transcript
- Slide 1
- Morgan, Lewis & Bockius LLP Chicago Chapter Tax Executives
Institute February 25, 2014 Current Developments in Compensation
and Benefits Mary (Handy) Hevener mhevener@morganlewis.com (202)
739-5982 Andy R. Anderson aanderson@morganlewis.com (312) 324-1177
Morgan, Lewis & Bockius LLP 1
- Slide 2
- Morgan, Lewis & Bockius LLP Final Affordable Care Act
Shared Responsibility Rules Andy R. Anderson
aanderson@morganlewis.com (312) 324-1177 Morgan, Lewis &
Bockius LLP 2
- Slide 3
- Morgan, Lewis & Bockius LLP 3 Final Shared Responsibility
Rules Released 2.10.2014 Prior day (2.9.2014) was a key date in
numerous transition rules Finalizes proposed rules from late 2012
Key concepts: Very similar in scope and content to proposed rules
Retains and expands proposed transition rules Retains and expands
full-time employee determinations Retains and clarifies
affordability safe harbors
- Slide 4
- Morgan, Lewis & Bockius LLP Final Shared Responsibility
Rules Confirms 2015 Shared Responsibility effective date for large
(100 or more FTE/FTeq) employers Expands proposed 95/5% offer rule
to 70/30% for 2015, but can still lead to inadequate coverage
penalty The 70% expansion creates new planning opportunities Delays
Shared Responsibility effective date until 2016 for mid-size
employers (50 to 99 FTE/FTeq) Numerous requirements and a necessary
certification in order to qualify Places new emphasis on when an
employer is small enough to escape Shared Responsibility rules for
2015 4
- Slide 5
- Morgan, Lewis & Bockius LLP Final Shared Responsibility
Rules Lots (and lots, and lots) of small detail changes that are
grounded in comments to the proposed rules and special interest
lobbying Final Regulations are generally clean for 2016 and beyond
Special rules, transition relief, etc. are found in the preamble to
the final rules, the preamble to the proposed rules, and releases
that predate the proposed rules Must, as a result, check multiple
sources, particularly for 2015 specifics 5
- Slide 6
- Morgan, Lewis & Bockius LLP Final Shared Responsibility
Rules Preamble nice overview of law, prior guidance, and proposed
rules See also new Q&As on IRS website:
http://www.irs.gov/uac/Newsroom/Questions-and-Answers-
on-Employer-Shared-Responsibility-Provisions-Under-the-
Affordable-Care-Acthttp://www.irs.gov/uac/Newsroom/Questions-and-Answers-
on-Employer-Shared-Responsibility-Provisions-Under-the-
Affordable-Care-Act Imbedded expectation for more subregulatory
guidance in a number of areas Such as additional FAQs, Q&As,
etc. Next up: Reporting Rules 6
- Slide 7
- Morgan, Lewis & Bockius LLP 7 Prior/Future Material ACA
considerations for employers
http://www.morganlewis.com/index.cfm/publicationID/8CD8F0A9
-4F6B-4170-A73A-3451008094D6/fuseaction/publication.detailhttp://www.morganlewis.com/index.cfm/publicationID/8CD8F0A9
-4F6B-4170-A73A-3451008094D6/fuseaction/publication.detail ACA
considerations for group health plans
http://www.morganlewis.com/index.cfm/publicationID/F5C8601D
-373C-4E4A-9850-671BB3B82499/fuseaction/publication.detailhttp://www.morganlewis.com/index.cfm/publicationID/F5C8601D
-373C-4E4A-9850-671BB3B82499/fuseaction/publication.detail ACA
considerations for individuals
http://www.morganlewis.com/index.cfm/publicationID/04845943-
61B7-49DE-BB0E-BAF9D3403D4E/fuseaction/publication.detailhttp://www.morganlewis.com/index.cfm/publicationID/04845943-
61B7-49DE-BB0E-BAF9D3403D4E/fuseaction/publication.detail Companion
LawFlash to Final Rules is in the pipeline
- Slide 8
- Morgan, Lewis & Bockius LLP Who Is Subject to the Shared
Responsibility Rules in 2015? Only employers with 100 or more
FT/FTeq employees On average, at least 100 FT/FTeq employees on
business days during the previous calendar year (initially 2014)
Six-consecutive-month transition rule for 2014 Determine if large
by adding together: FT employees 30 hours per week (or 130 hours
per month) FT employee equivalents Total hours worked by all PT
employees divided by 120 From all controlled group employers
Reserved for government and church employers 8
- Slide 9
- Morgan, Lewis & Bockius LLP Who Is Subject to the Shared
Responsibility Rules in 2015? Special rules for: Seasonal employees
(reasonable good faith definition) New employers (look at
reasonable expectation for current year) Counts all employeeseven
those eligible for Medicare, Medicaid, or other employer coverage
Exempts most overseas employees Predecessor employers (still
reserved for future guidance) Most employers will know, well in
advance of 2015, whether they are subject to the employer mandate
9
- Slide 10
- Morgan, Lewis & Bockius LLP Who Is Subject to the Shared
Responsibility Rules in 2016? Expanded to include employers with
50-99 FT employees Applied the same as 2015 rules for larger
employers Measured on the basis of 2014 workforce Must maintain
size and hours of workforce for period from 2.9.2014 to 12.31.2015
Must maintain previously offered coverage (if any) from 2.9. 2014
Must certify compliance as part of section 6056 reporting Which
apparently will apply to such employers for 2015 Does not generally
carryover other 2015 transition rules 10
- Slide 11
- Morgan, Lewis & Bockius LLP Non-Calendar Year Plans There
are revised and new (but still limited) delayed effective date
rules for non-calendar year plans existing (and not modified) after
12.27.2012 Delayed until start of non-calendar year for any
employee eligible to participate 2.9.2014 Delayed until start of
non-calendar year for all employees (whether previously eligible or
not) if: Offered plan to at least 1/3 of all employees at most
recent OE before 2.9.2014; or Covered at least 1/4 of all employees
on a day in 12-month period ending 2.9.2014 11
- Slide 12
- Morgan, Lewis & Bockius LLP Non-Calendar Year Plans Delayed
until start of non-calendar year for FT employees (whether
previously eligible or not) if: Offered plan to at least 1/2 of ACA
FT employees at most recent OE before 2.9.2014; or Covered at least
1/3 of ACA FT employees on a day in 12- month period ending
2.9.2014 Useful for employers with a significant percentage of
employees who will not become ACA FT employees Also applies to 2016
delay for smaller employers Regardless, must do Section 6056
reporting for all of 2015 12
- Slide 13
- Morgan, Lewis & Bockius LLP 13 Shared Responsibility Basics
No Coverage PenaltyInadequate Coverage Penalty If employer does not
offer Minimum Essential Coverage to 95% of its FT employees If
employer offers coverage to its FT employees, but the coverage is
not Affordable and/or does not provide Minimum Value AND One FT
employee enrolls in an Exchange and receives a subsidy Employer
must pay penalty of: $2,000 (indexed) for all FT employees (less
30) (including those receiving coverage) Employer must pay penalty
of: $3,000 (indexed) for each FT employee receiving a subsidy
(capped at the maximum No Coverage Penalty)
- Slide 14
- Morgan, Lewis & Bockius LLP 14 No Coverage Penalty Offer At
least 95% of all FT employees (and their children in 2016) or at
least 70% for 2015 FT employee = 30+ hours per week (130+ hours per
month) Treasury refused to increase above 30 hours Children now
excludes foster children and stepchildren Must offer coverage
through end of month in which child attains age 26 Excludes
children who are not citizens or residents of the U.S. But includes
children resident in Canada or Mexico Qualifying coverage...
Minimum Essential Coverage (basically any ER-sponsored plan)
- Slide 15
- Morgan, Lewis & Bockius LLP 15 No Coverage Penalty Or pay
No Coverage penalty $2,000 times all FT employees (minus 30; 80 for
2015 only) Note: employers who have less than 30 FT employees (or
80 for 2015) will pay no penalty Only applies if one FT employee
enrolls in Exchange and receives a subsidy (tax credit or
cost-sharing reduction, called a Section 1411 Certification) No
subsidy available if: Eligible for Medicaid (100-133% of federal
poverty level) Household income is more than 400% of federal
poverty level
- Slide 16
- Morgan, Lewis & Bockius LLP 16 No Coverage Penalty
Calculated on ALL FT employees of each controlled group member
separately 30/80 employee reduction apportioned across controlled
group members Offer includes offer of coverage from:
Multiemployer/single-employer Taft-Harley plans Additional interim
guidance for near future PEOs (if client pays more for the offered
coverage) MEWAs
- Slide 17
- Morgan, Lewis & Bockius LLP 17 No Coverage Penalty Includes
Evergreen offers Offer by one controlled group member satisfies
obligation for all members Useful for large single plan across the
entire controlled group No specific rules for demonstrating an
offer was made Limited no offer opportunity for coverage providing
minimum value that is free or meets Federal poverty level
affordability safe harbor
- Slide 18
- Morgan, Lewis & Bockius LLP 18 Inadequate Coverage Penalty
Offer To all FT employees (and their children in 2016)or fail to
offer to up to 5% (up to 30% in 2015) of FT employees FT employee =
30+ hours per week (130+ hours per month) Children now excludes
foster children and stepchildren Must offer coverage through end of
month in which child attains age 26 Excludes children who are not
citizens or residents of the U.S. But includes children resident in
Canada or Mexico
- Slide 19
- Morgan, Lewis & Bockius LLP 19 Inadequate Coverage Penalty
Offer Qualifying coverage Is Minimum Essential Coverage and
Provides Minimum Value That is Affordable Not more than 9.5% of
household income for employee-only coverage Safe harbors (discussed
later)
- Slide 20
- Morgan, Lewis & Bockius LLP 20 Inadequate Coverage Penalty
Or pay Inadequate Coverage penalty $3,000 per FT employee who
receives subsidy (Section 1411 Certification) for Exchange coverage
(capped at maximum No Coverage penalty) No subsidy available if:
Eligible for Medicaid (100-133% of federal poverty level) Household
income is more than 400% of federal poverty level Applied
separately to each controlled group member Limits scope of penalty
to only part of controlled group
- Slide 21
- Morgan, Lewis & Bockius LLP Who Is a Full-Time Employee?
