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Wash Sales... their clean. Right?

A client called late Wednesday with a question on losses resulting from stock sales. An investment made many years ago had paid off recently and the client had chosen to invest the proceeds in the stock market. Using client personnel to select the stock to purchase. Seems not all of the selections increased in value. And some selections were sold at a loss and then repurchased.

The client's basic question was could the gains be offset by the losses. My answer was in two parts. First, yes losses do offset gains. Second. Except when they are "Wash Sales". And here is where it gets technical and clients get fuzzy.

Under wash sale rules a taxpayer that sales securities and realizes a loss may not take a deduction for that loss. The "wash sale rules apply if, within a period beginning 30 days before the date of sale or disposition and ending 30 days after that date (61 day period), the taxpayer has acquired, or has entered into a contract or option to acquire substantially identical stock or securities (P 1937)(Code Sec. 1091(a):Reg.SS1.1091-1)." This rule applies to short sales of stocks or securities, and to futures contract to sell stocks or securities. This rule applies even if the stock or securities are held in an IRA. And under the "related persons rule" sells of stock by one spouse count for the other spouse in determining loss deduction under this rule.

If I were to by 1000 FaceBook shares at the market price of $42 May 18, 2012 and sold 500 shares at $28 on May 30, 2012 my deductible loss on the 500 shares would be $42-$28*500 or $7,000. On June 21 I purchase and additional 1000 shares of FaceBook stock at $32 per share. The wash sale rules apply to the May 30, 2012 stock sale and I no longer have a $7,000 deduction. I purchased subtantially identical stock (FaceBook has only one class of stock) within 30 days of the date I sold the stock. Sell date was May 30th, re-purchase date was June 21st or 22 days from the sell date. The wash sale rules apply.

When wash sale rules disallow a loss the deduction is not lost. The dissallowed loss is added to the cost of the new stock or securities increasing the buyer's basis in the new stock or securities. Thiis adjustment postpones the loss deduction until the disposition of the new investment.

My basis in the FaceBook stock is:

Purchased May 30th-500 shares at $42/share; $21,000

Purchased June 21st-1000 shares at $32/share; $32,000 plus the disallowed loss of $7,000 for a total basis of $39,000 or $39/share

This "rolling forward" of the loss continues each time a transaction meets the "Wash Rule" standard. The wash sale rule was created to prevent taxpayers from selling stock at a loss in December to be reported as a deduction and repurchasing the stock in January. It seems some taxpayers were creating a loss deductions and not really loosing anything when they repurchased the stock.

To receive the $7,000 deduction now attached to the FaceBook Stock purchased June 21st I can not purchase, contract to purchase, hold an option or futures contract on FaceBook shares until 30 days after June 21st. After July 21st I am no longer subject to the wash sale rule for the stock purchased June 21st.

This is not everything there is on wash sales, this is intended only to may the reader aware of a pitfall in frequent securities purchase and sales in the same security. As always call a CPA or investment advisor who can provide information appropriate to your situation.


Penalties to the left; penalties to the right...

To the casual observer it seems there is a penalty for every infraction of IRS rules.


There is.

The IRS wants employers and all tax payers to pay timely. And to pay using EFTPS (Electronic Federal Tax Payment System). Yes there are penalties for not making payments properly. More on making proper payments later. For amounts not deposited timely or properly the following rates apply.

2% for deposits 2-5 days late.

5% for deposits made 6-15 days late.

10% for amounts paid 16 or more days.

10% for deposits made to an unauthorized financial institution or directly to the IRS or with the return.

10% for amounts subject to electronic depositrequirements but not deposited using EFTPS.

15% for amounts unpaid 10 or more days after receiving the first notice.


If Tony's Tacos manager Cletus Chester failed to deposit the September 14th payroll taxes on October 15th waiting until Nov 1st would incure a penalty for Failure to Deposit (FTD). The delay is 17 days, the penalty rate is 10% so an additional $32.30 is due with the $322.95 tax deposit.

$32.30 sounds like a small penalty to pay and some employers fall to the temptation to use the federal government as a lender by not depositing payroll taxes. I have never seen this end well.

The employer loses track of what is owed, or decides "flying under the radar" is easy. How ever it starts the employer eventually receives a notice from the IRS "asking" for the missing deposits. By this time the employer may have failed to deposit several months of taxes and failed to file several quarters of payroll tax reports (Forms 941, 944, TWC form C-3) creating failure to file penalties. And at this point the costs to remedy the situation begin to climb as does my fee. Remember it is easier to do the job RIGHT (and cheaper, faster...) the first time than to go back and do it a second time.

With the FTD penalty comes a second ugly fact of missing the deposit, INTEREST! This is what makes missing the deposit painfully expensive. The interest rate is determined quarterly and is compounded daily using the sum total of unpaid tax and penalties.

