employee: 1. The beneficiary of the policy is the company. 2. The beneficiary of the policy is a charitable organization. 3. The employee terminates during the year due to permanent disability.

CAFETERIA PLANS
A cafeteria plan, including a flexible spending arrangement, is a written plan that allows your employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the qualified benefit taxable. Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay. Qualified benefits. A cafeteria plan can include the following benefits discussed in section 2.

Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance). Adoption assistance. Dependent care assistance. Group-term life insurance coverage (including costs that cannot be excluded from wages). Health savings accounts (HSAs). Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services. Flexible spending arrangements (FSAs). The maximum contribution is set at $2,500.

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CAFETERIA PLANS - continued


Benefits not allowed. A cafeteria plan cannot include the following benefits discussed in section 2.

Archer MSAs Athletic facilities. De minimis (minimal) benefits. Educational assistance Employee discounts Employer-provided cell phones Lodging on your business premises Meals Moving expense reimbursements No-additional-cost services Transportation (commuting) benefits Tuition reduction Working condition benefits

It also cannot include scholarships or fellowships (discussed in Publication 970, Tax Benefits for Education). Employee. For these plans, treat the following individuals as employees. A current common-law employee (see section 2 in Publication 15 (Circular E) for more information). A full-time life insurance agent who is a current statutory employee. A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Exception for S corporation shareholders Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder for this purpose is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Plans that favor highly compensated employees If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. A plan you maintain under a collective bargaining agreement does not favor highly compensated employees. A highly compensated employee for this purpose is any of the following employees. 1. An officer. 2. A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock. 3. An employee who is highly compensated based on the facts and circumstances. 4. A spouse or dependent of a person described in (1), (2), or (3).

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CAFETERIA PLANS - continued


Plans that favor key employees If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. However, a plan you maintain under a collective bargaining agreement does not favor key employees. A key employee during 2012 is generally an employee who is either of the following. 1. An officer having annual pay of more than $165,000. 2. An employee who for 2012 is either of the following. a. A 5% owner of your business. b. A 1% owner of your business whose annual pay was more than $150,000.

Simple Cafeteria Plans


After December 31, 2010, eligible employers meeting contribution requirements and eligibility and participation requirements can establish a simple cafeteria plan. Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan. Eligible employer You are an eligible employer if you employ an average of 100 or fewer employees during either of the 2 preceding years. If your business was not in existence throughout the preceding year, you are eligible if you reasonably expect to employ an average of 100 or fewer employees in the current year. If you establish a simple cafeteria plan in a year that you employ an average of 100 or fewer employees, you are considered an eligible employer for any subsequent year as long as you do not employ an average of 200 or more employees in a subsequent year. Eligibility and participation requirements These requirements are met if all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate and each employee eligible to participate in the plan may elect any benefit available under the plan. You may elect to exclude from the plan employees who: 1. Are under age 21 before the close of the plan year, 2. Have less than 1 year of service with you as of any day during the plan year, 3. Are covered under a collective bargaining agreement, or 4. Are nonresident aliens working outside the United States whose income did not come from a U.S. source.

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CAFETERIA PLANS - continued


Contribution requirements You must make a contribution to provide qualified benefits on behalf of each qualified employee in an amount equal to: 1. A uniform percentage (not less than 2%) of the employees compensation for the plan year, or 2. An amount which is at least 6% of the employees compensation for the plan year or twice the amount of the salary reduction contributions of each qualified employee, whichever is less. If the contribution requirements are met using option (2) above, the rate of contribution to any salary reduction contribution of a highly compensated or key employee cannot be greater than the rate of contribution to any other employee.

Why offer cafeteria plans?


Cafeteria plans give employees greater responsibility for planning their choice of benefits while saving benefit costs for the employer. There are also some immediate tax benefits. All of the before-tax deductions of the employees are exempt from federal income tax, social security, Medicare, and in some states, are exempt from state and local withholding. Most states exclude contributions to before-tax plans from income taxes. Before-tax plans provide many employees with their only opportunity to take a tax deduction for medical expenses, since few employees meet the percentage of income test required to deduct medical expenses on individual tax returns. Employers can save on social security, Medicare, and FUTA by instituting a cafeteria plan. Annual payroll tax savings may actually exceed the administration costs involved in implementing and maintaining a plan.

Pennsylvania State Law - Cafeteria Plans


If an employer maintains a federally qualified cafeteria plan pursuant to IRC Section 125, certain amounts deducted from taxpayers salary (e.g., health/accident insurance) are not subject to Pennsylvania Personal Income Tax to the extent excluded for Federal purposes. Employer-provided flex dollars that an employee must use to pay for Pennsylvania exempt benefits, such as health insurance or life insurance, are excludable from income taxation. Employee contributions to a qualified IRC Section 125 plan for coverage for hospitalization, sickness, disability or death, supplemental unemployment benefits, or strike benefits, like employer contributions, are exempt, but only to the extent they are exempt for Federal income tax purposes. If an employer has an employee benefit plan that is not a qualified IRC Section 125 plan, employee contributions, even for the same kinds of coverage, are not excludable from Pennsylvania taxable compensation. Employee payments and contributions for other benefits, including dependent care and contributions to an IRC Section 401 plan, are not excludable from Pennsylvania taxable compensation. If the employers plan provides life insurance coverage that includes coverage for an employees dependent child and the employee pays a portion of the premium for that coverage, that portion of the employees payment is not excludable. Pennsylvania Localities follow PA state compensation rules and exclude employee contributions to cafeteria plans.
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CAFETERIA PLANS - continued


Maryland State Law - Cafeteria Plans
Maryland follows federal laws with respect to Section 125 plans. Maryland requires employers (with 1-9) employees who participate in a subsidized plan with the Health Insurance Partnership under The Working Families & Small Business Health Coverage Act to offer Section 125 plans.

HEALTH CARE: Patient Protection and Affordable Care Act


Key Dates
June 23, 2010 HHS is mandated to establish high-risk pools for individuals currently unable to get coverage Small businesses under 25 employees will be eligible for tax credits, retroactive to January 1, 2010 September 23, 2010 Pre-existing condition limitations will be banned for dependent children under age 19 Lifetime maximums will be prohibited Health plans providing coverage for dependent children must permit dependent children to stay on or join their parents policies up to age 26, regardless of marital or student status, provided theyre ineligible for other group coverage January 1, 2011 Over-the-counter drugs will not be reimbursable under FSAs or HSAs without a doctors prescription Individual and small group market health insurance providers must spend 80% of premium dollars on medical services (large group plans 85%) Employers with fewer than 100 employees will become eligible for wellness grants for up to five years Some employers will be required to disclose the value of health benefits on employees IRS forms W-2 value based on COBRA premiums (recent legislation extended reporting requirements to 2012) Early retirees will become eligible for a temporary reinsurance program A voluntary federal long-term care program will be established, to be offered at the employers discretion

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HEALTH CARE - continued


Patient Protection and Affordable Care Act
January 1, 2013 Employees Health Care Flexible Spending Account (FSA) contributions will be capped at $2,500 per year A 0.9% hospital insurance tax will be imposed on high income individuals (annual income greater than $200,000 individual/$250,000 couple) A new 3.8% Medicare tax that applies to dividends, interest and other unearned income will apply for high-income individuals January 1, 2014 Individuals will be mandated to obtain health care coverage Employers will be required to provide vouchers toward the purchase of state exchange-based insurance for employees working 30+ hours per week who would pay between 8.0% and 9.8% of their household income for health coverage State-based insurance exchanges will be established, and employers must notify newly hired employees of the availability of exchange-based coverage Employers with more than 50 employees must offer coverage or pay a penalty of $2,000 per employee Employers must pay a penalty of $3,000 for any employee for whom the employer does not contribute at least 60% of the cost of employee health insurance premiums, or any employee who pays more than 9.5% of his or her household income for health coverage (first 30 applicable workers are exempt) Employers with more than 200 employees must auto-enroll all new employees in health care plans Employers will be permitted to offer employees incentives up to 30% of the cost of a wellness program Pre-existing conditions will be banned for all individuals Bans will be placed on annual coverage limits and deductibles

January 1, 2018 A 40% excise tax will be imposed on high-cost health plans (exceeding $10,200 per year for individual; $27,500 for family coverage)

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HEALTH CARE - continued


Patient Protection and Affordable Care Act Tax Credits for Small Employers
Please see section A-37 for additional information on the health care credit for small employers.

Additional Medicare Tax Withholding


Employers are required to withhold the 0.9% Additional Medicare Taxes on an employees wages paid that are in excess of $200,000 starting in the 2013 calendar year. Employers are obligated to withhold the Additional Medicare Tax regardless of the employees marital status. Employers are not required to notify employees when the additional tax is withheld. Ordinary wages paid by an employer and sick pay wages paid by a third party are required to be aggregated to determine if the $200,000 threshold has been met.

NON-TAXABLE PORTION OF EMPLOYER PROVIDED HEALTH CARE COVERAGE


Starting in tax year 2012, the Affordable Care Act requires certain employers to report the value of the health insurance coverage they provide on each employee's annual Form W-2. Certain employers include those who file 250 or more Form W-2s for the prior calendar year. Until further guidance is issued, the reporting is optional for employers who file less than 250 Form W-2s. This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income, and it is not taxable.

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NON-TAXABLE PORTION OF EMPLOYER PROVIDED HEALTH CARE COVERAGE - continued


In regards to W-2 reporting of health benefits, the following chart can be used to determine which benefits are required to be reported, optional for reporting, and not included in reporting. Form W-2 Reporting of Employer-Sponsored Health Coverage Coverage Type Form W-2, Box 12, Code DD Report Do Not Optional Report Major medical X Dental or vision plan not integrated into another X
medical or health plan Dental or vision plan which gives the choice of declining or electing and paying an additional premium Health Flexible Spending Arrangement (FSA) funded solely by salary-reduction amounts Health FSA value for the plan year in excess X of employees cafeteria plan salary reductions for all qualified benefits Health Reimbursement Arrangement (HRA) contributions Health Savings Arrangement (HSA) contributions (employer or employee) Archer Medical Savings Account (Archer MSA) contributions (employer or employee) Hospital indemnity or specified illness (insured or self-funded), paid on after-tax basis Hospital indemnity or specified illness (insured or X self-funded), paid through salary reduction (pre-tax) or by employer Employee Assistance Plan (EAP) providing Required if employer applicable employer-sponsored healthcare coverage charges a COBRA premium On-site medical clinics providing applicable Required if employer employer-sponsored healthcare coverage charges a COBRA premium Wellness programs providing applicable employerRequired if employer sponsored healthcare coverage charges a COBRA premium Multi-employer plans Domestic partner coverage included in gross income X Governmental plans providing coverage primarily for members of the military and their families

X X

X X X X

Optional if employer does not charge a COBRA premium Optional if employer does not charge a COBRA premium Optional if employer does not charge a COBRA premium

X X

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NON-TAXABLE PORTION OF EMPLOYER PROVIDED HEALTH CARE COVERAGE - continued


Federally recognized Indian tribal government plans and plans of tribally charted corporations wholly owned by a federally recognized Indian tribal government Self-funded plans not subject to Federal COBRA Accident or disability income Long-term care Liability insurance Supplemental liability insurance Workers' compensation Automobile medical payment insurance Credit-only insurance Excess reimbursement to highly compensated individual, included in gross income Payment/reimbursement of health insurance premiums for 2% shareholder-employee, included in gross income Other Situations Employers required to file fewer than 250 Forms W-2 for the preceding calendar year (determined without application of any entity aggregation rules for related employers) Forms W-2 furnished to employees who terminate before the end of a calendar year and request, in writing, a Form W-2 before the end of that year Forms W-2 provided by third-party sick-pay provider to employees of other employers X

X X X X X X X X X X Report Do Not Report Optional X

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PERSONAL USE OF COMPANY PROVIDED VEHICLE


Although the business use of an employer-provided vehicle is non-taxable, the personal use is considered to be a taxable fringe benefit. Employers are required to ascertain the value of this personal use and to include it in the employee's wages reported on Form W-2. The personal use of a company-provided vehicle is not taxable for Pennsylvania tax purposes. The employee must submit to the employer an accounting for the business use of the car to alleviate the employer reporting the entire value of both business and personal use of the car on the employee's Form W-2. The Internal Revenue Service has provided several valuation methods for the employer to select from which to determine the amount of income that will be subject to reporting and taxing of the employee's wages. The employer may either use the "general valuation method" or select one of the following "safe harbor" valuation methods. Commuting Valuation Cents Per Mile Valuation Lease Value Rule When the employer chooses one of the three "safe harbor" valuation methods they are required to notify their employees, in writing, by January 31 (or 30 days after the employer provides the vehicle to the employee), as to which method will be applied to their assigned vehicle. This written notice, which must be posted in a location where all affected employees are reasonably expected to see it, must state: The special valuation rule that has been selected The substantiation requirements under IRC Section 274(d) The effect of failing to comply with the substantiation requirements Date notice was posted If the employer has elected NOT to withhold Federal income tax

An employer must adopt a valuation rule by the first day on which the vehicle is made available to the employee. The employer must continue to use the same valuation method for an employee until the vehicle is no longer used by the employee unless the employee and employer can change to the commuting method.

