2012 Tax Changes
and what they mean to employers
Posted on January 26, 2012
During 2011, hundreds of new laws or extensions of existing laws were enacted that affect all Americans; many of the significant legislative changes were to tax laws that will have a direct effect on employers across the country in 2012.
Social Security Wage Base
The Social Security wage base is the maximum amount of earnings against which the Social Security tax can be applied. It has been increased from $106,800 in 2011 to $110,100 for 2012. This means that any wages earned in excess of $110,100 in 2012 are not subject to Social Security taxes.
Temporary Payroll Tax Cut Continuation Act of 2011
In December of 2011, Congress, by unanimous consent, passed the Temporary Payroll Tax Cut Continuation Act of 2011. The act, which is funded by an increase in mortgage guaranty fees, extends not only a payroll tax cut, but also unemployment benefits through the end of February 2012.
In 2011, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 reduced the employee portion of the Social Security tax from 6.2% to 4.2% on the first $106,800 of wages earned. The Temporary Payroll Tax Cut Continuation Act of 2011 extended the reduction of the employee portion of the Social Security tax through February 29, 2012. Because the extension only covers two-twelfths of the year, the tax reduction applies only to the first $18,350 (two-twelfths of $110,100) in wages earned in 2012. A Congressional conference committee is tasked with determining whether the act should be extended through the end of 2012. If it is not extended, a recapture of excess benefits clause in the existing act allows for a 2% tax on any wages over $18,350 previously taxed at the reduced rate.
Income Tax Withholding Tables Updated
The IRS has posted Notice 1036, Early Release Copies of the 2012 Percentage Method Tables for Income Tax Withholding on its website. The IRS recommends checking regularly for updated information on Notice 1036 and the status of the extension of the tax holiday and actions taken by Congress on their website.
Many states have also updated their withholding tables for 2012. Be certain to check your individual state’s website for information on state income tax rates and tables. The American Payroll Association’s website has a page of links to individual state government websites.
Tax Rate for Vehicle Use
The standard mileage rate for business use of a vehicle was increased to 55.5¢ per mile on July 1, 2011. The rate remains unchanged for 2012.
The fair market value limit amounts for cars and trucks, for use when utilizing the cents-per-mile rules to determine the value of an employee’s personal use of a company vehicle, increased from $15,300 to $15,900 and from $16,200 to $16,700, respectively. The value of the employee’s use of a company car is a taxable fringe benefit and must either be reimbursed to the employer or included in the employee’s wages on Form W-2.
Specific information on fringe benefit valuation rules is outlined in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
Commuter Tax Benefits
A temporary increase in the amount employers may provide workers in tax-free transit and vanpool benefits expired on December 31, 2011. As a result, the maximum amount was reduced from $230 per month in 2011 to $125 per month for 2012. On the other hand, the qualified parking benefit exclusion increased from $230 per month to $240 per month.
Elective Deferral Plan Limits
The limit for elective deferral plans, such as 401(k), has been increased to $17,000 for 2012. The SIMPLE plan limit remains unchanged at $11,500.
IRS Form W-2
Beginning with 2012 Form W-2 (generally issued to employees in January of 2013 for the 2012 calendar year), businesses that file more than 250 Forms W-2 are required to report the cost of employer-sponsored health coverage on the forms.
General instructions for 2012 IRS Forms W-2 and W-3, available on the IRS website, specify listing the cost of employer health coverage in box 12 with code DD.
Employers that file fewer than 250 Forms W-2 are not required to report this information for 2012. According to IRS Notice 2012-9, this exemption is expected to continue in 2013 and subsequent years until further guidance is issued.
Work Opportunity Tax Credits (WOTC)
The Work Opportunity Tax Credit program was established to encourage businesses to employ workers from economically challenged groups including ex-convicts, long-term recipients of benefits from the Temporary Assistance for Needy Families (TANF) program, veterans with disabilities and Supplemental Security Income benefits recipients. Although the nonmilitary WOTC programs expired on December 31, 2011, Congress passed the American Jobs Act in November 2011, which provides incentives to businesses that hire unemployed veterans.
The “Returning Heroes” tax credit provides a credit to employers of up to $2,500 for hiring veterans who have been unemployed for more than four weeks, or up to $5,600 for hiring veterans who have been out of work for over six months. The “Wounded Warrior” tax credit continues the previous WOTC credit to employers of up to $4,800 for hiring veterans with service-connected disabilities; however, it now provides a new credit of as much as $9,600 to businesses that hire a veteran with a service-connected disability who has been unemployed for more than six months.
Additional information on the Returning Heroes and Wounded Warriors Tax Credits is available on the White House website.
Small Business Health Care Tax Credit
Small employers with the equivalent of fewer than 25 full-time workers who pay an average wage of less than $50,000 per year and pay at least 50% of single health coverage for employees may be eligible for the Small Business Health Care Tax Credit. Small business employers may be able to apply up to a maximum of a 35% credit; small tax-exempt employers may be eligible for up to a 25% credit.
IRS Form 8941, Credit for Small Employer Health Insurance Premiums, must be used to calculate the credit. Small businesses should include the amount of the credit as part of the general business credit on their income tax return. Tax-exempt employers should file the tax credit amount on line 44f of IRS Form 990-T, Exempt Organization Business Income Tax Return. The credit can be taken for tax years 2010 through 2013. Employers that did not take the credit for 2010 can still file an amended return and take it now.
For more information on the Small Business Health Care Tax Credit, is available on the IRS website.
FUTA Credit Reductions
Unemployment insurance (UI) is a program established by the Federal Unemployment Tax Act (FUTA) that is jointly financed through federal and state employer payroll taxes. Currently, the FUTA tax rate is set at 6.0%; however, most employers do not pay a FUTA rate of 6.0%. Historically, employers who pay their state unemployment tax on time receive an offset FUTA credit of 5.4%, resulting in a net FUTA tax rate of 0.6% for those employers.
In 2011, businesses in 20 states and the U.S. Virgin Islands found themselves paying a higher FUTA tax rate because their FUTA offset credit was reduced. This happened because states that borrow money from the federal government to fund their state unemployment programs have two years to repay their loan in full. If the loan is not paid in full on or before November 10 of the second tax year, employers in that state lose 0.3% of their available FUTA credit, resulting in a higher FUTA tax rate.
A full explanation of FUTA credit reductions for 2011, including details regarding which states are affected, is covered in the January 2012 issue of Insights and Innovations..
Tax Update Resources
The IRS Small Business and Self-Employed Tax Center is an excellent resource for state and federal legislative and tax changes. Payroll and tax professionals will also benefit from visiting the Payroll Professionals Tax Center and the Issue Management Resolution System (IMRS) “Hot Issues” page of the IRS website on a regular basis.
The Payroll News page of the CompuPay website is updated regularly with payroll, tax and industry news affecting employers across the country and is an excellent source for up-to-date information.
CompuPay is one of the leading payroll, tax filing and HR-related service providers in the country. For 30 years, we have established relationships with thousands of accounting professionals, allowing them to better attract, serve and retain business clients.
The material contained in this document is for informational purposes only and is current as of the date of publication. CompuPay is not a legal advisor or financial advisor and makes no claims as such. For financial or legal advice, please seek the advice of a professional.
Listed in Employer Resources.