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Kings Highway, Cherry Hill, New Jersey 08034 856.667.4100 · 215.563.0276 · Fax: 856.667.3652 Previous What's New Articles Back to Current Article Major Tax Deadlines for February 2002 Major Tax Deadlines for December 2001 Major Tax Deadlines for August 2001 Major Tax Deadlines for June 2001 Expect a tax rebate check soon Important Roth IRA Changes New Jersey Changes Partnership basis rules Payroll Alert Social Security/Medicare New Jersey Gross Income Tax Pennsylvania Income Tax Pennsylvania Unemployment Tax New Jersey Unemployment Tax Federal Unemployment Tax City of Philadelphia Wage Tax Earnings under Social Security Minimum Wage Forms W4, I-9 and W9 Electronic Federal Tax Payment System (EFTPS) 1999 Filing of Forms W2 and 1099 on Magnetic Media 401(K) Plan Limits Household Employment-Domestic Workers New Hire Reporting Requirements Reporting requirements for attorneys New-hire reporting requirements Florida Resident: Changes in Florida Intangible Tax New Jersey payroll tax reporting changes New Jersey changes partnership basis rules The state of New Jersey recently overturned the rule that federal basis is to be used in determining gain or loss on the sale of a partnership interest. Prior to this, partnership basis was reduced by losses and those losses may or may not have been utilized on the New Jersey income tax return. If the losses were not utilized, under the old law, the tax on the amount of the gain was greater than the actual economic gain. Accordingly, the New Jersey Supreme Court ruled that if a partnership interest has been disposed of in New Jersey and there are prior year losses which were not used in New Jersey, it may be possible to adjust the basis on the sale of the partnership interest to reflect the unused NJ losses and therefore reduce the gain on the sale of the partnership interest. As a result of this recent ruling, consideration should be given to amending prior year New Jersey tax returns if a partnership interest was disposed of at a gain between 1995 and 1997 and there were losses which were not utilized. [Back to top] PAYROLL TAX ALERT Effective January 1, 1999 Social Security/Medicare The wage base increases to $72,600 for Social Security and remains UNLIMITED for Medicare. For Social Security, the tax rate remains unchanged at 6.2% for both employers and employees. (Maximum Social Security tax withheld from wages is $4,501.20) For Medicare, the rate remains unchanged at 1.45% for both employers and employees. [Back to top] New Jersey Gross Income Tax The withholding tax rates for 1999 remain unchanged and continue to reflect graduated rates from 1.4% to 6.37%. [Back to top] Pennsylvania Income Tax The withholding rate for 1999 remains at 2.8%. [Back to top] Pennsylvania Unemployment Tax There is no employee withholding in 1999. Wages subject to unemployment contributions for employers remain at $8,000. [Back to top] New Jersey Unemployment Tax Wages subject to unemployment contributions increase to $20,200 for 1999. The employee withholding rate will remain at .925%. The maximum unemployment tax withheld from wages will be $186.85. The percentage breakdown of the employee's contribution for unemployment is: Unemployment Insurance .150% Disability Insurance .500 Health Care Subsidiary .250 Workforce Development .025 Total .925% [Back to top] Federal Unemployment Tax The wage base remains at $7,000. The effective tax rate for 1999 remains at .8% in both Pennsylvania and New Jersey. [Back to top] City of Philadelphia Wage Tax Effective July 1, 1998 tax rates decreased to 4.6869% for Philadelphia residents and 4.075% for nonresidents. [Back to top] Earnings under Social Security Employees between 65 and 70 receiving Social Security benefits can earn a maximum of $15,500 with no loss of benefits. Over age 70, no wage restrictions. Age 62 to under 65, wage restrictions are $9,600. [Back to top] Minimum Wage The effective rates per hour for 1999 are as follows: Federal $5.15 New Jersey $5.15* Pennsylvania $5.15 * Employers not subject to FLSA $5.05 [Back to top] Forms W4, I-9 and W9 All new employees are required to file Forms W4 and I-9 to be kept on file by the employer. A new Form W4 should be obtained when filing status or exemption changes. Be sure to request and keep on file a completed Form W9 from all non-corporate taxpayers to whom your company pays commissions, interest, rents, etc., totaling $600 or more, and also payments made to incorporated entities such as attorneys for legal services and providers of medical and health care services. [Back to top] Electronic Federal Tax Payment System (EFTPS) For 1999, employers with $50,000 or more in federal tax deposits (Form 941, 943, 945 and CT-1) or other taxes for the determination period of 1997 must pay their Federal Tax Liabilities through the Electronic Federal Tax Payment System. Over time, the threshold amounts may be lowered so that the IRS will have the majority of businesses using EFTPS. The phase in of the threshold amounts is as follows: Effective Date Determination Period Threshold 1/1/99 1/1/97-12/31/97 $50,000 Business taxpayers required to use EFTPS will face a 10% penalty if they make payments by paper coupon after July 1, 1999. Please contact us if you have any questions or need assistance in completing the Business Enrollment Form. [Back to top] 1999 Filing of Forms W2 and 1099 on Magnetic Media The IRS may penalize an employer for not filing Form W2 and 1099 on magnetic media, if required. If you have 250 or more W2's, Forms 1098, 1099A, 1099G, 1099 MISC., 1099R, 