Average 30 hours of service/week For non-hourly employees, 8
hours/day or 40 hours/week equivalencies 130 hours/month can be
used Different from large employer determination No need to combine
PT employees into full-time equivalents Determined on a controlled
group basis Very challenging for transfers within a controlled
group 21
- Slide 22
- Morgan, Lewis & Bockius LLP Who Is a Full-Time Employee?
Determination of FT status Under statute, this is determined
monthly on an ongoing basis Final rules contain new details and
procedures for determining status on a monthly basis Plugs some of
the prior holes applicable to monthly determinations Very
complicated new final rules for when individuals move between
different methods of determining status over their careers Special
phased retirement (and similar situations) rule Employees whose
status is clearly full time when hired must be offered coverage
within 3 months of hire 22
- Slide 23
- Morgan, Lewis & Bockius LLP Who Is a Full-Time Employee?
Voluntary safe harbor method for new variable hour, seasonal, and
part-time employees Permits employers to calculate employee hours
during an initial measurement period (3-12 months after employment)
and lock in the resulting status for the following stability period
(6-12 months) Employer can define periods, subject to consistency,
based on categories of employees (i.e., salaried/hourly, union/non-
union, different entities, different states) Short (less than 2
months) administration period to start coverage if use full initial
measurement period Will be complicated to track and implement Note
new part-time requirements!! 23
- Slide 24
- Morgan, Lewis & Bockius LLP Who Is a Full-Time Employee?
Voluntary safe harbor method for ongoing employees Permits
employers to calculate employee hours during a consistent ongoing
measurement period (3-12 months) and lock in the resulting status
for the following stability period (6- 12 months) Employer can
define periods, subject to consistency, based on categories of
employees (i.e., salaried/hourly, union/non- union, different
entities, different states) Expected to be tied to open enrollment
process and timing 90-day administration period to start coverage
Must transition new variable hour, seasonal, and part-time
employees to this ongoing measurement process 24
- Slide 25
- Morgan, Lewis & Bockius LLP Who Is a Full-Time Employee?
Special rules for: Seasonal employees (6 month rule) Volunteers
Schools Adjunct faculty (new 2-1/2 hour equivalency) Rehired
employees (now 13 consecutive weeksstill 26 for educational
organizations) International employees and transfers Temporary
staffing firms Section 3508 employees Cruise ships 25
- Slide 26
- Morgan, Lewis & Bockius LLP Who Is a Full-Time Employee?
U.S. territories Student work-study On call hours Layover hours
Religious orders Home healthcare workers 26
- Slide 27
- Morgan, Lewis & Bockius LLP When Is Coverage Affordable?
Necessary to avoid Inadequate Coverage penalty Premium for cheapest
employee-only coverage must be less than 9.5% of household income
No cap on spouse/children premiums May be up to COBRA cost of
coverage Three optional safe harbors remain and are clarified: W-2:
Premium cannot exceed 9.5% of the employees W-2 wages from the
employer for that year New special rules for partial years 27
- Slide 28
- Morgan, Lewis & Bockius LLP When Is Coverage Affordable?
Rate of Pay Premium cannot exceed 9.5% of an amount equal to 130
hours multiplied by the lower of the hourly rate of pay on the
first day of coverage or the lowest hourly rate of pay during each
month (if reduced) Alternate is monthly salary on the first day of
the coverage periodwhich cannot be reduced Federal Poverty Line
Premium cannot exceed 9.5% of an amount equal to the Federal
poverty line for the year divided by 12 Can use the most recently
published guidelines in effect 6 months prior to the beginning of
the plan year 28
- Slide 29
- Morgan, Lewis & Bockius LLP Lingering Concerns
Nondiscrimination rules Particularly worrisome if employer has
different health coverage across its controlled group ERISA section
510 claims ACA Whistleblower claims Cadillac Tax Some coverage may
be too rich for 2018 Is 2015/2016 the time to cut back? 29
- Slide 30
- Morgan, Lewis & Bockius LLP New Developments in Payroll Tax
Controversies: Traveling Employees Crossing U.S. and State Borders,
and Developments in Independent Contractor Audits Mary (Handy)
Hevener mhevener@morganlewis.com (202) 739-5982 Morgan, Lewis &
Bockius LLP 30
- Slide 31
- Morgan, Lewis & Bockius LLP Overview A.Federal Data
Collection Program Audits B.Payroll Audits of Expatriate and
Impatriate Employees C.Wage Recharacterization Audits D.State
Payroll Tax Audits of Traveling Employees E.Developments in
Independent Contractor Audits 31
- Slide 32
- Morgan, Lewis & Bockius LLP DATA COLLECTION AND FRINGE
BENEFITS AUDITS 32
- Slide 33
- Morgan, Lewis & Bockius LLP Data Collection and Fringe
Benefit Audits, Overview Since 2009, the IRS has audited over 2,000
employers (under a program that the IRS initially hoped would cover
examinations of 6,000 taxpayers during 2009-2011). Most of these
audits were of small companies, with an intention to extrapolate
the audit results, to measure businesss compliance with worker
classification, fringe benefit, and payroll tax laws. The IRSs
first extrapolation report was deemed, in May, 2011, by the
Treasury Inspector General for Tax Administration to be too small
of a sample to provide meaningful compliance estimates, so the IRS
was required to restart big company audits in 2012 (most in Silicon
Valley). 33
- Slide 34
- Morgan, Lewis & Bockius LLP Initial IDRs in these audits
cover hundreds of issues, and can take over a year to complete.
There are typically five basic areas identified for attention
during these audits. (Call Mary Hevener for samples of initial
IDRs.) 34 Data Collection and Fringe Benefit Audits
- Slide 35
- Morgan, Lewis & Bockius LLP To comply with the New IDR
response deadlines, and to avoid the prompt delinquency notices and
summons enforcement procedures outlined in LB&I Directive
04-113-009), taxpayers need to be ready to explain to the Exam team
how long the information will take to be collected and why it will
take that long. This includes determining: Do you have the
information the IRS seeks? Where is the information and what format
is it in? Who will be responsible for obtaining and organizing the
information and how long will it take that person to do so? Who
needs to review the information before it is delivered to the IRS
and how long will that take? Are there any privilege or
confidentiality concerns? That may require additional review. 35
New IRS IDR Procedures with Mandatory Enforcement Provisions
- Slide 36
- Morgan, Lewis & Bockius LLP New IRS IDR Procedures with
Mandatory Enforcement Provisions Need to ensure that everyone
involved in the examination within your organization is aware of
the IDRs deadline, because once you agree to the deadline there is
virtually no way to extend it and the new enforcement provisions
are mandatory. If you miss the initial deadline in the IDR, the IRS
will issue a Delinquency Notice within 10 days of the missed
deadline and may allow up to 15 days to provide a response. 36
- Slide 37
- Morgan, Lewis & Bockius LLP Data Collection and Fringe
Benefit Audits 1.Fringe benefits; Likely to include use of company
cars, planes and home computers, spousal travel, corporate
apartments, prizes and awards, tax return preparation, meals
(including on-premises cafeterias), life insurance, and various de
minimis items (including gift cards) 2.Reimbursed expenses; Code
62(c) compliance 3.Executive compensation; Including deferred
compensation and stock-based awards, such as qualified and
nonqualified stock options, restricted stock, various phantom stock
programs, and for larger companies, Code 162(m) and 280G issues.
37
- Slide 38
- Morgan, Lewis & Bockius LLP Data Collection and Fringe
Benefit Audits 4.Payroll tax compliance (including expatriates, and
NRAs traveling to the U.S.); and Focused on W-4/W-9 collections
(including investigations of employees who have claimed exempt
status or too many exemptions), information return compliance
(including inquiries about individuals who have received both Forms
W-2 and 1099- MISC), B-1, J, and H-1B visa issues, and payroll tax
deposit timing (with focus on options/RSUs). 5.Worker/independent
contractor classification Focused on, ultimately, collecting solid
revenue estimates for an expected Administration proposal to repeal
530 of the 1978 Revenue Act (as sponsored by then Senator Obama).