Substantiation of Business Use


Employees and employers must maintain adequate records to calculate the business use of an employerprovided vehicle. The employee should log the business use of the vehicle including the date, purpose of the trip, and number of miles traveled. To eliminate the necessity of the substantiation requirements, an employer can issue a written policy that either prohibits workers from making personal use of company cars or restricts any personal use to commuting trips only.

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PERSONAL USE OF COMPANY PROVIDED VEHICLE continued General Valuation Method


The worker's personal use of the employer-provided vehicle is determined by the fair market value of the automobile (the cost an individual would have to pay to lease the same or comparable vehicle on the same comparable terms in the same geographic area).

Commuting Valuation Method


The commuting use of an employer-provided car is valued at $1.50 per one-way commute ($3.00 per round trip) if the employee meets the following requirements: 1. You provide the vehicle to an employee for use in your trade or business and, for bona fide noncompensatory business reasons, you require the employee to commute in the vehicle. You will be treated as if you had met this requirement if the vehicle is generally used each workday to carry at least three employees to and from work in an employer sponsored commuting pool. 3. You establish a written policy under which you do not allow the employee to use the vehicle for personal purposes other than for commuting or de minimis personal use. Personal use of a vehicle is all use that is not for your trade or business. 4. The employee, except for de minimis personal use, does not use the vehicle for any personal purpose other than commuting. 5. The employee required to use the vehicle for commuting is not a control employee of the employer.

Cents Per Mile Valuation Method


The value is determined by multiplying the number of miles driven for personal use by the standard mileage rates established by the IRS (55.5 per mile for 2012, and 56.5 for 2013). The standard rate includes maintenance, insurance, and fuel provided by the employer. If the employee does not provide fuel, the valuation can be reduced by no more than 5.5 cents. To use this valuation method the following conditions are necessary: Employer expects the employee to use the vehicle while conducting the employer's business during the year. Vehicle will be driven more than 10,000 miles in the year. Vehicle will be used primarily by employees. Fair market value of the vehicle cannot exceed $15,300 for a passenger automobile or $16,200 for a truck or van. At least 50% of the vehicle's total annual mileage is for your trade or business.

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PERSONAL USE OF COMPANY PROVIDED VEHICLE continued


Cents Per Mile Valuation Method - continued EXAMPLE: Vehicle Cents Per Mile John Smith was issued a vehicle on January 2, 2012 Fair market value of vehicle on January 2, 2012 was $12,500 John has driven 15,500 miles during 2012 (4,500 personal miles and 11,000 business miles) The vehicle cents per mile valuation method is used (4,500 x .555) = $2,497.50) to be included in John's income (fuel provided) $2,497.50 minus $247.50 (5.5 x 4,500) = $2,250.00 (fuel not provided)

Fair Market Valuation Method (Annual Lease Value)


An employer determines the fair market value of the employer-provided vehicle on the first day the vehicle was available to the employee and then consults the IRS's "Annual Lease Value Table." The fair market value of the vehicle is that amount which the employee would pay when acquiring the vehicle in an armslength transaction, including sales tax, registration fees, and title fees. Once the fair market value is determined for the vehicle, that value is to be used for the first four (4) calendar years the employer makes the vehicle available to the employee. After four calendar years, the employer may determine a new fair market value. If a vehicle is transferred to another employee, the employer may re-determine its fair market value and calculate a new annual lease value, provided this is not done for the purpose of reducing an employee's income taxes.

Example of Annual Lease Value


John Smith was issued a vehicle on January 2, 2012 FMV of the vehicle on January 2, 2012 was $20,400 John has driven 15,500 miles during 2010; 4,500 personal miles and 11,000 business miles

Calculation:
Annual lease value Personal use percentage (4,500/15,500) Personal use value included in John's W-2 $5,600.00 29.03% $1,625.68

If fuel is provided, the employer must include an additional 5.5 cents per mile for personal miles. In this example, John would have an additional $247.50 (4,500 X .055) in taxable wages.
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PERSONAL USE OF COMPANY PROVIDED VEHICLE continued Fair Market Valuation Method (Annual Lease Value) - continued
Automobile Fair Market Value $ 0 - 999 1,000 - 1,999 2,000 - 2,999 3,000 - 3,999 4,000 - 4,999 5,000 - 5,999 6,000 - 6,999 7,000 - 7,999 8,000 - 8,999 9,000 - 9,999 10,000 - 10,999 11,000 - 11,999 12,000 - 12,999 13,000 - 13,999 14,000 - 14,999 15,000 - 15,999 16,000 - 16,999 17,000 - 17,999 18,000 - 18,999 19,000 - 19,999 20,000 - 20,999 21,000 - 21,999 22,000 - 22,999 23,000 - 23,999 24,000 - 24,999 25,000 - 25,999 26,000 - 27,999 28,000 - 29,999 30,000 - 31,999 32,000 - 33,999 34,000 - 35,999 36,000 - 37,999 38,000 - 39,999 40,000 - 41,999 42,000 - 43,999 44,000 - 45,999 46,000 - 47,999 48,000 - 49,999 50,000 - 51,999 52,000 - 53,999 54,000 - 55,999 56,000 - 57,999 58,000 - 60,000 Annual Lease Value (ALV) .................................................................................................... $ .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... .................................................................................................... 600 850 1,100 1,350 1,600 1,850 2,100 2,350 2,600 2,850 3,100 3,350 3,600 3,850 4,100 4,350 4,600 4,850 5,100 5,350 5,600 5,850 6,100 6,350 6,600 6,850 7,250 7,750 8,250 8,750 9,250 9,750 10,250 10,750 11,250 11,750 12,250 12,750 13,250 13,750 14,250 14,750 15,250

For vehicles having a fair market value in excess of $60,000, the ALV is equal to: (.25 x automobile fair market value) + $500. The ALV is decreased for any periods during which the car was unavailable and increased to cover other services provided for the car. The final amount is then multiplied by the percentage that represents personal use.
B - 36

PERSONAL USE OF COMPANY PROVIDED VEHICLE continued Company Fleets


Company fleets comprised of twenty or more vehicles using the annual lease value method may choose a fleet average valuation. When the employer reasonably expects the vehicles to be used in the employer's trade or business and each unit of the fleet has a fair market value of less than $21,100 (adjusted periodically by the IRS), the average of the fair market value for all vehicles may be used. If the fleet falls below 20 vehicles for more than 50% of the days in the year, the employer will not be able to use the fleet valuation method in the next year. Employers may identify more than one fleet within the vehicles owned by the employer. If the fleet average method is used, the employer must recalculate the valuations every two years. When the fleet valuation method is used, and the employer continuously provides a unit from the fleet to the employee, the employer is not required to provide the same vehicle for the entire period. Employerprovided fuel for fleet automobiles can be valued by using an average fuel cost of the entire fleet, or 5.5 per mile. After you have determined the fair market value or fleet value, find this amount on the "annual lease value table" and multiply the amount from the table by the employee's personal use percentage for the vehicle (personal miles divided by total miles driven). The employer must add an additional 5.5 for each personal mile driven if the employer also provides fuel for the vehicle.

Prorated Annual Lease Value


If you provide an automobile to an employee for a continuous period of 30 or more days but less than an entire calendar year, you can prorate the annual lease value. Figure the prorated annual lease value by multiplying the annual lease value by a fraction, using the number of days of availability as the numerator and 365 as the denominator. If you provide an automobile continuously for at least 30 days, but the period covers 2 calendar years (or 2 special accounting periods if you are using the special accounting rule for fringe benefits discussed in section 4), you can use the prorated annual lease value or the daily lease value. If you have 20 or more automobiles, see Regulations section 1.61-21(d)(6). If an automobile is unavailable to the employee because of his or her personal reasons (for example, if the employee is on vacation), you cannot take into account the periods of unavailability when you use a prorated annual lease value. You cannot use a prorated annual lease value if the reduction of federal tax is the main reason the automobile is unavailable.

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PERSONAL USE OF COMPANY PROVIDED VEHICLE continued Daily Lease Value


If you provide an automobile to an employee for a continuous period of less than 30 days, use the daily lease value to figure its value. Figure the daily lease value by multiplying the annual lease value by a fraction, using four times the number of days of availability as the numerator and 365 as the denominator. However, you can apply a prorated annual lease value for a period of continuous availability of less than 30 days by treating the automobile as if it had been available for 30 days. Use a prorated annual lease value if it would result in a lower valuation than applying the daily lease value to the shorter period of availability.

MEDICAL AND MOVE-RELATED MILEAGE RATES


For 2012, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 23 cents per mile. For 2013 the standard rate goes to 24 cents per mile. See Transportation under What Medical Expenses Are Includable in Publication 502 or Travel by car under Deductible Moving Expenses in IRS Publication 521, Moving Expenses.

CHARITABLE RELATED MILEAGE RATE


For 2012 and 2013, the standard mileage rate for the cost of operating your car for charitable purposes remains at 14 cents per mile.

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SICK PAY (DISABILITY INCOME)


1. Employer pays employee sick pay: Treated as normal wages Payments are subject to all withholding requirements 2. Agent pays employee: Agent (third-party) is paid on a cost-plus-fee basis by the employer, therefore bears no insurance risk Payments are subject to all withholding requirements Agent is not treated as employer 3. Third-party pays employee: Third-party is paid an insurance premium by employer, so therefore bears the insurance risk Payments are subject to FICA/Medicare withholding requirements, but not income tax withholding (employee can elect to have federal income tax withheld by submitting Form W-4S to third party). Third-party is treated as the employer Can be responsible for "employer portion" of FICA/Medicare taxes, or transfer responsibility back to original employer a. Third-party retains responsibility for taxes: Third-party: Withholds FICA and Medicare from "employees" (income taxes if requested) Deposits withheld and matching portion of FICA/Medicare according to deposit requirements Files Form 941 and W-2s as any other employer Original employer does not need to do anything b. Third-party transfers responsibility for taxes back to original employer: o In order for transfer to occur, third-party must: Withhold employee's share of FICA/Medicare Deposit such tax according to deposit requirements Notify the employer of the amount of wages and withholdings within time required for employer's share of deposit to be deposited according to deposit requirements. o Employer pays employer's share of FICA & Medicare taxes only o Employer files 941 and W2's ** Note: If sick pay is paid by a third party as an agent of the employer; then wages are considered supplemental wages and supplement withholding rules apply.

B - 39

FORM 1099 - MISCELLANEOUS INCOME


Non-employee Compensation Fees, commissions, prizes and awards for services performed, or other forms of compensation paid to non-employees for services rendered, and expenses incurred for the use of an entertainment facility treated as compensation paid to a non-employee are reported on Form 1099-MISC in box 7. The exemption from reporting payments made to corporations no longer applies to payments made for legal services. Report any attorney's fees, including corporations that provide legal services, in box 7. If you make a payment to an attorney in connection with legal services but you cannot determine the portion that is the attorney's fee, then report the total amount paid to the attorney (gross proceeds) in box 14. Include fees, commissions, prizes and awards for services performed, or other forms of compensation for services performed for your trade or business by an individual who is not your employee. Include oil and gas payments for a working interest, whether or not services are performed. Also include expenses incurred for the use of an entertainment facility that you treat as compensation to a non-employee. Do not report in box 7, nor elsewhere on Form 1099-MISC an employee's wages, travel or auto allowance, or bonuses (reported on Form W-2); or the cost of group-term life insurance paid on behalf of a former employee (reported on Form W-2). Generally, amounts reportable in box 7 are subject to self-employment tax. If payments are not subject to this tax and they are not reportable elsewhere on Form 1099-MISC, report the payments in box 3. If the following four conditions are met, a payment generally is reportable as non-employee compensation: 1) you made the payment to someone who is not your employee; 2) you made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations); 3) you made the payment to someone other than a corporation (with the exception of legal services), e.g., an individual or a partnership; and 4) you made payments to the payee of at least $600 during the year. Examples of payments to be reported in box 7 are: 1. 2. 3. 4. Professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, etc. Fees paid by one professional to another, such as fee-splitting or referral fees. Payments by attorneys to witnesses or experts in legal adjudication. Payment for services, including payment for parts or materials used to perform the services as long as supplying the parts or materials was incidental to providing the service. For example, report the total insurance company payments to an auto repair shop under a repair contract showing an amount for labor and another amount for parts, since furnishing parts was incidental to repairing the auto.

