2008 Tax Update

We would like to bring to your attention some tax changes for 2008 at both the federal and state levels.

• Payroll
• Corporate
• Federal

In addition, please view our tax facts update.

Payroll

1. Social Security Tax and Medicare Tax
   The taxable wage base for the social security portion of the tax has been increased to $102,000 for 2008. The withholding tax rate remains at 6.20%. There continues to be no wage limit for the Medicare component of the tax for 2008. The withholding tax rate for Medicare remains at 1.45%. The self employment tax rate continues at 15.30% on the first $102,000 of earnings for 2008 and 2.9% on earnings above this amount.
2. Federal Unemployment Tax
   The taxable wage base for federal unemployment tax purposes (FUTA) remains at $7,000 for calendar year 2008. The tax, which is an employer's tax (not withheld), remains at 8 mills (.008) on the first $7,000 of gross wages per employee per year.
3. Federal Withholding Tax
   There are revised federal withholding tax tables for 2008 to adjust for the effects of inflation. Please see your federal circular "E" or your withholding charts (we have some available if you need them).
4. Electronic Funds Transfer Requirements

   Federal - Businesses that paid $200,000 or more in aggregate federal employment tax and other tax deposits in the year ended December 31, 2006 are required to make tax deposits electronically starting January 1, 2008.

   Pennsylvania - For 2008, any single tax payment of $20,000 or more must be deposited electronically. This requirement applies regardless of the amount of prior year tax liabilities. If you have previously registered for electronic filing because you had made a payment of $20,000, you can still make payments by check if the payment amount is less than $20,000.

   New Jersey - Electronic tax depositing is required for 2008 if your total annual liability for a particular 2007 tax equaled or exceeded $10,000. For example, if you collected $11,000 in NJ sales tax in 2007, you are required to make tax deposits electronically in 2008. If in 2007, you collected $9,000 in sales tax and withheld $5,000 in NJ income tax from your employees' payroll, you are NOT required to deposit electronically (different taxes are not aggregated for NJ). If you are required to deposit electronically, then all taxes (sales tax, withholding tax, corporation income tax, etc.) must be deposited electronically. Please contact us if you require further clarification of these rules.

   All taxing jurisdictions impose penalties for failure to deposit electronically if you are required to do so. Please let us know if you need help getting started.

5. Pennsylvania Withholding Tax
   The Pennsylvania withholding tax rate remains at 3.07% for 2008.
6. Pennsylvania Unemployment Tax & Withholding
   For 2008, the $8,000 taxable wage base per employee remains the same. The employee withholding rate for 2008 has been decreased from .9 mills to .6 mills (.0006). Remember, the .0006 rate applies to gross payroll paid in 2008 (the $8,000 limit does NOT apply to the withholding requirement). The amount withheld is remitted along with the employer's share of tax with the quarterly filing of the Pennsylvania UC-2 return.
7. PA Minimum Wage
   Pennsylvania has a two-tier minimum wage:
   

   For employers with 10 employees or less, effective July 1, 2007, the minimum wage rate is $6.65 per hour. On July 1, 2008, the minimum wage rate will increase from $6.65 to $7.15 per hour.

   For employers with more than 10 employees, the minimum wage rate is $7.15 per hour.

8. New Jersey Unemployment Tax & Withholding
   The wage base for both New Jersey employer unemployment tax and employee tax withholding has been increased to $27,700 per employee for 2008. The combined employee withholding rate remains at 0.925% for 2008.
9. New Jersey Individual Withholding Taxes
   The New Jersey individual income tax rates have changed for 2008. The tax rates now range from 1.50% to 9.90% based upon income levels.
10. NJ Minimum Wage
    The New Jersey minimum wage rate remains at $7.15 per hour for 2008. Pennsylvania employers of New Jersey residents should use the applicable Pennsylvania minimum wage rate discussed previously.
11. FL Minimum Wage
    Effective for wages paid after December 31, 2007, the State of Florida has raised its minimum wage rate to $6.79 per hour.
12. Philadelphia Withholding Tax
    Effective for compensation paid on or after January 1, 2008, the withholding tax rate will decrease to 4.219% (previously 4.260%) for residents of Philadelphia and to 3.7242% (previously 3.7557%) for non-residents. Please remember that all Pennsylvania employers are required to withhold Philadelphia wage tax for their employees who are Philadelphia residents.
13. PA Local Services Withholding
    For 2008, the method of withholding the Local Services Tax (formerly known as the Emergency and Municipal Services Tax) has been changed. This tax is levied by certain (not all) municipalities within the State of Pennsylvania. Effective for compensation paid on or after January 1, 2008, the tax is to be withheld at a rate of $1 per week (or its equivalent in the case of bi-weekly, semi-monthly or monthly payroll periods) instead of the one-time withholding of the total amount from one paycheck. Please contact our office if you are not certain whether your municipality levies a Local Services Tax.

