There is an enormous amount of uncertainty about federal taxes for 2010 and 2011. Will proposed tax cuts, such as 50 percent bonus depreciation on equipment purchases, an extension of the research credit, and an increase in the deduction for startup cost for small businesses be enacted this year? Will the Bush tax cuts expire at the end of 2010, pushing personal tax rates for ordinary income and capital gains considerably higher in 2011 and eliminating special treatment for dividends? Amid this uncertainty, there are some new rules that will take effect in 2011 and they may impact your actions for this year.
Changes in medical reimbursement plans
If your company maintains a flexible spending account (FSA), health reimbursement account (HRA), or health savings account (HSA), new rules take effect in 2011. Starting next year, these plans will no longer be able to reimburse over-the-counter medications on a tax-free basis. The only exception: doctor-prescribed over-the-counter medications, such as for Clariton and Prilosec, can continue to be reimbursed tax free.
What to do now: You'll need to officially revise the terms of your plan and communicate the new terms to employees. Starting next year, the penalty on non-medical reimbursements from HSAs to those who are under age 65 doubles to 20 percent; currently it's 10 percent.
Advise employees who have these accounts to maximize their withdrawals for over-the-counter medications this year and avoid penalties next year. Reimbursable items are listed in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
Reporting of credit card transactions
For tax years beginning after 2010, payment processors and third-party settlement organizations, including PayPal, are required to report to the IRS all credit card and similar transactions of payments to merchants on the new Form 1099-K, Merchant Card and Third Party Payments. There is an exemption from reporting for merchants who have 200 or fewer transactions, or proceeds of $20,000 or less for the year (the "de minimis rule").
What to do now: Review your record-keeping practices to make sure your information on income receipts will square with the information being reported about your credit card transactions to the IRS. Also be prepared to see an increase in banking fees, if you have not already received one, because it is likely that banks will increase their fees to cover this administrative chore.
Grants for wellness programs
The federal government will make tax-free grants to small businesses that set up Comprehensive Workplace Wellness Programs; $200 million of federal funds has been appropriated for this purpose. The wellness programs can focus on certain aims such as smoking cessation, physical fitness, nutrition, and stress management. The grants run for up to five years. Funds will be appropriated for five years beginning in the government's fiscal year 2011, which starts October 1, 2010. The grants apply to companies that did not have a wellness program prior to March 23, 2010, and that have fewer than 100 employees who work 25 hours or more per week. The grants will be made by the Department of Health and Human Services.
What to do now: As yet, no application rules have been created for these wellness programs. If you do not yet have a wellness program but may set one up if you can receive financial assistance, then continue to check HealthCare.gov for details. (There's nothing there yet, but hopefully there will be soon).
Employers are required to report on employee W-2 forms the value of health insurance, starting with W-2 forms for 2011. Reporting is required whether premiums are paid by the employer, employee, or a combination of both.
What to do now: Make sure that you track health care premiums for the year. If you use a payroll service, this likely will be done for you, but be sure to ask just in case.
Cafeteria plans are employee benefit plans that let participants choose from a menu of benefits or cash. Plans cannot discriminate in favor of "highly compensated employees" (e.g., owners or management); complex testing rules are used to determine whether plans are discriminatory. Starting next year, small businesses (those with no more than 100 employees) can set up Simple Cafeteria Plans under which plans are automatically treated as nondiscriminatory (no testing is necessary).
To be a Simple Cafeteria Plan, an employer must make certain contributions:
- A uniform percentage of compensation (but not less than 2 percent), or
- The lesser of (a) at least 6 percent of compensation or (b) twice the contributions that employees make from their wages on a pre-tax basis.
Note: Despite the changes in the nondiscrimination rule, sole proprietors, members of limited liability companies and partners in a partnership, and more-than-2 percent S corporations shareholders are still barred from participating in a cafeteria plan.
What to do now: Watch for IRS guidance on these plans; as yet, no guidelines have been issued. Meet with a benefits expert to determine whether these plans make sense for your company. If you don't yet have a plan you may want to set one up, and if you already have a cafeteria plan, you may want to adapt it to Simple Cafeteria Plan rules. If a company adopts a Simple Cafeteria Plan for 2011, be sure to factor into the company's 2011 budget the cost of employer contributions.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.