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FORM 1099 - MISCELLANEOUS INCOME - continued


5. 6. 7. 8. Commissions paid to nonemployee salespersons, subject to repayment but not repaid during the calendar year. A fee paid to a nonemployee and travel reimbursement for which the nonemployee did not account to the payer if the fee and reimbursement total at least $600. Payments to nonemployee entertainers for services. Exchanges of services between individuals in the course of their trades or businesses. For example, an attorney represents a painter for nonpayment of business debts in exchange for the painting of the attorney's law offices. The amount reportable by each on Form 1099-MISC is the fair market value of his or her own services performed. However, if the attorney represents the painter in a divorce proceeding, the attorney must report on Form 1099-MISC the value of his or her services, but the painter need not report. The payment by the painter is not made in the course of the painter's trade or business, even though the painting services are of the type normally performed in the course of the painter's trade or business. Taxable fringe benefits for non-employees. For information on valuation of fringe benefits, see Pub. 15-B, Employers Tax Guide to Fringe Benefits.

9.

10. Gross oil and gas payments for a working interest. 11. Payments to an insurance salesperson who is not your common law or statutory employee. Please see Pub. 15-A for the definition of employee. 12. Directors fees. Forms 1099-MISC are due to the recipient by January 31 and to the IRS by February 28 (April 1 if they are electronically filed). When Forms 1099 are transmitted to the IRS, they must be summarized on Form 1096, Annual Summary and Transmittal of U. S. Information Returns. A separate Form 1096 should be used for each type of information return submitted to the IRS. Boxes are provided on the form to indicate the types of information return being submitted. Backup Withholding: Payments of interest, dividends, rents, royalties, commissions, and nonemployee compensation may be subject to backup withholding at a 28% rate. Backup withholding applies if: 1. The payee fails to furnish their taxpayer identification number (TIN) to you (Form W-9) or 2. The IRS notifies you to impose backup withholding because the payee furnished an incorrect TIN. Electronic Submission: If an employer has 250 or more Form 1099-MISCs, they are requirement to file the returns electronically.

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FORM 1099 - MISCELLANEOUS INCOME - continued


Penalties: If you are required to file electronically but fail to do so, you may be subject to a penalty of up to $100 per Form 1099 over 250. If you fail to file Form 1099-MISC by the appropriate due date, the penalty will be as follows: $30 per return if you correctly file within 30 days. Maximum penalty is $250,000 per year. $60 per return if you correctly file more than 30 days after the due date but before August 1. Maximum penalty is $500,000 per year. $100 per return if you correctly file after August 1 or if you do not file. Maximum penalty is $1,500,000 per year. Pennsylvania Law Change: Beginning for the 2012 calendar year, any payor of either non-employee compensation or payments under an oil or gas lease are required to submit Form 1099-MISC to the Department of Revenue. If a payor is subject to employer withholding in Pennsylvania and is required to perform electronic filing for Pennsylvania employer withholding purposes, Form 1099-MISC is required to be filed electronically through e-TIDES.

B - 42

BUSINESS EXPENSE REIMBURSEMENTS


The IRS has divided employee expense reimbursement plans into two categories: 1. Accountable Plans and 2. Non-Accountable Plans. Accountable Plans Reimbursements or other expense allowances made under this type of plan are generally tax-free to the employee and do not require the reporting of income on the employee's Form W-2. An accountable plan must meet the following three requirements: 1. Business Connection: The individual must have paid or incurred expenses while performing services as your employee. The reimbursement must be paid for the expense and must not be an amount that would have otherwise been paid to the employee.

2. Substantiation: The employee must substantiate the expenses to you with a detailed record of the expense including the time, business purpose, place, and amount of the expense within a reasonable time period. Please see below for a discussion of a reasonable time period. 3. Return of Unsubstantiated Amounts: The employee must return, within a reasonable time, any advances that exceed their substantiated expenses. If the employee does not return or substantiate the expenses, income and employment taxes must be withheld on the first pay period ending after the expiration of the reasonable time. The IRS has provided two safe-harbor methods for meeting the "reasonable time" requirements: Fixed Date Method Advance payments made no more than 30 days before an employee incurs business expenses Expenses that are substantiated within 60 days after they are incurred or paid Excess payments returned to employer within 120 days after being incurred/paid Periodic Statement Method Employer issues periodic statements to employees, at least quarterly, identifying unsubstantiated expenses or unreturned excess payments. Employees substantiate the expenses and refund any excess within 120 days after receiving the statement.

Per Diems and Mileage Allowances


Meals and incidental expense per diems or mileage allowances paid to employees which are less than or equal to the applicable rates set for federal employees are "deemed satisfied" without the employee having to provide receipts. The employees need only account for time, place and business purpose of their expenses.

B - 43

BUSINESS EXPENSE REIMBURSEMENTS - continued


The CONUS Continental United States Advantage
The IRS allows private-sector employers to use these rates to provide employees with tax-free reimbursements for their business travel-related expenses. Thats good news for employees and employers, since using the federally approved CONUS per diems can mean less paperwork. Under the accountable plan rules, an employee who is reimbursed for a business expense must substantiate the cost of the expense. Rather than deal with collecting, verifying, and totaling all those receipts, you can reimburse employees at the federally approved per diem amount for each day the employee travels on business. Then, all the employee has to do is substantiate the time, place, and business purpose. Note: You will not have to withhold or pay employment taxes on the amount reimbursed, or report it as wages on the employees W-2.

High - Low Method


In lieu of using a different per diem rate for each locality, the high-low method can be used to compute per diem allowances for travel within the continental United States. This method divides all CONUS localities into two categories: low-cost or high-cost localities. Certain areas are treated as high-cost only during designated periods of the year (e.g., a peak tourist season) and low-cost during other periods of time. Thus, employers who use the high-low method must determine whether the employee traveled in a high-cost area and if the area was classified as high-cost during the actual period of travel. If the high-low method is used for an employee, then the payor may not use the actual federal maximum per diem rates for that employee during the calendar year for travel within the continental United States. A complete listing of localities eligible for the high-low substantiation can be found in the IRS Publication 1542. This publication also lists the maximum federal per diem rates for many locations within the continental United States. Another helpful websites for per diem charts is www.gsa.gov/perdiem.

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BUSINESS EXPENSE REIMBURSEMENTS - continued


Use What Works for You
You do not have to make an all-encompassing decision as to whether you will use the CONUS rates, high-low rates, or actual-expense reimbursement. You have some flexibility-and a few restrictions: 1. 2. If you have been using the high-low rates so far this year, you cannot switch to the CONUS rates during the transition, and vice versa. If you used the CONUS per diems the first time you reimbursed an employees travel expenses in 2012, you must use CONUS rates for that employees reimbursements for the remainder of the year. You can, however, use the high-low rates for some employees and the CONUS rates for others if you feel the different rates are more accurate for the sites most visited by the employees. If employees submit receipts, you can reimburse them tax-free for actual expenses under an accountable plan, even if you reimbursed them for previous expenses using the high-low or CONUS rates.

3. 4.

Non-accountable Plan
Any business expense reimbursement or advance which does not meet the three qualifications of an accountable plan is considered a non-accountable plan. These reimbursements are to be treated as supplemental wages and are subject to federal income, social security, Medicare, and unemployment taxes. Payment is defined as when the employee fails to meet any of the three requirements required for an accountable plan. They must also be reported on the employee's Form W-2. Reimbursing an employee at a higher amount than the standard IRS mileage rate, would result in the amount of the excess being classified as a non-accountable plan.

Travel Expenses for Dependents


Employers are not allowed a deduction for travel expenses with respect to a spouse, dependent, or other individual accompanying an employee on business trips unless: 1. The spouse, dependent, or other person is a bona fide employee of the person paying or reimbursing the expenses, 2. the travel of the spouse, dependent, or other person is for bona fide business purposes, and 3. the expenses of the spouse, dependent, or other person would otherwise be deductible. If all three criteria are not met, the travel expenses of the spouse, dependent, or other person can only be deducted to the extent they are treated as compensation to the employee.
B - 45

MOVING EXPENSES
Qualified moving expenses are limited to reimbursements for moving your household goods and traveling to a new residence, including lodging. They are non-taxable fringe benefits (provided the move qualifies as deductible, i.e. a 50 mile increase in distance from work, etc.). These excludable reimbursements should be shown in Box 12 of Form W-2, identified by using Code P, and are not included in Box 1. Non-qualified moving expenses are meals, pre-move house hunting trips, temporary lodging and costs associated with selling the old residence and buying the new. These expenses are not deductible as moving expenses, and therefore, are taxable fringe benefits. Reimbursements for these expenses must be included in boxes 1, 3, and 5 of Form W-2.

B - 46

MILITARY SPOUSE RESIDENCY RELIEF ACT

In General
The Military Spouses Residency Relief Act is intended to lessen the state income-tax filing burden on military families. Currently military service members can keep their state of legal residence for tax, voting, car registration and other purposes, regardless where they are stationed. For decades, however, non-military spouses who accompany service members on military assignment have been required to file their state taxes in the states where the service members were stationed. That forced many non-military spouses to file tax returns in a state different from their service-member spouses. The new law says the non-military spouse can now retain the same home state of record/state of residence as the military spouse, as long as the non-military spouses sole reason for leaving that state was due to a permanent change of station (PCS) for the military spouse. The law applies starting in tax year 2009, meaning that spouses of service members who change their residency to the same state of residency as their service-member spouses can recover withholding taxes paid in 2009 to their states of military assignment. For guidance about recovering your withholding from a state that is no longer your state of residency/legal residence, see that states individual website.

Requirements
The spouse of a service member is exempt from income taxation by a state when all three of these qualifications are met. The spouse: 1. Currently resides in a state different than the state of his or her domicile; 2. Resides in the state solely in order to live with the service member; and, 3. The service member is present in the state in compliance with military orders. NOTE: Some states also require a fourth qualification: The spouse and the service member both are able to claim the same domicile.

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MILITARY SPOUSE RESIDENCY RELIEF ACT - continued


Is it always best to choose the service member's state of legal residency?
Not necessarily. Tax laws vary from state to state, so each couple will have to weigh the tax and filing benefits before choosing. Other factors could also influence which state to pick, such as:

Voter registration Auto registration In-state college savings plans and in-state college tuition savings Car, home or other insurance Wills and estate plans Powers of attorney Spouse's business/professional licenses

B - 48

Stock Options
If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option or property acquired through exercise of the option. The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Your employer can tell you which kind of option you hold.

Nonstatutory Stock Options


Grant of option. If you are granted a nonstatutory stock option, you may have income when you receive the option. The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. The fair market value of an option can be readily determined if it is actively traded on an established market. The fair market value of an option that is not traded on an established market can be readily determined only if all of the following conditions exist.

You can transfer the option. You can exercise the option immediately in full. The option or the property subject to the option is not subject to any condition or restriction (other than a condition to secure payment of the purchase price) that has a significant effect on the fair market value of the option. The fair market value of the option privilege can be readily determined.

The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option without risking any capital. For example, if during the exercise period the fair market value of stock subject to an option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher value. The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the property subject to the option. Option with readily determinable value. If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. Option without readily determinable value. If the fair market value of the option is not readily determinable at the time it is granted to you (even if it is determined later), you do not have income until you exercise or transfer the option. Exercise or transfer of option. When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value.

