On February 1, 2010, President Obama released a proposed budget for FY 2011 (Oct. 1, 2010 – Sept. 30, 2011). The following summary of the budget proposal may be of interest to payroll professional as the proposed changes would affect employers.
General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals
Making Work Pay Tax Credit
Extends ‘Making Work Pay’ tax credit through taxable year 2011. The Making Work Pay provision in the American Recovery and Reinvestment Act of 2009 provides a refundable tax credit equal to 6.2% of earned income, up to a maximum of $400 for working single and $800 for married filing a joint return. Employees receive the credit through a reduction in the amount withheld from their paychecks. The credit is phased out at 2% for modified AGI in excess of $75,000 ($150,000 for married filing joint return).
Reinstatement of Tax Rates
Reinstate the 36% and 39.6% tax rates in 2011, indexed for annually for inflation.
Advance Earned Income Tax Credit (AEITC)
The budget proposal seeks to eliminate the Advance Earned Income Tax Credit (AEITC) for taxable years beginning January 1, 2011. The AEITC provides eligible workers with portions of their tax credits in advance of filing their Federal income tax returns by filing Form W-5, Earned Income Credit Advance Payment Certificate, with their employer.
COBRA Premium Assistance
COBRA premium assistance eligibility would be extended for one year by allowing individuals who qualify for COBRA coverage due to involuntary termination of their employment before the end of the year to qualify for a 65% COBRA health insurance premium subsidy. The subsidy period for those first eligible to receive the subsidy after Feb. 28, 2010, would be reduced to 12 months (currently 15 months). Under current law, workers involuntarily terminated after Feb. 28, 2010 do not qualify for the subsidy.
Misclassify Workers
The Department of Labor and Treasury are pursuing a joint proposal that eliminates incentives for employers to misclassify employees. Worker classification, under the proposal, would require prospective reclassification of workers as employees who were misclassified as independent contractors and whose reclassification has been prohibited by law. The proposal would be effective upon enactment, but prospective reclassification covered under the current special provision would not be effective until the first calendar year beginning at least one year after date of enactment.
Employee Leasing Companies
Contained within the proposal are establishing standards for holding employee leasing companies liable for clients’ employment taxes in order to clear up uncertainty with regard to tax assessment and collection if the taxes are not paid by the client or the leasing firm.
Automatic IRA accounts
Proposed effective January 1, 2012, would require employers that have been in business for at least two years and have more than 10 employees would be required to offer automatic payroll-deduction IRA option for employees. Employers would not be required to provide this option if they already sponsors a qualified retirement plan, a Simplified Employee Pension (SEP), or a Savings Incentive Match Plan for Employees (SIMPLE). Employers could claim a temporary tax credit for making automatic payroll-deposit IRAs available to employees. The amount of the two year credit would be $25 per enrolled employee per year up to $250.
Contractors
This proposal requires contractors receiving payments of at least $600 a year from a business to furnish a certified taxpayer identification number (TIN) on Form W-9. If a contractor fails to provide a valid TIN, the business would be required to withhold a flat percentage rate on gross payments to the contractor.
Other Proposals
- No longer classifying cell phones as listed property
- Increase information return penalties
- Requiring electronic filing of returns and imposing penalties
- Making it a felony for repeated willful failure to file a tax return
- Levying payments to federal contactors with delinquent tax debt
- Increasing levy authority to 100% for vendor payments
- Facilitating tax compliance with local jurisdictions
- Child Care Tax Credits eligibility limits
- Equal Pay Laws
- Expand and Enhance E-Verify programs
In addition to the Administration’s key proposals for FY2011, the budget proposal outlines spending requests and priorities across governments. The budget proposal calls for Congress to expand funding for some initiatives and to reduce or eliminate funding for others.
The complete budget proposal can be found at: http://www.gpoaccess.gov/usbudget/fy11/index.html
