Payroll Taxes: A Webinar to Help Your Nonprofit Understand What It Needs to Know About FICA Taxes and Income Tax Withholding

Transcription

1 Payroll Taxes: A Webinar to Help Your Nonprofit Understand What It Needs to Know About FICA Taxes and Income Tax Withholding Marianna G. Dyson February 26, 2013

2 Today s Agenda -- Employer s Responsibilities Tax treatment of compensation taxable or nontaxable? Payroll taxation of wages and ER s withholding responsibilities (the principle of secondary liability ) Requirement to timely deposit withheld tax and employer s share of FICA taxes Reporting requirements (e.g., Forms W-2 and Forms 941) Penalties for failing to comply with responsibility to withhold payroll taxes Worker classification is the worker an EE or independent contractor? 2

3 List of Abbreviations IC = independent contractor EE = employee CL = common law Business = service recipient Worker = service provider IRS Form 941 = Employer s Quarterly Return IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes FITW = Federal income tax withholding FICA taxes = Federal Insurance Contributions Act taxes (i.e., Social Security and Medicare taxes) FUTA taxes = Federal Unemployment Tax Act taxes Code = Internal Revenue Code 3

4 Tax Treatment of Payments to Employees Wages are subject to payroll taxation (FITW, EE and ER FICA, and FUTA taxes) and must be reported on Forms W-2 The definition of wages in the payroll tax provisions is very broad Virtually any form of remuneration for services to EEs constitutes wages for payroll tax purposes, whether paid in cash, property (including ER stock), non-cash benefits or any other form All exemptions from the definition of wages are expressly stated in the Code Cash or benefits provided to a former EE are generally also wages subject to W-2 reporting and payroll taxation 4

5 Exclusions from Wages The Code contains provisions that exclude certain forms of compensation from the EE s taxable income If excludable, the value of the benefit is not subjected to payroll taxation and generally not reported as W-2 wages. Examples of excludable items provided by ERs include: Accident and health benefits; Certain de minimis fringes; Working condition fringes; Meals and lodging while traveling overnight on business; EE business expense reimbursements; and, Training, professional and non-job-related educational programs See IRS Pub. 15-B for discussion of fringe benefits 5

6 Employer s Obligation to Withhold Payroll Taxes on Taxable Wages The Code requires ERs to collect FITW and the EE s share of FICA taxes from wages at the time of payment ER remains secondarily liable if it fails to withhold these taxes from EE wages IRS will assess these liabilities during an employment tax examination ER also liable for ER s share of FICA taxes and FUTA taxes. Withheld payroll taxes must be deposited promptly with the U.S. Treasury (sometimes by the close of the next business day!) 6

7 Income Tax Withholding from Wages Importance of IRS Form W-4 Collect W-4s from EEs at time of hire FITW is based on the number of withholding allowances claimed If EE does not provide W-4, ER should withhold income taxes as if EE has filing status of single and is claiming zero withholding allowances Must have a Form W-4 on file for each EE W-4 remains in effect until EE provides a new one EEs claiming exempt from FITW must submit new W-4 by Feb. 15 th Special FITW procedures for nonresident alien EEs In an employment tax exam, IRS will look to see if ER followed Forms W-4 to calculate FITW liability Special flat rate withholding may be applied to supplemental wage payments 7

8 FICA Taxation of Wages Matching shares for ER and EE: For Social Security taxes, 6.2% of wages up to annual wage base (e.g., $113,700 for 2013) Combined ER and EE Social Security tax rate of 12.4% Payroll tax holiday of 4.2% for EE s share of Social Security taxes expired (only applied in 2011 and 2012) For Medicare taxes, 1.45% of all wages Combined ER and EE Medicare tax rate of 2.9% Additional Medicare taxes of 0.9% must be withheld by the ER on wages exceeding $200,000 for the calendar year ER is not required to match this additional 0.9% Medicare tax 8

9 Employer s Obligation to Timely Deposit Payroll Taxes Most ERs required to deposit FITW and both EE/ER s shares of FICA taxes using the Electronic Federal Tax Payment System ( EFTPS ). Determine whether employer is a monthly depositor or a semiweekly depositor: Deposit schedule is based on total tax liabilities for prior year Greater than $50,000, semi-weekly schedule applies: Deposit payroll taxes for payments to employees made on Wednesday, Thursday and/or Friday by following Wednesday; and deposit payroll taxes for payments made on Saturday, Sunday, Monday and/or Tuesday by the following Friday Business day rule any day other than Saturday, Sunday, or legal holiday $100,000 next-day deposit rule 9

10 Late Deposit Penalty Rates 2% - Deposits made 1 to 5 days late 5% - Deposits made 6 to 15 days late 10% - Deposits made 16 or more days late; and amounts paid within 10 days of first notice asking for taxes due 10% - Amounts that should have been deposited via EFTPS 15% - Amounts still unpaid more than 10 days after date of first IRS notice Note: IRS can forgive late deposit penalties for reasonable cause including, innocent mistakes, or changes in payroll dept. staff or outside payroll service provider 10