38
- Slide 39
- Morgan, Lewis & Bockius LLP Data Collection and Fringe
Benefit Audits Possible State Referrals Not only are these IRS
audits painful processes, but, given increased coordination between
the IRS and state tax agencies, it is possible that audit findings
will be coordinated with state tax authorities. Many states have
longer statutes of limitations some extending two or three years
after the employer pays taxes to the IRS at the conclusion of the
IRS audit, which leads to painful delays, and problems with
data-retention. If the employer does not confess to the state its
payment of taxes to the IRS, the state SOL may never run (e.g., in
California). 39
- Slide 40
- Morgan, Lewis & Bockius LLP Procedural Delays in Getting to
IRS Appeals So many IRS Appeals Officers have retired over the past
3 years that there is a huge backlog in IRS processing of protests,
particularly those on payroll tax issues. Many of the Protests
filed with respect to the data collection audits of larger
employers, which started in late 2011, have not yet been considered
even at a first meeting at Appeals. Although the IRS insists that
taxpayers have only 30 days (or even less) to file a Protest, the
delay before the first Appeals Meeting is 12 to 15 months. 40
- Slide 41
- Morgan, Lewis & Bockius LLP 2010 Increase in Information
Reporting Penalties The Code includes not only penalties on
individual taxpayers for underreporting income and underpaying (or
late-paying) taxes, but also imposes penalties on employers for
making the same types of errors. These penalties were dramatically
increased in late 2010, effective for information returns filed in
January 2011 for 2010 (although there is a typo in the I.R.M.,
indicating that for small employers, the increased penalties may be
delayed until the 2011 year). Also, employers liability for
underwithholding on executives increased in 2013 when the
withholding rate on supplemental wages over $1,000,000 jumped from
35% to 39.6%. 41
- Slide 42
- Morgan, Lewis & Bockius LLP 2010 Increase in Information
Reporting Penalties The post-2010 penalties imposed under each of
Code 6721 and 6722 are: $100 per W-2, up to maximum of $1,500,000
for all such failures in the aggregate for the year; $30 per W-2,
with $250,000 annual cap if corrected within 30 days of January 31;
$60 per W-2 with $500,000 annual cap if corrected on or before Aug.
1; In cases of intentional disregard, greater of 10% of
underreported amount or $250 per W-2 (with no annual cap). Note
that lower annual caps apply to small employers with gross receipts
under $5,000,000. 42
- Slide 43
- Morgan, Lewis & Bockius LLP 2010 Increase in Information
Reporting Penalties For errors on any single W-2 (or 1099), this
change has effectively doubled penalties from $100 to $200 per
return since penalties are imposed on errors in both the employee
and employer copies of the forms. For errors by large employers
(which affect 15,000 or more employees), the penalties have
increased six-fold, from $500,000 to $3 million. Lower caps apply
to small employers with gross receipts under $5M. For intentional
disregard errors, the penalty is 20% of the underreported income.
43
- Slide 44
- Morgan, Lewis & Bockius LLP 2010 Increase in Information
Reporting Penalties Have these changes increased the accuracy of
information returns? Perhaps information returns are more accurate,
but certainly these higher penalties (and higher withholding rates
on executive compensation) have increased the worry factor for
return filers. Will these changes increase the frequency of audits?
Maybe, and they certainly will increase costs for those audited.
They have also lead to more computer-notice assessments. 44
- Slide 45
- Morgan, Lewis & Bockius LLP 45 FEDERAL PAYROLL AUDITS OF
CROSS-BORDER EMPLOYEES: COMMON AUDIT ISSUES
- Slide 46
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Employees 1.Tax Return Preparation 2.Expatriate
Withholding 3.Impatriate Withholding 46
- Slide 47
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Tax Return Preparation IRS Arguments The tax
return preparation benefits only the employee. The Code 132(d)
exclusion does not apply to 212 deductions (e.g., return
preparation). See Reg. 1.132- 5(a)(1)(iii); Code 212; Rev. Rul.
73-13; P.L.R. 8547003; P.L.R. 199929043; and F.S.A. 200137039 (all
addressing employer-paid tax return preparation). The exclusion for
non-discriminatory qualified retirement planning services under
132(m) is not applicable. The employers cost measures the benefit
value. 47
- Slide 48
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Tax Return Preparation Employer Response The
assessed tax preparation costs should be excludable under Code 132
as a working condition fringe benefit because incurred primarily
for the employers benefit. See, e.g., Rev. Rul. 92-69 (applying
this principle to job- search expenses to terminated employees).
Even the ruling cited by the IRS imply that under certain
conditions the working condition exclusion could apply. There is
ample pre- and post-TRA 84 guidance indicating that property and/or
services provided to employees for an employers benefit should be
excluded from wages. See also Rev. Rul. 63-144 (question 31); Doak
v. Commr, 234 F.2d 704 (1956); and Teeling v. Commr, 42 T.C. 671
(1964), acq. 1965-2 C.B. 6 (all allowing deductions for personal
meal and entertainment expenses, where it is clearly shown that the
taxpayer was incurring costs exceeding those that would have been
incurred for their personal expenses). 48
- Slide 49
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Tax Return Preparation Employer Response Cost
cannot be used to measure value, per Reg. 1.61- 21(b)(2). The
amount payable by an employee for the U.S. return preparation is
the effective value. The IRS should accept values of $350 to $500
as income imputed to employees for this benefit. (Notably, $500 is
more than double the value of tax return preparation services, as
estimated by the National Society of Accountants and the IRS.)
49
- Slide 50
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Tax Return Preparation Employer Response
Because expatriates are only responsible for the hypothetical stay
at home tax, the value received by these employees for domestic and
foreign tax return preparation services is far less than the
employers cost. Much of the return preparation cost is aimed at
minimizing the tax equalization payments due expatriates.
Expatriates do not benefit from foreign tax return preparation
services because they are guaranteed tax equalization payments and
gross-ups. Any tax attributes (including FTCs) that generate tax
reduction in an expatriates return for prior or future periods,
including pre- and post-assignment periods, solely benefit the
employer. 50
- Slide 51
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Tax Return Preparation Employer Response The
facts for most employers are clearly distinguishable from those
described in Rev. Rul. 73-13 and P.L.R. 8547003. Under the facts of
Rev. Rul. 73-13, the services were rendered primarily for the
benefit of the employees. For most employers, the foreign tax
preparation expenses were incurred primarily for the employers
benefit (as discussed above). P.L.R. 8547003 differs from most
employers situations, since few, if any, expatriate employees are
ever given a choice between the tax preparation services and cash.
51
- Slide 52
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Expatriate Withholding IRS Arguments
Withholding should have been collected on wages while the employees
were traveling. The Code 911 exclusion was inadequate to protect
the wages from withholding. The exempt status Forms W-4 were
completed incorrectly (per inclusions of requested exemptions), or
had expired (on Feb. 15 of every year). The only way for an
employer to abate its liability for underwithheld income taxes is
to collect originally signed Forms 4669 from each affected
employee. 52
- Slide 53
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Expatriate Withholding Employer Response
Wages paid to U.S. citizens performing services in a foreign
country for an employer are exempt from withholding if at the time
of payment it is reasonable to believe the employees wages will be
excluded from gross income under Code 911. See Treas. Reg.
31.3401(a)(8)(A)-1(a)(1)(i). In many instances, the IRS agents
computations of the Code 911 exclusion significantly understate the
available exclusion. 53
- Slide 54
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Expatriate Withholding Employer Response
Qualified individuals could exclude up to $91,500 in 2010. $92,900
in 2011. $95,100 in 2012, $97,600 in 2013, and $99,200 in 2014. See
Code 911(b)(2)(D)(i); Rev. Procs. 2009-50, 2010-40, 2011-52,
2012-42, and 2013-35. The Code 911 exclusion amount is computed on
a daily basis based on the number of days that fall within the
employees qualifying period during the taxable year. See Code
911(b)(2)(A). Pursuant to Reg. 1.911-3(d)(2)(i), to determine the
maximum exclusion amount, the annual exclusion amount is multiplied
by the following fraction: The number of qualifying days in the
taxable year The number of days in the taxable year IRS agents
often misapply (or ignore) this exemption. 54
- Slide 55
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Expatriate Withholding Employer Response In
addition to the Code 911 exclusion, Code 3401(a)(8)(A)(ii) (and the
underlying regulations) provide a wage withholding exemption for
remuneration paid for services by a U.S. citizen employee in a
foreign country if the employer is required by the law of a foreign
country to withhold income tax upon such remuneration. The tax need
not be imposed under general income tax laws of the foreign
country, so as the foreign tax would otherwise qualify for credit
(if elected) under Code 901. See P.L.R. 8129013. Some IRS agents
insist on detailed explanations (and translations) or foreign laws,
plus proof that withholding in fact occurred, before applying this
exclusion. 55
- Slide 56
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Expatriate Withholding Employer Response Some
employees file Forms W-4 claiming exempt status and the IRS
scrutinizes these forms, and the updates to the forms (required
every February) very carefully. Here again, many of the criticisms
are contradicted by the I.R.M. and the W-4 form instructions, which
indicate that the form is NOT invalidated completely if both exempt
status and a high number of exemptions are claimed, and also permit
reliance on prior-filed Forms W- 4 with high numbers of exemptions.