B - 49

Stock Options - continued


Option with readily determinable value. When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you do not have to include any amount in income. Option without readily determinable value. When you exercise a nonstatutory stock option that did not have a readily determinable value at the time the option was granted, the restricted property rules apply to the property received. The amount to include in your income is the difference between the amount you pay for the property and its fair market value when it becomes substantially vested. If it is not substantially vested at the time you exercise this nonstatutory stock option (so that you may have to give the stock back), you do not have to include any amount in income. You include the difference in income when the option becomes substantially vested. Recourse note in satisfaction of the exercise price of an option. If you are an employee, and you issue a recourse note to your employer in satisfaction of the exercise price of an option to acquire your employer's stock, and your employer and you subsequently agree to reduce the stated principal amount of the note, you generally recognize compensation income at the time and in the amount of the reduction. Tax form. If you receive compensation from employer-provided nonstatutory stock options, it is reported in box 1 of Form W-2. It also is reported in box 12 using code V. If you are a nonemployee spouse and you exercise nonstatutory stock options you received incident to a divorce, the income is reported to you on Form 1099-MISC, Miscellaneous Income, in box 3. Sale of the stock. There are no special income rules for the sale of stock acquired through the exercise of a nonstatutory stock option. Report the sale on Schedule D (Form 1040), Capital Gains and Losses, for the year of the sale. You may receive a Form 1099-B, Proceeds from Broker and Barter Sale Transactions, reporting the sales proceeds. Your basis in the property you acquire under the option is the amount you pay for it plus any amount you included in income upon grant or exercise of the option. Your holding period begins as of the date you acquired the option, if it had a readily determinable value, or as of the date you exercised or transferred the option, if it had no readily determinable value.

Statutory Stock Options


There are two kinds of statutory stock options.

Incentive stock options (ISOs), and Options granted under employee stock purchase plans.

B - 50

Stock Options - continued


For either kind of option, you must be an employee of the company granting the option, or a related company, at all times during the period beginning on the date the option is granted and ending 3 months before the date you exercise the option (for an incentive stock option, 1 year before if you are disabled). Also, the option must be nontransferable except at death. If you do not meet the employment requirements, or you receive a transferable option, your option is a nonstatutory stock option. Grant of option. If you receive a statutory stock option, do not include any amount in your income when the option is granted. Exercise of option. If you exercise a statutory stock option, do not include any amount in income when you exercise the option. Sale of the stock. You have taxable income or a deductible loss when you sell the stock that you bought by exercising the option. Your income or loss is the difference between the amount you paid for the stock (the option price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss and report it on Schedule D (Form 1040) for the year of the sale. However, you may have ordinary income for the year that you sell or otherwise dispose of the stock in either of the following situations. You do not satisfy the holding period requirement. You satisfy the conditions described under Option granted at a discount, under Employee stock purchase plan. Report your ordinary income as wages on Form 1040, line 7, for the year of the sale. Holding period requirement. You satisfy the holding period requirement if you do not sell the stock until the end of the later of the 1-year period after the stock was transferred to you or the 2-year period after the option was granted. However, you are considered to satisfy the holding period requirement if you sold the stock to comply with conflict-of-interest requirements. Incentive stock options (ISOs). If you sell stock acquired by exercising an ISO, you need to determine if you satisfied the holding period requirement. Holding period requirement satisfied. If you sell stock acquired by exercising an ISO and satisfy the holding period requirement, your gain or loss from the sale is capital gain or loss. Report the sale on Schedule D (Form 1040). The basis of your stock is the amount you paid for the stock. Holding period requirement not satisfied. If you sell stock acquired by exercising an ISO, do not satisfy the holding period requirement, and have a gain from the sale, the gain is ordinary income up to the amount by which the stock's fair market value when you exercised the option exceeded the option price. Any excess gain is capital gain. If you have a loss from the sale, it is a capital loss and you do not have any ordinary income. In determining capital gain or loss, your basis is the amount you paid when you exercised the option plus the amount reported as wages.

BB -51 - 51

Stock Options - continued


Example 1 Your employer, X Corporation, granted you an ISO on March 12, 2009, to buy 100 shares of X Corporation stock at $10 a share, its fair market value at the time. You exercised the option on January 6, 2010, when the stock was selling on the open market for $12 a share. On January 26, 2011, you sold the stock for $15 a share. Although you held the stock for more than a year, less than 2 years had passed from the time you were granted the option. In 2011, you must report the difference between the option price ($10) and the value of the stock when you exercised the option ($12) as wages. The rest of your gain is capital gain, figured as follows:

Selling price ($15 100 shares) Purchase price ($10 100 shares) Gain Amount reported as wages [($12 100 shares) $1,000 Amount reported as capital gain

$ 1,500 1,000 $ 500 200 $ 300

Employee stock purchase plan. If you sold stock acquired by exercising an option granted under an employee stock purchase plan, you need to determine if you satisfied the holding period requirement. Holding period requirement satisfied. If you sold stock acquired by exercising an option granted under an employee stock purchase plan, and you satisfy the holding period requirement, determine your ordinary income as follows. Your basis is equal to the option price at the time you exercised your option and acquired the stock. The timing and amount of pay period deductions do not affect your basis. Your holding period for the property you acquire when you exercise an option begins on the day after you exercise the option. Example 2 XYZ Company has an employee stock purchase plan. The option price is the lower of the stock price at the time the option is granted or at the time the option is exercised. The value of the stock when the option was granted was $25. XYZ deducts $5 from A's pay every week for 48 weeks (total = $240 ($5 48)). The value of the stock when the option is exercised is $20. A receives 12 shares of XYZ stock ($240 $20). A's holding period for all 12 shares begins the day after the option is exercised, even though the money used to purchase the shares was deducted from A's pay on 48 separate days. A's basis in each share is $20.
B - 52

Stock Options - continued


Option granted at a discount. If, at the time the option was granted, the option price per share was less than 100% (but not less than 85%) of the fair market value of the share, and you dispose of the share after meeting the holding period requirement, or you die while owning the share, you must include in your income as compensation, the lesser of:

The excess of the fair market value of the share at the time the option was granted over the option price, or The excess of the fair market value of the share at the time of the disposition or death over the amount paid for the share under the option.

For this purpose, if the option price was not fixed or determinable at the time the option was granted, the option price is figured as if the option had been exercised at the time it was granted. Any excess gain is capital gain. If you have a loss from the sale, it is a capital loss, and you do not have any ordinary income. Example 3 Your employer, Y Corporation, granted you an option under its employee stock purchase plan to buy 100 shares of stock of Y Corporation for $20 a share at a time when the stock had a value of $22 a share. Eighteen months later, when the value of the stock was $23 a share, you exercised the option, and 14 months after that you sold your stock for $30 a share. In the year of sale, you must report as wages the difference between the option price ($20) and the value at the time the option was granted ($22). The rest of your gain ($8 per share) is capital gain, figured as follows: Selling price ($30 100 shares) Purchase price (option price) ($20 100 shares) Gain Amount reported as wages ($22 100 shares) $2,000; Amount reported as capital gain $ 3,000 2,000 $ 1,000 200 $ 800

Holding period requirement not satisfied. If you do not satisfy the holding period requirement, your ordinary income is the amount by which the stock's fair market value when you exercised the option exceeded the option price. This ordinary income is not limited to your gain from the sale of the stock. Increase your basis in the stock by the amount of this ordinary income. The difference between your increased basis and the selling price of the stock is a capital gain or loss.

B - 53

PAYROLL START-UP GUIDE

PART C

PART C - PAYROLL START UP GUIDE NEW EMPLOYERS - NEW EMPLOYEES


C C C C C 1 2 2 3 3 4 4 6 8 Employer Responsibilities New Employer Packets SS-4 Instructions (Application for EIN) PA-100 Instructions MD Registration Pennsylvania Income Tax PA Reciprocal Agreements Maryland and County Income Tax MD Reciprocal Agreements Federal Unemployment Tax Pennsylvania Unemployment Tax Maryland Unemployment Tax New Hire Reporting Requirements Pennsylvania Local Earned Income Tax PA Local Tax Enabling Act 32 Local Services Tax Designing the Payroll System Maintaining Payroll Records

C C C C -

C - 9 C - 10 C - 12 C - 14 C - 15 C - 15 C - 18 C - 19 C - 20

EMPLOYER RESPONSIBILITIES
Employer Responsibilities: The following list provides a brief summary of basic responsibilities: New Employees: 1. Verify work eligibility - Form I-9 a. If applicable, use e-Verify 2. Record employees names and SSNs from social security cards 3. Ask employees for Form W-4 Each Payday: 1. Withhold federal income tax based on each employees Form W-4 2. Withhold employees share of social security and Medicare taxes 3. Withhold state and local income taxes (if applicable) 4. Make applicable state deposits electronically NOTE: The due date of federal and state deposits depend on your deposit schedule Quarterly (Due by 4/30, 7/31, 10/31 & 1/31): 1. Calculate the amount of Federal unemployment (FUTA) tax for each employee a. Deposit FUTA tax via EFTPS if undeposited accumulated amount is over $500 5. Make applicable federal deposit via EFTPS: a. Withheld income tax, plus b. Withheld and employer social security taxes, plus c. Withheld and employer Medicare taxes, less 4. File New Hire Reporting Form 5. Ask employees for PA Residency Certification Form (if applicable) 6. Ask employees for MD Form MW507 (if applicable)

2. File Form 941 (pay tax with return if not required to deposit via EFTPS) 3. File applicable state and local withholding tax reconciliations. 4. File state unemployment reconciliation 5. File local services tax if required in your locality 6. Furnish each recipient a Form 1099 (e.g., Forms 1099-R and 1099-MISC) 7. File Forms 1099 and the transmittal Form 1096 8. File Form 940 or 940-EZ 9. File Form 945 for any non-payroll income tax withholding 10. File Form 944 (Employers Annual Federal Tax Return) only if yearly total employer liability is under $1,000 in lieu of Form 941 quarterly

Annually: 1. Remind employees to submit a new Form W4 if they need to change their withholding 2. Reconcile Forms 941 with Forms W-2 and W-3 3. Furnish each employee a Form W-2 4. File copy A of Forms W-2 and the transmittal Form W-3 with the SSA & file copy B & C with the appropriate transmittal form with state and local

C-1

NEW EMPLOYER PACKETS


New Employer Packets are available in Stambaugh Ness, PC offices. These packets contain the following forms: Form SS-4 - Application for (EIN) Employer's Federal Identification Number As a new employer, you are required to have an Employer Identification Number (EIN). Use Form SS4 to apply for an EIN. You can apply for an EIN either by mail, fax, telephone, or on-line. To apply by mail: Complete Form SS-4 and mail to: Internal Revenue Service Attn: EIN Operation Cincinnati, OH 45999 To apply by fax: Complete Form SS-4 and fax to: 1-859-669-5760. To apply by telephone: Complete Form SS-4 and call the new business and specialty tax line, 1800-829-4933. To apply on-line: Complete the new on-line EIN Internet application at http://www.irs.gov/businesses and click on Employer ID Numbers. The IRS will issue an EIN immediately. Third parties may request EINs via the internet on behalf of their clients. A copy of the SS-4 form, signed by the customer, must be maintained in the third party business files. Form W-4 - Employee's Withholding Allowance Certificate I-9 - Employment Eligibility Verification Requirement New Hire Reporting Forms PA Residency Certification Forms Form MW507 Employee's Earnings Record Payroll Tax Deposit Worksheet Payroll and Other Tax Data Rate Schedule

C-2

NEW EMPLOYER PACKETS - continued


PA-100 ON-LINE REGISTRATION
Businesses may register and open tax accounts over the Internet. The on-line registration system will allow business owners to apply for Sales & Use Tax Licenses, register to withhold employer taxes, and open Unemployment Compensation accounts administered by the PA Department of Labor & Industry. It can be accessed through the Department of Revenue's home page at: www.revenue.state.pa.us or directly at www.pa100.state.pa.us. The on-line system will reduce mistakes before the registration is sent, eliminating the need for followup inquiries. The Department estimates that on-line registration will cut the time needed to process an account by weeks. Notify the Bureau of Business Trust Fund Taxes in writing within 30 days of any change to the information provided on the registration form.

MD COMBINED REGISTRATION FORM (CRF) ONLINE


Businesses may register and open some tax accounts over the Internet. On-line registration will allow business owners to apply for Sales & Use Tax Licenses, employer income tax withholding accounts, and unemployment insurance accounts. It can be accessed through the Comptroller of Marylands website at: https://interactive.marylandtaxes.com/webapps/comptrollercra/entrance.asp. Be sure to print a copy of each page during the online registration process to keep for your records.

