PAYROLL TAX CHANGES IN 2009

Many important payroll tax figures are changing, effective Jan. 1, 2009.

The maximum amount of earnings subject to Social Security (OASDI) tax increases to $106,800 in 2009. The old-age, survivor, and disability benefits (OASDI) tax rate remains at 6.2%. The maximum amount of Social Security tax that can be paid by employees and employers in 2009 is $6,621.60. The Medicare (HI) tax rate remains at 1.45% on all wages paid.

Withholding/AEIC
New federal percentage method withholding tables have been issued. An annual federal withholding allowance is now valued at $3,650 (previously, $3,500). You must withhold from the pay of any employee who had claimed exemption from withholding in 2008, but who does not give you a new Form W-4 to continue the exemption by Feb. 16, 2009.

In 2009, the maximum amount that an employee can receive in advance earned income credit (AEIC) payments is $1,826. To qualify for the AEIC, the employee's expected earned income and adjusted gross income must both be less than $35,463 ($38,583 if the taxpayer is filing a joint return). Employees must file a new Form W-5 to receive the AEIC.

Fringe Benefits
Effective Jan. 1, 2009, the standard mileage rate for computing the deductible costs of operating a car (including vans, pickups, or panel trucks) for business use is 55 cents per mile.

If an employer provides a car to an employee which is available for personal use, the value of the personal use must generally be included in the employee's income and wages. There are several methods that can be used to value the personal use. Under the cents-per-mile method, the value of the personal use is determined by multiplying the standard mileage rate by the total miles driven in the vehicle for personal purposes. However, the cents-per-mile method may not be used if the automobile's fair market value exceeds a certain amount, as adjusted for inflation. For employer-provided vehicles first made available to employees for personal use in 2009, the cents-per-mile method cannot be used if the value of a passenger automobile exceeds $15,000 ($15,200 for a truck or van).

An employer may reimburse employee automobile expenses with a mileage allowance, using a flat rate or stated schedule that combines periodic fixed and variable rate payments — a FAVR allowance. The cost of the "standard automobile" may not exceed 95% of the automobile's retail price, plus state and local taxes, nor may the cost exceed $27,200 in 2009.

An employee may exclude up to $230 a month for qualified parking expenses in 2009, and up to $120 a month of the combined value of transit passes and transportation in a commuter highway vehicle. There is a new fringe benefit available to bicycle commuters in 2009. Employer reimbursements to a commuter in a calendar year are limited to $20 per month (maximum annual employer reimbursement is $240). The maximum amount that can be excluded from an employee's gross income in connection with the adoption by the employee of a child (whether or not he or she has special needs) is limited to $12,150 in 2009.

The maximum aggregate annual contribution that can be made to a health savings account in 2009 is $3,000 for self-only coverage and $5,950 for family coverage.

Pension Plan Limitations
The maximum amount that an employee may elect to defer to an IRC §401(k) cash or deferred compensation plan in 2009 is $16,500. The maximum amount that an employee/participant may elect to defer to a savings incentive match plan for employees (SIMPLE plan) is $11,500. The limitation on total annual contributions to defined contribution plans is $49,000. The annual benefit limit for defined benefit plans increases to $195,000. The limitation on deferrals for IRC §457 deferred compensation plans of state and local governments and tax-exempt organizations is $16,500. The limitation used in the definition of highly compensated employee increases to $110,000 for 2009.

The employee compensation amount used in the definition of "control employee" for purposes of the auto commuting valuation rule is $195,000 in 2009. The compensation amount used in the definition of company officers who are ineligible for the commuting valuation rule increases to $95,000 in 2009.

Employees Working in Foreign Countries
An individual who has a tax home in a foreign country and satisfies either the bona fide foreign residence test or the foreign physical presence test may elect to exclude $91,400 of his foreign earned income from gross income in 2009. Qualified individuals may also elect to exclude certain foreign housing costs paid or incurred on their behalf (or claim a deduction where the costs are not paid by the employer). The maximum housing cost exclusion is generally limited to $12,796 in 2009. However, individuals who work outside the U.S. and live in foreign countries with high housing costs may be able to deduct or exclude a greater portion of their housing costs.

Wage Hour
The minimum wage rate is $6.55 per hour and will increase to $7.25 per hour, effective July 24, 2009. New Family and Medical Leave Act regulations go into effect on Jan. 16, 2009.

I hope this information is helpful.

Please contact the Law Offices of William H. Copperthwaite Jr., L.L.C. if you have any questions.

Please note that the information contained in this summary is intended for informational purposes only and is not to be considered tax/legal advice. For specific advice, please contact the Law Offices of William H. Copperthwaite Jr., L.L.C.