11 Forms 941 Employer s Quarterly Return ERs who pay wages subject to FITW and/or FICA taxes generally must file Form 941 with IRS by the last day of the month that follows the end of each calendar quarter Reporting agents may file Forms 941 electronically for ERs Failure-to-file penalty is 5% of unpaid tax due with the Form 941 Aggregate Forms 941 for the year must reconcile with aggregate Form W-2 data filed with Social Security Administration ( SSA ) ERs may amend Forms 941 (using Form 941-X), and may be able to self-correct errors in earlier quarters under interest-free adjustment rules FITW errors in an earlier (open) calendar year may not be corrected except in rare instance of administrative error 11

12 Best Practice: Review of Payroll Processes Review payroll processes (timing of deposits, Forms W-4). Review reconciliation of Forms W-2/W-2c with Forms 941/941-X Compile list of benefits provided and determine proper tax treatment, i.e., excluded from wages (full or partial) Consider strategies for revising policies and perhaps voluntary corrections to get application of interest-free adjustment rules and to minimize penalty assessments Good documentation of procedures for administration of payroll and benefits is important first line of defense in IRS employment tax examination 12

13 Failing to Treat Taxable Benefits as Wages: Most Common Liabilities Asserted ER is secondarily liable ( 3403) for FITW and will be assessed: 25% with respect to additional wages paid to employees receiving less than $1 million in supplemental wages in the aggregate during the year, and 35% (pre-2013) and 39.6% (post-2012) for additional supplemental wages in the aggregate equal or exceeding $1 million during the year ER is relieved of secondary liability for FITW if EE pays FIT with his personal tax return (and signs a form attesting to that fact) However, ER remains liable for penalties and interest in connection with failure to timely collect FITW. ER is secondarily liable for EE s share of FICA taxes and will be assessed: 6.2% OASDI up to annual wage base % Medicare; Note: 4.2% EE OASDI rate for 2011 and 2012; Beginning 2013, additional 0.9% EE Medicare tax for wages > $200,000 13

14 Failing to Treat Taxable Benefits as Wages (cont d) ER is liable for failing to pay its share of FICA taxes (6.2% OASDI up to annual wage base % Medicare) ER is liable for late deposit penalty on its share of FICA taxes only (i.e., 10% of FICA taxes it should have paid) Information reporting penalties under 6721/6722. Generally, $100 per incorrect W-2, up to annual maximum of $1,500,000, although both penalties may be applied. Potential negligence penalty of 20% under 6662 Potential personal liability of responsible persons for 100% of withheld payroll taxes (including ER s share of FICA taxes) under 6672 Rarely imposed, but a powerful weapon in the IRS s enforcement toolbox Limited protection for uncompensated board members of exempt organizations 14

15 Common Law Employees or Independent Contractors? Employee defined under common law test set forth in FICA and FUTA tax regulations A service recipient s right to direct and control a worker determines status for employment tax purposes, even if the right remains unexercised Revenue Ruling sets forth the 20 factors that the IRS takes into account when determining whether an ER - EE relationship exists or whether worker is an IC. The IRS has never met an employee it didn t like! Contingent workers can be employees: The IRS can potentially treat volunteers and interns as EEs, for employment tax purposes, whether they are directly compensated, or receiving expense reimbursements and other perquisites 15

16 IRS Training Materials on Worker Classification 1996 IRS Training Materials condense the 20-factor test to three broad aspects of an ER s right to control: Behavioral control Financial control Relationship of the parties It is very important to carefully evaluate the facts and circumstances of an independent contractor relationship. Control is a matter of degree and the relevant evidentiary facts must be selected and weighed. The IRS will not issue a prospective determination on worker classification. -- But see the Form SS-8 process. 16

17 Red Flags That Could Give Rise to IRS Inquiries About Worker Classification The business (i.e., the service recipient) treats workers performing similar services differently The worker treated as an IC was previously treated by the business as an EE for performing similar services An IC receives employee benefits, such as health insurance coverage A state tax authority or another federal/state agency has reclassified an IC or similar situated workers as EEs A frequent source of referrals for IRS worker classification cases is the filing of state unemployment claims by disgruntled former workers The worker has not filed tax returns consistent with how he/she is treated by the business 17

18 Resolving a Worker Classification Dispute Rather complex rules apply when resolving a worker classification dispute with the IRS, including-- Potential relief from the imposition of retroactive payroll taxes, known as Section 530 relief but only for the employer Special calculation of employer s payroll tax liability under section 3509 of the Code Availability of Classification Settlement Program ( CSP ) And before any dispute, the availability of the Voluntary Classification Settlement Program ( VCSP ). Most states apply a separate, and more rigorous standard for worker classification determinations than the IRS. Arizona is the only state with a safe harbor provision similar to Section

19 Reviewing Worker Classification Issues Determine who has responsibility for determining worker status coordinate the team Are there written procurement procedures, e.g., questionnaires at hire, procedures for tough calls Categorize workers that cause concern and apply 20-factors using approach of 1996 Training Materials Behavioral control, Financial control, and Relationship of the parties Be prepared to argue status using common law factors before resorting to Section 530 for relief 19

20 Resources IRS Pub. 15 Circular E, Employer s Tax Guide IRS Pub. 15-A Employer s Supplemental Tax Guide IRS Pub. 15-B Employer s Guide to Fringe Benefits Independent Contractor or Employee? Training Materials, IRS Training (Rev , TPDS ) IRS website American Payroll Association, The Payroll Source 20