PAA LEHIGH VALLEY CFO FORUM

1. PAA LEHIGH VALLEY CFO FORUM Year-End Payroll Processing Wednesday, November 12, 2008

2. 1099 VS. W-2 TREATMENT • What to File • W-2 issued when employer/employee relationship exists • 1099 issued to independent contractors paid over $600 during calendar year

3. 1099 VS. W-2 TREATMENT • IRS has issued guidance to determine whether an employment relationship exists. • Factors to be considered: • Instructions • Training • Integration • Services rendered personally • Hiring, supervising and paying assistants

4. 1099 VS. W-2 TREATMENT • Factors to be considered: (continued) • Continuing relationship • Set hours of work • Full-time required • Work performed at employer’s place of business • Order or sequence set

5. 1099 VS. W-2 TREATMENT • Factors to be considered: (continued) • Oral or written reports • Payment by hour, week, month • Payment of business and/or traveling expenses • Furnishing of tools or materials • Significant investment

6. 1099 VS. W-2 TREATMENT • Factors to be considered: (continued) • Realization of profit or loss • Working for more than one firm at a time • Making service available to general public • Right to discharge • Right to terminate • Other factors

7. 1099 VS. W-2 TREATMENT • IRS Reclassification • Frequently asked questions when IRS reclassifies workers as employees • What should I do now? • How do I figure my liability for FICA tax and federal withholding? • Do I qualify for any type of reduced tax rates, and if so, what are these rates?

8. 1099 VS. W-2 TREATMENT • Frequently asked questions when IRS reclassifies workers as employees (continued) • What are the reduced rates under Section 3509? • What do I do about Form 941? • What do I do about Forms W-2

9. DEMONSTRATORSRev. Proc. 2001-56 • What is the purpose of the Revenue Procedure? • Provides optional simplified methods for determining the value of the use of Demonstration Vehicles. • What is the effective date? • January 1, 2002

10. DEMONSTRATORSRev. Proc. 2001-56 • The Methods Include: • Simplified Method for the Full Exclusion of Qualified Automobile Demonstration Use • Simplified Partial Exclusion Method • Simplified Inclusion Method

11. DEMONSTRATORSRev. Proc. 2001-56 • Who may use the Simplified Methods? • Available to any Automobile Dealer engaged in the business of Retail Sales of New or Used Vehicles • What Vehicles Qualify as Demos? • Vehicles currently in inventory and available for test drives by customers during the normal business hours.

12. DEMONSTRATORSRev. Proc. 2001-56 • Which employees qualify for the simplified Methods? • Limited to use by Full-Time Salespeople. • Does new Rev. Proc. Describe all methods available? • No - a dealer may use any other method that complies with the Internal Revenue Code

13. DEMONSTRATORSRev. Proc. 2001-56 • Simplified Full Exclusion • Use of vehicle in Sales Area • Employer must have a qualified written policy • Substantial restrictions on personal use • Use limited to salesperson (ie spouse not allowed) • Use of personal vacation trips prohibited • Storage of personal possessions is prohibited • Employer must reasonably believe that sales person is complying with written policy

14. DEMONSTRATORSRev. Proc. 2001-56 • Simplified Full Exclusion Method (cont.) • Use outside normal working hours is limited to commuting plus an average of 10 miles per day on a monthly basis. • Mileage records must be maintained such as recording the mileage at the time of arrival and departure at the sales office each day. Some verification is necessary

15. DEMONSTRATORSRev. Proc. 2001-56 • Simplified Partial Inclusion Method • Written Policy required • Prohibited use includes personal vacations, storage of personal possessions and use by anyone other than the full-time salesperson • Unlimited miles • No record keeping requirement

16. DEMONSTRATORSRev. Proc. 2001-56 • Simplified Partial Inclusion Meth. (cont.) • Salesperson taxed on $6 per day for vehicles valued at $15,000 - $30,000 (determined on the dealership average sales price basis). • Can be used for any month a full-time salesperson does not qualify for the simplified exclusion method

17. DEMONSTRATORSRev. Proc. 2001-56 • Simplified Inclusion Method • Can be used for any month a full-time salesperson does not qualify for the simplified full or partial exclusion methods. • Simplified method of determining value of demo used by employee (dealership average sales price basis). • Must be used on a monthly basis.

