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The Moment You Have All Been Waiting For: Payroll Tax Guidance for 2013

January 4, 2013

The IRS released Notice 1036 to assist employer’s with determining the payroll tax consequences of the fiscal cliff.

2013 Withholding Tables. Notice 1036 includes the 2013 Percentage Method Tables for Income Tax Withholding. Employers should implement the 2013 withholding tables as soon as possible, but not later than February 15, 2013. Employers can use the 2012 withholding tables until they implement the 2013 withholding tables.

Social Security Tax. For 2013, the employee tax rate for social security increases to 6.2%. The social security wage base limit increases to $113,700. Employers should implement the 6.2% employee social security tax rate as soon as possible, but not later than February 15, 2013. After implementing the new 6.2% rate, employers should make an adjustment in a subsequent pay period to correct any underwithholding of social security tax as soon as possible, but not later than March 31, 2013. The employer tax rate for social security remains unchanged at 6.2%.

Medicare Tax. The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2012. There is no wage base limit for Medicare tax.

Additional Medicare Tax Withholding. In addition to withholding Medicare tax at 1.45%, employers must withhold a 0.9% Additional Medicare Tax from wages paid to an employee in excess of $200,000 in a calendar year. Employers are required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee and must continue to withhold it each pay period until the end of the calendar year. Additional Medicare Tax is only imposed on the employee. There is no employer share of Additional Medicare Tax. All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold.

Employment Tax: Yet Another Opportunity to Come Clean -

December 17, 2012

Employment Tax: Yet Another Opportunity to Come Clean -

Whether a worker is performing services as an employee or as an independent contractor depends on the facts and circumstances.  This determination may be difficult for many companies and may lead to significant exposure.  In order to facilitate voluntary resolution of  potential worker classification issues and achieve the benefits of increased tax compliance and certainty for all parties, taxpayers, workers and the government, the IRS established the Voluntary Classification Settlement Program (“(VCSP”) on September 11, 2011.  The program was created to allow for voluntary reclassification of workers as employees outside the administrative context.

In light of feedback received, today the IRS has announced changes to the VCSP. (Announcement 2012-45; 2012-51 IRB 724).  The VCSP has been modified to: 1) permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP; 2) clarify the current eligibility requirement that a taxpayer that is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCP if any member of the affiliated group is under employment tax audit; 3) clarify that a taxpayer is not eligible to participate in the VCSP if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or the Department of Labor; and 4) eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

In addition, today the IRS announced a temporary expansion of eligibility for the VCSP through June 30, 2013.  The temporary eligibility expansion makes a modified VCSP available to taxpayers who would otherwise be eligible for the current VCSP but have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified.  Eligible taxpayers that take advantage of this limited, temporary eligibility expansion agree to prospectively treat workers as employees and will receive partial relief from federal employment taxes. (Announcement 2012-46; 2012-51 IRB 725)

This program can be used as a tax planning tool with the advice of your tax counsel.

MORE BREAKING NEWS: IRS Announces New Voluntary Worker Classification Settlement Program

September 21, 2011
 
On September 21, 2011, the IRS announced the launching of the Voluntary Classification Settlement Program.  This program will provide employers with the ability to resolve past worker classification issues and achieve certainty under the tax law at a significantly reduced employment tax rate by voluntarily reclassifying their workers. Under the program, eligible employers can obtain substantial relief from federal payroll taxes owed for misclassification in the past, if they agree to prospectively treat workers as employees. In exchange, the employer will pay 10 % of the employment liability that may have been due on compensation paid to workers for the most recent year, determined under the reduced rates of IRC section 3509, will not be liable for any interest and penalties on the liability and will not be subject to an employment tax audit with respect to worker classification of the workers for prior years.  Certain eligibility requirements must be met including that the employer cannot be currently under audit concerning the classification of workers by the Department of Labor or by a state government agency.  This program can be used as a tax planning tool with the advice of your tax counsel.
 
