Reporting Income Payments Using Form 1099-MISC

Form 1099-MISC is used to report payments made in a trade or business.

By , About.com Guide     http://taxes.about.com/od/businesstaxes/qt/1099-Misc-Reporting-for-Miscellaneous-Payments.htm

Form 1099-MISCis used to report certain types of payments made in the course of a trade or business. If you’re in business or self-employed, you may need to submit this report to both the Internal Revenue Service and the person or business whom you paid.

When is Form 1099-MISC Required?

Businesses will need to fill out a Form 1099-MISC for persons, vendors, subcontractors, independent contractors, and others in the following circumstances:

$600 or more per year is paid for

  • cash payments to fishermen
  • crop insurance proceeds,
  • medical and health care payments,
  • prizes and awards,
  • proceeds paid to attorneys,
  • rents,
  • services (including parts and materials), and
  • other types of payments not covered by another information reporting document.

$10 or more per year is paid for

  • broker payments in lieu of dividends or tax-exempt interest, and
  • royalties

Reporting such payments is required if the recipient of the payment is not a corporation — for example, when the recipient is an individual, partnership, a limited liability company treated as a partnership or sole proprietorship. Payments made to corporations are required in the case of medical and health care payments and in the case of legal fees paid to attorneys. Other types of payments made to corporations may be reported using Form 1099-MISC, but is not required. 

Report Payments Made by Cash or Check, but Not Payments Made by Credit Card

Starting with the 2011 tax year, the IRS is instructing businesses that payments made via credit card and other third party payment processing services need not be reported on Form 1099-MISC. Refer to the Instructions for Form 1099-MISC1, especially the What’s New2section. 

Expanded 1099-MISC Reporting Starting in 2011 for Rental Property Owners Has Been Repealed

Rental property would have needed to issue a 1099-MISC for payments relating to their rental properties beginning in the year 2011, but this requirement has been repealed by the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 20113

Expanded 1099-MISC Reporting Starting in 2012 Has Been Repealed

1099 reporting would have been expanded starting with the year 2012, but this provision has also been repealed by the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011. Prior to repeal, reporting would have been expanded to include payments made to corporations and as well as to include payments for goods and property. The 1099-MISC expansion was originally legislated as part of the health care reform package4

 

Steps to Take to Prepare for 1099-MISC Forms

You should request that your vendors, contractors and other payment recipients submit to you a Form W-95. The W-9 will provide you with the legal name, address and taxpayer identification number for the vendor, which is the information you will need when preparing any 1099-MISC forms.You should also keep track of your payments in your bookkeeping system. You will need to know whether the payment falls under any of the categories listed above for reportable payments, whether your payments to a particular recipient reaches the $10 or $600 threshold for reporting, and finally you’ll need to know the exact amount you paid the recipient for the year.

 

Penalties for Filing Form 1099-MISC Late

The following penalties will be in effect for the year 2011:

  • $30 penalty for filing a 1099 not more than 30 days late;
  • $60 penalty for filing a 1099 more than 30 days late and before August 1;
  • $100 penalty for filing a 1099 on or after August 1;
  • $250 penalty for intentional failure to file.

These Form 1099-MISC penalties were increased as part of the Small Business Jobs Act6, and have not been repealed.

Deadlines for 1099-MISC Forms

  • Provide the recipient with his or her copy of the Form 1099-MISC by January 31 reporting income for the previous calendar year.
  • Mail the Form 1099-MISC to the IRS by February 28.
  • Or electronically file 1099s with the IRS by March 31.

Businesses can request a 30-day extension to file 1099s with the IRS using Form 8809. An extension does not permit additional time for providing the 1099 to the recipient. 

Form 1099-MISC Tax Resources

Properly Defined Dependents

Properly Defined Dependents Can Pay Off At Tax Time

By Kay Bell • Bankrate.com

Your son is off at college. Can you still claim him as a dependent? The answer for most parents is “yes.” But, as is often the case with tax questions, determining who can be claimed as a dependent is not always a clear-cut exercise.

Dependent claims aren’t limited to children. An adult relative could qualify as a taxpayer’s dependent as long as he or she meets certain Internal Revenue Service conditions.

Dependency tests that must be met

By a child By a relative
Relationship
Residency
Age
Support
Citizenship
Joint return
Not a qualifying child
Relationship/Household member
Gross income
Support
Citizenship
Joint return

Making sure the requirements are met is critical, because dependents can help reduce your tax bill. In many cases, you can claim certain tax-cutting deductions and credits related to a dependent. The key tax breaks associated with a child are the child tax credit, the child and dependent care credit and the earned income tax credit.

Even if these added tax credits don’t apply to your situation, a dependent named on your return can still trim your taxes. Each dependent directly translates into an exemption, a specific dollar amount, adjusted annually for inflation, that you deduct from your adjusted gross income.

Child dependent tests

In order to claim a child as your dependent, the youngster must now meet four key tests:

  • Relationship test: The child must be your child, either by birth, adoption or by being placed in your home as a foster child. Even if the adoption isn’t yet final, if the child is living with you and the process is under way, it counts. A dependent child can also be your brother, sister, stepbrother, stepsister or a descendent of one of these relatives.
  • Residency test: The child must live with you for more than half of the year. If the youth is away temporarily for special circumstances, such as for school, vacation, medical treatment, military service or detention in a juvenile facility, these particular absences still count as time lived at home. A child who was born or died during the year is considered to have lived with you for the entire year if your home was the child’s home for the entire time he or she was alive during the year.
  • Age test: A child must be under a certain age depending on the particular tax benefit. For the dependency exemption, the child must be younger than 19 at the end of the year. However, a youth who was a student at the end of the year can be claimed as long as he or she is younger than age 24. There is no age limit if the individual is permanently and totally disabled.
  • Support test: This refers to the youngster’s contributions, not those of adults in the family. To qualify as a dependent, the child cannot provide more than half of his or her own support during the year.

The support issue usually is not a problem. However, if the child is a successful model, for example, he or she could bring in substantial income and therefore might not be able to be claimed as a dependent under this test. Even then, as long as the parents provide more than the youngster is bringing in, then the child would still qualify.

Even after the child meets the four qualifying tests, there are two other considerations before he or she can be claimed as a dependent for exemption purposes.

The youngster generally must also be a U.S. citizen, U.S. national or a resident of the United States, Canada or Mexico. An exception applies for certain adopted children.

And if married, the child cannot file a joint return unless the return is filed only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns.

Other dependent relatives

Other relatives also might be your tax dependent if they meet similar qualifying tests.

The first requirement is, obviously, that the person not be your qualifying child for tax purposes. The person also cannot be considered the dependent child of anyone else.