18. DEMONSTRATORSRev. Proc. 2001-56 • Summary of Methods available for full-time salespersons • Full exclusion • Keep records, limit personal use to commuting plus 10 miles per day and other restrictions apply. Taxable amount-zero

19. DEMONSTRATORSRev. Proc. 2001-56 • Summary of Methods available for full-time salespersons (Continued) • Partial exclusion • No records, no mileage limit to personal use, some other restrictions. Taxable amount - about $6 per day.

20. DEMONSTRATORSRev. Proc. 2001-56 • Summary of Methods available for full-time salespersons (Continued) • Inclusion Method • Available if does not qualify for Full or Partial Inclusion Method. Taxable amount - simplified method of determining value of demo used by employee

21. DEMONSTRATORSRev. Proc. 2001-56 • Summary of Methods available for full-time salespersons (Continued) • Commuting and de minimis • No record keeping if the employer reasonably believed that there was no personal use except for de minimis and no amount would be includible in income for the value of commuting (may have to maintain some evidence of this). Taxable amount-Zero

22. DEMONSTRATORSRev. Proc. 2001-56 • Method available for all dealership employees: • Full inclusion at annual lease value amount based on average dealership vehicle sales price, no record keeping. Taxable amount-$17 per day average.

23. GROUP TERM-LIFE INSURANCE (GTL) • Premiums for coverage over $50,000 • Amount of such “excess” premiums must be reported through payroll • Non-taxable jurisdictions • Federal unemployment • PA income tax • PA unemployment tax • NJ unemployment tax

24. THIRD PARTY SICK PAY • What is reportable? • Taxable AND • Non-taxable sick pay made to employees from a third party • W-2 Requirements • Sick pay MUST be included on the employees’ W-2 or on a separate form provided by the third party

25. THIRD PARTY SICK PAY • Non-taxable jurisdiction determination • First six months • New Jersey income tax • New Jersey unemployment tax • Delaware unemployment tax • After six months • PA unemployment tax • New Jersey unemployment tax • Delaware unemployment tax • Social Security and Medicare • Federal Unemployment

26. S-CORP MEDICAL INSURANCE Shareholders of an S-Corp may not participate in Section 125 plans (cafeteria plans) Medical insurance premiums paid by the employer on behalf of 2% shareholder are taxable to the shareholder

27. S-CORP MEDICAL INSURANCE • Non-taxable jurisdictions • Social security tax • Medicare tax • Federal unemployment tax • PA income tax • PA unemployment tax

28. S-CORP MEDICAL INSURANCE • Non-taxable jurisdictions (continued) • Philadelphia wage tax • New Jersey income tax • New Jersey unemployment tax • Delaware unemployment tax

29. CAFETERIA PLANS • Plan under which certain qualified benefits, paid for by the employees are not taxable under certain jurisdictions • Non-taxable jurisdictions • Federal • Social security tax • Medicare tax

30. CAFETERIA PLANS • Non-taxable jurisdictions (continued) • Federal unemployment tax • PA income tax • Delaware income tax • Must have a formal plan in place

31. CAFETERIA PLANS Employees must agree to pay for their benefits under the plan Form 5500 must be filed annually for the plan (due seven months after the end of the plan year)

32. 401(k) PLAN • Maximum amounts that an employee can defer per federal regulations • $15,500 • Refer to plan documents for restrictions • Non-taxable jurisdictions • Federal income tax • New Jersey income tax • Delaware income tax

33. 401(k) PLAN Employees must authorize salary deferrals Form 5500 must be filed annually for the plan (due seven months after the end of the plan year)

34. SERVICE TECHNICIAN TOOL REIMBURSEMENTS • Issue • Are amounts paid to technicians as reimbursements for the use of the technicians’ tools paid under an accountable plan?