56
- Slide 57
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Expatriate Withholding Employer Response Many
examining agents, in calculating proposed taxes, apply the highest
possible effective marginal rates, instead of applying the 25%
supplemental rate (which admittedly jumped to 39.6% in 2013 for
supplemental wages over $1M). This violates instructions in the
I.R.M. Moreover, agents sometimes use the 25% supplemental rate in
computing adjustments, when in fact the regular wage rate would
have been less. Thus, in any audit, agents tend to use the higher
of the regular marginal rate or the supplemental rate, when they
should use the lower of the two rates. 57
- Slide 58
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Expatriate Withholding Employer Response An
employers Code 3403 liability for non-withheld taxes can be abated,
pursuant to Code 3402(d), if the tax against which such tax may be
credited is paid. According to Treas. Reg. 31.3402(d)-1, the
employer will not be relieved of his liability for payment of the
tax required to be withheld unless he can show that the tax has
been paid. One potential method of proof is the Form 4669 but other
methods should be available, as discussed below. 58
- Slide 59
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Expatriate Withholding Employer Response The
I.R.M. does not limit Form 4669 as the exclusive method by which an
employer can show that the tax has been paid. It simply provides
one manner in which an employer can make a prima facie showing that
an employee paid the underlying tax. Alternative forms of
satisfying the Code 3402(d) abatement rules have been recognized in
numerous court cases. 59
- Slide 60
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers : Expatriate Withholding Employer Response
Alternative forms of proof include: Providing records relating to
affected employees for whom the employers accountant prepared U.S.
federal income tax returns, pursuant to the employers expatriate
employee benefits program; Providing information return filing
records; Providing a list of the names and SSNs of the affected
employees, along with a statement that the employer has maintained
records of: (1) each affected employees Form W-2 (and, if
applicable, Form W-2c); (2) payment to the accounting firm for tax
return preparation and filling fees; and (3) a tax equalization
computation; or Producing records evidencing the costs of preparing
each employees tax return and related tax equalization
computations. 60
- Slide 61
- Morgan, Lewis & Bockius LLP Best Practices to Avoid
Expatriate Withholding Issues? What forms should be completed by
employee? What are the Dos and Donts of completing Forms W-4 and
other election forms? What questions should be resolved in written
assignment letters? What steps should be taken to track equity
compensation vesting? 61
- Slide 62
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues For
impatriates, different rules apply. Code 861 provides only a
limited exclusion (for under $3,000 of income, and for work of
under 90 days) for services performed in the U.S. The IRS counts
even a minute of a calendar day as a full day, even though the
regulations indicate that the calendar day test is a general rule
(implying that exceptions exist). In a pending Tax Court case,
American Airlines v. Commr, the IRS examining agents proposed to
count stays of under 24 hours by flight attendants as two, and
possibly three days ignoring Tax Court precedent that would ignore
de minimis short-term stays. Note: This American Airlines case
presents interesting procedural issues re: the ability to litigate
payroll tax cases in the U.S. Tax Court where there is a dispute
about the application of Section 530, even if the IRS has not
issued a Notice of Determination of Worker Classification. 62
- Slide 63
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues Income tax
treaties (in place with nearly 60 countries) also provide a general
exemption from U.S. income taxes for amounts received by
nonresident aliens who travel to the U.S. for study, research, or
business or technical training (which is precisely why many B-1
visa-holders travel to the U.S.). However, these treaty exemptions
do not apply to persons actually working in the U.S. (e.g.,
employees traveling on L-1, TN, or H-1B visas). Note: Some IRS
agents examine even employees on B-1 visas, attempting to prove
that the visas were obtained in error, and that the employees are
ineligible for treaty protections. 63
- Slide 64
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues For these NRA
workers, whose income and period of stay likely exceeds the Code
861 exclusion limits, many employers arrange to pay their U.S.
taxes (even though the foreign entity pays their wages), typically
depositing the taxes on a quarterly basis, and then following
through with tax return preparation. However, in some audits, the
IRS has alleged that the U.S. employers payments of taxes are
late-deposited, thus triggering FTD penalties under Code 6656 (even
though the U.S. employer never in fact paid the wages). This issue
is pending in several appeals. 64
- Slide 65
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues FICA/FUTA taxes
also apply (since the exception discussed below) for work performed
for non-American employers applied only to work performed outside
the U.S. Unfortunately for many of these NRA workers, they may
never qualify for social security or unemployment benefits, but the
IRS ignores the basic unfairness of imposing these social taxes,
where no benefits will be received. On the other, some workers
(e.g., the flight attendants in the American Airlines case) may
qualify for lifetime post- retirement benefits, after paying
minimal FICA, but there again the IRS attorneys have indicated that
receipt or nonreceipt of social security or unemployment benefits
is irrelevant to us. 65
- Slide 66
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues FICA taxes are
imposed on all remuneration for employment . Code 3121(b) defines
employment to include: Any service performed within the United
States (irrespective of the citizenship or residence of the worker
or the service recipient); and Any service, of whatever nature,
performed outside the United States by a citizen or resident of the
United States as an employee for an American employer. Code 3121(h)
defines American employer to include a corporation organized under
the laws of the United States or of any State. Where NRA employees
work outside the U.S. for CFCs corporations organized under the
laws of foreign countries FICA taxes are not applicable if the CFCs
are not American employers. 66
- Slide 67
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues This exception
for non-American employers does not apply to any work performed in
the U.S. However, some wages earned in the U.S. qualify for the
totalization tax treaty exemption from FICA (applicable where (and
only if) certificates of coverage are obtained). For employees
whose wages are not exempt under 861 or a treaty, many employers do
withhold FITW (and FICA, if applicable),for foreign employees
working in the U.S. who are paid by the U.S. affiliate during their
stay. Unfortunately, the IRS is challenging both the payment and
the nonpayment of payroll taxes for these impatriate employees.
67
- Slide 68
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues For employers
who have withheld and deposited FICA (as well as other payroll
taxes), as noted above, the IRS has alleged that the FICA-taxes are
late-deposited, and has proposed FTD penalties. This penalty is
hard to justify, since the U.S. employer in many instances did not
pay the wages in the first instance, and no FTD penalties can be
applied to an employer that has not withheld (and, as a practical
matter, has not even paid the wages). This issue is also still
pending in several IRS appeals. 68
- Slide 69
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues For employees
whose wages likely exempt under 861 or a treaty, where no payroll
taxes are paid, the IRS has announced in several audits that it
intends to audit the foreign affiliate, even though: the U.S. has
no jurisdiction over the foreign employer; the U.S. affiliate
cannot be held liable for underwithheld taxes, except for certain
government contractors affected by Code 3121(z); and It is very
hard to obtain the information, given strict procedures for seeking
and obtaining foreign records, and limitations on information
exchanges (on top of IRS budget limitations on traveling to the
foreign countries). 69
- Slide 70
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues It is possible,
in opening audits of these foreign affiliates of U.S. employers,
that the IRS is only trying to collect unpaid employment taxes (for
workers with compensation not exempt under Code 861 or a treaty).
It is also possible that the IRS is trying to determine visa
violations, which it could report to US immigration authorities.
Finally, it is possible that the IRS is trying to prove that the
foreign affiliates have created a permanent establishment in the
U.S. The IRSs motives are not as yet very clear, since most of
these foreign affiliate audits are in early stages. 70
- Slide 71
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues Additional
problems arise when NRA employees (or green card holders) move back
overseas and exercise option or receive other equity compensation
(e.g., RSUs), since at least FICA withholding, and possibly also
income tax withholding, applies to that compensation attributable
to U.S. services, irrespective of the fact that the employees are
working for non- American employers at the point the compensation
is ultimately received. 71
- Slide 72
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues In sourcing
income from options and other equity compensation, the U.S.
generally applies the grant-to-vest method. See Treas. Reg.
1.861-4(b)-(d). However, this is not the exclusive method, as
source-of- income allocation must turn on the specific facts and
circumstances of the particular case. An alternative to the
grant-to-vest method allocates income based upon the taxpayers
residence during the period of significant appreciation in the
underlying stock. Many agents also make mistakes in their
computations, counting income from equity grants after leaving the
U.S. 72
- Slide 73
- Morgan, Lewis & Bockius LLP Common Audit Issues for
Cross-Border Workers: Impatriate Withholding Issues Since the IRS
has never issued adequate guidance supporting the application of
U.S. payroll taxes to non- citizens employees who have moved back
overseas, the principles outlined in the Confusion Doctrine bar the
IRS from imposing FICA taxes on employers. See Central Illinois
Public Service Co. v. U.S., 435 U.S. 21 (1978) (waiving liability
for payroll taxes, where the IRS has never issued guidance or
outlined clear rules governing the computation and collecting of
payroll taxes). 73
- Slide 74
- Morgan, Lewis & Bockius LLP Best Practices to Avoid
Impatriate Withholding Issues? What forms should be completed by
employee (e.g., Forms W-2, collection of Certificates of Coverage
(if applicable) under foreign social security system, and Forms
4669?? What questions should be resolved in written assignment
letters? Are secondment agreements advisable? Note: in OECD
commentary issued in 2012, the OECD has made clearer that the
adoption of secondment agreements which allow multinationals to put
personnel in countries without separating them from their formal
employers (typically with with cost-plus charges to the local
affiliate) can minimize the PE risk. What are the does and donts of
entering into secondment agreements? 74
- Slide 75
- Morgan, Lewis & Bockius LLP 75 WAGE RECHARACTERIZATION
AUDITS
- Slide 76
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits Background: Many
financial institutions over recent years have cooperated with
requests from their senior financial advisors and certain
executives to allow the employees to establish reimbursement
accounts, funded in part by the employees agreement to forgo
certain amounts typically percentages of future compensation.