C-3

PENNSYLVANIA INCOME TAX


GENERAL INFORMATION
Introduction: Pennsylvania law requires the withholding of Pennsylvania personal income tax from compensation of resident employees for services performed either within or outside Pennsylvania. Pennsylvania personal income tax must also be withheld from wages of nonresident employees for services performed within Pennsylvania, unless a nonresident lives in a state with which Pennsylvania has a reciprocal tax agreement. The current PA withholding rate is 3.07% (.0307). Questions may be directed to the PA Department of Revenue telephone (717) 787-1064, TDD# 1-800447-3020 (Hearing Impaired Only) or to any of the PA Department of Revenue District Offices. Definition of Employer: An "employer" is any individual, partnership, association, corporation, government body or other entity required under the Internal Revenue Code to withhold federal income tax from wages paid to an employee. If the person for whom an individual performs or performed services does not have control of the payment of the wages for such services, the personal having control of the payment of such wages is also an employer. Statutory Requirement: The requirement of withholding Personal Income Tax is imposed on every employer maintaining an office or transacting business within this Commonwealth and making payment of compensation to a resident individual or to a nonresident individual performing services on behalf of the employer within this Commonwealth. Reciprocity: Pennsylvania has reciprocal agreements with Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia. These agreements provide that: 1. If a Pennsylvania resident employee receives compensation for services performed in one of these six states, the employer in that state withholds the Pennsylvania personal income tax from compensation received and remits that tax to Pennsylvania. If a nonresident employee from one of these states receives compensation for services performed within Pennsylvania, no withholding of Pennsylvania personal income tax is required provided an Employees Non-Withholding Application Certificate (REV-419 EX) is filed by the nonresident employee with the Pennsylvania employer. The Pennsylvania employer withholds the income tax of the state in which the nonresident employee resides and pays the tax to that state. If a Form REV-419 EX is not filed, the employer should withhold Pennsylvania income tax as for a resident. C-4

2.

PENNSYLVANIA INCOME TAX - continued


PA Employer Identification: An employer should use his Pennsylvania Account Number to report all Pennsylvania withholding. An Employer is also required to provide its Federal Employer Identification number (EIN). If an employer has multiple divisions using the same EIN but remitting and reconciling withholding tax separately, the employer should request a separate Pennsylvania (PM) identification number for each division. Direct questions relating to identification numbers to the PA Department of Revenue, Bureau of Business Trust Fund Taxes, telephone (717) 787-3653, TDD# (717) 772-2252. PA Employer Withholding: Employers must file and pay Employer Withholding Taxes by using the Internet based e-TIDES system at www.etides.state.pa.us, or by calling the Departments Business Tax TeleFile system at 1-800-748-8299.

C-5

MARYLAND AND COUNTY INCOME TAX


Introduction: Each employer paying wages subject to withholding must withhold Maryland income tax from each payment of taxable wages to his covered employees. In addition to withholding state income tax, an employer must withhold a county income tax from his resident employees based on the tax rate established by the employee's county of residence. A tax is also imposed by the City of Baltimore. Definition of Employee: For withholding purpose an employee is: An individual, whether a resident or nonresident of Maryland, who performs any service in Maryland for wages. A resident of Maryland who performs any service outside Maryland for wages. An officer, employee, or elected official of the United States, Maryland, or any other state or territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any of the above. An officer of a corporation.

Definition of Employer: Generally, an employer is a person or organization, subject to the jurisdiction of Maryland, for whom an individual performs a service as an employee. An employer who is not required by law to withhold Maryland income tax may withhold Maryland income tax through a voluntary arrangement with the employees or payees, provided that the employer registers with the Revenue Administration Division. This arrangement must conform to the Maryland withholding and payment requirements.

C-6

MARYLAND & COUNTY INCOME TAX - continued


State Tax Rates In May 2012, the Maryland General Assembly passed Senate Bill 1302, which resulted in major changes in the income tax law that may affect the amount of income tax withholding for 2012. The law changes effective date was January 1, 2012 and consequently, the withholding tax tables were changed. The new tax withholding tax tables apply prospectively and do not adjust to catch up for the rate changes that were effective January 1. However, there is a safe harbor providing relief from underpayment of estimated taxes and penalties for taxpayers who are underpaid as a result of the rate change. Withholding tables are available online. County and Local Tax Rates Each Maryland county and the City of Baltimore is required by law to levy a local income tax at a rate based on the taxable income of a taxpayer. The local income tax rate is based on where the employee lives. Any ordinance or resolution imposing a rate of tax for any current calendar year may provide that such tax rate is to continue in effect for each succeeding calendar year, unless and until such tax rate is changed or modified by a subsequent ordinance or resolution. 2012 LOCAL TAX RATE CHART Subdivision Worcester County Talbot County Anne Arundel County Dorchester County Caroline County Garrett County Calvert County, Cecil County, Washington County Baltimore County Kent County Charles County Frederick County St. Marys County Allegany County and Carroll County Harford County Wicomico County Somerset County Baltimore City, Howard County, Montgomery County, Prince Georges County, Queen Annes County

Rate .0125 .0225 .0249 .0262 .0263 .0265 .0280 .0283 .0285 .0290 .0296 .0300 .0305 .0306 .0310 .0315 .0320

C-7

MARYLAND & COUNTY INCOME TAX - continued


Nonresidents A nonresident is not subject to tax if: Their income consists entirely of wages or other compensation for personal services performed in Maryland; and The state of residence has agreed in writing to allow a reciprocal exemption from tax and withholding for each others residents.

Nonresidents from states that have no income tax law or have no written reciprocal income tax agreement with this state are subject to Maryland tax and withholding must be made from salaries and wages for services performed in Maryland. The nonresident rate does not include a local tax, but does include the Special 1.25% Nonresident rate. Use the 1.25% Local Income Tax table to calculate withholding for nonresidents. Reciprocity: Maryland has reciprocal agreements with District of Columbia, Pennsylvania, Virginia, and West Virginia. 1. 2. Employers in these states may withhold Maryland income tax from their employees who are Maryland residents. Maryland employers are not required to withhold Maryland income tax from certain employees who are residents of these states; instead, these employers withhold the appropriate tax of the employee's resident state. To qualify for exemption from Maryland income tax withholding, an employee who is a resident of one of the states with which Maryland has a reciprocal agreement must file Form MW507 (Employee's Maryland Withholding Exemption Certificate) with his or her employer. If a Form MW507 is not filed, the employer should withhold Maryland income tax as for a resident.

C-8

Federal Unemployment Tax Act (FUTA)


The Federal Unemployment Tax Act (FUTA) tax is paid by employers to fund the unemployment account of the federal government, which pays employees who leave a company involuntarily. Employers pay FUTA tax based on an employee wages or salaries. The FUTA gross tax is 6.0%, with a credit up to 5.4% percent for state unemployment taxes paid, resulting in a FUTA net tax of 0.6%, on the first $7,000 of wages per year. FUTA Credit Reductions Because of State Loans Under the joint federal/state unemployment insurance system, states with a high rate of unemployment and difficulty meeting their benefit obligations can borrow money from the Federal Unemployment Account (FUA) to pay benefits. If loans taken out during one year are not repaid by the end of the following calendar year, the FUTA credits for employers in those states are reduced, with the extra FUTA taxes paid being applied against each states loan balance. A state with an outstanding loan can avoid a credit reduction for its employers by repaying the loan by November 10 of the year the reduction is scheduled to take effect. If the loan is not repaid by that date, a credit reduction of 0.3% goes into effect. Each year a loan remains unpaid, the credit reduction increases by 0.3% although there are limits for states that have made an effort to keep their balances in check. Even if a state has outstanding loans on November 10, it can avoid a credit reduction by meeting certain criteria regarding the amount it has paid back, whether it can meet upcoming payments without needing any further advances from the federal government, and the size of the net increase in the solvency of the state unemployment compensation system. Sometime after November 10 of each year, the credit reductions for that year are announced by the IRS and are included on Form 940 so employers in the affected states can figure the amount of their credit reduction. Credit Reduction States For 2012, these are the states with credit reductions per Schedule A (Form 940): Reduction Rate of 0.3% - AZ, DE, VT Reduction Rate of 0.6% - AR, CA, CT, FL, GA, KY, MO, NC, NJ, NV, NY, OH, RI, WI Reduction Rate of 0.9% - IN Reduction Rate of 1.5% - VI

C-9

PA UNEMPLOYMENT COMPENSATION
The new Unemployment Compensation Management System, or UCMS, will be available for employers who previously submitted reports on eTides starting the 4th quarter of 2012. All other employers will have access to the UCMS starting the 1st quarter of 2013. For more information on the new UC tax system, please visit the UCMS Web page, or call the UC Employer Contact Center toll-free at (866) 403-6163 or within the Harrisburg area (717) 787-7679. Employer questions regarding the new UC tax system should be submitted in an e-mail to uc-news@pa.gov. The framework for an Unemployment Compensation Amnesty Program was established with recent legislature. The program will exist for a period of three consecutive months and will apply to the following: Unpaid employer contributions through the first quarter of 2012. Unpaid reimbursements due on or before April 30, 2012. Unpaid interest due on contributions through the first quarter of 2012 or on reimbursements due on or before April 30, 2012. Unpaid penalties for reports filed late though the first quarter of 2012. The amnesty program is not yet available, but please stayed tuned for additional information! The taxable wage base for employer contributions will increase from $8,000 to $10,000 over a period of six years in the following manner: 2013: 2014: 2015: 2016: 2017: 2018: $8,500 $8,750 $9,000 $9,500 $9,750 $10,000

Starting the 4th quarter of 2011, the credit week reporting has changed. Under previous law, an employee is considered to be working one credit week if they earn at least $50 during the week. Under current legislation, an employee is considered to be working one credit week if they earn at least $100 during the week. Effective January 1, 2013, public works contractors and subcontractors are required to use the E-Verify Program (operated by the Department of Homeland Security) to verify employment eligibility of each new employee.

C - 10

PA UNEMPLOYMENT COMPENSATION - continued


New employers start paying unemployment tax based on a new employers rate. The rate for new PA employers in 2012 is: Non-construction Employers New Construction Employers 3.6785% 10.1947%

Based on various factors, an employers experience rating may be increased or decreased each year. State unemployment tax is paid each quarter up to maximum amount of wages per year per employee. The new employer rate will apply to an employer for the first 2 or 3 calendar years that the employer pays wages. After that time, the employer may have sufficient experience to receive a computed rate, or will receive a standard rate which will be received from the state. The PA UC Tax to be withheld is .08% (.0008) on all wages earned during 2012 and .07% for 2013. A surcharge on employer contributions has been factored into the employers contribution rate. Due to higher unemployment, this surcharge and employee tax went into effect to protect the PA Unemployment Compensation Trust Fund balance.

C - 11

MD UNEMPLOYMENT COMPENSATION
Maryland employers are required to report the amount of total "gross wages" paid each quarter. Employers should file online using the WebTax application or on the "Contribution Return" (DLLR/DUI 15) and on the "Employment Report" (DLLR/DUI 16) supplied by Department of Labor, Licensing, and Regulation (DLLR). Gross wages include all remuneration for personal services, including commissions and bonuses and the cash value of all compensation in any medium other than cash. Employers must also calculate and report the amount of total "taxable wages." For Maryland unemployment insurance purposes, "taxable wages" are defined as the first $8,500 earned by each employee in a calendar year. Maryland employers are assigned one of three different types of rates: the new account rate, the standard rate, or the experienced (earned) rate. New account rates are assigned when the employer units is not eligible for an experienced rate. The tax rate for a new employer will be the average of the rates for all employers in the State during the last five years. Construction companies headquartered in another state will be assigned a tax rate that is the average of the rates for all construction employers in Maryland during the year for which the rate is assigned. If an employer is eligible for an earned rate, but has no taxable wages in a fiscal year (July 1 to June 30) because the employer failed to file its quarterly tax and wage reports, the employer is assigned the standard rate. The standard rate is the highest rate that is in effect for the year. After an employer has paid wages to employees in two rating years (July 1 to June 30) prior to the computation date (July 1st prior to the rated year), he/she is entitled to be assigned a tax rate reflecting his/her own experience with layoffs. The employers new rate is proportional to the number and amount of benefit charges its employees obtain. As a result of the solvency calculation, the MD Division of Unemployment Insurance has determined that the range of rates for calendar year 2013 is 1.0% to 10.5%. An exception is that the rate for new construction employers headquartered in another state was 10.5%. Effective for the 3rd quarter of 2012, the MD Division on Unemployment Insurance will no longer mail paper Quarterly Contribution Reports to employees who historically file their report electronically or use a payroll service. The taxable wage base for 2013 will remain at $8,500. Your tax rate may be appealed within 15 days from the Date of Notice as shown on the rate notice. An appeal of your rate should be submitted in writing to the address shown on the rate notice. However, if you simply have a question concerning your rate, please contact the Experience Rate Unit at the telephone number (410-767-2413 in the Baltimore calling area or toll free at 1-800-492-5524), fax number (410-767-2848), or e-mail address. In this economic time, the Division of Unemployment Insurance has implemented an initiative to assist employers that may find themselves in a position of financial hardship. The Division seeks to assist employers in paying quarterly unemployment insurance taxes for calendar year 2012. Listed below are the Payment Plan options that are available for all four quarterly unemployment insurance returns. Requests for Payment Plans should be made by the quarterly due dates of April 30, 2012, July 31, 2012, October 31, 2012 and January 31, 2013.

