Answers to the 2014 Form W-4 questions most frequently asked

Five employer facts about the Form W-4Spring is in the air and time for employees to get their tax matters in order for 2014. With the 2013 tax filing season now over for most employees, they likely already know about changes they may need to make to their Form W-4, Employee Withholding Allowance Certificate.

To assist payroll departments in dealing with the myriad issues likely to arise at this time of year, we offer answers to the top 10 Form W-4 questions of 2014.

  1. Is a new Form W-4 required if an employee will receive wage payments subsequent to termination?
  2. Is there a limit on the number of Form W-4 changes an employee can make in a year?
  3. How long do copies of Forms W-4 have to be retained in the employer’s files?
  4. Can employees claim a flat dollar or percentage of withholding on the Form W-4?
  5. When is a Form W-4 invalid, and what is the employer required to do when it receives an invalid form?
  6. How long does an employer have to implement changes in the Form W-4?
  7. What special rules apply to the Form W-4 of a nonresident alien?
  8. Are there any regulatory or other compliance considerations that need to be taken into account when using an electronic system for gathering and retaining federal, state and local Form W-4 data?
  9. Are we required to submit copies of certain withholding allowance certificates to the IRS or other income tax authorities?
  10. Is it safe to assume that the Form W-4 applies for federal, state and local withholding tax purposes?

Read the answers to these questions and our 2014 state Form W-4 requirements chart.

Severance pay planning can benefit everyone affected by a workforce reduction

FICA on severanceEmployers that routinely pay severance benefits or expect to pay such benefits in the future as a result of shutdowns, downsizing or seasonal employment may be able to realize substantial Social Security and Medicare tax (FICA) savings for them and their employees by structuring these payments under a supplemental unemployment benefit (SUB) plan. [IRC §501(c)(17)]

For example, assume an employer is forced to lay off 200 employees in connection with a plant shutdown and plans to pay $3,000 in severance benefits to each employee, or $600,000 in total. Normally, the employer would have to pay $45,900 in FICA taxes on these amounts [$600,000 * 7.65% = $45,900] for an effective cost of $645,900.

In order to restructure these amounts as SUB benefits exempt from FICA/FUTA, the $3,000 in severance benefits could be paid to employees in 10 weekly installments of $300 (or other periodic amounts that qualify as SUB benefits) at an effective cost of only $600,000. Employees would save a comparable amount.

What exactly is a SUB plan?

The FICA/FUTA exemption for SUB stems from a series of revenue rulings, in particular Rev. Ruls. 56-249 and 90-72. The overriding theme of these rulings is that the SUB benefits must be designed to supplement state unemployment benefits according to the following requirements.

  • Benefits are only paid to those employees who involuntarily separate from employment (e.g., plant shutdowns, reductions in force, etc.) and who meet prescribed conditions after termination of employment, such as registering for unemployment benefits with the state (Rev. Rul. 56-249)
  • Benefits are only payable to those employees who satisfy the requirements for state unemployment benefits except if:

- the employee does not have sufficient wage credits under the state law

- the employee has not satisfied the state-required waiting period

-or-

- the employee has exhausted the state benefits (Rev. Rul. 90-72)

  • Benefits are designed to supplement the state unemployment benefits. In Rev. Rul. 56-249, the benefits were integrated with state unemployment benefits such that the total payments (SUB and unemployment) to the employee were a specified percentage of the employee’s pre-separation straight time take-home pay.
  • The benefits are paid periodically and not in a lump-sum distribution [Rev. Rul. 90-72]
  • The benefits are paid through a trust or directly to employees through an unfunded program [Rev. Rul. 60-330]
  • No employee has an interest in the SUB fund until the employee is qualified to receive benefits [Rev. Rul. 56-249]

While there is planning involved in creating and administering SUB plans, they warrant investigation where the FICA tax savings outweigh the investment. Since long-term severance pay out arrangements help businesses to stay connected to their former employees during transition periods, SUB plans are also worth consideration in situations where businesses believe their workforce needs will return in the future.

Ways to potentially reduce severance pay costs

Employers should keep in mind that there are several areas where severance planning can cut down on unnecessary costs and/or facilitate a continuing connection with separated workers. Here are just a few.

  • As previously mentioned, consider supplemental unemployment benefit (SUB) plans
  • Properly report severance and salary continuation payments to state employment agencies
  • Properly exclude severance and similar payments from wages covered by state unemployment insurance where allowed by law
  • Consider state work share programs

House Ways and Means eyes fringe benefits in tax reform plan

Capitol buildingOn 26 February 2014, House Ways and Means Committee Chairman Dave Camp (R-MI) released his long-anticipated tax reform proposal. The plan, which proposes sweeping reforms in US corporate, individual and international tax regimes, would significantly affect employment tax and employment-related business tax deductions and credits. Individuals and employers would also see changes in the operation of qualified retirement plans.

Many of the proposals contained in the Chairman’s draft legislation were also suggested last year in a series of papers issued by the Senate Finance Committee documenting various options to consider in a revamp of the tax code. For more information, see our blog post, “The Senate’s bucket list may foretell the end to some tax-free perks.”

This proposal marks a starting point in the Chairman’s push for tax reform. Still ahead is the effort of garnering sufficient support from Republican leaders and the business community. In the meantime, employers should carefully consider the provisions that are currently on the table and how they would affect their policies and compliance efforts in the future.

Fringe benefits

The proposed tax reform plan modifies or eliminates a significant number of fringe-benefit provisions.

Of significant mention is the possibility of disallowing the current deferral of federal income tax on nonqualified deferred compensation. Currently, under the special-timing rule, FICA tax applies when there is a lapse in the risk of forfeiture. Income tax, on the other hand, doesn’t come due until a distribution is made. Under this proposal, FICA and income tax (and income tax withholding) would be due at the same time.

Some tax-free fringe benefits (e.g., achievement awards, educational assistance, medical savings accounts and qualified moving expense reimbursements) would be eliminated entirely, while others (e.g., employer-provided housing, transit benefits, qualified retirement benefits and health benefits provided to the highly paid) would be scaled back.

Read the full analysis, including a side-by-side chart of the employer-related provisions.