Typically these reimbursement plans are established before the
employee has any right to any specific amount of future
compensation. Other industries employing high percentages of
traveling workers have similar trade-offs between travel expenses
and taxable wages. The IRS is now challenging these wage
recharacterization plans in dozens of audits particularly in the
travel nursing industry. 76
- Slide 77
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits Code 132(a) provides
that gross income shall not include any fringe benefit that
qualifies as a working condition fringe, defined as any property or
services provided to an employee of the employer to the extent
that, if the employee paid for such property or services, such
payment would be allowable as a deduction under Code 162. Cash
payments to an employee can also qualify as a working condition
fringe benefit, per Treas. Reg. 1.132- 5(a)(1)(v). 77
- Slide 78
- Morgan, Lewis & Bockius LLP Despite this general exclusion
for working condition fringes, there are limitations on structuring
choices between fringe benefits and cash, on establishing expense
arrangements that are funded out of future employee earnings, and
on paying travel expenses which appear to be substituted for
taxable wages. However, the IRSs prohibition of employee choices
between cash or Code 132 benefits (including working condition
fringe benefits) is very confusingly drafted. 78 Wage
Recharacterization Audits: Choices between Cash and Code 132(d)
Benefits
- Slide 79
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits Specifically, Treas.
Reg. 1.132-5(a)(1)(i) provides as follows: A service or property
offered by an employer in connection with a flexible spending
account is not excludable from gross income as a working condition
fringe. For purposes of the preceding sentence, a flexible spending
account is an agreement (whether or not written) entered into
between an employer and employee that makes available to the
employee over a time period a certain level of unspecified non-cash
benefits with a predetermined cash value. No IRS guidance explains
or illustrates this rule. Even the 2012 ruling (discussed below)
does not cite it. 79
- Slide 80
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits In addition, the
proposed regulations under Code 125 (re-proposed in August 2007)
specifically provide that Code 125 is the exclusive means by which
an employer can offer employees an election between taxable and
nontaxable benefits without the election itself resulting in
inclusion in gross income by the employees. See Prop. Reg.
1.125-1(b). If a plan does not meet the requirements of the
proposed regulations, the employee will be taxed on the value of
the taxable benefit regardless of what benefit is elected and when
the election is made. Id. 80
- Slide 81
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits The proposed
regulations prohibit offering fringe benefits in Code 132,
including working condition fringe benefits, through a Code 125
cafeteria plan. See Prop. Reg. 1.125- 1(q). The scheduled effective
date for these proposed regulations was plan years beginning on or
after January 1, 2009. See Prop. Reg. 1.125-1(s). The IRS has never
finalized these proposed regulations. Until proposed regulations
are formally adopted, they carry no more weight than a position
advanced on brief by the IRS. See F. W. Woolworth Co. v. Commr, 54
T.C. 1233, 1265-66 (1970). 81
- Slide 82
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits The IRS has changed
its position numerous times over the last 20 years as to when and
whether expense accounts might be effectively arranged for by
agreement to reduce future bonuses. See P.L.R. 9325023 (elective
commission reduction to place specified amounts in a reimbursement
account not an accountable plan); In both P.L.R. 9822044 and in an
unpublished 1998 field service advice, F.S.A. 002985, issued to the
IRS district director in connection with an audit of a
travel-licensed clinician staffing company, the IRS concluded that
a mandatory nonelective reduction of pay and establishment of a
reimbursement arrangement satisfied the accountable plan and Code
132(d) rules. 82
- Slide 83
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits In P.L.R. 199916011,
the IRS ruled that an elective salary reduction arrangement to set
up an expense reimbursement plan satisfied the accountable plan
rules, but then nine months later, in P.L.R. 200035012, the IRS
announced that it was reconsidering that conclusion. The
reconsideration did not extend to nonelective arrangements. No
P.L.R. has ever been issued on agreements to reduce compensation
before it is earned, and to receive specified noncash fringe
benefits and expense reimbursements. 83
- Slide 84
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits Taxpayers have won
two cases in which the facts showed that local employees (who did
not receive per diems and travel expenses) were paid higher wages
than traveling employees, who were reimbursed for expenses. Trucks,
Inc. v. U.S., 234 F.3d 1340 (11 th Cir. 2000), reversing and
remanding 987 F. Supp 1474 (N.D. Ga. 1997). Worldwide Labor Support
of Mississippi, Inc. v. U.S. 312 F.3d 712 (5 th Cir. 2002),
vacating and remanding 2001-1 U.S.T.C. 50,463. 84
- Slide 85
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits At a 2007 meeting of
the Fringe Benefit Tax Section of the American Bar Association, IRS
attorneys present conceded that there were practical difficulties
with enforcing an absolute prohibition on wage recharacterization;
they also admitted that if an arrangement was properly structured,
it would be unlikely to be challenged by the IRS on audit. In 2008,
some Treasury Department attorneys admitted that the proposed
cafeteria plan regulations are overbroad and should be revised so
as not to attempt to block all choices made by employees among
different types of benefits. 85
- Slide 86
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits In a significant
recent reversal of its prior reluctance to challenge wage
recharacterization, on September 10, 2012, the IRS issued Rev. Rul.
2012-25, providing various examples of prohibited wage
recharacterization most in the context of per diem travel expense
reimbursement plans. Three examples in Rev. Rul. 2012-25 (for cable
installers, travel nurses, and construction workers) conclude that
plans provide all taxable benefits, where employees taxable wages
have been reduced to accommodate tax-free allowances for travel and
job- related expenses. 86
- Slide 87
- Morgan, Lewis & Bockius LLP Wage Recharacterization Audits:
Choices between Cash and Code 132(d) Benefits One example in Rev.
Rul. 2012-25 allows prospective wage reductions for all employees
in a housecleaner workforce, coupled with a reimbursement plan for
workers documented expenses. Rev. Rul. 2012-25 does not address the
prospective establishment of different amounts of salary reduction
(and different sizes of reimbursement accounts) for different
employees, nor does to address how frequently a reimbursement
arrangement might be modified. It is unclear whether the IRS will
use this 2012 revenue ruling to challenge choices by financial
industry employees between wages and working condition fringes.
87
- Slide 88
- Morgan, Lewis & Bockius LLP Wage Recharacterization Dos and
Donts Advisable Protections for Establishment of Any Salary-Choice
Reimbursement Plans: Require determination of expense reimbursement
budget well before the employees right to the compensation has
ripened, and while the amount to be received is still speculative.
The compensation reduction should be some percentage of as yet
unaccrued, undetermined future compensation, so that the account is
not funded with a pre-determined amount in violation of Treas. Reg.
1.132-5(a)(1)(i). The accounts should cover pre-specified types of
reimbursable business expensesagain to avoid any violation of
Treas. Reg. 1.132-5(a)(1)(i) (which prohibits the establishment of
accounts to pay fixed amounts of unspecified noncash benefits).
88
- Slide 89
- Morgan, Lewis & Bockius LLP Wage Recharacterization Dos and
Donts The give up of compensation should occur at specific times
preferably before the year in which the future compensation will be
earned. The assigning employee must forfeit all rights to the
assigned compensationabsolutely no reversion of unspent amounts.
The employer should have discretion to make the final determination
of the reimbursement amounts. Consider obtaining opinion of outside
counsel confirming the arrangements compliance with tax rules.
89
- Slide 90
- Morgan, Lewis & Bockius LLP Wage Recharacterization Dos and
Donts Arguments Supporting Legitimacy of Such Assignments: No
violation of the regulations under Code 132(d) or 62(c). They
comply with the Lucas v. Earl prohibition (also discussed below) on
assignments of ripened rights to income. No constructive receipt of
any compensation under Treas. Reg. 1.451-1 and -2; Rev. Rul. 60-31,
because the assigning employee never had any immediate or current
right to any specific amount. See Trucks, Inc. and Worldwide Labor
Support (cited above. 90
- Slide 91
- Morgan, Lewis & Bockius LLP Wage Recharacterization Dos and
Donts Steps Not to Take in Designing an Expense Reimbursement Plan.
Dont pay tax-free reimbursements for any expenses that are already
covered under a per diem arrangement or to persons receiving tax
free lodging in kind. Dont offer cash options. Dont allow pay per
diem allowances, regardless of whether or not the worker travels
away from home on the employers business. Dont pay expenses on
non-travel days. Dont pay amounts exceeding Federal per diem rates.
Dont pay per diems on an hourly basis (or otherwise on the same
basis as other wages). 91
- Slide 92
- Morgan, Lewis & Bockius LLP STATE AND LOCAL TAX
DEVELOPMENTS FOR MOBILE WORKFORCE EMPLOYERS 92
- Slide 93
- Morgan, Lewis & Bockius LLP Topics Covered I.Current State
Rules II.Mobile Workforce State Income Tax Simplification Act
III.Voluntary Compliance Programs IV.NY MTA Payroll Tax Refund
Claims V.Federal Protections 93
- Slide 94
- Morgan, Lewis & Bockius LLP I.Current State Rules: State
Taxation of Workers in Multiple States & Employer Withholding
Obligations Companies with peripatetic workforcesemployees and
contractors working in, and moving among, many different states,
either in a single year or over the course of the vesting period
for bonuses, stock options, restricted stock, or other equity
compensationhave special problems due to myriad state laws
governing the taxation of residents and non-residents. 94
- Slide 95
- Morgan, Lewis & Bockius LLP State Taxation of Workers in
Multiple States: Impediments/Opposition Form W-2 includes spaces in
Boxes 15-20 at the bottom of the Form for reporting income to two
different states (separated by a broken line). The IRS instructions
to Form W-2 say, If you need to report information for more than
two states or localities, prepare a second Form W-2. Payroll
systems may not accommodate (or capture) multiple work locations.