C - 12

In order to establish a payment plan, please contact the Skip Trace and Investigations Unit at 410-7672525 or send an e-mail to the unit at: uitaxskip@dllr.state.md.us. At the end of the payment installments, interest will be waived as long as all payments were made according to the payment plan. Plan #1: 1) Quarterly Tax Return and Wage Report filed timely; 2) 50% of Tax paid when the Quarterly return is filed; 3) Remaining tax due is spread over three equal monthly installments, due on the last day of the next three months; 4) Note that the last installment of this plan coincides with the due date of the next quarter, and unless another payment plan is in place, the reports and tax must be filed by the due date; Plan #2: 1) Quarterly Tax Return and Wage Report filed timely; 2) Tax due is spread over 6 equal monthly installments, with the first installment due on the Quarterly due date; 3) Note that this plan overlaps the due date of the next quarter, and unless another payment plan is in place, the reports and tax for the overlapped quarter must be filed and paid by the due date; Plan #3: 1) Quarterly Tax Return and Wage Report filed timely; 2) Tax due is spread over 9 equal monthly installments, with the first installment due on the Quarterly due date; 3) Note that this plan overlaps the due date of the next two quarters, and unless another payment plan is in place, the reports and tax for the overlapped quarters must be filed and paid by the due date; Plan #4 1) An individual plan as established with the Division of Unemployment Insurance.

C - 13

NEW HIRE REPORTING REQUIREMENTS


The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 required employers to report certain information on their newly-hired employees to a designated State agency. Once the state agency receives new hire information from an employer, it will match that information against a case registry of child support orders issued in the state. It will also forward the new hire information to the National Directory of New Hires (maintained by the Department of Health and Human Services), where a similar matching process will take place with a federal case registry of child support orders. The primary purpose of new hire reporting is to speed up the enforcement of child support orders by locating noncustodial parents who are newly employed but are not meeting their child support obligations. New hire reporting information is also intended to be used by the states to reduce unemployment and workers' compensation fraud. If sent by mail, new hire reports must be submitted within 20 days of the date of hire. Reports submitted electronically or magnetically must be submitted twice a month, not less than 12 days nor more than 16 days apart. General information on new hire reporting is available by accessing http://www.acf.hhs.gov/programs/css/employers/new-hire-reporting or by calling 1-202-401-9373. An Employee Is Considered A New Hire And Must Be Reported If: 1) Your company never employed this individual previously 2) Your company previously employed this individual, but has been separated from such prior employment for at least 60 consecutive days. A summary of the requirements for Pennsylvania and Maryland employers is listed below: PENNSYLVANIA EMPLOYERS: - Phone: 1-888-724-4737 - Fax: 717-866-748-4473 - E-mail: ra-li-cwds-newhire@state.pa.us - Website: www.cwds.state.pa.us - Methods of Transmission: SFTP (Secure File Transfer Protocol), mail, fax, and website MARYLAND EMPLOYERS: - Phone: 410-281-6000 - Fax: 888-657-3534 or 410-281-6004 - E-mail: md-newhire@policy-studies.com - Website: www.mdnewhire.com - Methods of Transmission: mail, fax, magnetic tape, cartridge tape, diskette, website, and email

IF A MULTI-STATE EMPLOYER: May choose to report all new hires to only one state. May choose to report new hires to each state involved. Must report your reporting methodology to the US Department of Health & Human Services (in writing or online).

C - 14

PA LOCAL INCOME TAX


Employers Required to Withhold: Employers who maintain worksites in PA or employ individuals who may work from their homes are required to withhold applicable earned income tax from those employees. Under Act 32, employers are required to withhold the higher of the employee's resident earned income tax amount (rate of total resident EIT where they reside) vs. the employees municipal non-resident earned income tax amount (rate of non-resident EIT where they are employed). ACT 32 Steps 1. Employers should determine their tax collection district and register with the appropriate tax collector(s)/officer(s). Please use the links to determine Tax Collection District and Tax Collector(s)/Officer(s). Each Pennsylvania based worker needs to complete a Residency Certification Form. This form can be found on online (www.newpa.com in the forms section or by using the link http://www.newpa.com/webfm_send/1605). A properly completed certificate requires the appropriate Political Subdivision Code (PSD) for the employees lived in and worked in localities. The certificate provides the information necessary to look up the appropriate PSD codes. This form is mandatory and should be kept in the employers file. It does not need to be remitted to the local tax collector. If employees move during the year, they will need to complete a new form. Employers will be required to withhold the local Earned Income Tax from all employees who either live or work in a Pennsylvania TCD. Employers are required to withhold at the higher of the local earned income tax rate where the employee lives or where the employee works. If they do not withhold the employees correct rate, the employer could be responsible for any under withheld amounts. Employers will also be required to report a PSD code for both the lived in and worked in localities of each employee when remitting and filing withholding tax reports. The assigned PSD code for Pennsylvania local jurisdictions can be found in the attachment or at http://munstatspa.dced.state.pa.us/, and entering the applicable county and/or municipality. PSD codes can also be found by using the Find your withholding rates by Address section located on the website menu or by using this link.

2.

3.

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PA LOCAL INCOME TAX - continued


4. Send withheld taxes for all employees to the appropriate tax collector(s)/officer(s). This can be done in two ways:

Quarterly - Within 30 days (which may not necessarily be at the end of the month) after the end of each quarter, the employer must remit withheld taxes and employee information to the tax collector/officer of each worksite-location. Monthly - Within 30 days (which may not necessarily be at the end of the month) after the end of each month, the employer must electronically remit withheld taxes and employee information to a single tax collector/officer where the PA corporate headquarters are located. However if the corporate headquarters are located outside the state, the company may remit withheld taxes from all employees statewide to a tax collection district of their choice upon agreement with that tax collector/officer. The electronic format for transfer of funds and information must be obtained from the applicable single tax collector/officer.

5.

Within 30 days of the close of each calendar year, employers complete and submit the Annual Withholding Reconciliation Form to the appropriate tax collector(s)/officer(s).

Should you require assistance or have questions regarding this information, contact your local tax bureau listed on the next page.

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PA LOCAL INCOME TAX - continued


Adams County Office York Adams Tax Bureau 900 Biglerville Road P.O. Box 4374 Gettysburg, PA 17325 Phone: 717-334-4000 Fax: 717-334-5220 www.yatb.com York County Office York Adams Tax Bureau 1405 N. Duke Street P.O. Box 15627 York, PA 17405-0156 Phone: 717-845-1584 Fax: 717-854-6376 www.yatb.com 1845 William Penn Way Lancaster, PA 17601 Phone: 717-569-4521 Fax: 717-569-1623 www.lctcb.org 21 Waterford Drive, Suite 201 Mechanicsburg, PA 17050 Phone: 717-590-7997 Fax: 717-590-7998 www.westab.org Harrisburg Division 2301 N. Third Street Harrisburg, PA 17110-1893 Phone: 717-234-3217 Fax: 717-234-2962 http://www.captax.com/ P.O. Box 25132 Lehigh Valley, PA 18002 Phone: 866-701-7206 Fax: 610-588-5765 http://www.hab-inc.com/ 546 Wendel Road Irwin, PA 15642 Phone: 724-978-0300 Fax: 724-978-0339 http://www.keystonecollects.com/ C - 17

York Adams Tax Bureau

Lancaster County Tax Collection Bureau

Cumberland County Tax Bureau

Capital Tax Collection Bureau

Berkheimer Tax Administrator

Keystone Collections Group

PA LOCAL SERVICES TAX


Senate Bill 218 signed into law on June 21, 2007, amends the Local Tax Enabling Act to make changes to the Emergency and Municipal Service Tax (EMST) effective January 1, 2008. The name of the tax will change to the Local Services Tax (LST). The rate, determined by the Pennsylvania municipality, ranges from $5 - $52. If the Local Services Tax is over $10, there is an "Income Exemption" for employees earning a total of less than $12,000 during the calendar year. Employers must make upfront exemption forms readily available to employees at all times and provide new employees with the forms at the time they are hired. A "Military Exemption" is also available for disabled veterans and members of the Armed Forces Reserves on active duty during the tax year. If the tax rate is over $10, employers will be required to withhold pro-rated over the number of pay periods. Unlike local earned income tax, LST rates are determined by where an employee works. In order to determine the appropriate LST rate: 1. 2. 3. 4. Log on to http://munstatspa.dced.state.pa.us/ Click Map Search. Choose appropriate County and Municipality from drop down list and then click Select. Under Real-time Register select View Register. Results should appear.

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DESIGNING THE PAYROLL SYSTEM


What Information Should the System Provide? One of the most important elements of a well-designed payroll system is that it provides the information the employer needs. For many companies, the payroll system does not have to be elaborate. It can be designed to provide only the basic information necessary to: Calculate payrolls, including gross pay and withholdings for federal, state, and local income taxes, Social Security and Medicare taxes, and other payroll deductions. Compute and make timely payroll tax deposits. Record payroll liabilities and expenses on the general ledger. Prepare monthly and/or quarterly and annual payroll tax returns. What Information Should Be Provided? To accurately calculate payrolls, the following information, at a minimum, is needed about each employee: a. b. c. d. Name, address, and Social Security number. Salary or hourly rate. Pay frequency (for example, weekly, biweekly, semi-monthly, or monthly). Amount of federal income tax that should be withheld from each payroll check (that is, the number of withholding allowances claimed on IRS Form W-4 plus any additional withholding requested by the employee). Amount of other payroll tax deductions (for example, for retirement plans, savings plans, or insurance) and whether those deductions should be made before or after federal income taxes. Number of normal and overtime hours worked (if paid on an hourly basis).

e. f.

The information in a. through e., above, need only be provided once - before the initial payroll is processed. Thereafter, the information should be provided only as employees are added or as changes in the information about existing employees occur. Generally, the information in a. through e. can be obtained by reviewing employee files containing employment contracts or letters, completed Form W-4s, benefit enrollment forms, etc. To facilitate payroll processing, however, the information should be summarized in one place.

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** MAINTAINING PAYROLL RECORDS


The Internal Revenue Service requires employers to maintain the following payroll records for at least four years after the later of (1) the due date of the related payroll tax returns or (2) the date the payroll taxes were paid: ** Note: State and locality retention policies may differ from the IRS Employer identification number Copies of payroll tax returns that have been filed Dates and amounts of payroll tax deposits made and verification numbers for electronic deposits Each employee's name, address, and Social Security number The total amount and date of each wage payment and the period of time the payment covers For each wage payment, the amount subject to income tax, Social Security tax, and Medicare tax Withholdings The amounts of withholding taxes collected on each payment and the date it was collected The reasons for any differences between the taxable amounts and the total wage payment The total amount paid to employees during the calendar year The amount of compensation subject to federal unemployment tax & amount paid into state unemployment funds Any other information required to be shown on Form 940. The fair market value and date of each payment of noncash compensation made to a retail commission salesperson, if no income tax was withheld For accident or health plans, information about the amount of each payment The dates in each calendar quarter on which any employee worked for the employer, but not in the course of the employer's trade or business, and the amount paid for that work Copies of any statements furnished by employees relating to nonresident alien status, residence in Puerto Rico or the Virgin Islands, or residence or physical presence in a foreign country Form W-4 (Employee's Withholding Allowance Certificate) & Form I-9 (Employment Eligibility Requirements) for each employee. PA Residency Certificate and MDMW507 when applicable. Any agreement between the employer and employee for the voluntary withholding of additional amounts of tax Copies of statements given to the employer by employees reporting tips received in their work Requests by employees to have their withheld tax figured on the basis of their individual cumulative wages C - 20

PAYROLL REPORTING FORMS

PART D - PAYROLL REPORTING


D D D D D D D D D D D D D D 1 3 4 5 6 7 8 9 10 13 14 15 16 17 Quick Links to Payroll Forms PA Unemployment Compensation MD Unemployment Compensation PA Employer Withholding Tax PA Local Earned Income Tax PA Local Services Tax MD Employer Withholding Tax MD Local Withholding Reference Guide for Form W-2 MD Annual W-2 Reconciliation PA New Hire Reporting Form MD New Hire Registry Social Security Number Verification Service E-Verify

