Illinois increases income tax rates, restores research credit

Illinois increases income tax rates, restores research credit

Illinois lawmakers have ended a two-year long budget stalemate by enacting individual and corporate income tax rate increases over the Governor’s veto.

Key provisions of the bill include:

  • An increase in the individual flat income tax rate to 4.95 percent, from the former 3.75 percent rate.
  • An increase in the corporate income tax rate to a combined 9.5% rate (including the 2.5% “replacement tax” component). The rate had been 7.75%.
  • Limiting the Illinois domestic production deduction to manufacturing in Illinois.
  • Restoration of the state research credit until 2022.
  • An increase in the state earned income tax credit.

The changes are effective July 1, 2017. The bill is expected to increase Illinois tax revenues by $5 billion annually.

The bill was passed under the threat of a downgrade of Illinois debt to junk status. It is unclear how the rating agencies will react to the bill. Illinois currently has a $6.2 billion annual budget deficit and a backlog of $14.7 billion in unpaid bills.

Additional reading:

Chicago Tribune, Illinois House overrides Rauner vetoes of income tax increase, budget

Contact your Eide Bailly professional to learn more and to take advantage of the restoration of the R&D tax credit in Illinois.

Increased Payroll Scrutiny

The frequency of payroll audits has surged over the last five years and businesses are facing increased payroll scrutiny.

Most payroll audits have traditionally focused on whether or not a business is misclassifying an employee as an independent contractor, thus avoiding Social Security, Medicare and other payroll taxes. According to an article published last March by the Wall Street Journal entitled Payroll Audits Put Employers on Edge, “local businesses misclassify anywhere from 10% to more than 60% of their workers as independent contractors.”

Since the 2008 economic meltdown states have been springing into action to audit payroll taxes as a way to increase revenue. States are assessing hefty fines for misclassification. For example, Colorado passed House Bill 1301, which allows the Colorado Department of Labor and Employment to fine a business up to $5,000 for the first misclassification offense and up to $25,000 for subsequent offenses (Payroll audits increase as government seeks added revenue, Heather Draper, Denver Business Journal).

The increase in payroll audits has also been intensified by the Federal government. The U.S. Department of Labor has issued partnership agreements with California, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington to collaboratively investigate more than 6,000 employers for misclassifying employees. The U.S. Treasury estimates that if all employers were forced to properly classify employees it would result in $8.71 billion in added federal tax revenue over the next decade.

If an employer is misclassifying employees then they can take advantage of a voluntary disclosure program. The IRS is offering a Voluntary Clarification Settlement Program (VCSP) that allows employers to reclassify employees while minimizing look back, and waiving penalties and interest. Similar agreements may be negotiated at the state level.