But employees almost invariably complain if employers report wages
in more than one state. 95
- Slide 96
- Morgan, Lewis & Bockius LLP State Taxation of Workers in
Multiple States: Employer Withholding The employer nexus to trigger
withholding, for most states is: Employer office in state, or some
other nexus to trigger state income tax; and Payments of any wages
subject to income tax in the state (or subject to contribution
under the states unemployment compensation laws). 96
- Slide 97
- Morgan, Lewis & Bockius LLP State Taxation of Workers in
Multiple States: Employer Withholding Some states provide
thresholds before withholding is triggered, based on days worked,
dollars earned, or some combination of the two. (See map on
following slide.) Examples: NY reasonable expectation that employee
will work 14 days or less in NY GA 23 days a quarter, or
GA-allocated wages exceeding 5% of total compensation CT 14 working
days a year ND 20 working days a year 97
- Slide 98
- Morgan, Lewis & Bockius LLP Overview of Thresholds 98 WA ID
AZ NM LA AL ME HI CT MA AK AR CO MD CA KS FL GA IA IL MI MN MO MT
NC SC VA WV WY OK NY PA OR ND NV NH OH RI VT NJ TX UT SD NE MS TN
KY IN WI DE Nonresident employees subject to tax withholding on
first day of travel Nonresident employees subject to tax
withholding after reaching threshold No general personal income tax
(or, in the case of Washington, DC, no tax on nonresidents)
- Slide 99
- Morgan, Lewis & Bockius LLP State Taxation of Workers in
Multiple States: Risks of Employer Audits As with any payroll
audits, it is simpler for state/local tax officials to audit
employers, holding them liable for non- withheld income taxes where
allocated wages exceed the states personal exemption, because that
is more efficient than finding and auditing individual employees.
If employers have neither reported nor withheld on the income, it
is extremely unlikely that any non-resident of a state would have
voluntarily paid income taxes (thereby enabling the employers to
abate their liability for nonwithheld income taxes). 99
- Slide 100
- Morgan, Lewis & Bockius LLP State Taxation of Workers in
Multiple States: Risks of Employer Audits However, it is nearly
impossible for employers to keep track of day-counting income
allocation rules (or with 183+ days residency tests). Some states
have poorly explained rules on income allocations. Historically,
many states were not aggressive in auditing non-residents or
conducting payroll audits. Some states (e.g., NY) have been
operating amnesty programs or Voluntary Disclosure Agreements to
encourage employers to voluntarily confess their
withholding/reporting errors. 100
- Slide 101
- Morgan, Lewis & Bockius LLP State Taxation of Workers in
Multiple States: Some NY Horror Stories Part-Day Counting: Any
portion of a day in NY can trigger allocation of income to NY. See
Matter of Holt, DTA No. 821018 (2007) (petitioner [a Florida
resident] finds it incredible that an individual's presence in New
York for a portion of a day constitutes a day for New York tax
purposes). No Minimum Number of Days: Many states have some minimum
number of days of work in a particular state before state
income-allocation rules apply. NY does not. 101
- Slide 102
- Morgan, Lewis & Bockius LLP State Taxation of Workers in
Multiple States: Some NY Horror Stories Meeting Burden of Proof to
Show Non-Resident Status: In In the Matter of Julian H. and
Josephine Robertson, NY DTA 822004 (2009 and 2010), NY auditors had
maintained that a couple had been in NY for 183 days and that the
taxpayers records showing time outside NY were inadequate for 4
days, and thus the taxpayers, as NY residents for more than 183
days, would owe additional NY City taxes totaling $26,702,341 for
2000. After an extensive trial, in a 100+ page opinion, the judge
believed the taxpayers testimony; after an exception was filed, the
case was argued again, another opinion was issued, and the
taxpayers won again. But see Puccio, NY DTA 822476 (2011). 102
- Slide 103
- Morgan, Lewis & Bockius LLP State Taxation of Workers in
Multiple States: Some NY Horror Stories Convenience of Employer
Rule: NY counts even services performed by any NY non-resident at
the taxpayer's out-of-state home that could have been undertaken at
the employer's office in NY, unless the services were performed out
of state for the employers necessity, not the employee's
convenience. (20 NYCRR section 132.18(a). See, e.g., Matter of
Phillips v. New York State Department of Taxation and Finance, 267
AD2d 927, 700 NYS2d 566, lv denied, 94 NY2d 763, 708 NYS2d 52,
Matter of Page v. State Tax Commission, 46 AD2d 341, 362 NYS2d 599;
Matter of Simms v. Procaccino, 47 AD2d 149, 365 NYS2d 73), Matter
of Zelinsky v. Tax Appeals Tribunal of State of New York, 1 NY3d
85, 769 NYS2d 464, cert denied 541 US 1009, 158 L Ed 2d 619), In
the Matter of the Petition of Manohar and Asha Kakar, DTA No.
820440 (Feb. 16, 2006), and Matter of Huckaby v. New York State
Division of Tax Appeals, 4 NY3d 427, 796 NYS2d 312, cert denied 546
US 976, 126 S Ct 546, 163 L Ed 2d 459). 103
- Slide 104
- Morgan, Lewis & Bockius LLP State Taxation of Workers in
Multiple States: Some NY Horror Stories See Edward A. Zelinsky, New
Yorks Convenience of the Employer Rule Is Unconstitutional, State
Tax Notes Doc. 2008-9044 (New Yorks convenience of the employer
doctrine has not fared well in the court of professional opinion.).
These harsh results are one of the drivers behind efforts to enact
federal blockers on states abilities to tax non- residents. (See
discussion below.) 104
- Slide 105
- Morgan, Lewis & Bockius LLP State Taxation of Employers Due
to Telecommuting Employees Telebright New Jersey Appellate Division
found company subject to income tax based solely on presence of one
telecommuting computer programmer. Company did not care where
employee worked. Employee was originally based outside NJ, but
asked to continue employment after moving there. No
solicitation/marketing activities in NJ. Employees daily presence
in NJ for the purpose of carrying out her responsibilities as an
employee was sufficient to satisfy the substantial nexus
requirement of the Commerce Clause. See Warwick McKinley, Inc.,
Cal. SBE 489090. 105
- Slide 106
- Morgan, Lewis & Bockius LLP State Taxation of Workers in
Multiple States: Stock Option/SAR Allocation Methods The state
rules governing the taxation of stock options (or SARs) and the
income allocation withholding rules for option income received by
non- residents vary greatly depending on the state (and some states
have never adopted any option-sourcing rules): Grant-to-Vest
Method: Taxes option exercise income based on the percentage of
time in the state between the date of grant and the date the
options vest; Grant-to-Exercise Method: Taxes option exercise
income based on the percentage of time between the date of grant
and the date the options are exercised; Year-of-Exercise Method:
Option spread from exercise is taxable only if services were
performed during the year of exercise and not over a multiyear
period; Degree of Appreciation Method: Allocates the income based
on the amount of appreciation of the underlying option that
occurred while the taxpayer was a resident of the state. The
variance between the states, and from year to year within certain
states, clearly suggests there is no set rule, and the most
appropriate method is to allocate the income based on a reasonable
facts and circumstances analysis. 106
- Slide 107
- Morgan, Lewis & Bockius LLP II. Mobile Workforce State
Income Tax Simplification Act (aka Marketplace Fairness Act) This
bill would address the taxation of non-resident employees
(excluding professional athletes, professional entertainers, and
some public figures) and would set a threshold of days below which
a state could not subject the non-resident to state income tax.
H.R. 1864 passed the U.S. House of Representatives on May 15, 2012.
H.R. 1129, containing language identical to H.R. 1864, was
reintroduced to the House and referred to the House Committee on
the Judiciary on March 13, 2013. Its lead sponsors are Reps. Howard
Coble (R-NC) and Hank Johnson (D-GA), plus 28 more House
cosponsors. S. 1645, the corresponding Senate bill, was introduced
in November 2013, by an impressive list of bipartisan original
cosponsors, including Senators Sherrod Brown (D-OH) and John Thune
(R-SD) (both on Senate Finance). For information about the
254-member coalition of supporters, contact Maureen Riehl at
mriehl@cost.org. mriehl@cost.org 107
- Slide 108
- Morgan, Lewis & Bockius LLP Mobile Workforce State Income
Tax Simplification Act Establishes a 30-day threshold that
non-residents would have to work in a state before becoming subject
to out- of-state taxes Strong state opposition The initial bills
had proposed a 60-day threshold, but because of state clamor a
compromise was reached between employers and states, and in the
most recent version of the bill a 30-day threshold was proposed.
108
- Slide 109
- Morgan, Lewis & Bockius LLP Mobile Workforce State Income
Tax Simplification Act A day is attributed to the state where an
employee performs more of his employment duties compared to another
state, UNLESS, the employee performs employment duties in a
resident state and ONLY one non-resident state during one day. In
this case the employee will be considered to have performed more of
the duties in the non-resident state. Incentive to visit two states
in a travel day Recordkeeping issues Unclear whether it simplifies
anything 109
- Slide 110
- Morgan, Lewis & Bockius LLP Mobile Workforce State Income
Tax Simplification Act In testimony before the House Committee on
the Judiciary on May 25, 2011, the President of the Federation of
Tax Administrators (FTA) opposed H.R. 1864, arguing that: The
30-day rule should count work for any part of a day A dollar
threshold should be added so that highly paid employees might be
subjected to withholding for less than 30 days of work Stock
options and multiyear compensation should be exempted The House
Committee on the Judiciary approved H.R. 1864 on November 17, 2011
after rejecting changes proposed by Rep. Nadler (NY), but
recognizing that changes may be required to respond to the FTAs
concerns. 110
- Slide 111
- Morgan, Lewis & Bockius LLP MTC Model Statute The
Multistate Tax Commission (MTC) has proposed a mobile workforce
withholding and individual income tax model statute that would
decrease the threshold to 20 days. The MTCs model statute provides
that MOST non-residents income from work performed in states of
non-residence would be exempt from withholding if the
non-residents: have no income derived from the non-resident states;
worked fewer than 20 days in such states (days in transit would be
exempt from the day count); and reside in states that have
reciprocal exemptions or do not impose personal income taxes.