QUICK LINKS TO PAYROLL TAX FORMS


Federal Forms: The IRS website has undergone significant naming changes. Consequently, the links below may not provide direct access to their corresponding forms or instructions. If the links are broken, we recommend going to http://www.irs.gov/ , clicking on Forms and Pubs and using the search feature. Form 1096 & Instructions: http://www.irs.gov/uac/Form-1096,-Annual-Summary-and-Transmittalof-U.S.-Information-Returns Form 1099-MISC: http://www.irs.gov/pub/irs-pdf/f1099msc.pdf o Instructions for Information Returns: http://www.irs.gov/uac/General-Instructions-forCertain-Information-Returns Form 940 & Instructions: http://www.irs.gov/uac/Form-940,-Employer's-Annual-FederalUnemployment-(FUTA)-Tax-Return Form 940 Schedule A & Instructions: http://www.irs.gov/pub/irs-pdf/f940sa.pdf Form 941 & Instructions: http://www.irs.gov/uac/Form-941,-Employer's-Quarterly-Federal-TaxReturn Form 941 Schedule B: http://www.irs.gov/pub/irs-pdf/f941sb.pdf o Instructions for Form 941 Schedule B: http://www.irs.gov/pub/irs-pdf/i941sb.pdf Form 944 & Instructions: http://www.irs.gov/uac/Form-944,-Employer's-ANNUAL-Federal-TaxReturn Form I-9: http://www.uscis.gov/files/form/i-9.pdf o The current form, dated August 2009, had an expiration date of August 2012. At this time, the IRS and the USCIS has indicated to continue using the expired form until a new form is made available. Form W-2, Form W-3, and Instructions: http://www.irs.gov/uac/Form-W-2,-Wage-and-TaxStatement Form W-2c: http://www.irs.gov/pub/irs-pdf/fw2c.pdf Form W-4 & Instructions: http://www.irs.gov/pub/irs-pdf/fw4.pdf Form W-4S & Instructions: http://www.irs.gov/uac/Form-W-4S,-Request-for-Federal-Income-TaxWithholding-From-Sick-Pay

D-1

QUICK LINKS TO PAYROLL TAX FORMS - continued


Federal Forms (continued): Form W-4V & Instructions: http://www.irs.gov/uac/Form-W-4V,-Voluntary-Withholding-Request-1 Form W-9: http://www.irs.gov/pub/irs-pdf/fw9.pdf o Instructions for Form W-9: http://www.irs.gov/pub/irs-pdf/iw9.pdf Schedule H (Form 1040): http://www.irs.gov/pub/irs-pdf/f1040sh.pdf o Instructions for Schedule H (Form 1040): http://www.irs.gov/pub/irs-pdf/i1040sh.pdf

D-2

PA DEPARTMENT OF LABOR & INDUSTRY PA UC-2, FORM UC-2A, FORM UC-2B


1. File electronically via e-TIDES www.etides.state.pa.us/ 2. Paper Copies Acceptable until the UCMS website is fully available http://www.portal.state.pa.us/portal/server.pt?open=514&objID=599784&mode=2 3. Amended Reports Paper copy UC-2X 4. Business Changes Required to file UC-2B paper only 5. PA Employers Reference Guide to Unemployment Compensation http://www.portal.state.pa.us Keyword UCP-36

IMPORTANT UNEMPLOYMENT COMPENSATION WAGE AND TAX FILING INFORMATION The new Unemployment Compensation Management System (UCMS) is not yet available. Employers and employer representatives currently registered with e-TIDES should continue to file quarterly reports using e-TIDES (UC-2/2A) or magnetic media (UC-2A) until further notice. New e-TIDES registrations for Unemployment Compensation are no longer being accepted by the Department of Labor & Industry, however the Department of Labor & Industry is still accepting paper UC2/2A forms and magnetic media for UC-2A wage information. For more information, please visit the UCMS website, or call, toll-free, 866-403-6163, or 717-787-7679 within the Harrisburg area.

D-3

STATE OF MARYLAND DEPARTMENT OF LABOR, LICENSING AND REGULATION DIVISION OF UNEMPLOYMENT INSURANCE DUI 15, DUI 16

1. File electronically via webtax https://secure-2.dllr.state.md.us/webtax/welcome.aspx 2. E-Wage Reporting via email - The e-mail address for sending quarterly wage information is ewage@dllr.state.md.us 3. Paper Copies Acceptable contact MD DLLR

For additional help and questions:


https://secure-2.dllr.state.md.us/webtax/images/UserManual.pdf

D-4

PA WITHHOLDING AND REPORTING


e-TIDES https://www.etides.state.pa.us/

An Internet filing system that allows electronic filing of returns, payments and extension requests.

Telefile Information for Businesses 1-800-748-8299

Businesses without Internet access may file sales and employer withholding taxes electronically by phone.

Electronic Filing Software Creative Software and Quickbooks

Alternatives to eTIDES and Telefile to electronically files sales tax, employer withholding tax and corporate tax returns.

D-5

PA LOCAL WITHHOLDING AND REPORTING

HTTP://WWW.PALITE.ORG/

PALite Portal
The Pennsylvania Local Income Tax Exchange (PALite) Online system allows Pennsylvania employers and residents in participating localities to quickly prepare tax returns to be sent to their local tax collector. This Act 32 compliant web site was made possible with funding from the Pennsylvania Department of Community and Economic Development (DCED).

Participating Localities
Use the Tax Filing Links at left to begin filing your local taxes with the collectors listed below.

Visit http://www.newpa.com/local-government/municipal-statistics for links to other tax collectors and to look up PSD codes and rates.

For EMPLOYERS Click the underlined link for registration information:


For RESIDENTS filing Earned Income tax with:


Blair County Tax Collection Bureau Danville Area Earned Income Tax Office Forest County Tax Office Municipal & School Earned Income Tax Office (Williamsport/Lycoming County)

Berks County (access through Berks) Blair County Tax Collection Bureau Cumberland County Tax Bureau Danville Area Earned Income Tax Office Forest County Tax Office Municipal & School Earned Income Tax York Adams Tax Bureau

York Adams Tax Bureau

The system only permits online filing for residents who have resided in Pennsylvania for the entire tax year. The following tax collectors have switched from PA Lite to their own reporting systems. Click on the link to access their website. Cumberland County Tax Bureau for employer filing Capital Tax Collection Bureau

D-6

PA LOCAL SERVICES TAX


General Information: http://www.newpa.com/get-local-gov-support/tax-information/local-services-tax Applicable tax per jurisdiction: http://www.newpa.com/node/6710 Act 7 of 2007 amends the Local Tax Enabling Act, Act 511 of 1965, to make the following major changes to the Emergency and Municipal Service Tax (EMST): Name Change. The name of the tax is changed to the Local Services Tax (LST). Effective Date. The changes are effective for taxes levied in calendar year 2008. Mandatory Low-Income Exemption. Political subdivisions that levy an LST at a rate that exceeds $10 must exempt from the tax taxpayers whose total earned income and net profits from all sources within the political subdivision is less than $12,000. Upfront Exemption. Employers are required to stop withholding the LST if an employee provides an exemption certification. Installment Collection. If the combined rate of a municipal and school LST exceeds $10, it must be assessed and collected in installments based on payroll periods. Timing. An LST imposed for the first time becomes effective on January 1 of the year following enactment of an ordinance authorizing the tax. The same holds true for an ordinance which changes the tax rate. The Department of Community and Economic Development (DCED) must be notified of the rate by December 1 of the year prior to the effective date for the tax to be shown on the Official Tax Register that is released December 15. Assessment and Collection. If the LST is levied at a combined rate [1] exceeding $10, the tax must be assessed and collected on a pro-rata basis determined by the number of payroll periods established by an employer for a calendar year. The pro-rata share of the tax assessed on each taxpayer for a payroll period is calculated by dividing the combined rate of the LST by the number of payroll periods established by the employer for the calendar year. When calculating the pro-rata share, employers are required to round down to the nearest one-hundredth of a dollar. For instance, a $52 tax would be collected at $1 per week for taxpayers paid weekly, or at $4.33 per month for taxpayers paid monthly. A $36 tax would be collected at 69 cents a week for taxpayers paid weekly, or at $3 a month for employees that are paid monthly. If the LST is levied at a combined rate of $10 or less, the tax may be collected in a lump sum. Withholding. All employers with work sites within the taxing jurisdiction are required to deduct the LST from their employees at the site of employment if the tax is listed in the Official Tax Register. If the municipality and/or school district's tax rates are not listed in the Register, employers are not required to withhold the LST from employee wages. Remittance. Employers must remit withheld taxes to the designated tax collector 30 days after the end of each calendar quarter. If the combined tax rate exceeds $10, the municipal and school tax must be withheld together and remitted to the municipality or the tax collector, who are required to distribute the schools share of the tax to the school district. Self-Employed Individuals. If the combined rate of an LST exceeds $10, the tax should be pro-rated and paid by self-employed individuals on a quarterly basis, as if their payroll period is a calendar quarter. Self-employed taxpayers shall pay the tax to the municipality or the tax collector 30 days after the end of each calendar quarter.

D-7

MD WITHHOLDING AND REPORTING


Paper Copy Pre-printed MW506 Coupons Electronic Filing File over the Internet and pay by direct debit Use bFile, the Comptrollers free internet filing service for businesses, to file and pay online at www.marylandtaxes.com. bFile is a free service that allows you to file and make your payment by electronic funds withdrawal (direct debit). Zero reports may also be filed through the bFile service. File and pay by ACH Credit File and pay through your bank using the ACH Credit method. Contact your bank to see if it offers this service. Your bank may charge a nominal fee for an ACH Credit transaction. File and pay by phone Use your telephone and the free ACH Debit Electronic Funds Transfer (EFT) service to pay your employer withholding, sales and use tax, motor fuel tax and corporation income tax payments. You must preregister for EFT payments. Visit www.marylandtaxes.com or call 410-260-7601 for more information on the EFT program and registration requirements. File and pay by credit card Pay with your MasterCard, VISA, Discover or American Express card by calling Official Payments Corp. at 1-800-2PAYTAX or by visiting www.officialpayments.com. Official Payments Corp., a private credit card payment services provider, charges a convenience fee per transaction. The State does not receive this fee. File zero reports If you did not withhold any Maryland income tax for a reporting period, do not mail us your MW 506. Instead, file online using bFile or call 410-260-7225 to file the zero report by phone. Please have the form in front of you when you call. Annual withholding tax filers These filers receive a coupon book with four quarterly reports. Use the report with the quarter ending that corresponds with your tax end. For example, if your tax year ends between October 1 and December 31, use the fourth quarter coupon to report and pay tax withheld. The annual reconciliation Form MW 508 and state copy of federal Form W-2s issued for the previous calendar year is due on the last day of February, regardless of the quarter in which your year ends.

D-8

MD LOCAL WITHHOLDING AND REPORTING


COUNTY RATES Local tax is based on taxable income and not on Maryland state tax. Listed below are the actual 2012 local income tax rates. Employers will use $3,200 as the value of an exemption when using the withholding tables. There is no need to adjust for the reduction in the exemption amount as employees are instructed to reduce the number of exemptions being claimed on their Exemption Certificate, Form MW507. Allegany 3.05% Anne Arundel 2.49% Baltimore County 2.83% Baltimore City 3.20% Calvert 2.80% Caroline 2.63% Carroll 3.05% Cecil 2.80% Charles 2.90% Dorchester 2.62% Frederick 2.96% Garrett 2.65% Harford 3.06% Howard 3.20% Kent 2.85% Montgomery 3.20% Prince Georges 3.20% Queen Annes 2.85% St. Marys 3.00% Somerset 3.15% Talbot 2.25% Washington 2.80% Wicomico 3.10% Worcester 1.25%

Withholding tables can be downloaded from the Comptrollers Web site at www.marylandtaxes.com. If you do not have Internet access, you may call 410-260-7951 from Central Maryland or 1-800-MD TAXES from elsewhere. ADDITIONAL MD WITHHOLDING INFORMATION Accelerated taxpayers may request a waiver allowing monthly returns for the remainder of the calendar year. A renewal of the waiver is also available if eligibility to file federal withholding tax returns on a monthly basis is unchanged. Payers of distributions that are Eligible Rollover Distributions (ERDs) under IRC Section 3405(c), subject to mandatory federal income tax withholding, are required to withhold Maryland income tax from these distributions paid to Maryland residents at the rate of 7.75%. Designated distributions are only subject to Maryland income tax withholding if the payee elects to have withholding made by the payer. The amount required to be withheld is the amount that the payee requests using Form MW507P. A spouse whose wages are exempt from Maryland income tax under the Military Spouses Residency Relief Act may claim an exemption from Maryland withholding tax by filing Form MW507 with their employer.