The person must live with you for the full tax year or be related to you. Relatives who do not have to reside in your home but who can be claimed as tax dependents include parents, siblings, grandparents, nieces and nephews, aunts and uncles and in-laws.

Your dependent relative must earn less than the personal exemption amount during the year, and he or she must get more than half of his or her total support for the year from you.

Qualifying relatives also must meet the same citizenship and joint tax filing requirements as do qualifying children.

Tiebreaker guidelines

Sometimes a child can be the qualifying child of more than one person. However, because the IRS only allows one taxpayer to claim the same youngster, all eligible taxpayers must decide who will claim the child and any ensuing tax benefits.

If you can’t agree and both of you list the youth on separate returns, expect the IRS to disallow one or more of the claims using tiebreaker rules.

Tiebreaker rules

  • First, the agency looks at whether only one person is the child’s parent. This would be the case, for example, if one credit claimant is a stepparent. The parent would get the credit.
  • If both taxpayers are the child’s parents, then the parent with whom the child lived the longest during the tax year would be allowed the credit. If the child lived with both separated parents for an identical amount of time, the credit would go to the parent with the highest adjusted gross income.
  • Finally, if neither person is the child’s parent, the IRS would then allow the credit to the filer with the highest eligible AGI.

If several children are involved in a family situation where two taxpayers may claim them, the adults can decide to share the children for tax purposes. For example, you and your three children live with your mother. You can claim one child as a dependent and your mother can claim the other two. Again, if such a sharing agreement cannot be reached, the tiebreaker rules would come into play.

Final exemption factors

A spouse is never considered a dependent. However, you can claim an exemption for your husband or wife as long as you file a joint return.

You also are allowed an exemption deduction for yourself. But if you file a return while being claimed as a dependent on someone else’s 1040, the IRS warns that you won’t be able to claim a personal exemption on your own return.

Details and relationship dependency examples are available in IRS Publication 501, Exemptions, Standard Deduction and Filing Information.
http://www.bankrate.com/system/util/print.aspx?p=/finance/taxes/properly-defined-dependents-can-pay-off-1.aspx&s=br3&c=taxes&t=guide&e=1&v=1#ixzz1jpa7Xkuo

Missouri Sales and USE TAX

Sales Tax

Sales tax is imposed on retail sales of tangible personal property and certain services. All sales of tangible personal property and taxable services are generally presumed taxable unless specifically exempted by law. Persons making retail sales collect the sales tax from the purchaser and remit the tax to the Department of Revenue. The state sales tax rate is 4.225%. Cities, counties and certain districts may also impose local sales taxes as well, so the amount of tax sellers collect from the purchaser depends on the combined state and local rate at the location of the seller. The state and local sales taxes are remitted together to the Department of Revenue. Once the seller remits sales tax to the department, the department then distributes the local sales taxes remitted by the sellers to the cities, counties and districts.

Use Tax

Use tax is imposed on the storage, use or consumption of tangible personal property in this state. The state use tax rate is 4.225%. Cities and counties may impose an additional local use tax. The amount of use tax due on a transaction depends on the combined (local and state) use tax rate in effect at the Missouri location where the tangible personal property is stored, used or consumed. Local use taxes are distributed in the same manner as sales taxes.

Unlike sales tax, which requires a sale at retail in Missouri, use tax is imposed directly upon the person that stores, uses, or consumes tangible personal property in Missouri. Use tax does not apply if the purchase is from a Missouri retailer and subject to Missouri sales tax.

Missouri cannot require out-of-state companies that do not have nexus or a “direct connection” with the state to collect and remit use tax. If an out-of -state seller does not collect use tax from the purchaser, the purchaser is responsible for remitting the use tax to Missouri.

A seller not engaged in business is not required to collect Missouri tax but the purchaser in these instances is responsible for remitting use tax to Missouri. A purchaser is required to file a use tax return if the cumulative purchases subject to use tax exceed two thousand dollars in a calendar year.

Any vendor and its affiliates selling tangible personal property to Missouri customers should collect and pay sales or use tax in order to be eligible to receive Missouri state contracts, regardless of whether that vendor or affiliate has nexus with Missouri.

Section 34.040.6 states, “The commissioner of administration and other agencies to which the state purchasing law applies shall not contract for goods or services with a vendor if the vendor or an affiliate of the vendor makes sales at retail of tangible personal property or for the purpose of storage, use, or consumption in this state but fails to collect and properly pay the tax as provided in chapter 144, RSMo. For purposes of this section, “affiliate of the vendor” shall mean any person or entity that is controlled by or is under common control with the vendor, whether through stock ownership or otherwise.”

Sales Tax Rate Changes

Access the latest sales and use tax rate changes for cities and counties. Local sales taxes are effective on the first day of the second calendar quarter after the Department of Revenue receives notification of the rate change (January, April, July, October). Local taxes can also have an expiration date, lowering the sales or use tax rate for that particular city or county. Expirations also take place on the first day of a calendar quarter (January, April, July, October). The Department of Revenue notifies every business impacted by any local sales or use tax rate change during the month prior to the effective date of the change.

http://dor.mo.gov/business/sales/

Capital Gains Rates

Long Term Capital Gains Rates  0%, 5%, 15%, 25% or 28% depending on income level thru 12-31-2012

A look at the many CAPITAL GAINS RATES by Kay Bell • Bankrate.com • Bankrate’s Tax Guide

Money gurus are always preaching long-term investing. Not only will that give you a better shot at earning more, it’ll also get you a lower tax rate when you sell.

But exactly what capital gains tax rate you pay depends on several things, including when you bought the asset, when you sold it, your overall income level, and sometimes, what tax-code changes were made in the meantime.

Currently, capital gains are at historic lows. Some taxpayers in the two lowest tax brackets could end up without any capital gains tax bill. That’s right, zero capital gains for some filers.

Others will face tax rates of just 5 percent. Most investors will see their gains taxed at 15 percent. And 25 percent and 28 percent rates apply in special circumstances.

One thing all these tax levels do have in common is that they are known as long-term capital gains. This means they apply to assets that you hold for at least 366 days — more than one year.

The tax appeal of the long-term capital gains tax rate is that it is generally much lower than what you pay on your regular income. In fact, it is a taxpayer’s income level that generally determines which capital gains rate applies. And if your profit pushes you into a higher bracket, you could possibly be taxed at a combination of rates. And you could face yet another rate depending on the type of property you sell.

Zero capital gains taxes for some

On Jan. 1, 2008, the best of all possible tax rates — zero percent — took effect for investors in the 10 percent and 15 percent income tax brackets.