111
- Slide 112
- Morgan, Lewis & Bockius LLP MTC Model Statute Certain
workers would be excluded from the withholding protections provided
by the MTCs model statute: professional athletes; persons of
prominence who perform services on a per- event basis; professional
entertainers; construction laborers; and key employees. 112
- Slide 113
- Morgan, Lewis & Bockius LLP MTC Model Statute Under the
MTCs model statute, qualifying employees would not have a filing
requirement in the state of nonresidence; and employers would not
have a withholding requirement regarding qualifying employees.
However, the model act does not explicitly address nexus issues for
employers with no nexus to the state. Also, states with income
thresholds instead of day-counting thresholds (e.g., Montana) have
criticized the MTC's model statute and its days of working presence
test for creating problems for states that have an income threshold
for taxability. They also note that high-earner non-residents
working less than 20 days would be exempt from filing returns,
while lower-paid non-residents working more than 20 days in a state
would have to file. 113
- Slide 114
- Morgan, Lewis & Bockius LLP Telecommuter Tax Fairness Act
First introduced in 2004, and most recently introduced in November
2011 (S. 1811, 112th Cong.) Would bar states from adopting a
convenience of the employer rule, and require that an employee be
physically present in the state as a precondition to imposition of
tax on that worker. 114
- Slide 115
- Morgan, Lewis & Bockius LLP III. Voluntary Compliance
Opportunities As noted previously, many states have voluntary
disclosure agreements and/or temporary amnesty programs. Processes
and requirements are not consistent. Limitation of look-back period
and penalty relief New York has a streamlined program. California
has both a voluntary compliance program and a filing compliance
agreement program. Other states 115
- Slide 116
- Morgan, Lewis & Bockius LLP Voluntary Compliance
Opportunities Given the heightened focus on audits and
unreasonableness of the one-day rule in certain states, we are
seeing many clients take advantage of these programs Typically
anonymous Formal agreement Correction programs have worked for
executive groups and have eliminated the need to file individual
returns. 116
- Slide 117
- Morgan, Lewis & Bockius LLP IV. NY MTA Payroll Tax Refund
Claims Employers in New York City and several surrounding counties
have paid a 0.34% payroll tax since 2009 on the wages and certain
other compensation paid to employees employed within this
Metropolitan Commuter Transportation District. Although several
prior challenges to the legality of this MTA Payroll Tax had
failed, on August 22, 2012, the 10 TH District of the NY State
Supreme Court struck down this mobility tax, on grounds that it had
been enacted without first obtaining the constitutionally required
prior approval of local legislative bodies (a home rule message),
or, alternatively, approval under a message of necessity by 2/3 of
each NY legislative house. 117
- Slide 118
- Morgan, Lewis & Bockius LLP NY MTA Payroll Tax Refund
Claims Although this ruling in Mangano, et al. v. Silver, et al.,
N.Y. S. Ct., No. 14444/10, is being appealed, any employers that
have been paying this payroll tax may file protective refund
claims. On October 17, 2012, the New York State Department of
Taxation and Finance published guidance regarding the procedures
for taxpayers to file these refund claims. See
http://www.tax.ny.gov/bus/mctmt/mctmt_legal
proceedings.htmhttp://www.tax.ny.gov/bus/mctmt/mctmt_legal
proceedings.htm and the claim form, at
https://www8.tax.ny.gov/MCPC/mcpcStarthttps://www8.tax.ny.gov/MCPC/mcpcStart
Some employers estimate that their refunds could exceed $1 million.
118
- Slide 119
- Morgan, Lewis & Bockius LLP V.Federal Protections: Federal
Blocker of State Taxation of Certain Retirement Income of Former
State Residents Since 1996, 4. U.S.C. 114 has prohibited states
from imposing an income tax on qualified retirement plan income and
certain other types of non-qualified deferred compensation benefits
paid to any individual who had earned the income while working in
one state (either as a resident, domiciliary, or part-time worker)
but had retired and moved out of the source state before the income
was paid. 119
- Slide 120
- Morgan, Lewis & Bockius LLP Federal Blocker of State
Taxation of Certain Retirement Income of Former State Residents
These rules were lobbied into the interstate commerce section of
the Federal Code in 1996 by RESIST (Retirees Eliminating State
Income Source Taxation), the American Payroll Association, and
other affected mobile workforce employees. The rules were later
extended to certain retired partners (as described in Code
7701(a)(2)) who have retired under their partnership agreements.
120
- Slide 121
- Morgan, Lewis & Bockius LLP Federal Blocker of State
Taxation of Certain Retirement Income of Former State Residents
There will never be federal regulations because no federal agency
would undertake such a project. There are some states that have
issued regulatory guidance, and some that have issued private
rulings on the rules application. 121
- Slide 122
- Morgan, Lewis & Bockius LLP Federal Blocker of State
Taxation of Certain Retirement Income of Former State Residents The
definition of retirement income that cannot be taxed when earned by
non-residents generally includes the following items: Qualified
retirement plans; Excess benefit plans or wrap-around plans; and
Certain other forms of nonqualified deferred compensation described
in Code 3121(v)(2) paid out in equal periodic installments over at
least a 10-year period or for a recipients life or life expectancy.
122
- Slide 123
- Morgan, Lewis & Bockius LLP Federal Blocker of State
Taxation of Certain Retirement Income of Former State Residents The
excepted payments from Qualified Retirement Plans include: 401(k)
plans; 408(k) simplified employee pensions; 403(a) annuity plans;
403(b) annuity contracts; 7701(a)(37) individual retirement
accounts; 457(a) eligible deferred compensation plans; 414(d)
governmental plans; Military retired or retainer pay plans; and
501(c)(18) employee contribution trusts. 123
- Slide 124
- Morgan, Lewis & Bockius LLP Federal Blocker of State
Taxation of Certain Retirement Income of Former State Residents
Excess benefit plans or wrap-around plans are defined as: Plans
solely for the purpose of providing retirement benefits for
employees in excess of the limitations imposed by one or more of
Sections 401(a)(17), 401(k), 401(m), 402(g), 403(b), 408(k), or 415
of such Code or any other limitation on contributions or benefits
in such Code on plans to which any of such sections apply. The
description of these plans in the legislative history references a
statute before it was amended in conference, which confuses
interpretation of this provision. 124
- Slide 125
- Morgan, Lewis & Bockius LLP Federal Blocker of State
Taxation of Certain Retirement Income of Former State Residents The
final exception encompasses other forms of nonqualified deferred
compensation described in Code 3121(v)(2) paid out in equal
periodic installments over at least a 10-year period or for the
recipients life or life expectancy. Directors and independent
contractors are not eligible for this exception because SECA taxes
have no corollary to 3121(v)(2). We are waiting to see if a
petition is filed, or a settlement offer is proposed. Retired
partners have special statutory protections added to the Federal
statute in 1996. 125
- Slide 126
- Morgan, Lewis & Bockius LLP Federal Blocker of State
Taxation of Certain Retirement Income of Former State Residents
Presumably the determination of whether distributions meet the
substantially equal periodic payment rule would be determined by
Reg. 1.402(c)2, Q&Q 5(a) (providing that the determination is
made at the annuity starting date, and is not affected by
subsequent contingencies and modifications, such as death of a
participant) and Q&A 5(d) (specifying that distributions over
ten years can be paid under a declining balance of years method,
which pays 1/10 in year 1, 1/9 of the remainder in year 2, etc.).
126
- Slide 127
- Morgan, Lewis & Bockius LLP Federal Blocker of State
Taxation of Certain Retirement Income of Former State Residents The
Code 3121(v)(2) regulations expressly exempt stock options, stock
appreciation rights, restricted stock, severance, sick leave,
compensatory time, and vacation pay. Stock options, SARs, and
restricted stock could not be paid out over 10 years or as an
annuity in any event. Code 409A has significantly limited
application of this exception by barring most changes in deferred
compensation distribution schedules. 127
- Slide 128
- Morgan, Lewis & Bockius LLP Federal Blocker of State
Taxation of Certain Retirement Income of Former State Residents
Since Code 3121(v)(2) applies only to common law employees, it is
not clear whether this provision applies to corporate directors or
other non-employees (excepting certain retired partners who are
covered by a later statutory expansion of this federal source tax
legislation). 128
- Slide 129
- Morgan, Lewis & Bockius LLP Additional Specialized Federal
Blockers of State Taxation of Transient Non-Resident Workers
Congress has enacted several industry-specific laws that fully or
partially block states from mandating withholding on wages of
certain non-resident employees of certain types of employers:
Railroads 49 USC 11502 (4-R Act); Airlines 49 USC 40116 (Anti-Head
Tax Act); Motor Carriers 49 USC 14503; Fishing vessels, or vessels
engaged in foreign, coastwise, intercoastal, interstate, or
noncontiguous trade 49 USC 11108. 129
- Slide 130
- Morgan, Lewis & Bockius LLP IRS and Independent
Contractors: Basic Questions Audit Who are Independent Contractors
(ICs)? What are the Applicable IRS Tests? Who are the Stakeholders?
