Obama Budget Proposal Finalized

President Obama has finalized his Administration's budget proposals for fiscal year (FY) 2012 (Oct. 1, 2011 to Sept. 30, 2012). The Administration has a large agenda of tax proposals that it will push Congress to enact, including the following.

Increase in the taxable wage base for unemployment tax from $7,000 to $15,000, beginning in 2014. Federal unemployment tax (FUTA) rates would be lowered so employers' FUTA liability would not increase.

Make FUTA surtax permanent. The FUTA surtax is part of the 6.2% gross unemployment tax rate that employers pay on the first $7,000 paid annually to each employee (6% permanent tax rate, 0.2% temporary surtax). The surtax has been in effect on a temporary basis since 1976. It is scheduled to expire on June 30, 2011. A proposal in the budget would keep the 0.2% FUTA surtax in effect on a permanent basis.

Reduce improper payments of unemployment insurance (UI) benefits. The budget proposal would provide additional funding to help reduce improper unemployment benefit payments and employer tax evasion. The budget notes that over $15 billion in UI benefits were erroneously paid in 2010, and the overpayment rate increased to 11.2%, despite the efforts by States to reduce improper payments to 9.9% or less.

Quarterly W-2 reporting. The proposal would require W-2s to be reported on a quarterly basis, rather than annually.  This would presumably close up the tax planning loophole that many CPA's currently use to avoid underpayment of estimated tax payment penalties by way of having the business owner pay themselves a bonus at year end with taxes withheld in the amount needed to avoid the penalty, instead of paying quarterly as required. 

Repeal information reporting of payments to corporations. The 2010 Patient Protection and Affordable Care Act (Health Care Act, P.L. 111-148 ) included a provision that, effective for payments made after 2011, would require a person engaged in a trade or business (payors) to file an information return for all payments totaling $600 or more in a calendar year to a single payee (other than a payee that is a tax-exempt corporation). Under current law, payments to corporations, except those made for medical or health care services, are not required to be reported on an information return.

A proposal in the budget would repeal the new information reporting requirements in the Health Care Act. However, the proposal would require businesses to file an information return for payments for services or for determinable gains aggregating to $600 or more in a calendar year to a corporation (except a tax-exempt corporation).

Reduce electronic filing threshold. A proposal in the budget would give IRS regulatory authority to reduce the 250 return threshold for filing information returns electronically.

Worker classification. The Administration's budget proposal includes $46 million to combat worker misclassification, including $25 million for grants to States to identify misclassification and recover unpaid taxes, and $15 million for personnel at the Wage and Hour Division to investigate misclassification. There would be less circumstances under which service recipients would qualify for reduced penalties if they misclassify workers.

Expand work sharing. The budget proposal includes funding to encourage States to provide partial unemployment checks to workers who are part of a work-sharing arrangement. Work-sharing is a voluntary employer program that helps firms retain workers by reducing employees' weekly hours instead of laying them off.