Previously these taxpayers had to pay Uncle Sam 5 percent of their long-term capital gains. Now any long-term assets they sell will be exempt from capital gains taxes.

Zero percent capital gains tax rate applies to

Filing status Maximum taxable income
Single or Married filing separately $34,000
Married filing jointly $68,000
Head of household $45,500

To qualify for the zero rate, you must own the asset for more than one year before you sell it.

While lower-income individuals aren’t typical investors, this tax benefit could help out folks such as retirees who have little or no taxable income. And the children of older individuals could combine the annual gift exclusion ($13,000 in 2010 and 2011) with this capital gains break and give appreciated long-term assets to their older parents.

15 percent tax rate for most

The zero percent rate is just the latest in a series of investor-friendly tax changes enacted during the George W. Bush administration. Prior to his taking office, investors whose overall income put them in the top four income tax brackets faced a long-term capital gains rate of 20 percent, while lower-income investors paid capital gains taxes of 10 percent.

Tax-law changes in May 2003, however, lowered the rates by 5 percent each, with the lower rate, as noted earlier, eventually being zeroed out in 2008. The lower rates were extended by the December 2010 tax bill through the 2012 tax year.

The changes have had the most effect on investors in the higher income ranges – 25 percent to 35 percent tax brackets. These individuals now find their capital gains taxed at 15 percent. This lower rate also applies to some dividends that stocks and mutual funds pay account holders. When you hear “lower capital gains rate,” it generally means this 15 percent level, because there are few investors with incomes low enough to qualify solely for the 5 percent, now zero percent, rate.

Remember, these rates are for long-term capital gains. In most cases, that means you have to hold an asset for more than a year before you sell it. If you cash it in sooner, you’ll be taxed at the short-term rate, which is the same as your ordinary income tax level and could be as high as 35 percent on 2010 returns.

25 percent capital gains rate

While the 5 percent (now zero percent) and 15 percent rates have received the most attention, at least on Capitol Hill, for the last few years there have been several other categories of capital gains taxes.

A rate of 25 percent applies to part of the gain from selling real estate you depreciated. Basically this keeps you from getting a double tax break. The Internal Revenue Service first wants to recapture some of the tax breaks you’ve been getting via depreciation throughout the years. You’ll have to complete the work sheet in the instructions for Schedule D to figure your gain (and tax rate) for this asset, known as Section 1250 property. More details on this type of holding and its taxation are available in IRS Publication 544, Sales and Other Dispositions of Assets.

28 percent capital gains rate

Two categories of capital gains are subject to this rate: small business stock and collectibles.

If you realized a gain from qualified small-business stock that you held more than five years, you generally can exclude one-half of your gain from income. The remainder is taxed at a 28 percent rate. If you’ve already hired a tax professional to help you sort out the 25 percent rate on depreciable property, she can help you figure this tax, too. Or you can get the specifics on gains on qualified small business stock in IRS Publication 550, Investment Income and Expenses.

If your gains came from collectibles rather than a business sale, you’ll still pay the 28 percent rate. This includes proceeds from the sale of a work of art, antiques, gems, stamps, coins, precious metals and even pricey wine or brandy collections.

More rate changes to come?

The capital gains tax rates are set through Dec. 31, 2012, but there continues to be a push by some in Washington, D.C., to return at least the top capital gains tax rate to the prior 20 percent level.

That decision will hinge in large part on the economy and future congressional and presidential elections.

With Congress continually tweaking investment tax laws, what’s an investor to do? Most financial experts say to take advantage of today’s lower rates while they are around and when they fit into your portfolio plans.

But don’t forget about the Dec. 31, 2012, deadline. And definitely keep an eye on federal tax-law writers in the interim.

http://www.bankrate.com/system/util/print.aspx?p=/finance/money-guides/capital-gains-tax-rates-1.aspx&s=br3&c=taxes&t=guide&e=1&v=1#ixzz1YbpRQfhz

Employer Mandatory Posters

Mandatory Posters in the workplace

Various state and federal laws require employers to display certain posters for the benefit of both employees and customers informing them of key provisions in the law. While not limited to, below you will find other required posters pertaining to a broad spectrum of business and industry, including housing and public accommodations.

Posters Required by the Federal Government http://www.dol.gov/compliance/topics/posters.htm

Posters Required by the State of Missouri http://labor.mo.gov/posters/

The following only describes required posters requested of the Missouri Department of Labor and Industrial Relations.

  1. Notice to Workers Concerning Unemployment Benefits (MODES-B-2). (Revised:09/09)

    Required by Missouri Revised Statutes, Section 288.130 and Division of Employment Security Code of State Regulations 8 CSR 10-3.070.

  2. Workers’ Compensation Law (WC-106). (Revised:04/10)

    *This poster prints out on two sheets of paper (8.5 x 11) that can then be taped together and used as the poster.

    Workers’ Compensation Law (WC-106-Tabloid size). (Revised 04/10)

    **For best use, print out the poster either on one sheet of 11 X17 paper or two pieces of 8.5 X 11 (standard size) and tape pieces together, side by side. Printing this poster by using only one 8.5 X 11 paper (tabloid size) makes it challenging for the visually impaired to read.

    Required Missouri Revised Statutes, Section 287.127.

  3. Discrimination in Employment (MCHR-9). (Revised:01/11)*This poster prints out on two sheets of paper (8.5 x 11) that can then be taped together and used as the poster.

    Discrimination in Employment (MCHR-9-Tabloid size). (Revised:01/11)

    **For best use, print out the poster either on one sheet of 11 X17 paper or two pieces of 8.5 X 11 (standard size) and tape pieces together, one on top of the other. Printing this poster by using only one 8.5 X 11 paper (tabloid size) makes it challenging for the visually impaired to read.

    Every employer, labor organization, employment agency, or other business or establishment covered by Chapter 213, RSMo shall post the Commission’s equal employment poster in a place where other employee notices are posted or in a conspicuous place where employees will have access to it. Required by Missouri Revised Statutes, Section 213.020.2 and Code of State Regulations 8 CSR 60-3.010.

  4. Missouri Minimum Wage Law (LS-52). (Revised:07/09)

    Required by Missouri Revised Statutes, Section 290.522.

  5. Employer’s Employing Workers Under the Age of 16 List (LS-43). (Revised:04/10)Missouri Revised Statutes Section 294.060.1 requires employers who employ youth under the age of 16 to post LS-43 Youth Employment List. (Must be printed on 8.5 x 14 paper to fit content on one page)
  6. Discrimination in Housing (MCHR-6). (Revised:01/11)*This poster prints out on two sheets of paper (8.5 x 11) that can then be taped together and used as the poster.

