Some Government Regs Help, Others Can Hurt
When a police officer reads a perpetrator his Miranda rights or a surgeon makes that first incision of the day, it’s second nature. With the same instinct, dealership owners and managers automatically know the right procedures for financing, selling, insuring and registering vehicles.
What might be less familiar in dealer management suites are the latest regulations for managing employees. It’s a changing landscape, and owners are smart to stay on top of where changes are taking place—both to avoid government penalties and to benefit the business and its employees.
These three areas stand out for their potential to help or hurt small businesses:
• Worker classification. Classifying workers as employees or independent contractors must be done correctly, or business owners risk penalties imposed by the Internal Revenue Service and the Department of Labor.
• Hiring the unemployed. The federal HIRE act enables organizations to save on employment taxes through the end of 2010, and provides an extra incentive for keeping employees on the job.
• Health insurance tax credits. For the 2010 tax year, health care reform provides tax credits to eligible employers who offer health insurance to their employees.
Dealership owners must correctly determine whether workers are employees or independent contractors. Employees get a paycheck with certain taxes deducted and are issued a Form W 2 each year by the employer; independent contractors get checks with no taxes deducted and are issued a Form 1099 from the employer that states how much they were paid for the year. Classifying workers as independent contractors may save employers money, because businesses don’t incur payroll taxes for the individual and are not required to provide employee benefits or workers’ compensation insurance.
The relationship of employers and workers is key. Factors might include whether there is a written contract in place and whether the business provides the worker with employee-type benefits such as insurance, vacation pay or a retirement plan.
While the temptation may be great to save on those items, the IRS penalties for misclassifying workers are significant. The liability for an employer who unintentionally misclassifies an employee is limited to 1.5 percent of the employee’s wages for income tax withholding and 20 percent of the employee’s portion of FICA tax. However, penalties for the intentional misclassification of a worker can include the full amount of income tax that should have been withheld, the full amount of the employer’s and employee’s FICA payments, interest and penalty amounts, and possible civil and criminal penalties, including jail time for the worst offenders.
Hiring the Unemployed
To spur higher employment, the federal HIRE Act offers two major provisions:
1. Businesses save the 6.2 percent employer portion of the Social Security tax for any qualified individuals hired after February 3, 2010, and before January 1, 2011. The available break is up to $6,622 for each new employee, depending on wages paid. Wages paid between March 19, 2010 through December 31, 2010 qualify for the credit.
2. Employers get a business tax credit of up to $1,000 after 52 weeks of continuous employment for each employee hired under the provisions of the act. For the employer to claim this credit, wages paid during the previous 26 weeks must equal at least 80 percent of the worker’s wages during the first 26 weeks of employment.
Jobseekers who enable businesses to get the credit need to have worked fewer than 40 hours over the previous 60 days or have not worked at all in the past 60 days. Since the act is designed to get unemployed people back in the workforce, employees who jump from one organization immediately to another are not qualified to yield the benefit for their new employers.
There are no limits on hiring employees to get these tax credits. However, the act prohibits unscrupulous business owners or managers from churning employees just to get the tax credits. Qualifying employees can only be hired to replace another employee when the existing employee is separated from the company voluntarily or for cause.
Health Insurance Tax Credits
If a business already offers health coverage to employees, the owner may apply for a credit to offset the cost of premiums. If the business doesn’t currently offer health insurance it may now be affordable. Any credit the business qualifies for will be applied against taxes owed beginning with the 2010 employer's annual income tax return. Guidance is still pending on how tax-exempt and non-tax-exempt entities will claim the credit. Small businesses can receive the credit not only for regular health insurance, but also for add-on dental and vision coverage. Owners should check with their tax advisors for the specifics on how this will affect their businesses.
For the first four years of the program, full credit for employers equals 35 percent of the employer's contribution to health insurance, or 35 percent of the average premium for the small-group market in the employer’s state—whichever is less.
Vol. 7, Issue 10