Using Tony's Tacos again the interest due when the tax is paid Nov 1st the total due would be $355.75 - the PR tax of $322.95 plus the penalty of $32.30 plus the interest of $0.50. Sounds small until you consider this is for a single pay period. What if Cletus missed the deposit for the entire month of September. For the pay dates of Sept 7, Sept 14, Sept 21, Sept 28. The total tax deposit would be $1,335.69. And what if Cletus makes the payment 6 months late on March 15, 2013. And Tonly's Tacos had received notice form the IRS regarding the missing deposit dated February 5, 2013. The penalty on $1,335.69 would be at the rate of 15% or $200.35 and $19.18 interest at 3% resulting in a total due of $1,555.22 when paid March 15, 2013.

The IRS applies deposits in date made order to liabilities in due date order. They apply the oldest deposit received to the oldest past due deposit liability. This can result in a mis-match of deposits to liabilities if a deposit is missed. Even if deposits made are paid in full the mis-match will result in FTD penalties and interest for shortfall. These add up if permitted to continue or if there are large payrolls.

Failures to deposit payroll taxes result normally from either: a.) willful choice to not deposit, b.) a flaw in the payroll process that results in multiple deposits being missed or made for the wrong amounts. For situation (a) there is little that can be done until the employer chooses otherwise. Fortunetly such employers are rare. Employers in situation (b) need to review their payroll process and identify why deposits are missed or incorrect. Doing this usually results in significant savings as penalties and interest paid are eliminated and other costs once ignored are identified and controlled.




Deposit of Payroll Taxes

When do payroll taxes become a liability? What is the due date for deposit of payroll taxes?

Payroll taxes become a liability  when payroll is calculated; the pay check date (pay date) is used as the calculation date. In my example, Tony's Tacos the pay date is Sept 14, 2012. For Tony's Tacos the tax liability date is the payroll check date of Sept 14th, 2012.

The due date for payroll taxes is a tad more involved. Here I will only talk about taxes reported using Form 941 Employers Quarterly Federal Tax Return. There are two dates when withheld taxes and the employer and employee FICA taxes are to be deposited. Determination of the correct date is based on the amount of the tax deposit and the employee pay date (payroll check date). A third date is available for employers with a payroll tax liability below $2,500. It is my strong recommendation that an employer follow the monthly or semi-weekly deposit schedule.

  • Monthly: Deposit on or before the 15th of the month following the payday generating the tax liability or;
  • Semi-weekly: Deposit taxes on or before the Wednesday following a payday on Wednesday, Thursday, Friday; on or before the Friday for a payday on a Saturday, Sunday, Monday or Tuesday.
  • With the Quarterly Form 941 if the current quarter and the prior quarter total tax liability does not exceed $2,500 for either quarter. It is highly recommended this not be used and that an employer deposit payroll taxes no less than monthly!

 To determine which of the final two date to use an employer uses a look-back period that starts on July 1st of the year prior to the prior June 30. For Tony's Tacos the look back period for the current year started July 1, 2010 and ends June 30, 2011. This determination is to be made annually before the first payroll of the calendat year. If the sum total of the payroll tax deposits (Form 941 deposits) made in during that period is equal to or exceeds $50,000 the employer would be a Semi-weekly Depositor. If the sum total of the payroll tax deposits made during the Look Back period is less than $50,000 the employer would be a monthly depositor.

New employers that do not have prior payroll history or; are not a successor employer will use the Monthly Deposit schedule for the first year of payroll as they do not have a look-back period. As Tony's Tacos started operations June 1, 2012 it will be using the Monthly Deposit schedule. Tony'w will deposit the $322.95 payroll tax liability for the pay date September 14, 2012 on or before October 15, 2012.

$100,000 Next Day Deposit Rule:

If an employer accrues a $100,000 payroll tax liability on any day of the payroll period the payroll tax deposit is due and payable by the next business day. This rule applys to and replaces the monthly or semi-weekly deposit schedule for any payroll where the payroll tax liability exceeds $100,000. For example if a semi-weekly depositor employer accrued a payroll tax liability of $95,000 on Tuesday and on Wednesday accrues another $6,000 in payroll tax liability the $100,000 next day deposit rule would not apply as the $100,000 threshhold was net met by the employer on either day. The payroll tax deposit of $95,000 would be due on or before Friday following the Tueday and the $6,000 payroll tax deposit would be due on or before the following Wednesday the liabilities were created.

Continuing the example if the same semi-weekly depositor were to accrue a payroll tax liability of $100,000 on Monday then the payroll tax deposit would be due the next business day, here Tuesday. If on Tuesday an additional $30,000 in payroll taxes were accrued only the $100,000 from Monday would be deposited. The $30,000 payroll tax liability of Tuesday would follow the normal semiweekly deposit schedule and be deposited the following Friday.


Thursday I will cover the nasty things that can happen when an employer dailes to deposit payroll taxes or makes deposits late.