    Discrimination in Housing (MCHR-6-Tabloid size). (Revised:01/11)

    **For best use, print out the poster either on one sheet of 11 X17 paper or two pieces of 8.5 X 11 (standard size) and tape pieces together, one on top of the other. Printing this poster by using only one 8.5 X 11 paper (tabloid size) makes it challenging for the visually impaired to read.

    The Rules and Regulations of the Missouri Commission on Human Rights require employers in the business of sale or rental of housing to post MCHR-6 Discrimination in Housing.

  7. Discrimination in Public Accommodations (MCHR-7). (Revised:01/11)*This poster prints out on two sheets of paper (8.5 x 11) that can then be taped together and used as the poster.

    Discrimination in Public Accommodations (MCHR-7-Tabloid size). (Revised:01/11)

    **For best use, print out the poster either on one sheet of 11 X17 paper or two pieces of 8.5 X 11 (standard size) and tape pieces together, one on top of the other. Printing this poster by using only one 8.5 X 11 paper (tabloid size) makes it challenging for the visually impaired to read.

    The Rules and Regulations of the Missouri Commission on Human Rights require employers doing business in places open to the public to post MCHR-7 Discrimination in Public Accommodations.

The Social Security earnings test for people at full retirement age

Updated 06/03/2011    www.ssa.gov

What is the earnings test for people at full retirement age (FRA)?

Only earnings before the month of FRA count towards the earnings test.  Earnings in the month you reach FRA and after do not count towards the earnings test.

The Senior Citizens’ Freedom To Work Act of 2000 eliminated the Social Security annual earnings test and the foreign work test in and after the month a person attains FRA. The FRA was age 65 in 2000 through 2002, but began increasing beginning in 2003.

If you are under FRA when you start getting your Social Security payments, we will deduct $1 in benefits for each $2 you earn above the annual limit.  In 2011, the limit is $14,160; for 2010, the limit also was $14,160.  In the calendar year you attain FRA, we will deduct $1 in benefits for each $3 you earn above a higher annual limit up to the month of FRA attainment.

For 2011, the limit is $37,680; for 2010, the limit also was $37,680.

Examples: When you work and get Social Security at the same time Updated: January 04, 2011
You can continue to work and earn above the annual earnings limit and still get some of your benefits.Let’s look at a couple of examples: You are receiving Social Security retirement benefits every month in 2011 and you

You work and earn $23,760 ($9,600 over the $14,160 limit) during the year. Your Social Security benefits would be reduced by $4,800 ($1 for every $2 you earned over the limit), but you would still receive $4,800 of your $9,600 in benefits for the year. ($9,600 – $4,800 = $4,800)

  • Reach full retirement age in August 2011. You are entitled to $800 per month in benefits ($9,600 for the year).

You work and earn $62,000 during the year, with $39,690 ($2,010 over the 37,680 limit) of it in the 7 months from January through July.

  • Your Social Security benefits would be reduced through July by $670 ($1 for every $3 you earned over the limit). You would still receive $4,930 out of your $5,600 benefits for the first 7 months (January through July). ($5,600 – $670 = $4,930)
  • Beginning in August 2011, when you reach full retirement age, you would receive your full benefit ($800 per month), no matter how much you earn.

      When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you’re self-employed. We include bonuses, commissions and vacation pay. We don’t count pensions, annuities, investment income, interest, veterans or other government or military retirement benefits.

      Also, as long as you continue to work and receive benefits, we will check your record every year to see whether the additional earnings will increase your monthly benefit. If there is an increase, we will send you a letter telling you of your new benefit amount.

      In addition, after you reach full retirement age, we will recalculate your benefit amount to give you credit for any months in which you did not receive a benefit because of your earnings. We will send you a letter telling you about any increase in your benefit amount.

      If you are eligible for retirement benefits this year and are still working, you can use the SSA earnings test calculator to see how your earnings could affect your benefit payments.

      http://www.socialsecurity.gov/OACT/COLA/RTeffect.html

      Don’t default on Student Loans – Modify your payment plan if possible

      Repayment Plans and Calculators

      http://studentaid.ed.gov/PORTALSWebApp/students/english/repaying.jsp

      When it comes time to start repaying your student loan(s), you can select a repayment plan that’s right for your financial situation. Generally, you’ll have from 10 to 25 years to repay your loan, depending on which repayment plan you choose.

      • Standard Repayment

      With the standard plan, you’ll pay a fixed amount each month until your loans are paid in full. Your monthly payments will be at least $50, and you’ll have up to 10 years to repay your loans.

      Your monthly payment under the standard plan may be higher than it would be under the other plans because your loans will be repaid in the shortest time. For that reason, having a 10-year limit on repayment, you may pay the least interest.              To calculate your estimated loan payments, go to the Standard Repayment plan calculator.   http://www2.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlentry1.html

      • Extended Repayment

      Under the extended plan, youll pay a fixed annual or graduated repayment amount over a period not to exceed 25 years. If you’re a FFEL borrower, you must have more than $30,000 in outstanding FFEL Program loans. If you’re a Direct Loan borrower, you must have more than $30,000 in outstanding Direct Loans. This means, for example, that if you have $35,000 in outstanding FFEL Program loans and $10,000 in outstanding Direct Loans, you can choose the extended repayment plan for your FFEL Program loans, but not for your Direct Loans. Your fixed monthly payment is lower than it would be under the Standard Plan, but you’ll ultimately pay more for your loan because of the interest that accumulates during the longer repayment period.

      This is a good plan if you will need to make smaller monthly payments. Because the repayment period will be 25 years, your monthly payments will be less than with the standard plan. However, you may pay more in interest because you’re taking longer to repay the loans. Remember that the longer your loans are in repayment, the more interest you will pay.         To calculate your estimated loan payments, go to the Extended Repayment plan calculator http://www2.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlentry1.html

      • Graduated Repayment

      With this plan, your payments start out low and increase every two years. The length of your repayment period will be up to ten years. If you expect your income to increase steadily over time, this plan may be right for you. Your monthly payment will never be less than the amount of interest that accrues between payments. Although your monthly payment will gradually increase, no single payment under this plan will be more than three times greater than any other payment.               To calculate your estimated loan payments, go to the Graduated Repayment plan calculator http://www2.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlentry1.html

      • *Income Based Repayment (IBR) Effective July 1, 2009

      Income Based Repayment is a new repayment plan for the major types of federal loans made to students. Under IBR, the required monthly payment is capped at an amount that is intended to be affordable based on income and family size. You are eligible for IBR if the monthly repayment amount under IBR will be less than the monthly amount calculated under a 10-year standard repayment plan. If you repay under the IBR plan for 25 years and meet other requirements you may have any remaining balance of your loan(s) cancelled. Additionally, if you work in public service and have reduced loan payments through IBR, the remaining balance after ten years in a public service job could be cancelled.     http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp

      • Income Contingent Repayment (ICR) (Direct Loans Only)

      This plan gives you the flexibility to meet your Direct LoansSM obligations without causing undue financial hardship. Each year, your monthly payments will be calculated on the basis of your adjusted gross income (AGI, plus your spouse’s income if you’re married), family size, and the total amount of your Direct Loans. Under the ICR plan you will pay each month the lesser of:

      1. The amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor that varies with your annual income, or
      2. 20 percent of your monthly discretionary income.

