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The IRS does not initiate communication with taxpayers through email.  It could be a phishing attempt to steal personal information.  Identity thieves sometimes use social security numbers to file tax returns in order to receive a refund.  If the thief files the tax return before you do, the IRS will believe you already filed and have received any eligible refund.

If you receive a notice or letter from the IRS in the mail that leads you to believe someone may have used your social security number fraudulently, please respond immediately to the name, address, and/or number printed on the IRS notice.  You should be alert to possible identity theft if the IRS issued a notice or sent a letter that states more than one tax return was filed for you or indicates you received wages from an employer unknown to you.

If you receive a letter or notice in the mail claiming to be from the IRS but you think it’s a scam, contact the IRS  to determine if it is legitimate.  Contact the Treasury Inspector General for Tax Administration at 1-800-366-4484.

Congress just passed changes to the Federal Insurance Contributions Act (FICA) reducing the employee Social Security tax rate by two percentage points to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduces the Social Security tax rate under the Self Employment Contributions Act (SECA) tax by two percentage points to 10.4% percent. (Act Sec. 601)

If you are an employer, all your employees will receive a 2% increase in their paychecks on wages paid in 2011. This will cost you, the employer, nothing but there are some potential bookkeeping hassles.

As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800 and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800. The maximum savings for 2011 will be $2,136 (2% of $106,800) per taxpayer. If both spouses earn at least as much as the wage base, the maximum savings will be $4,272.

If you use a software package like QuickBooks to do your payroll, you may have to manually override the employee portion of the Social Security if the software update is not available by the time you pay your first wages in 2011. If you are one of the many small business who manually calculate payroll, you will have a few extra steps to figure the amount of your payroll tax deposits.

Under the Affordable Care Act of 2010, FSAs and other health reimbursement arrangements cannot reimburse the cost of over-the-counter (OTC) medicines or drugs that are purchased after Jan. 1, 2011 without a prescription. Medicines or drugs purchased without a prescription in 2010 can be reimbursed by FSAs in 2011, only if the employer’s plan permits it.

Exceptions to new rule: Insulin, even if purchased without a prescription, or items other than medicines and drugs available without prescriptions, such as medical devices, contact lenses and eyeglasses. Also, both deductibles and co-pays can be reimbursed from an FSA.

OTC medicine and drug purchases using FSA debit cards should be made by Dec. 31, but the IRS says it will not challenge debit card purchases made through Jan. 15, 2011. After that date, purchases of OTC items must be substantiated with a prescription.

A similar rule will go into effect on Jan. 1 for HSAs and Archer medical savings accounts, the IRS says.

The IRS recently issued guidance reflecting the changes and intends to amend other rules and regs.

If your FSA allows reimbursement of over-the-counter drugs and medicines, tell your employees with balances in their accounts that they might want to stock up on items before Dec. 31 to maximize the use of their accounts. [Notice 2010-59; 2010-39 IRB 1; IR-2010-95]

FICA stands for the Federal Insurance Contributions Act.  It is a federal employment tax paid by both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, the disabled, and children of deceased workers.

Social Security benefits include old-age, survivors, and disability insurance. Medicare provides hospital insurance benefits. The amount that a person pays in taxes throughout that person’s working career is indirectly tied to the social security benefits annuity received as a retiree.

The State of Texas’ annual holiday from sales and use tax is coming up soon.  The 2010 holiday is August 20, 21 and 22. As in previous years, the law exempts school supplies, clothing and footwear priced under $100 from sales and use taxes. Check the lists and exceptions on the Texas Comptroller’s website.

School Supplies

The 81st Texas Legislature passed HB 1801 (2009) expanding the list of items qualifying for exemption from Texas state and local sales and use taxes during the annual sales tax holiday in August. Effective this year, in addition to clothes, footwear and some backpacks, Texas families also get a sales tax break on most school supplies priced at less than $100 purchased for use by a student in an elementary or secondary school.

No exemption certificate is required – with one exception. If the purchaser is buying the supplies under a business account, the retailer must obtain an exemption certificate from the purchaser certifying that the items are purchased for use by an elementary or secondary school student. “Under a business account” means the purchaser is using a business credit card or business check rather than a personal credit card or personal check; being billed under a business account maintained at the retailer; or is using a business membership at a retailer that is membership based.

Backpacks

Backpacks under $100 and used by elementary and secondary students are also exempt. A backpack is a pack with straps one wears on the back. The exemption during the sales tax holiday includes backpacks with wheels, provided they can also be worn on the back like a traditional backpack, and messenger bags. The exemption does not include items that are reasonably defined as luggage, briefcases, athletic/duffle/gym bags, computer bags, purses or framed backpacks. Ten or fewer backpacks can be purchased tax-free at one time without providing an exemption certificate to the seller.