Corporate

1. Pennsylvania Corporate Taxes
   The Pennsylvania corporate income tax rate continues at 9.99% for the 2007 tax year. For tax years beginning in 2007, the capital stock tax rate has decreased to 3.89 mills (previously 4.89 mills). For 2008, the rate will decrease again to 2.89 mills.
2. New Jersey Corporate Taxes

   The New Jersey corporate income tax rate remains 9% for 2007 with an additional 4% surtax. The 4% surtax is based on the amount of NJ corporation income tax, it is not an additional 4% tax on income. Corporations with taxable income of $100,000 or less are taxed at reduced rates.

   The NJ minimum tax amounts range from $500 to $2,000 depending on gross receipts. Taxpayers with NJ gross receipts less than $100,000 qualify for the $500 minimum tax, while taxpayers with NJ gross receipts of $1 million or more pay the $2,000 minimum tax.

New Jersey Gross Receipts	Minimum Tax
Less than $100,000	$500
Equal to or greater than $100,000, but less than $250,000	$750
Equal to or greater than $250,000, but less than $500,000	$1000
Equal to or greater than $500,000, but less than $1,000,000	$1500
Equal to or greater than $1,000,000	$2000

Federal Income Tax Changes

The Small Business and Work Opportunity Tax Act of 2007 was the major federal tax act signed into law this year. The thrust of the Act was to provide some tax relief to small business in connection with an increase in the federal minimum wage. Most of the provisions of the Act concerned the expansion and extension of the Work Opportunity Tax Credit which applies to certain employers hiring individuals from one or more of certain targeted groups; however, two items of interest to most of our readers are discussed below.

1. The amount of tangible business property that may be currently expensed under Code Section 179 was increased to $125,000 for 2007 (originally this would have been $112,000). This dollar limit will now be adjusted for inflation for tax years 2008 through 2009. For 2008, the dollar limit is $128,000. The phase-out threshold was also increased to $500,000 for 2007 and $512,000 for 2008.
2. The “kiddie tax” has been expanded for years beginning after May 25, 2007. Currently, the “kiddie tax” (which taxes the unearned income of dependent children at the parent’s tax rate) applies to dependent children who are under age 18 or are full-time students under age 24. For 2008, the “kiddie tax” will apply to children under age 19 and who have earned income that does not exceed one-half of the amount of the child’s support.

It is expected that Congress will soon enact an “extenders” tax bill to preserve some popular tax breaks that would otherwise expire. However, as of the date of this letter, the legislation still has not been signed into law. The “extenders” legislation is expected to contain an “AMT patch”. The Alternative Minimum Tax (AMT) was originally designed to insure that wealthy individuals could not completely avoid paying income tax; however, over the years, millions of taxpayers with moderate incomes have been forced to pay AMT. Unless Congress acts, the AMT exemption amount will decrease significantly for 2007 causing even more millions of taxpayers to be subject to AMT tax in 2007. The uncertainty over the final form of this legislation has already caused concerns that the IRS may not be able to provide 2007 tax forms on a timely basis. We will keep you abreast of this developing situation.

Many provisions of prior year’s tax legislation will have an effect on tax year 2007. Of particular significance are:

1. For tax year 2007, all cash contributions regardless of amount must be documented by either a bank record or a receipt, letter, or other written communication from the donee, otherwise the deduction will be disallowed. Previously, the documentation requirement applied to only gifts of $250 or more. For non-cash contributions, a deduction will only be permitted if the donated item is in good or better condition.
2. The maximum tax rate of 15% on qualifying dividends and long term capital gains continues for 2007 and will continue to be in effect through 2010.
3. The “manufacturing deduction” will continue to be available to those businesses engaged in manufacturing, construction, and engineering. The amount of the allowable deduction limit has been increased to 6% for 2007 (formerly 3%).
4. For 2007, individual taxpayers will still be able to claim a tax credit for qualifying investments in energy conserving property. This overall $500 credit consists of two parts, a $200 maximum for items such as windows and insulation (calculated on 10% of their purchase price), and a $300 maximum for items such as qualifying heat pumps or furnaces (calculated on 100% of their purchase price, but, subject to specific dollar limits per item). The purchases of energy efficient appliances (washers, refrigerators, dishwashers, etc) do not qualify for the credit. This credit is scheduled to expire for property placed in service after 2008.
5. Effective January 1, 2008, the standard mileage rate for the business use of a car will increase to 50.5 cents per mile. The standard mileage rate for 2007 had been 48.5 cents.