      If your payments are not large enough to cover the interest that has accumulated on your loans, the unpaid amount will be capitalized once each year. However, capitalization will not exceed 10 percent of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized (added to the loan principal).

      The maximum repayment period is 25 years. If you haven’t fully repaid your loans after 25 years (time spent in deferment or forbearance does not count) under this plan, the unpaid portion will be discharged. You may, however, have to pay taxes on the amount that is discharged.

      As of July 1, 2009, graduate and professional student Direct PLUS Loan borrowers are eligible to use the ICR plan. Parent Direct PLUS Loan borrowers are not eligible for the ICR repayment plan.            To calculate your estimated loan payments, go to the ICR plan calculator http://www2.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlentry2.html

      • Income-Sensitive Repayment Plan (FFEL Federal Family Education Loans)  Loans only)

      With an income-sensitive plan, your monthly loan payment is based on your annual income. As your income increases or decreases, so do your payments. The maximum repayment period is 10 years. Ask your lender for more information on FFEL Income- Sensitive Repayment Plans.

      * Income-Based Repayment Plan

      The information below describes the Income-Based Repayment (IBR) Plan for federal student loans. It includes the IBR eligibility requirements, the benefits of IBR, an IBR payment calculator, and some examples of how a borrower’s monthly student loan payment amount can be reduced under IBR. For a PDF version of this information, see http://studentaid.ed.gov/students/publications/factsheets/factsheet_IncomeBasedRepayment.pdf

      What is Income-Based Repayment?

      Income-Based Repayment (IBR) is a repayment plan for the major types of federal student loans that caps your required monthly payment at an amount intended to be affordable based on your income and family size.

      What federal student loans are eligible to be repaid under an IBR plan?

      All Stafford, PLUS and Consolidation Loans made under either the Direct Loan or FFEL Program are eligible for repayment under IBR, EXCEPT loans that are currently in default, parent PLUS Loans (PLUS Loans that were made to parent borrowers), or Consolidation Loans that repaid parent PLUS Loans. The loans can be new or old, and for any type of education (undergraduate, graduate, professional, job training).

      Who is eligible for IBR?

      You may enter IBR if your federal student loan debt is high relative to your income and family size. While your loan servicer will perform the calculation to determine your eligibility, you can use the U.S. Department of Education’s IBR calculator to estimate whether you would likely qualify for the IBR plan. The calculator looks at your income, family size, and state of residence to calculate your IBR monthly payment amount. If that amount is lower than the monthly payment you would be required to pay on your eligible loans under a 10-year standard repayment plan, based on the greater of the amount you owed on your loans when they initially entered repayment or the amount you owe at the time you request IBR, then you are eligible to repay your loans under IBR.

      If you are married and you and your spouse file a joint federal tax return, and if your spouse also has IBR-eligible loans, your spouse’s eligible loan debt is taken into account when determining whether you are eligible for IBR. In this case, the required monthly payment amount under a 10-year standard repayment plan is determined based on the combined amount of your IBR-eligible loans and your spouse’s IBR-eligible loans, using the greater of the amount owed when the loans initially entered repayment or the amount owed at the time you or your spouse request IBR. If the combined monthly amount you and your spouse would be required to pay under IBR is lower than the combined monthly amount you and your spouse would pay under a 10-year standard repayment plan, you and your spouse are eligible for IBR.

      What are the benefits of IBR?

      • PAY AS YOU EARN — Under IBR, your monthly payment amount will be less than the amount you would be required to pay under a 10-year standard repayment plan, and may be less than under other repayment plans. Although lower monthly payments may be of great benefit to a borrower, these lower payments may result in a longer repayment period and additional accrued interest.
      • INTEREST PAYMENT BENEFIT — If your monthly IBR payment amount does not cover the interest that accrues on your loans each month, the government will pay your unpaid accrued interest on your Subsidized Stafford Loans (either Direct Loan or FFEL) for up to three consecutive years from the date you began repaying your loans under IBR.
      • 25-YEAR CANCELLATION — If you repay under the IBR plan for 25 years and meet certain other requirements, any remaining balance will be canceled.
      • 10-YEAR PUBLIC SERVICE LOAN FORGIVENESS — If you work in public service, on-time, full monthly payments you make under IBR (or certain other repayment plans) while employed full-time in a public service job will count toward the 120 monthly payments that are required to receive loan forgiveness through the Public Service Loan Forgiveness Program. Through this program, you may be eligible to have the remaining balance of your Direct Loans forgiven after you have made the 120 qualifying as described above. The Public Service Loan Forgiveness Program is available only for Direct Loans. If you have FFEL loans, you may be eligible to consolidate them into the Direct Loan Program to take advantage of the Public Service Loan Forgiveness Program. However, only the on-time, full monthly payments made under IBR or certain other repayment plans while you are a Direct Loan borrower will count toward the required 120 monthly payments. For more information about this program, review the Department’s Public Service Loan Forgiveness Program Fact Sheet.

      Are there any disadvantages to repaying under IBR?

      • YOU MAY PAY MORE INTEREST — The faster you repay your loans, the less interest you pay. Because a reduced monthly payment in IBR generally extends your repayment period, you may pay more total interest over the life of the loan than you would under other repayment plans.
      • YOU MUST SUBMIT ANNUAL DOCUMENTATION — To set your payment amount each year, your loan servicer needs updated information about your income and family size. If you do not provide the documentation, your monthly payment amount will be the amount you would be required to pay under a 10-year standard repayment plan, based on the amount you owed when you began repaying under IBR.

      How is the IBR amount determined?

      Under IBR, the amount you are required to repay each month is based on your Adjusted Gross Income (AGI) and family size. If you are married and file a joint federal tax return with your spouse, your AGI includes both your income and your spouse’s income. The annual IBR repayment amount is 15 percent of the difference between your AGI and 150 percent of the Department of Health and Human Services Poverty Guideline for your family size and state. This amount is then divided by 12 to get the monthly IBR payment amount.

