2006 Payroll Update

December 2005

As a service to you, we are pleased to provide this list of updates and reminders regarding payroll.

Social Security and Medicare Wage Base and Rate

The wage base subject to social security tax has risen to $94,200 for 2006. There is no wage base limit for Medicare tax. The tax rates remain the same for both employee and employer at 6.2% for Social Security and 1.45% for Medicare.

Earnings Allowed When Receiving Social Security Benefits

Beneficiaries can earn the following amounts without losing benefits:

* One dollar for each $2 of earnings in excess of these limits is deducted from the benefits paid.
** Retirees who attain ‘full retirement age’ in 2006 will lose $1 for every $3 earned above $33,240, but only on earnings earned before the month in which they attain full retirement age. There is no limit on earnings beginning the month an individual attains full retirement age, (65 and eight months for retirees born in 1941; 65 and six months for those born in 1940).

401(k) and 403(b) Elective Deferral

The maximum annual elective deferral an employee may make to a Section 401(k) or 403(b) plan for 2006 is $15,000.
SIMPLE elective contributions remain limited to $10,000 for 2006.

“Catch-up” Contributions - Individuals who have attained age 50 before the close of the plan year who would otherwise be precluded from making any additional elective contributions will be permitted to make additional contributions as follows for 2006:

• 401(k), 403(b) catch-up is $5,000
• SIMPLE catch-up is $2,500

Health Savings Accounts (HSAs)

When considering health care benefits, you may want to consider health savings accounts. This type of health care account rolls forward, is portable, and can be offered through a Section 125 Cafeteria Plan. For more information, contact your partner in charge.

Mileage Reimbursement

The standard business mileage rate will be 44.5 cents per mile, effective January 1, 2006.

Form W-2 for 2005

A few changes have been made to the 2005 W-2 form.

• New Code, Q, Non-taxable combat pay.

• New Code, Y,* Deferrals under a Section 409A nonqualified deferred compensation plan.

• New Code, Z,* Income under a Section 409A nonqualified deferred compensation plan.

* Some of the reporting requirements for nonqualified deferred compensation have been suspended for 2005. Contact your client service partner or manager for details.

• The last year for filing Forms W-2 on diskette is tax year 2005 (forms timely filed with the SSA in 2006).

IRS May Assess Penalties for Name/SSN Mismatches on 2005 W-2s

The Internal Revenue Service may assess penalties against employers whose Forms W-2 have mismatched employee names
and social security numbers. The IRS has issued guidance on “reasonable cause” for Form W-2 errors. See Publication 1586
for more information.

You can verify information on social security numbers at http://www.socialsecurity.gov/ or phone 1.800.772.6270.

Fringe Benefits

Some examples of fringe benefits that need to be added to Form W-2 are personal use of company auto, the cost of group-term life insurance over $50,000, and fringe benefits paid to shareholders of S-corporations.

• Personal use of company auto amounts are taxable for FICA, federal/state withholding, and federal/state unemployment.

• The cost of group-term life insurance over $50,000 is only taxable for FICA and federal/state withholding and is
included in box 12 and identified as Code C.

An employer can choose not to withhold income tax on the value of the personal use of a company vehicle and group-term life
insurance, but the employer must notify the employee if this choice is made.

Income Tax Withholding Tables

There is a change to the 2006 Federal withholding tax tables. These changes take effect January 1, 2006. A new procedure is
required for calculating the federal income tax withholding on wages paid to non-resident, alien employees. The procedure is
detailed in IRS Publication 15 Circular E.

Federal Tax Deposit Schedules

There are two deposit schedules for federal income, social security, and medicare taxes- monthly or semiweekly. Prior to
the beginning of each calendar year, the employer must determine which of the two deposit schedules they are required to use. The deposit schedule is based on the total tax liability you reported on Form 941, during a four-quarter look-back period. The 2006 look back period begins on July 1, 2004 and ends June 30, 2005. If the total tax liability reported on Form 941 during this period is $50,000 or less, you are a monthly depositor; if over $50,000, you are a semiweekly depositor for the 2006 calendar year.

There is a special depository rule if the employer accumulates a tax liability of $100,000 or more during a deposit period.
Contact your client service partner or manager for details.

Electronic Federal Tax Payment System (EFTPS)

Certain taxpayers are required to use EFTPS. Taxpayers who had total federal tax deposits greater than $200,000 in 2004 or were required to file via EFTPS in 2005 must deposit using EFTPS in 2006. The IRS uses an aggregate deposits test for comparison to the $200,000 threshold. Under this test, federal employment and other federal tax payments (such as excise and corporate income tax) are all combined for comparison to the threshold. Once an employer is required to use EFTPS, they are required to use it for all federal tax deposits and cannot resume making paper coupon deposits if deposits fall below $200,000 in a subsequent year. Taxpayers not exceeding the threshold may voluntarily enroll and participate in EFTPS.

To receive an enrollment form, call EFTPS Customer Service at 800.555.4477 or go online at http://www.eftps.gov/.

Form W-4 - Employee’s Withholding Allowance Certificate

A new W-4 form for 2006 must be completed by an employee on or before February 15, 2006, if he or she had requested total exemption from withholding in 2005 and wishes to claim total exemption again in 2006. A claim of exemption from withholding lasts for only one calendar year. If an employee does not submit a new W-4, the employer must begin to withhold as if the employee were single with zero withholding allowances on the first paycheck after February 15.

A new W-4 form should also be completed if the employee requests changes in filing status and/or number of allowances throughout the year.

Previously, an employer was required to send copies of W-4 forms to the IRS when an employee claimed (1) more than 10 withholding allowances or (2) exemption from withholding and his or her wages would normally be more than $200 per week.
Under new rules, employers no longer have to automatically submit these forms. However, the IRS may request the employer to submit specified W-4’s for review or to make them available for inspection by an IRS employee.

Form W-5 - Earned Income Credit (EIC) Advance Payment Certificate

A new 2006 form must be completed by employees claiming the EIC payment. All current forms expire December 31, 2005.
Employers are required to honor Form W-5 if an employee files one. Employees may change or revoke Form W-5 at any point
in time.

Reemployment Rights for Military Personnel

Employers are now facing the increasing prospect that some of their employees will either be called to active duty in the reserve units of the U.S. Armed Forces or the National Guard or will enlist in a branch of the Armed Forces. The right of these military personnel to be reinstated in their jobs when they return from active duty is governed by the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA).

Return to Top