 

THE INK IS STILL WET: IRS, DEPARTMENT OF LABOR AND STATES TEAM TOGETHER -SHARING OF INFORMATION ON WORKER CLASSIFICATION

September 20, 2011

On September 19, 2011, Commissioner Shulman and Secretary of Labor Solis signed a memorandum of understanding that will allow for the sharing of information intended to combat employee misclassification.  The sharing of information and collaboration between the two agencies is intended to help reduce the incidence of misclassification, reduce the tax gap, and improve compliance with federal tax and labor laws.  The increased collaboration will also strengthen the relationship between the IRS and DOL, enable both agencies to leverage existing resources and send a consistent message to employers about their duties to properly classify workers and pay employment taxes.  The memorandum of understanding’s specific objectives include the following:

  • Expanding the IRS-DOL partnership launched in the Questionable Employment Tax Practices Program
  • Reduce the employment tax portion of the tax gap
  • Increase compliance with federal employment and unemployment tax requirements
  • Increase compliance with federal labor laws enforced by the DOL
  • Reduce fraudulent filings
  • Reduce abusive employment/unemployment schemes
  • Reduce worker classification
  • Reduce questionable employment tax practices
  • Reduce worker misclassification
  • Reduce questionable employment tax practices
  • Work together to create educational and outreach materials and guidance for employer and employees

The initiative will be coordinated by an IRS-DOL team.  The members of the team will meet regularly and make recommendations for improvement in partnership activities.  In addition, the DOL will refer to the IRS, Wage and Hour Investigation information and other data that the DOL believes may raise Internal Revenue Service employment tax compliance issues related to misclassification.  The IRS will share the employment tax referrals provided by the DOL with the state and municipal taxing agencies that are authorized to receive tax return information under approved agreements.  The IRS will provide annual reports to the DOL summarizing the results achieved by using DOL referrals.  Moreover, the IRS will provide the DOL with information which may constitute evidence of a violation of any federal criminal law that the DOL enforces.

In addition to this landmark signing hosted at the U.S. Department of Labor headquarters in Washington, DC, labor commissioners and other agency leaders representing several states signed memorandums of understanding with the Department’s Wage and Hour Division and, in some cases, its Employee Benefits Security Administration, Occupational Safety and Health Administration, Office of Federal Contract Compliance Programs and Office of the Solicitor.  The signatory states are Connecticut,Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington.  Secretary Solis also announced agreements for the Wage and H our Division to enter into memorandums of understanding with the state labor agencies of Hawaii, Illinois, and Montana, as well as New York’s attorney general.  The memorandums of understanding will enable the U.S. Department of Labor to share information and coordinate law enforcement with the IRS and participating states in order to combat worker misclassification.

In a press release issued on September 19, 2011, Secretary Solis is quoted “We’re here today to sign a series of agreements that together send a coordinated message: We’re standing united to end the practice of misclassifying employees.  We are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike.”  Commissioner Shulman said “This agreement takes the partnership between the IRS and Department of Labor to a new level.  In this new phase of our relationship, we will work together more efficiently to address worker misclassification issues…. 

The stakes are higher than before.  The government has forged an inter-agency team to combat the issue.  Business owners should prepare and seek assistance of trusted legal advisors to ensure compliance with federal and state employment tax and labor laws.

Who Will Be Subject to Employment Tax and at What Rate?

September 15, 2011
 
The American Jobs Act submitted to Congress this week calls for a temporary payroll tax cut and a temporary credit for increased payroll.  The specific tax breaks in the proposal include:
 
  • For 2012, the employee’s portion of Social Security tax would be 3.1%; the employer’s portion would also be 3.1%, up to the first $5 million of wages paid by the employer.  The tax on self-employed workers would be reduced to 6.2%.
  • From October 1, 2011 through December 31, 2012, the proposed bill would provide a payroll tax credit to offset the employer portion of Social Security tax due to wage increases over the corresponding period in the prior year.
While these proposed changes seek to reduce tax for those who may be affected by the current economic conditions, another proposed bill would increase the Social Security wage base for certain wage earners.  Senator Bernie Sanders and Representative Peter DeFazio introduced companion bills this week.  Under the proposed legislation, the wealthiest workers would pay the same payroll tax that is assessed on those workers with incomes up to $106,800 annually.  Sanders indicated that “The most effective way to strengthen Social Security for the next 75 years is to eliminate the cap on the payroll tax on income above $250,000 annually.
 