      The following chart shows the maximum IBR monthly payment amounts for a sample range of incomes and family sizes using the Poverty Guidelines that were in effect as of January 20, 2011 for the 48 contiguous states and the District of Columbia.

      IBR Monthly Payment Amount
      Annual
      Income
      Family Size
      1 2 3 4 5 6 7
      $10,000 $0 $0 $0 $0 $0 $0 $0
      $15,000 $0 $0 $0 $0 $0 $0 $0
      $20,000 $46 $0 $0 $0 $0 $0 $0
      $25,000 $108 $37 $0 $0 $0 $0 $0
      $30,000 $171 $99 $28 $0 $0 $0 $0
      $35,000 $233 $162 $90 $18 $0 $0 $0
      $40,000 $296 $224 $153 $81 $9 $0 $0
      $45,000 $358 $287 $215 $143 $72 $0 $0
      $50,000 $421 $349 $278 $206 $134 $63 $0
      $55,000 $483 $412 $340 $268 $197 $125 $54
      $60,000 $546 $474 $403 $331 $259 $188 $116
      $65,000 $608 $537 $465 $393 $322 $250 $179
      $70,000 $671 $599 $528 $456 $384 $313 $241

      After the initial determination of your eligibility for IBR, your payment may be adjusted each year based on changes in your income and family size, but your required monthly payment amount will never be more than what you would be required to pay under a 10-year standard repayment plan, based on your outstanding loan balance on the date you began repaying the loans under IBR (unless you choose to exit the IBR program).

      Are there examples of borrowers who are eligible for IBR and borrowers who are not?

      Example 1 — Based upon the IBR repayment formula a borrower with a family size of one and an AGI of $30,000 would have an IBR calculated payment amount of $171 per month. If this borrower had total eligible student loan debt of $25,000 when the loans initially entered repayment, and the loan balance had increased to $30,000 when the borrower requested IBR, the calculated monthly repayment amount under a 10-year standard plan would be based on the higher of the two amounts. Using an interest rate of 6.8%, the 10-year standard payment amount for $30,000 would be $345. Since the $171 IBR calculated amount is less than the 10-year plan amount of $345, the borrower would be eligible to repay under IBR at a monthly amount of $171. However, if this borrower’s total eligible loan debt used to calculate the 10-year standard amount was only $10,000 the 10-year standard payment would be $115 per month, which is less than the IBR amount of $171. Therefore, the borrower would not be eligible for IBR.

      Example 2 — A borrower with a family size of four and income of $50,000 would have an IBR calculated monthly payment amount of $206. If this borrower had total eligible student loan debt of $20,000 when the loans initially entered repayment, and this amount had not changed when the borrower requested IBR, the calculated monthly repayment amount under a 10-year standard plan would be based on $20,000. Using an interest rate of 6.8%, the 10-year standard payment amount for $20,000 would be $230. Since the $206 IBR calculated amount is less than the 10-year plan amount of $230, the borrower would be eligible to repay under IBR at a monthly amount of $206. However, if the borrower’s total eligible loan debt used to calculate the 10-year standard amount was only $15,000, the 10-year calculated amount would be $173 per month, which is less than the IBR amount of $206. This borrower would not be eligible for IBR.

      Income-Based Repayment Questions and Answers (Q&As)

      http://studentaid.ed.gov/students/attachments/siteresources/IBR_QA_Final2-2011.pdf
      For additional information on IBR, check out the Income-Based Repayment Q&As. The Q&As are grouped into six categories: General Information, Eligible Loans, Determination of IBR Monthly Payment Amount, Married Borrowers, Application Process, and Other Information. The answers are dated and, as new questions are added or a previous response is updated, we will include a new date.

      Health Care Tax Credit for Small Employers

      Tuesday May 11, 2010             http://taxes.about.com/od/businesstaxes/qt/Small-Business-Health-Care-Tax-Credit.htm

      Small businesses may qualify for a new tax credit worth up to 35 percent of the cost of employer-paid health insurance premiums. This health care tax credit1 was enacted as part of the massive health care reform bill2 passed, and the credit is available starting in the year 2010.

      As with all tax credits, there are limitations as to which small businesses qualify, as well as rules for calculating the actual amount of the tax credit. In general, eligible small employers can claim a federal tax credit based on health insurance premiums paid by the employer on behalf of their employees, up to a maximum credit of 35% of premiums paid. Eligible small businesses are those with fewer than full-time 25 employees (or full-time equivalents), average annual wages under $50,000 per employee, and paying 50% or more of the health benefit.

      Health Care Tax Credit Amounts
      • 35% of eligible premiums — for 2010 through 2013
      • 50% of eligible premiums — beginning in 2014
      Qualifying for the Health Care Tax Credit

      There’s a three-part test for see if a small business qualifies for the health care tax credit:

      • The business must have less than 25 full-time equivalent employees
      • The average wage of employees must be less than $50,000 per full-time equivalent employee
      • Health insurance premiums must be paid through a “qualifying arrangement”
      No Tax Credit for Owners of the Business

      Small businesses cannot take a tax credit for insurance premiums paid for owners of the business. This means that owners of corporations, partners in a partnership, and sole proprietors. For small businesses structured as a C-corporation, no tax credit is available for employees who own 5% or more of the corporation. For S-corporations, no tax credit is available for employees who own 2% or more of the S-corporation. Partners, members of LLC treated as a partnership, owners of a single-member LLC, S-corporation shareholders owning 2% or more of an S-corporation, and sole proprietors are all treated as self-employed persons for health insurance purposes, and are eligible for the self-employed health insurance deduction instead of the tax credit.

      Employer Must Pay at Least Half of the Insurance Premiums

      So far the IRS is applying the term “qualifying arrangement” to any scenario in which the small business pays at least half of the health insurance premiums for its employees. In a set of frequently asked questions, the IRS clarified that this 50% test applies only to employee-only health coverage. So a scenario is which the employers pays half of the employee-only coverage, and the employee pays all the premiums for covering spouse and children would still qualify for the tax credit.

      3 Limitations That Reduce the Health Care Tax Credit

      Small employers may not qualify for the full amount of the credit. The 35% credit amount represents a maximum amount for the tax credit. The credit must be reduced (or phased out) in the following circumstances:

      • The number of full-time equivalent employees exceeds ten,
      • Average annual wages exceeds $25,000 per full-time equivalent, or
      • Actual health insurance premiums exceed average premiums paid for health coverage in the employer’s area.

      In Revenue Ruling 2010-13 (pdf, 4 pages), the IRS has set forth average health insurance premiums by state that can be used for 2010. Average health insurance premiums will be determined by the Department of Health and Human Services and published by the IRS.

