Year: 2011

The Payroll Tax Debate – Simplified

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What is the present payroll tax cut debate all about and how does it affect workers and businesses?

If you look at your paycheck, you will usually see four taxes withheld from your gross pay.

  • The first one is Federal Tax, which is your payment toward the amount owed for your Income Taxes.  The more money that you make, the more you owe in Income Tax, as this tax is a function of earnings.
  • The next one is State Income Tax, if you live in a state that has an Income Tax.  Same concept as the Federal Income Tax, but this goes to fund your state.
  • The next one is Medicare Tax.  This tax funds the Medicare system, which is the retiree health insurance plan.  It is a flat 1.45% of total earnings.   Your employer matches this amount and remits to the government 2.9% (1.45% that you have paid and 1.45% the employer paid).
  • The final tax is the Social Security Tax and this is the subject of the debate in Congress.   For a very long time, the employee paid 6.2% of their earnings and your employer paid the same amount, therefore, remitting 12.4% (6.2% that you have paid and 6.2% the employer paid).  The employee and employer only pay this tax on about the first $110K in earnings, which is indexed annually.

In 2011, the employee only rate was cut from 6.2% to 4.2%.  The employer rate remained at 6.2%.  Therefore, if you are making $1,500 per week, you received an additional $30 in net pay (2% * $1,500) or about $1,500 more per year.  The thought is that this amount would be spent by the employee and it would stimulate the economy.

Initially, the main issue was how to pay for this tax cut.  The Democrats wanted to pay for this with their millionaire tax and the Republicans wanted to pay for this by continuing the pay freeze on government workers and by reducing the government workforce through attrition.

The issue now is gamesmanship between the Senate and the House.  The Senate voted a temporary 2 month extension and the House wants a full-year extension.  The House is trying to force the Senate to return to Washington this week to vote on a new bill.

Note that there is no impact to employers, as their taxes neither increase nor decrease.

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IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

PA Governor Slaps Consumers, Online Retailers and the US and PA Constitutions in the Face

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Facts:

  1. The US Constitution’s Due Process and Commerce clauses prohibit states from inhibiting the free flow of commerce between each other.
  2. Pursuant to these clauses, the US Supreme Court has ruled that out-of-state businesses need a physical presence (an office, factory, employees, etc.) in a state, in order to be required to collect and remit tax in that state.
  3. In 1959, Congress passed a law that reaffirmed the Supreme Court decision and said that states are prohibited from imposing a tax on out-of-state businesses “..if a company’s only state activities are
    solicitation of orders for sales of tangible personal property…” .

On December 1, 2011, the PA Department of Revenue (“DOR”) issued a bulletin requiring out-of-state businesses to collect sales tax for all PA sales, even if they have no physical presence in PA.  The DOR went into great detail on how they would punish businesses who did not register before February 1, 2012.

We see several problems with this:

  1. It is unconstitutional and against the law.
  2. It hurts PA consumers financially and small online retailers who need systems to comply with this mandate.
  3. In other states (RI, NC, and IL) that have similar unconstitutional laws, there has been no increase in state sales tax collections, due to the loss of revenue suffered by these retailers because of this law.
  4. PA DOR defined “maintaining a place of business” so loosely, that if you can spell PA, you are probably now required to collect sales tax.
  5. The PA Constitution requires that tax laws need to be strictly construed, and this tax law was done merely by issuing a press release.

Clearly, PA and its Governor Tom Corbett are overreaching and their actions are hurting both consumers and businesses.

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IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

 

 

Why Amazon.com Supports the Online Sales Tax

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For years, Amazon.com opposed collecting state sales tax on sales to states where they did not have a physical presence.  This is the law.  In 1992, the Supreme Court ruled that a business needed to have a physical presence in a state to be forced to collect state sales tax.

Now, Congress is ready to pass the Marketplace Fairness Act that would require online retailers with internet sales greater than $500,000 to charge consumers sales tax. Remember, sales tax neither adds nor subtracts anything from a company’s sales or profits, as it is a pass-through.  The company simply collects it and then remits it to the state.

 So, why would Amazon.com want to give up a competitive advantage they and all other online retailers presently have over traditional brick-and-mortar stores?  The simple answer is they do not see brick-and-mortar stores as their competition anymore – they see smaller, start-up online retailers as their main competition.

Amazon.com has the systems in place, whereby collecting and remitting state sales tax will not be a burden.  It will be a killer for smaller and start-up online retailers, though.  A recent PriceWaterhouseCoopers study found sales tax compliance costs small retailers 13.47% of all sales tax collected, compared to 2.17% for large retailers.  Amazon.com’s cost would be negligible, as their systems are already in place.

Sales tax compliance is not easy.  In many states such as California, in addition to state sales tax, businesses are also required to collect city sales tax, county sales tax, district sales taxes, etc.  Often, the total rate is not unique to zip code, but to individual addresses and the rates change quarterly.

The tech community should be aggressively opposing this bill.

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IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

Investors and Entrepreneurs: Incorporate before 2012 to get 100% Capital Gain Exclusion

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Under the Job Creation Act of 2010, you can exclude 100% of your capital gain (including no Alternative Minimum tax consequences) on the sale of C Corporation stock (not S Corporations or LLCs), under the following conditions:

  • Stock is acquired before January 1, 2012
  • You hold the stock for at least 5 years
  • At time of sale of the stock, it has been held for more than five years
  • The stock was acquired at its original issue for money, other property or services
  • Stock was not acquired through a stock-for-stock exchange (makes S Corporation conversion to a C Corporation somewhat tricky)
  • Assets cannot exceed $50M on the date the stock is issued
  • Most businesses qualify with the exception of the following:
    • Any trade or service business (such as accounting, consulting, law, etc.)
    • Any Banking or financial business
    • Any farming business
    • Any mining, oil, or gas business
    • Any business operating a hotel, motel, restaurant, or similar business

So, you incorporate in 2011 and sell your company 5+ years later for a $1M gain, you pay NO income or capital gain taxes – you avoid $150K in taxes (assuming capital gain tax is still 15% when you sell).  Same scenario, but you incorporate in 2012, you pay $150K in taxes.

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IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

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