Payroll Calculation

I will use Tony's Tacos to explain the basic payroll calculation and the laws that apply. As Tony's grows its payroll will increase in complexity to explain and demonstrate more advanced payroll information. The button above opens a window showing the basic layout for Tony's payroll for a single pay period, here a single week, for the three current employees.

Tony's started business June 1, 2012 and its pay period starts Sunday Midnight and runs through to the following Saturday Midnight and the pay day is the Friday following the Satuday ending the pay period. The payday shown for Tony's Tacos is September 14, 2012 for the pay period starting Midnight Sunday September 2, 2012 and ending Midnight Saturday September 8, 2012. Tony's employees a cook, a waitress and a manager to prepare and serve tacos to the breakfast and lunch crowd.

This basic layout is typical for a manual payroll systems, a row is used to record information for a single employee and a column is used to record information for a single payroll item. As this layout is so common and easily understood most computerized payroll packages us it as well.

To make explanation easy each column is label with a Capital Letter (A,B,C) for use in a formula (E=AxB).

  • Rate is pay rate per hour or period.
  • Reg is regular hours.
  • O/T is over time.
  • Tips are the Tips the waitress B. Booker collected during week 1.
  • Reg $ is the regular wages (Reg Hours x Rate)
  • O/T $ is Overtime wages [O/T Hours x (Rate x1.5)]

 The separate columns for Reg. time and O/T are necessary under the FLSA requirement that hours worked  exceeding 40 hours in a workweek be compensated at a minimum rate of 1.5 times the regular rate.

The tax calculations following gross wage are for Federal Tax reporting and payment. The amounts and rates are statutorily set by Congress. The withholding (W/H) amount was determend using tables from Publication 15; Circular E, Employer's Tax Guide issued annually by the IRS.

Prior to passage of the Tax Relief, unemployment Insurance Reauthorization, and Job Creation Act of 2010 the social security rate was the same for both employer and employee at 6.2% up $106,800 in gross wages. The Act reduced the rate on paid by the employee to 4.2% and it was temporarily extended for the first two months of 2012 then subsequently extended by the Middle Class Tax Relief and Job Creation Act of 2012 to the end of 2012 with the uncollected social security funds being replaced by transfers from the General Fund.

An employee's net wage is Gross Wages less W/H, Emp SocSec, Emp Medicare. The amounts withheld from an employee's gross wage is called the Trust Fund Portion.

The employer's payroll liability is the total of the Trust Fund Portion and the Employer's social security and medicare tax, FUTA and SUTA taxes. There are regulations established by the IRS on when these taxes are to be deposited. Unfortunately many employers fail to timely deposit the tax incuring penalties and interest on the undeposited amounts with the taxing authorities.

This is the basic layout that will be used to explain payroll taxes and payroll transactions.


What Employers Face. The Governmental Trinity.

Employer Blog is intended to help small employers and business people learn and understand the governmental regulations and taxes that they are subject to as employers. An employer ignorant of even the basic information is placing their business, livelihood and future in jeopardy. And if an employer agrees to use anyone of the host of employee leasing or payroll service companies they will need this information to determine which outside service provider will best fit the employer's situation and judge if the service provider is performing agreed upon services.

There are three principal government agencies with oversight and enforcement powers regarding employee compensation, taxation and reporting; The Department of Labor (DOL) charges with enforcing federal labor laws principally under the Fair Labor Standards Act (FLSA). The Internal Revenue Service (IRS) which is responsible for for tax reporting and collections to the federal government. Each state has an agency that is responsible for administering a program for unemployment taxes and benefits. In Texas the Texas Workforce Commission (TWC) is responsible for enforcing Texas Labor Laws and collecting and administering unemployment taxes from employers and to workers, aiding employers find employees and in some training of workers.

Because each agency has authority over the employer/employee relationship complying with the laws, regulations, reporting requirements for employee taxes, benefits etcetera can be overwhelming to business people to remain informed, compliant and still run a business. To complicate the issue for an employer recently the IRS and DOL have signed a Memorandum of Understanding (MOU) to share information “to end the business practice of misclassifying employees in order to avoid providing employment protections”. Now if the DOL learns of an employer who has not followed the labor laws the DOL will inform the IRS and vice versa. To further complicate matters for the employer the IRS Small Business/Self-Employed Division and 37state have had a MOU since the early 2000s to exchange information on abusive tax avoidance transactions (ATAT). This can result in the employer complying with the DOL and suddenly find the IRS and state employment agency asking questions of the employer. It is easier and less costly to comply with the labor laws. To comply an employer and management must be aware of the laws that affect their industry and be aware of changes as they occur.

The right sidebar provides the current numbers, rates and amounts used in payroll, tax, and financial calculations.

First subject to be posted Tuesday will be a summary of DOL FSLA standards for determining hours worked, minimum wage, overtime rate and pay period and the related TWC pay day rules. The following Thursday a basic payroll calculation will be demonstrated using an excel spreadsheet.

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