Why does Employee/IC Status Matter? What are the Financial Stakes?
The Tax Relief Provisions Best Practices and Methods to Reduce
Exposure IRS Information Sharing with the DOL and the states
(including particularly California) 130
- Slide 131
- Morgan, Lewis & Bockius LLP IRS and Independent
Contractors: Audit Triggers and Audit Developments Increased
requests for post-termination Form 1099 reporting (including in
settlements); automatic review of all information reporting where
the same worker received a Form W-2 and a Form 1099. requests for
withholding on director fees (and pending legislation on this
issue); and backup withholding audits (involving both alleged
underwithholding, and penalties for non-filing of Information
returns). 131
- Slide 132
- Morgan, Lewis & Bockius LLP IRS and Independent
Contractors: Audit Triggers and Audit Developments California
worker classification audits; Developments in ability to take
worker classification cases to Tax Court (which historically had
not had jurisdiction over payroll taxes). 132
- Slide 133
- Morgan, Lewis & Bockius LLP Employee or Independent
Contractor? Common Law Employee Independent Contractor Leased
Employees Joint Employment/Co-Employment Dual-Status Workers
Corporate Officers and Other Statutory Employees Statutory
Nonemployees Section 218 Agreement Employees 133
- Slide 134
- Morgan, Lewis & Bockius LLP Employee Misclassification:
Government Stakeholders Federal and State Agencies Affected by
Employee Misclassification AgencyAreas potentially affected by
employee misclassification IRSFederal income and employment
(payroll) taxes DOLMinimum wage, overtime, and child labor
provisions Job protection and unpaid leave Safety and health
protections Immigration/Form I-9 issues IRS, DOL and PBGCPension,
health, and other employee benefit plans Department of Health and
Human ServicesMedicare benefit payments EEOCProhibitions of
employment discrimination based on factors such as race, gender,
disability, or age NLRBThe right to organize and bargain
collectively SSARetirement and disability coverage and payments
State AgenciesUnemployment insurance benefit payments State income
and employment taxes Workers compensation benefit payments 134
- Slide 135
- Morgan, Lewis & Bockius LLP Employee or Independent
Contractor: The Common Law Test 135 20-Factor Test
instructionsorder or sequences set integrationreports
paymentsexpenses traininginvestment services rendered
personallytools and materials hiring assistantsprofit or loss
continuing relationshipworks for more than one person or firm set
hours of workoffers services to general public full-time workright
to discharge work done on premisesright to quit
- Slide 136
- Morgan, Lewis & Bockius LLP Independent Contractor Tests:
IRS Three-Factor Test For audit purposes, IRS auditors use a
modified version of the 20-Factor Test that focuses on three
factors: Behavioral Control Factors Financial Control Factors
Relationship of the Parties Factors IRS Three-Factor Test considers
the work that is being performed and the business context in which
it is being performed 136
- Slide 137
- Morgan, Lewis & Bockius LLP Why Does It Matter? Benefits
and Business Expenses Differences Among Benefits Responsibilities
Type of BenefitsEmployeesIndependent Contractors Retirement
plansEmployers sponsor benefit plans Employers and employees
contribute Contractors sponsor plans Contractors bear the full
financial cost of the plans HealthcareEmployers sponsor on a tax-
free basis Employers and employees contribute Contractors obtain
coverage Contractors bear the full financial cost, but receive a
tax deduction Reimbursed expenses/ accountable plans Employers can
reimburse expenses Nontaxable to the extent they are paid under an
accountable plan Service recipient can reimburse, although expenses
are generally unreimbursed Reimbursed expenses are nontaxable if
they are under an accountable plan Unreimbursed expensesMany
employers dont fully reimburse expenses Unreimbursed expenses are
subject to a 2% floor and AMT Businesses dont generally reimburse
expenses Not subject to a 2% floor or AMT 137
- Slide 138
- Morgan, Lewis & Bockius LLP Why Does It Matter? Payroll
Taxes Differences Among General Tax Responsibilities
EmployeesIndependent Contractors Type of Tax Businesses' general
responsibilities Workers' general responsibilities Businesses'
general responsibilities Workers' general responsibilities Federal
income Tax Withholding (FITW) Withhold tax from employees' pay Pay
full amounts owed, generally through withholding Generally, nonePay
full amounts owed, generally through estimated tax payments Social
Security and Medicare Taxes (FICA) Withhold one-half of taxes from
employees' pay and pay other half Pay half of total amounts owed,
generally through withholding NonePay full amounts owed, generally
through estimated tax payments Federal Unemployment Taxes (FUTA)
Pay full amountNone State Unemployment Taxes (SUTA/SUI) Pay full
amount, except in certain states None, except pay partial amount in
certain states None 138
- Slide 139
- Morgan, Lewis & Bockius LLP Why Does It Matter? Payroll
Taxes and the Tax Gap 139 $5 billion associated with FICA/FUTA $51
billion-$56 billion associated with SECA Other estimates place the
annual Employment Tax Gap at $15 billion (IRS, in introduction of
NRP program), $54 billion (Treasury study issued 9/26/06), or up to
$78 billion. (Billions)
- Slide 140
- Morgan, Lewis & Bockius LLP Why Does It Matter? Payroll
Taxes Full-rate Federal statutory liability equal to at least 40%
of compensation payments to independent contractors 25% FITW
exposure 15.3% Employer and Employee FICA (Social Security and
Medicare)* Social Security Taxable Wage Base ($110,100 for 2012)
Interest-free adjustments and rarely impose penalties Full-rate
state liability varies by state, by UI experience rates and taxable
wage bases. In California, the following rates apply: Unemployment
Insurance (UI)rate varies and is imposed on first $7,000 of wages
Personal Income Tax Withholding (PIT)6.0% on all wages, but is
generally eliminated if the company has issued Forms 1099 to the
ICs Supplemental Disability Insurance (SDI)1.0% on approximately
first $95,000 of wages Impose interest and penalties * The rate
varies due to the 2011 and 2012 payroll tax holiday that reduced
employee Social Security taxes from 6.2% to 4.2% 140
- Slide 141
- Morgan, Lewis & Bockius LLP IRS Payroll Tax Audits: Example
of Tax Exposure and Tax Relief The annual full rate tax exposure
for 60 misclassified independent contractors averaging $50,000 is
approximately $1,500,000. $1,167,000 for federal taxes (FITW, FICA
and FUTA) $332,000 for California EDD tax liabilities (PIT, SUI,
SDI, interest and penalties), but reduced to $125,000 if Forms 1099
issued to ICs Relief provisions can reduce the four year full-rate
exposure of approximately $5 million as follows: One-Year Total
Four-Year Relief Provision Exposure Exposure No Relief 1,167,000
4,668,000 Statutory relief 320,400 1,281,600 100% CSP Offer 320,400
320,400 25% CSP Offer 80,100 80,100 VCSP Offer 32,000 32,000
Section 530 Off-Code Relief 0 0 141
- Slide 142
- Morgan, Lewis & Bockius LLP Federal Payroll Tax Relief
Significant Statutory and Administrative Payroll Tax Relief Exists:
1.Section 530 Relief 2.Section 3509 Relief 3.Classification
Settlement Program Relief 4.Voluntary Classification Settlement
Program Relief (best settlement rates, but shifting standards)
142
- Slide 143
- Morgan, Lewis & Bockius LLP Federal Payroll Tax Relief:
Section 530 Relief Reduces the employers federal employment tax
exposure to zero for all past and future years Employer-only relief
and only for employment taxes Can continue treatment of the workers
as independent contractors for payroll tax purposes IRS bears
burden of proof Three Tests Reporting Consistency Substantive
Consistency Reasonable Basis (prior audit, industry practice,
judicial precedent or any other reasonable basis) 143
- Slide 144
- Morgan, Lewis & Bockius LLP Federal Payroll Tax Relief:
Section 3509 Relief Provides an opportunity for reduced employment
tax assessments if service recipient issued Forms 1099. Section
3509 does not provide any relief regarding the employers portion of
FICA taxes nor the FUTA tax. The effective Section 3509 rate is
10.68% for both FICA and FITW for the compensation paid to
reclassified worker. (Note however, that due to the 2% payroll tax
holiday applicable to employee-share FICA taxes in 2011 and 2012,
the Section 3509 rate for these two years was 10.28%. Also, the
comparative rate is slightly higher for 2013, due to the Additional
Medicare Tax applicable to employees with FICA-taxable wages in
excess of $200,000.) 144
- Slide 145
- Morgan, Lewis & Bockius LLP Federal Payroll Tax Relief: IRS
CSP Relief The Classification Settlement Program (CSP) is available
if the business previously issued Forms 1099 and agrees to
prospectively reclassify the ICs as employees Only applies if the
business is under an actual ongoing IRS audit The business will is
assessed employment tax liability as either 25% or 100% of the
Section 3509 liability for the most recent year under audit (i.e.,
generally ranges from 0.5% to 3% of the remuneration paid to the
ICs) 145
- Slide 146
- Morgan, Lewis & Bockius LLP Federal Payroll Tax Relief: IRS
VCSP Relief The Voluntary Classification Se