Employment Tax Cuts – Stay Tuned

September 9, 2011

In a speech to a joint session of Congress on September 8, 2011, President Obama proposed cuts to both employee and employer payroll taxes for 2012 and tax credits meant to encourage hiring of unemployed workers.

The President’s proposal, the American Jobs Act, would cut employee Social Security payroll taxes in half in 2012.  It would also reduce business payroll taxes by the same percentage on companies’ first $5 million in wages and would completely eliminate payroll taxes for companies that increase their payroll by up to $50 million relative to the prior year. The payroll tax provisions would cost $240 billion, according to a White House fact sheet. See Tax Analyst, September 9, 2011, Obama Proposed 1-Year, 50 Percent Cut to Payroll Taxes by Drew Pierson. and Michael Gleeson.

Additional details of the plan are expected on September 19, 2011 when it is anticipated that President Obama will submit a proposal to the Joint Select Committee on Deficit Reduction.

 

Increased Employment Tax Scrutiny: IRS Continues to Crack Down on Tool Plans

July 29, 2011

In Chief Counsel Advice 201120021, the Service concluded that an enterprise’s tool reimbursement plan failed the accountable plan business connection requirement because it impermissibly recharacterized wages and reimbursed employees for tool expenses incurred before the start of employment.  The IRS reiterated its view that for an expense to satisfy the business connection requirement of the accountable plan rules, it is not sufficient for an employee to incur a deductible business expense but the expense must also arise in connection with the employment.  Thus, since the accountable plan rules were not sufficiently met, the amounts paid under the plan were to be included in the employees’ gross income and reported on their Forms W-2 and subject to employment taxes. 

Tools plans have been the subject of a long standing controversy.  As a condition of employment, it is common in many industries to require  workers to provide their own tools and equipment which often must be maintained on the employer’s premise.  The IRS has challenged this practice for years taking the aggressive position that amounts paid with respect to these tool plans are wages and thus subject to employment taxes. 

The Internal Revenue Service previously established a cross divisional team to address significant concerns with certain Employee Tool and Equipment Plans, sometimes called Service Technicians Tool Reimbursement Plans, that purport to receive tax-favored treatment as an accountable plans under Internal Revenue Code.

An expense reimbursement arrangement is a tax-favored accountable plan if it satisfies the three requirements of business connection, substantiation, and returning amounts in excess of substantiated expenses, and if it does not evidence a pattern of abuse of the rules applicable to such plans. Amounts treated as paid under an accountable plan are excluded from the employee’s gross income, are not reported as wages on the employee’s Form W-2, and are exempt from withholding and payment of employment taxes. Conversely, if the arrangement fails any of the requirements or otherwise evidences a pattern of abuse of the rules, the amounts paid under the arrangement are treated as paid under a nonaccountable plan and are included in the employee’s gross income, must be reported as wages or other compensation on the employee’s Form W-2, and are subject to withholding and payment of employment taxes.

Many of the tool plans currently being marketed may not meet the requirements to be tax-favored accountable plans despite their claims to the contrary. It appears that the Service is operating on the assumption that the majority of the plans being marketed are designed and operated around a structure that recharacterizes a portion of the employee’s existing pay as a reimbursement for the employee’s tools merely to generate tax savings for both the employer and the employee. The accountable plan rules are sufficiently clear that amounts paid whether or not there are expenses are not reimbursements and are not eligible for tax-favored treatment.

As mentioned, the Service’s attention to tool plans is not new and has recently become more aggressive. These plans are widely marketed in various industries, including the automotive, heavy equipment, construction, aircraft maintenance, agriculture, and other industries. Taxpayers that are considering implementing such a plan or are currently operating with tool plans are advised to seek the assistance of tax counsel to review such plans.  Given the increased scrutiny in the employment tax arena, careful planning is required.

 


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