      Claiming the Health Care Tax Credit

      The IRS has not yet released any forms or instructions for claiming the credit. It’s clear, however, that the tax credit will be reported on the business’s income tax return. The health care credit will reduce any income tax. The credit is non-refundable (meaning it can reduce income tax to at most zero). The credit cannot offset payroll tax or self-employment tax liabilities for small business owners.

      Can Businesses Take a Deduction for Health Insurance Premiums?

      Small businesses can take both a deduction for health insurance premiums as well as the health care tax credit. However, the amount of the deduction must be reduced by the amount of the tax credit.

      Planning Tips for the Health Care Tax Credit

      Small businesses should review their accounting systems to make sure they are keeping track of employer-paid and employee-paid health insurance premiums. This will become vitally important as employers will need to report the value of health insurance benefits on employees’ W-2 Forms starting in 2011.

      Additionally, business owners will want to review how they structure their health benefits. For example, owners may want to revise what percentage of health insurance premiums they want to pay so as to be eligible for the tax credit.

      Business may also want to calculate different scenarios such as paying 50% of the insurance premiums, or 60%, or 100%, or taking only the deduction instead of the tax credit. This could help reveal the most cost-efficient way to structure health benefits for employees.

      More information:

      1. http://taxes.about.com/od/businesstaxes/qt/Small-Business-Health-Care-Tax-Credit.htm
      2. http://taxes.about.com/b/2010/03/30/tax-provisions-in-the-health-care-reform-law.htm
      3. http://taxes.about.com/od/businesstaxes/qt/Small-Business-Health-Care-Tax-Credit.htm
      4. http://biztaxlaw.about.com/od/healthcarebusinesstax/f/smallbiztaxcredit.htm
      5. http://biztaxlaw.about.com/od/healthcarebusinesstax/tp/healthcareplanlist.htm

      When Do the Health Care Reform Provisions Go Into Effect for Businesses?

      By Jean Murray,     http://biztaxlaw.about.com/od/healthcarebusinesstax/f/hclawtimeline.htm?nl=1

      President Obama signed into law HR 3590, the Patient Protection and Affordable Care Act (commonly called “Health Care Reform”) in March 2010 This law was modified by a reconciliation bill. The provisions of this combined legislation go into effect at various times, starting in 2009 forward through 2018. Here is a brief timeline of provisions which affect your business taxes, adapted from the Tax Foundation1.

      Retroactive provisions

      Small Business Tax Credit for certain small businesses (those meeting certain criteria) providing health insurance to employees (retroactive to January 1, 2010). In 2013, restricted only to insurance purchased through an exchange and only available for two consecutive years.

      Provisions going into effect before the end of 2010
      July 1, 2010: Impose 10% excise tax on indoor tanning services

      Provisions going into effect in 2011

      • Employers must report the value of health benefits on employee W-2 forms2.
      • Conform the definition of medical expenses for health savings accounts, Archer MSAs, health flexible spending arrangements, and health reimbursement arrangements to the definition of the itemized deduction for medical expenses (excluding over-the-counter medicines prescribed by a physician)
      • Increase in additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses to 20%

      Provisions going into effect in 2012

      • Simple cafeteria plan nondiscrimination safe harbor for certain small employers
      • Require information reporting on payments to corporations (on Form 1099-MISC3)

      Provisions going into effect in 2013

      • Limit health flexible spending arrangements in cafeteria plans to $2,500; indexed to CPI-U after 2013
      • Eliminate business tax deduction for expenses allocable to Medicare Part D subsidy
      • Impose Fee on Insured and Self-Insured Health Plans; Patient-Centered Outcomes Research Trust Fund (expires after 2019)

      Provisions going into effect in 2014

      • Increase by 15.75 percentage points the required corporate estimated tax payments factor for corporations with assets of at least $1 billion for payments due in July, August, and September 2014
      • Excise Tax (i.e., penalty) on Employers Not Providing Health Insurance Coverage to Employees (Shared Responsibility for Employers)
      • Requirement that employers report health insurance coverage
      • Provisions specifying cafeteria treatment of employers who purchase insurance through exchange

      Small Business Health Care Tax Credit: Frequently Asked Questions

      http://www.irs.gov/newsroom/article/0,,id=220839,00.html

      The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010. The following questions and answers provide information on the credit as it applies for 2010-2013, including information on transition relief for 2010. An enhanced version of the credit will be effective beginning in 2014. The new law, the Patient Protection and Affordable Care Act, was passed by Congress and was signed by President Obama on March 23, 2010.

      Employers Eligible for the Credit

      1. Which employers are eligible for the small employer health care tax credit?

      A. Small employers that provide health care coverage to their employees and that meet certain requirements (“qualified employers”) generally are eligible for a federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees (“FTEs”) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a “qualifying arrangement” described in Q/A-3.  See Q/A-9 through 15 for further information on calculating FTEs and average annual wages and see Q/A-22 for information on anticipated transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.

      2. Can a tax-exempt organization be a qualified employer?

      A. Yes. The same definition of qualified employer applies to an organization described in Code section 501(c) that is exempt from tax under Code section 501(a). However, special rules apply in calculating the credit for a tax-exempt qualified employer. A governmental employer is not a qualified employer unless it is an organization described in Code section 501(c) that is exempt from tax under Code section 501(a). See Q/A-6.

      Calculation of the Credit

      3. What expenses are counted in calculating the credit?

      A.  Only premiums paid by the employer under an arrangement meeting certain requirements (a “qualifying arrangement”) are counted in calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage. See Q/A-22 for information on transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.

      If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer.  For example, if an employer pays 80 percent of the premiums for employees’ coverage (with employees paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the credit. For purposes of the credit (including the 50-percent requirement), any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.

      In addition, the amount of an employer’s premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the state (or an area within the state) in which the employer offers coverage were substituted for the actual premium. If the employer pays only a portion of the premium for the coverage provided to employees (for example, under the terms of the plan the employer pays 80 percent of the premiums and the employees pay the other 20 percent), the premium amount that counts for purposes of the credit is the same portion (80 percent in the example) of the premiums that would have been paid for the coverage if the average premium for the small group market in the state were substituted for the actual premium.

      4.  What is the average premium for the small group market in a state (or an area within the state)?

      A. The average premium for the small group market in a state (or an area within the state) is determined by the Department of Health and Human Services (HHS). Revenue Ruling 2010-13 sets forth the average premium for the small group market in each state for the 2010 taxable year. For the 2010 taxable year, HHS may provide additional average premium rates for the small group market for areas within some states (sub-state rates). These additional sub-state rates will be published by the IRS and will not be lower than the applicable rate for each state that is set forth in RR-2010-13.