1099S, 5498, W2G's, 1099 INT, 1099 DIV, 1099 OID, 1099 PTR, you must file with IRS to use magnetic media reporting. Please contact us if you think you may be subject to these requirements. Effective 1997, Form 1099 must provide payor telephone number or will be subject to penalties. [Back to top] 401(K) Plan Limits The maximum employee pretax contributions will remain at $10,000 per individual (not per plan) for 1999. [Back to top] Household Employment-Domestic Workers Household employers are required to withhold and pay FICA for domestic workers (age 18 and older) if wages paid exceed $1,100 for the year. The $1,000 per calendar quarter threshold continues to apply for FUTA. These taxes are now reported on Schedule H of the employer's personal tax return (Form 1040), but must be remitted through withholding or estimated payments during the year. For Pennsylvania and New Jersey unemployment coverage applies for domestic service in an employer's private home for cash wages of $1,000 or more in a calendar quarter in the current or preceding calendar year. [Back to top] New Hire Reporting Requirements All employers in the states of New Jersey and Pennsylvania are required to report basic information about employees who are newly hired, rehired, or who return to work after separation of employment. New employers should receive instruction booklets upon registration with the state. Basic employee information which must be provided is as follows: 1) Employee's name 2) Employee's address 3) Employee's social security number 4) Employee's date of hire 5) Employer's name and address 6) Employer's federal identification number For further information please contact us or call the State of New Jersey at 1-877-NJ-HIRES or Pennsylvania at 1-888-724-4737. [Back to top] Reporting Requirements for Attorneys The Taxpayer Relief Act of 1997 enacted a new Code Sec. 6045 (f) which made significant changes to the reporting requirements of payments to attorneys received after December 31, 1997. Although the proposed regulations will not be available until sometime before the 1998 year end, the reporting requirements disclosed to date are as follows, and are subject to change. The new Code Sec. 6045 (f) calls for payments made to attorneys for legal services in the course of a trade or business to be reported on Form 1099-Misc., even when they are made to corporations or include damages awarded to clients. As a result, attorneys will be required to reconcile payments reported to them on Form 1099 to the revenues reported on the attorney's or law firm's annual income tax return. This new Code Section can also potentially switch the burden of the information-reporting responsibilities from the damage-payors to the attorneys. Presently, under Code Sec. 6041 (a), all persons engaged in a trade or business and making payments in the course of business to another person of $600 or more in any taxable year, are required to furnish the Secretary with information returns. The new Code Sec. 6045 (f) could result in the person filing the return to be the individual with the most knowledge regarding the payment, which may not necessarily always be the payor. As a result, if an attorney fails to provide the proper information, such as the allocation of fees and damages in a settlement, the damage payor will issue a 1099-Misc. to the attorney for the gross amount of the settlement and the attorney will be required to report a 1099-Misc to the claimant. This also places the burden of determining the taxability of a damage award and the necessity of reporting it on the attorney. For example, assume a plaintiff wins a $100,000 judgment and the payor has been instructed to make payment to the attorney. If the payor does not know the attorney's share of the award, the payor would report $100,000 on a 1099-Misc to the attorney in box 13 with code A. The attorney would then be responsible for issuing a 1099-Misc to the claimant for $100,000 reported in box 3. Assume the same scenario but the payor knows the proper allocation. In this case, the payor would issue a 1099-Misc to the attorney for his share, say $30,000, in box 7 and also issue the claimant a 1099-Misc for $100,000 in box 3. The attorney would be relieved of the filing responsibility for the claimant. As mentioned earlier, the proposed regulations will not be available until closer to year end and therefore, could result in changes to the requirements discussed above. In any event, we recommend that you make a thorough review of your client's files and make sure that you have the information required in case you need to issue 1099's at year end. Information required would consist of proper name, address and social security number, a Form W-9 can be used to obtain this information if it is not already on file. In addition, we advise that you open a file to collect the numerous 1099s you will receive after year end as a fee reconciliation utilizing those forms will have to be prepared and attached to your income tax returns. Should you have any questions regarding these new federal income tax reporting requirements, please call. [Back to top] Florida residents take note: Changes to Florida intangible tax The Florida Department of Revenue has recently adopted new regulations which expand the intangible tax to assets owned by certain partnerships, trusts, and corporations formed by Florida residents. The changes will affect intangible personal property owned by such entities beginning on January 1, 1999. Prior to the change, Florida residents could avoid the intangible tax by transferring assets