D-9

REFERENCE GUIDE FOR W-2, BOX 12 CODES


AUncollected social security or RRTA tax on tips. BUncollected Medicare tax on tips. CTaxable cost of group-term life insurance over $50,000 (included in boxes 1, 3 (up to social security wage base), and 5). DElective deferrals to a section 401(k) cash or deferred arrangement. Also includes deferrals under a SIMPLE retirement account that is part of a section 401(k) arrangement. EElective deferrals under a section 403(b) salary reduction agreement. FElective deferrals under a section 408(k)(6) salary reduction SEP. GElective deferrals and employer contributions (including nonelective deferrals) to a section 457(b) deferred compensation plan. HElective deferrals to a section 501(c)(18)(D) tax-exempt organization plan. See Adjusted Gross Income in the Form 1040 instructions for how to deduct. JNontaxable sick pay (information only, not included in boxes 1, 3, or 5). K20% excise tax on excess golden parachute payments. LSubstantiated employee business expense reimbursements (nontaxable). MUncollected social security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only). NUncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (former employees only). PExcludable moving expense reimbursements paid directly to employee (not included in boxes 1, 3, or 5). QNontaxable combat pay. REmployer contributions to your Archer MSA. SEmployee salary reduction contributions under a section 408(p) SIMPLE plan (not included in box 1). TAdoption benefits (not included in box 1).

D - 10

REFERENCE GUIDE FOR W-2, BOX 12 CODES - continued


VIncome from exercise of nonstatutory stock option(s) (included in boxes 1, 3 (up to social security wage base), and 5). WEmployer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria) plan) to your health savings account. YDeferrals under a section 409A nonqualified deferred compensation plan. ZIncome under section 409A on a nonqualified deferred compensation plan. This amount is also included in box 1. It is subject to an additional 20% tax plus interest. AADesignated Roth contributions under a section 401(k) plan. BBDesignated Roth contributions under a section 403(b) plan. DDCost of employer-sponsored health coverage. The amount reported with Code DD is not taxable. EEDesignated Roth contributions under a governmental section 457(b) plan. This amount does not apply to contributions under a tax-exempt organization section 457(b) plan.

REFERENCE GUIDE FOR W-2, BOX 13


Box 13Checkboxes. Check all boxes that apply.

Statutory employee. Check this box for statutory employees whose earnings are subject to social security and Medicare taxes but not subject to federal income tax withholding. Do not check this box for common-law employees. There are workers who are independent contractors under the common-law rules but are treated by statute as employees. They are called statutory employees. 1. A driver who distributes beverages (other than milk), or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning if the driver is your agent or is paid on commission. 2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company. 3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name if you also furnish specifications for the work to be done.

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REFERENCE GUIDE FOR W-2, BOX 13 - continued


4. A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed for you must be the salesperson's principal business activity. For details on statutory employees and common-law employees, see section 1 in IRS Pub. 15-A.

Retirement plan. Check this box if the employee was an active participant (for any part of the year) in any of the following. 1. A qualified pension, profit-sharing, or stock-bonus plan described in section 401(a) (including a 401(k) plan). 2. An annuity plan described in section 403(a). 3. An annuity contract or custodial account described in section 403(b). 4. A simplified employee pension (SEP) plan described in section 408(k). 5. A SIMPLE retirement account described in section 408(p). 6. A trust described in section 501(c)(18). 7. A plan for federal, state, or local government employees or by an agency or instrumentality thereof (other than a section 457(b) plan). Generally, an employee is an active participant if covered by (a) a defined benefit plan for any tax year that he or she is eligible to participate in or (b) a defined contribution plan (for example, a section 401(k) plan) for any tax year that employer or employee contributions (or forfeitures) are added to his or her account. For additional information on employees who are eligible to participate in a plan, contact your plan administrator. For details on the active participant rules, see Notice 87-16, 1987-1 C.B. 446; Notice 98-49, 1998-2 C.B. 365; section 219(g)(5); and Pub. 590, Individual Retirement Arrangements (IRAs). You can find Notice 98-49 on page 5 of Internal Revenue Bulletin 1998-38 at www.irs.gov/pub/irs-irbs/irb98-38.pdf. Also see Notice 2000-30, which is on page 1266 of Internal Revenue Bulletin 2000-25 at www.irs.gov/pub/irs-irbs/irb0025.pdf. Do not check this box for contributions made to a nonqualified or section 457(b) plan.

Third-party sick pay. Check this box only if you are a third-party sick pay payer filing a Form W-2 for an insured's employee or are an employer reporting sick pay payments made by a third party. See Sick Pay Reporting in section 6 of Pub. 15-A.

D - 12

MARYLAND ANNUAL W-2 RECONCILIATION


New for Tax Year 2011 There has been a reduction in the number of wage statements required to be filed in machine-readable or electronic format. Maryland House Bill 1233 changes the number of W-2s required to be submitted to the Comptroller of Maryland in machine-readable or electronic format, from 100 or more to 25 or more for tax year 2011 and later years. Maryland Magnetic Media Record Changes Tax Year 2012 There have been no changes to the record layouts for tax year 2012 reported, however, all fields in all records are now required. The 2012 Maryland record layout is the only acceptable format for both current and back year tax magnetic media submissions. See the Media Specifications page on the Maryland website for updates to requirements. Enhancements for Tax Year 2012 W2 Bulk Upload is now available. Visit the Business taxpayer online service center for registration and filing instructions. Reminders for Tax Year 2012 The RE record must include the Maryland Central Registration Number in positions 222-229. Failure to include your Central Registration Number will result in your data being rejected. The RS record must include the Employer Identification Number in positions 328-336. Failure to include your Employer Identification Number will result in your data being rejected. The RV record is an electronic version of the paper form, MW508, Annual Employer Reconciliation Return. The RV record contains all of the data from the MW508 and is a required record when using magnetic media. Do not include the paper MW508 with your magnetic media submission as the RV record is considered the electronic version. Do not send a paper Form MW508 unless the report is for all zeros and/or paper W-2s/1099s are attached. Amounts reported on a paper Form MW508 are for paper submission only. The Comptroller of Maryland will only accept 3 -inch diskettes, CDs, b-File and W-2 file upload submissions.

D - 13

PA NEW HIRE REPORTING


Paper/Fax Reporting New Hire Information can be submitted using the Standard Commonwealth Form. Instructions for Completing the Form

Unless noted as optional, all required information must be included on the form. Please type or print legibly in black or blue ink. This form may be duplicated.

Mailing Address: Commonwealth of Pennsylvania New Hire Reporting Program P.O. Box 69400 Harrisburg, PA 17106-9400 FAX Number: 1-866-748-4473 717-657-HIRE(717-657-4473) Customer Service: 1-888-PAHIRES(1-888-724-4737) Electronic Reporting Details https://www.cwds.state.pa.us/cwdsonline/NewHire/NewHireProgramInformation/ElectronicReporting.aspx Reporting newly-hired employees electronically is the easiest way to report. The benefits of reporting electronically include:

Reduces errors; saves on paper, processing time, and postage; Reduces rejected records because of missing or unreadable data; Enables Multi State Employers to easily fulfill the reporting requirements specific to their status as a "Multi State" employer Enables employers with many locations to consolidate their new hire reporting.

Using the PA New Hire Reporting Program Web Site is an easy, no-hassle way of reporting new hires. Employers will receive a printable confirmation of reports received and the web site is available 24 hours a day, 7 days a week.

Online Reporting: Employers may use our web site to report their new hires online. Confirmation reports of new hires submitted via the online form are provided each time an employer reports using this feature. Register for online reporting.

Electronic Reporting: Employers may export their new hire data directly from their payroll or human resources software into a file that meets our layout specifications. Many software vendors provide technical support, and several software vendors have recently added electronic new hire reporting options to their latest upgrades.

D - 14

MD NEW HIRE REGISTRY


http://newhire-reporting.com/MD-Newhire/default.aspx What is the Maryland New Hire Registry and what is my responsibility as a Maryland employer? Federal and State law requires all employers who are covered under the Maryland Unemployment Insurance Law to report all employees who are hired or rehired to a central registry within 20 days of the employee's first day of work. Employers are required to report the following information:

Employee's name and Social Security Number Employee's home address Employee's first physical day of work on the job Employer's name and address Maryland State Unemployment Insurance Ten Digit Account Number Federal Employer Identification Number Whether health insurance is available Several additional data elements may be reported on a voluntary basis. For more information contact the Maryland New Hire Registry Help Desk at (410) 281-6000 or 1-888-MDHIRES, Fax # (410) 281-6004, Toll Free Number 1-888-657-3534. Maryland Report of Hire website The New Hire Registry is a tool that the State of Maryland/DLLR utilizes to protect against unemployment insurance overpayments and fraud. Employer participation in this program is mandatory and helps protect the Maryland UI Trust Fund from individuals who continue to file after finding gainful employment. Where do I report new hires? Electronic Reports - Using our web site's online reporting feature is a very popular choice for employers. This feature provides a printable confirmation of reports received and is available 24 hours a day, 7 days a week. Employers can send new hire data files in a variety of ways, including transferring files through this Web site, electronic transfer via modem (EFT), or mail reports to the Maryland New Hire Registry on diskette. http://newhire-reporting.com/MD-Newhire/electronic.aspx. Non-Electronic Reports - Paper new hire reports may either be faxed or mailed to the Registry. Mail reports to: Maryland New Hire Registry P.O. Box 1316 Baltimore, MD 21203-1316 D - 15 Fax reports to: (410) 281-6004 Toll-free: (888) 657-3534

Social Security Number Verification Service (SSNVS)


http://www.ssa.gov/employer/ssnv.htm

Information and Instructions to Verify Social Security Numbers Online Overview There are two Internet verification options you can use to verify that your employee names and Social Security numbers match Social Security's records. You can:

Verify up to 10 names and SSNs (per screen) online and receive immediate results. This option is ideal to verify new hires. Upload overnight files of up to 250,000 names and SSNs and usually receive results the next government business day. This option is ideal if you want to verify an entire payroll database or if you hire a large number of workers at a time.

While the service is available to all employers and third-party submitters, it can only be used to verify current or former employees and only for wage reporting (Form W-2) purposes. Why Should I Verify Names and SSNs Online

Correct names and SSNs on W-2 wage reports are the keys to the successful processing of your annual wage report submission. It's faster and easier to use than submitting your requests paper listings or using Social Security's telephone verification option. Results in more accurate wage reports. Saves you processing costs and reduces the number of W-2cs. Allows Social Security to properly credit your employees' earnings record, which will be important information in determining their Social Security benefits in the future. Steps to Register for SSNVS

1. Register to Use SSNVS - Registration is required through www.ssa.gov/bso/bsowelcome.htm. Thirdparty preparers need only register once in their own firm's name. Complete the registration form and select your own password. Social Security will verify your identity against our records and display a User ID. Make note of your the User ID, password and expiration date. Social Security Number Verification Service Handbook 2. Request Access and Activation Code - Return to www.ssa.gov/bso/bsowelcome.htm and login in with your User ID and password. Select "Request Access and Activation Code." 3. Activation Code is mailed to Your Employer - Your employer should give you the activation code which allows you access to SSNVS. 4. Login to Use the Service - Go to www.ssa.gov/bso/bsowelcome.htm, select Login, input your User ID, password and activation code and you will be able to use the service. NOTE: For more detailed instructions on registering and/or using SSNVS, get a copy of the handbook at http://www.ssa.gov/employer/ssnvs_handbk.htm

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U.S. CITIZENSHIP AND IMMIGRATION SERVICES E-VERIFY


http://www.dhs.gov/e-verify E-Verify is an Internet-based system that compares information from an employee's Form I-9, Employment Eligibility Verification, to data from U.S. Department of Homeland Security and Social Security Administration records to confirm employment eligibility. Why E-Verify? The U.S. Department of Homeland Security is working to stop unauthorized employment. By using EVerify to determine the employment eligibility of their employees, companies become part of the solution in addressing this problem. Employment eligibility verification is good business and it's the law. Who Uses E-Verify? More than 409,000 employers, large and small, across the United States use E-Verify to check the employment eligibility of their employees, with about 1,300 new businesses signing up each week. While participation in E-Verify is voluntary for most businesses, some companies may be required by state law or federal regulation to use E-Verify. For example, most employers in Arizona and Mississippi are required to use E-Verify. E-Verify is also mandatory for employers with federal contracts or subcontracts that contain the Federal Acquisition Regulation E-Verify clause. For more information regarding E-verify, including enrollment, visit the Employer section of the E-Verify website.

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