      5. What is the maximum credit for a qualified employer (other than a tax-exempt employer)?

      A. For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3.

      Example: For the 2010 tax year, a qualified employer has 9 FTEs with average annual wages of $23,000 per FTE. The employer pays $72,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the requirements for the credit.  The credit for 2010 equals $25,200 (35% x $72,000).

      6. What is the maximum credit for a tax-exempt qualified employer?

      A.  For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt qualified employer is 25 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3. However, the amount of the credit cannot exceed the total amount of income and Medicare (i.e., hospital insurance) tax the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages.

      Example: For the 2010 tax year, a qualified tax-exempt employer has 10 FTEs with average annual wages of $21,000 per FTE. The employer pays $80,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the requirements for the credit. The total amount of the employer’s income tax and Medicare tax withholding plus the employer’s share of the Medicare tax equals $30,000 in 2010.

      The credit is calculated as follows:

      (1)  Initial amount of credit determined before any reduction: (25% x $80,000) = $20,000
      (2)  Employer’s withholding and Medicare taxes: $30,000
      (3)  Total 2010 tax credit is $20,000 (the lesser of $20,000 and $30,000).

      7. How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?

      A.  If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows (but not below zero). If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15. If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000. In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled. For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions. This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.

      Example: For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer’s state) and otherwise meets the requirements for the credit.

      The credit is calculated as follows:

      (1) Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600
      (2)  Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
      (3) Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720
      (4) Total credit reduction: ($4,480 + $6,720) = $11,200
      (5) Total 2010 tax credit: ($33,600 – $11,200) = $22,400.

      8. Can premiums paid by the employer in 2010, but before the new health reform legislation was enacted, be counted in calculating the credit?

      A. Yes. In computing the credit for a tax year beginning in 2010, employers may count all premiums described in Q/A-3 for that tax year.

      Determining FTEs and Average Annual Wages

      9.  How is the number of FTEs determined for purposes of the credit?

      A. The number of an employer’s FTEs is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. See Q/A-12 through 14 for information on which employees are not counted for purposes of determining FTEs.

      Example: For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours.

      The employer’s FTEs would be calculated as follows:

      (1) Total hours not exceeding 2,080 per employee is the sum of:

      a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080)
      b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040)
      c. 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080)

      These add up to 15,600 hours

      (2) FTEs: 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number)

      10. How is the amount of average annual wages determined?

      A. The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer’s tax year by (2) the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation).  See Q/A-12 through 14 for information on which employees are not counted as employees for purposes of determining the amount of average annual wages.

      Example: For the 2010 tax year, an employer pays $224,000 in wages and has 10 FTEs.

      The employer’s average annual wages would be: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000)

      11. Can an employer with 25 or more employees qualify for the credit if some of its employees are part-time?

      A. Yes. Because the limitation on the number of employees is based on FTEs, an employer with 25 or more employees could qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and therefore may qualify for the credit.

      12. Are seasonal workers counted in determining the number of FTEs and the amount of average annual wages?

      A. Generally, no. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year.

      13. If an owner of a business also provides services to it, does the owner count as an employee?

      A. Generally, no. A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.

      14. Do family members of a business owner who work for the business count as employees?

      A. Generally, no. A family member of any of the business owners or partners listed in Q/A-13, or a member of such a business owner’s or partner’s household, is not considered an employee for purposes of the credit. Thus, neither their wages nor their hours are counted in determining the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit. For this purpose, a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.

      15.  How is eligibility for the credit determined if the employer is a member of a controlled group or an affiliated service group?

      A. Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit. Thus, for example, all employees of the controlled group or affiliated service group, and all wages paid to employees by the controlled group or affiliated service group, are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer. Rules for determining whether an employer is a member of a controlled group or an affiliated service group are provided under Code section 414(b), (c), (m), and (o).

      How to Claim the Credit

      16. How does an employer claim the credit?

      A. The credit is claimed on the employer’s annual income tax return. For a tax-exempt employer, the IRS will provide further information on how to claim the credit.

      17. Can an employer (other than a tax-exempt employer) claim the credit if it has no taxable income for the year?

      A. Generally, no. Except in the case of a tax-exempt employer, the credit for a year offsets only an employer’s actual income tax liability (or alternative minimum tax liability) for the year. However, as a general business credit, an unused credit amount can generally be carried back one year and carried forward 20 years. Because an unused credit amount cannot be carried back to a year before the effective date of the credit, though, an unused credit amount for 2010 can only be carried forward.

      18.  Can a tax-exempt employer claim the credit if it has no taxable income for the year?

      A. Yes. For a tax-exempt employer, the credit is a refundable credit, so that even if the employer has no taxable income, the employer may receive a refund (so long as it does not exceed the income tax withholding and Medicare tax liability, as discussed in Q/A-6).

      19. Can the credit be reflected in determining estimated tax payments for a year?

      A. Yes. The credit can be reflected in determining estimated tax payments for the year to which the credit applies in accordance with regular estimated tax rules.

      20. Does taking the credit affect an employer’s deduction for health insurance premiums?

      A. Yes. In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.

      21. May an employer reduce employment tax payments (i.e., withheld income tax, social security tax, and Medicare tax) during the year in anticipation of the credit?

      A. No. The credit applies against income tax, not employment taxes.

      Anticipated Transition Relief for Tax Years Beginning in 2010

      22. Is it expected that any transition relief will be provided for tax years beginning in 2010 to make it easier for taxpayers to meet the requirements for a qualifying arrangement?

      A. Yes. The IRS and Treasury intend to issue guidance that will provide that, for tax years beginning in 2010, the following transition relief applies with respect to the requirements for a qualifying arrangement described in Q/A-3:

      (a) An employer that pays at least 50% of the premium for each employee enrolled in coverage offered to employees by the employer will not fail to maintain a qualifying arrangement merely because the employer does not pay a uniform percentage of the premium for each such employee. Accordingly, if the employer otherwise satisfies the requirements for the credit described above, it will qualify for the credit even though the percentage of the premium it pays is not uniform for all such employees.

      (b) The requirement that the employer pay at least 50% of the premium for an employee applies to the premium for single (employee-only) coverage for the employee. Therefore, if the employee is receiving single coverage, the employer satisfies the 50% requirement with respect to the employee if it pays at least 50% of the premium for that coverage. If the employee is receiving coverage that is more expensive than single coverage (such as family or self-plus-one coverage), the employer satisfies the 50% requirement with respect to the employee if the employer pays an amount of the premium for such coverage that is no less than 50% of the premium for single coverage for that employee (even if it is less than 50% of the premium for the coverage the employee is actually receiving).