35. SERVICE TECHNICIAN TOOL REIMBURSEMENTS • IRS conclusion • Effective date - July 21, 2000 • Generally, amounts paid to technicians as tool reimbursements will not meet the accountable plan requirements. Therefore, amounts paid under a non-accountable plan are included in the employee’s gross income, must be reported to the employee on Form W-2 and are subject to the withholding and payment of federal employment taxes.

36. SERVICE TECHNICIAN TOOL REIMBURSEMENTS • Corrective procedures • Do not exclude for 2001

37. 1099 REPORTING REQUIREMENTS • Due date to workers/independent contractors • Due date to federal government • Penalty for failure to file • $50 per return (non-filing or filed after August 1) • Maximum penalty $250,000 per year

38. 1099 REPORTING REQUIREMENTS • Penalties also apply if: • File on paper when you should have filed on magnetic media ( 250 forms) • You report on incorrect taxpayer ID • You fail to report a taxpayer ID • You fail to use forms that are machine readable

39. 1099 REPORTING REQUIREMENTS • Use your computer system to accumulate data • Use your computer system to print returns • ADP • Set up all unincorporated vendors to have computer accumulate and print 1099’s • Use ADV function to properly set up vendors

40. 1099 REPORTING REQUIREMENTS • ADP (continued) • Make sure that all “on demand” checks are coded as “Type 2” - vendor for proper accumulation • Run 1099 report • Check amounts to vendor files • Correct any errors • Re-run 1099 report • Print 1099’s

41. 1099 REPORTING REQUIREMENTS • Reynolds & Reynolds • Utilize Function O551 to set-up unincorporated vendors and change vendors to collect data for 1099 purposes • Utilize Function 0794 to run the 1099 balance report and check amounts to vendor files • Utilize Function 0792 to adjust 1099 balances and correct any errors

42. 1099 REPORTING REQUIREMENTS • Reynolds & Reynolds (continued) • Utilize Function 0794 to re-run 1099 balance report • Utilize Function 0414 to print 1099 forms

43. DEALER’S SAFEHARBOR BONUS • Getting this amount? • This should be calculated by the shareholder’s CPA • Why are we paying the federal withholding at year end? • Withholding is pro-rated as if paid evenly throughout the year • Think time value of money

44. DEALER’S SAFEHARBOR BONUS • Example - $1,000,000 due in the year • If estimates paid, payments paid on . . . April 15 $ 250,000 June 15 250,000 September 15 250,000 January 15 250,000 $1,000,000

45. DEALER’S SAFEHARBOR BONUS • Example - $1,000,000 due in the year (continued) • If paid $1,000,000 through withholding at December 30th • Interest at 8.5% on money kept until December 30th . . . $17,000

46. DEALER’S SAFEHARBOR BONUS • Remember . . . . • Federal tax liabilities in excess of $100,000 must be deposited by the NEXT banking day after the check date.

47. FEDERAL PAYROLL TAX DEPOSIT RULES • Determination status • Based on annual determination • Types of status • Monthly • If aggregate amount reported for lookback period is $50,000 or less

48. FEDERAL PAYROLL TAX DEPOSIT RULES • Semi-weekly • If aggregate amount reported for lookback period is $50,000 or more • Lookback period • Lookback period for each calendar year is twelve month period ended the preceding June 30th.

49. FEDERAL PAYROLL TAX DEPOSIT RULES • Deposit dates • Monthly rule • Must deposit employment taxes on or before the 15th day of the following month

50. Payment Dates Deposit Date Wednesday, Thursday and/or Friday On or before the following Wednesday Saturday, Sunday, Monday and/or Tuesday On or before the following Friday FEDERAL PAYROLL TAX DEPOSIT RULES • Deposit dates (continued) • Semi-weekly rule