to an out of state general partnership as long as the partnership maintained the assets outside of Florida and the partnership was not publicly traded. Also, out of state trusts were used as long as the assets were maintained outside of Florida with non-Florida trustees, and the creator did not retain certain powers over the trust. The new regulations issued by the Department establish safe harbor conditions that must be met so that intangible assets owned by a partnership, trust, or corporation established by a Florida resident will not be subject to the intangible tax. Failure to conform to any one or more of the conditions may subject the entity's intangible assets to the tax. The conditions are described below: Management and control must occur outside of Florida. This includes communications and correspondence concerning the intangible property. No Florida resident may exercise management or control. A Florida resident may be a shareholder or limited partner, but must act solely in that capacity and cannot exercise any management or control over the partnership or corporation. However, a Florida resident may not serve as general partner, either individually or through control of a corporation (or similar entity) that serves as general partner. In addition, no Florida resident may be a Trustee of a trust that owns intangible property and no Florida resident may exercise any management or control over the trust property or the Trustees. The trust must not have an employee or agent within the state of Florida who exercises management or control over the intangible assets. The partnership, corporation or trust must be created and maintained outside of Florida. The entity must be legally formed under the laws of another jurisdiction, must not transact business in Florida, and the intangible property must be maintained outside of Florida. In addition, all books and records, including all accounting and tax related materials, must be maintained outside of Florida. The intangible assets must be transferred to the partnership, corporation or trust prior to January 1st. The transfer of assets to the partnership, corporation or trust must be completed prior to the January 1st valuation date. With respect to a corporation or partnership, the intangible assets must be transferred to the partnership or corporation in an "arm's length" transaction, and the transferor must receive assets equal in value to the property contributed. Additional conditions of Trusts. If the Trust beneficiary is a Florida resident, the beneficiary may have no rights in the trust other than the right to receive income or principal in the Trustee's discretion. In addition, a trust which requires the assets to revert back to the Grantor will render the trust subject to tax, if the trust directs the form or type of assets which must be returned. Taxation of Trust Grantor. If a trust owning intangible property is created by a Florida resident, the creator ("grantor") will be subject to the intangible tax if he or she retains any of the following powers: The power to revoke the trust: The power to appoint or direct the distribution of trust principal, other than the power to direct distributions to a limited class of beneficiaries upon the grantor's death; The power to veto distributions of principal from the trust to other beneficiaries; or The power to remove or appoint Trustees, unless the power is limited to specific conditions not within the grantor's control, such as the death or resignation of a trustee. Many existing partnerships, corporations and/or trusts which had previously been exempt from taxation may now be subject to the intangible tax. We recommend that you contact your attorney in order to review and possibly amend your partnership, trust, and/or corporation. [Back to top] New-hire reporting requirements On March 5, 1998, Governor Whitman signed into law the New Jersey Child Support Improvement Act, P.L. 1998, C. 1. The Act requires all New Jersey employers to report basic information about employees who are newly hired, rehired, or who return to work after a separation of employment. This information will be used principally to help locate parents who owe child support. It will also be used to identify recipients of public assistance and unemployment compensation who fail to report earnings. More information including frequently asked questions and a copy of the reporting form may be obtained from the New Jersey New Hire Reporting Operations Center web site (www.nj-newhire.com) or by calling toll-free (877) NJ-HIRE. [Back to top] New Jersey payroll tax reporting changes Effective for the third quarter 1998 reporting, a single employer ID number format will be used for reporting both state income tax and state unemployment insurance information. The new 15-digit format will completely replace the existing employer ID number formats. Concurrently, existing forms UC-27 (Contribution Report) and NJ-941 (Employer's Quarterly Report (Gross Income Tax)) will be combined to create a single new form: NJ-927 (for quarterly filers) and NJ-92W (for weekly filers). [Back to top] The new Roth IRA. What is it? Am I eligible to contribute to one? Would it make sense for me to convert my existing traditional IRA? If you would like to investigate the answers to these questions on your own, we have assembled some useful links on our Hot Links page. These links provide articles and interactive worksheets. Keep in mind, we are always available to answer any questions you may have regarding the Roth IRA. 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