There is lots of energy in the payroll industry right now about the stimulus plan—who is affected and how and what it means for small business employers. So, I thought I would clarify what the essential elements are, what PayCycle is doing in response, and where you can get additional information. If you are confused or need answers to most common questions about how your payroll as a small business employer will be affected by the stimulus plan, then this is for you.
The tax stimulus plan, the American Recovery and Reinvestment Act of 2009, has 2 elements that affect you and your employees and former employees. There are the Cobra credits for Health Insurance, and the individual tax credit, known as “Making Work Pay”/ Let me start with this one. This is the big exciting change for employees: more money in their paychecks. IRS has changed the tax tables to reduce the amount of withholding for most workers and this increases net pay. Most workers will be getting $400 extra spread out over the rest of the year. There is NO additional cost to employers.
As an employer, what actions need to be taken, if any?
It depends on how you do your payroll. In any case, new tax tables need to used by April 1, 2009.
· If you are a PayCycle customer, it’s already done for you.
· If you are using other payroll programs, check with your provider to find out when they will be updating the tax rate tables. You may need to download new information and update your software. If you have rates or withholding amounts in a spreadsheet, you’ll need to update them with the new information. If you manually calculate checks from the federal tax tables, make sure you are using the new Publication 15-T issued 2/21/09. Again, you must change your tax tables by April 1st. This is available on the IRS website www.irs.gov.
· Again, if you are using PayCycle, because the service is online, your tax tables are already updated and employees of small business owners using PayCycle are already getting their bigger paychecks. There is nothing more you need to do.
If some companies make the change later than others, won’t some workers get smaller credits?
a. Eventually everyone will get the full credit they are owed, regardless of when it is implemented. Here’s why:
b. Everyone eligible for the credit will be able to claim the full amount of it when they file their 2009 form 1040 income tax return in early 2010. Employees who didn’t get all the tax reductions in their paychecks in 2009 will get a larger refund (or have less tax due), but they’ll have to wait for it until next Spring. That would be too bad. The whole idea of the stimulus act is to get more money into the economy by increasing employee paychecks immediately.
Do employees need to complete a new W-4?
c. No.
d. However, there are 2 groups of employees who might wish to complete a new W-4: One, any employee that works multiple jobs is likely to get too much money now and owe it in extra taxes later, because he’ll be getting a $400 credit at each job. Two, if an employee has income from other sources, and his total exceeds $75,000 for an individual or $150,000 for a married couple, he may not even be eligible for the credit. He could end the year owing all of it as extra tax on his 2009 1040 income tax return. You don’t want to deal with an unhappy employee next year who faces a big tax bill. We suggest you tell all your workers to review their tax situation and use the worksheet on the IRS W-4 form to make sure they have the correct withholding selections. PayCycle customers can print a blank W-4 for their workers from our site. Or you can go to the IRS website and search for Form W-4.
How do the new Cobra credits for health insurance work?
· Cobra is continuation coverage for workers who lose their work based health insurance. The goal of the stimulus plan is to make it easier for laid off workers to purchase health insurance through Cobra.
· WHO CARES about this: Those who already are involved in Cobra health insurance. You probably don’t need to follow this if you don’t offer health insurance to your employees, or have fewer than 20 workers, or have no involuntary terminated employees since 9/1/2008. However, there are lots of edge cases. If you are unsure, talk to your benefit provider or tax advisor.
· If you currently offer COBRA health insurance to former employees or if you anticipate future layoffs in this calendar year, those employees may be allowed to purchase their coverage at 35% of the actual cost. You the employer are required to initially pay the 65% difference, but you can claim a credit on your 941 quarterly forms, and get fully refunded. To claim the credit, you will report the amount of your COBRA payments on your 941 Quarterly Tax form. You have a few choices:
o You can wait and claim your credit at the end of the quarter and ask for a refund, or you can apply it to your next quarter tax liability.
o Or you can enter your credits as you make the payments, and then you can reduce the payroll tax amounts you need to pay by the same amount. To use this approach, your payments have to b e made in the same quarter that you report them.
As a PayCycle customer, all the new forms will be waiting for you when it’s time to file.
Are there any other Cobra requirements people should know about?
Yes, There are a few additional requirements of employers:
· You need to tell your former employees that Cobra health insurance is available to them , if they were terminated on or after September 1, 2008, even if they already declined coverage. The new Cobra coverage will be available to them until 9 months after the date they were terminated.
· Documentation is required . You must keep the following records:
o Proof of payment of the health insurance premiums you paid for the qualified employees.
o Notice of involuntary termination for each qualified employee
o Proof of eligibility, receipt of the payment from your former employee, and the names of the covered individuals.
Where can people find out more about these topics?
e. If you’re currently doing your payroll manually or with software that needs updates, you may want to look at the PayCycle solution. Our phone staff can answer questions about the stimulus plan, but also how PayCycle can save you time and money every payday – call our sales line at (866) 729-2925
f. If you have Cobra questions, especially around eligibility issues unique to your business – talk to your tax/benefit advisor
g. The IRS and Dept of Labor websites have lots of information, including employee and employer FAQ’s and links to the tax tables, forms, and Cobra rules. www.IRS.gov for the IRS and http://www.dol.gov/ebsa/cobra.html for the DOL.
h. Also, small business employers can send us their comments and suggestions of other topics they would like PayCycle to cover at feedback@paycycle.com.
