Employment tax provisions expire in 2015, what to do now

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An “extender” is a legislative item that Congress has set to expire or “sunset” and frequently applies to tax breaks or tax credits. There are a number of extenders tied to federal income tax and hiring incentives, such as the Work Opportunity Tax Credit (WOTC).

The budget debate over the last several years has caused frequent delays in dealing with “extenders;” consequently, numerous tax provisions expire only to be retroactively reinstated. In 2014, for instance, the parity in transit and parking benefits was retroactively reinstated to 1 January 2014, resulting in last-minute adjustments to taxable wages and, for some employers, Forms W-2c and employment tax refunds.

Roughly 55 tax extenders, 6 of them relevant to employers, expired on 31 December 2014. This means that employers again face uncertainty about certain tax provisions and the resulting complexities that retroactive legislation creates.

Shown below is a list of employer tax provisions that were temporarily extended through 31 December 2014, under the Tax Increase Prevention Act of 2014 (Pub. Law 113-295).

What employers need to do now

When there is a possibility that an extender will be reinstated, employers may need to take certain steps during the period a tax provision has lapsed (termed the “hiatus”). Consider these items, for instance:

  • Work Opportunity Tax Credit (WOTC). History has shown that this extender will be reinstated. However, to be eligible for the tax credit if it is retroactively reinstated, employers must have continued to certify their eligible employees with the appropriate state workforce agency during the hiatus. Certification is made by filing the Form 8850, Pre‑Screening Notice and Certification Request for the Work Opportunity Credit.It is hoped that like last year, the U.S. Department of Labor (DOL) will issue a directive to state workforce agencies to accept, date stamp, log and retain certification requests for employers’ new hires made on or after 1 January 2015. In 2014, the DOL told state workforce agencies that they should issue Conditional Certifications (ETA Form 9062) and may, if they have resources, conduct all steps necessary to process certification requests up to, but not including, issuance of the actual certification or denial.
  • Transit benefits. In Proc. 2014-61, the IRS announced that the monthly tax-free limit for transit benefits for tax year 2015 is $130, while the limit for parking remains at $250. Should Congress reinstate the parity provision, the transit benefit limit could retroactively increase from $130 to $250. With this in mind, employers should consider the prudence of allowing employees to contribute the monthly gap of $120 ($250 less $130) on an after-tax basis. In this way, an adjustment can be made in taxable wages for the hiatus period by reclassifying after-tax contributions to pretax.
  • Other extenders. Keep adequate records during the hiatus so that tax credits can be easily identified and claimed.

Employer provisions set to sunset on
December 31, 2014

Provision

Details

Effective period

Fringe benefits
Mass-transit benefit parity Under current law, the monthly exclusion for employer-provided transit and vanpool benefits was set at $130, while the monthly limit for parking was set at $250. Pub. Law 113-295 reinstates parity for these benefits, increasing the monthly exclusion for transit and vanpool assistance to $250. 1 January 2014 through 31 December 2014
Tax credits
Indian tax credit Prior to 2014, the law made a business tax credit available to employers with qualified employees that work and live on or near an Indian reservation. Effective 1 January 2014, the tax credit is reinstated, making available through 31 December 2014, a tax credit of 20% of the excess of wages and health insurance costs paid to qualified employees (up to $20,000 per employee) in the current year over the amount paid in 1993. 1 January 2014 through 31 December 2014
Wage credit for military reservists Retroactive to 1 January 2014, eligible small-business employers are eligible for a credit against their income tax liability for a taxable year equal to 20% of the sum of differential wage payments made to active military reservists. 1 January 2014, through 31 December 2014
Work Opportunity Tax Credit Retroactive to 1 January 2014, employers are eligible to claim the Work Opportunity Tax Credit (WOTC) of up to 40% of the first $6,000 of wages paid to new hires in one of eight targeted groups. 1 January 2014 through 31 December 2014
Empowerment Zone tax incentives Retroactive to 1 January 2014, businesses and individual residents within designated Empowerment Zones are eligible for special federal tax incentives. 1 January 2014 through 31 December 2014

 

Correcting Additional Medicare Tax on Form 941-X

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The IRS has issued clarifications and examples pertaining to the correction of errors in reporting or withholding the Additional Medicare Tax on line 11 of the Form 941-X, Adjusted Employer’s Quarterly Federal Tax or Claim for Refund. These guidelines will be incorporated in the next revision of the instructions for Form 941-X.

For more information about the Additional Medicare Tax, read our special report.

Restrictions on making corrections to Additional Medicare Tax withholding

If you made an error in the amount you reported as withheld from wages for Additional Medicare Tax, a correction of the amount withheld is allowed only if:

  • You discovered the error in the same year you were required to withhold.
  • The amount you withheld in the current or previous year was correct but you reported it incorrectly Form 941, line 5d, column 2 (i.e., an administrative error).
  • You are reporting Additional Medicare Tax wages and paying the tax for prior years because you have reclassified a worker from independent contractor to employee using the IRC §3509 rates (see the Form 941-X instructions for line 17).

Completing Form 941-X

  • Errors discovered in the same calendar year or prior year administrative errors. If you are correcting the taxable wages and tips subject to Additional Medicare Tax withholding that you reported on Form 941, line 5d, column 1, enter the total corrected amount in Form 941-X, line 11, column 1. In column 2, enter the amount you originally reported or as previously corrected. In column 3, enter the difference between columns 1 and 2. If the amount in column 2 is larger than column 1, use a minus sign in column 3. If the amount in column 3 used a minus sign, also use a minus sign in column 4.

Example: Current year error or prior year administrative error

Form
941X
Column 1
Total corrected amount
Column 2
Amount originally reported
Column 3
Difference
Column 4 Tax correction
Line 11: $220,000 - $200,000 = $20,000 X 0.009 = $180
  •  Corrections of withholding tax errors from the prior year that are not allowed (non-administrative errors). If a prior year correction is for a non-administrative error or you are not correcting wage and tax pursuant to reclassifying a worker from independent contractor to employee, you may correct only the wages and tips subject to Additional Medicare Tax withholding that were originally reported on Form 941, line 5d, column 1, or previously corrected on Form 941-X. You cannot correct the tax reported on Form 941, line 5d, column 2. In other words, complete Form 941-X, line 1, columns 1, 2 and 3 only. If Column 2 is larger than column 1, use a minus sign in column 3.

Leave column 4 blank and explain the reasons for this correction on line 23.

Example: Prior year non-administrative error

Form
941X 

Column 1
Total corrected amount
Column 2
Amount originally reported
Column 3
Difference
Column 4 Tax correction
Line 11: $220,000 - $200,000 = $20,000 X 0.009 = Blank
  • Combination of prior year administrative and non-administrative errors. If you are reporting both administrative errors and non-administrative errors for the same quarter of a prior year, enter the total corrected amount in Form 941-X, line 1, column 1. In column 2, enter the amount you originally reported or as previously corrected. In column 3, enter the difference between columns 1 and 2. However, multiply only the amount of wages and tips reported in column 3 that are related to administrative errors by 0.009 (0.9% tax rate). Do not multiply any wages and tips reported in column 3 that are related to non-administrative errors by 0.009 (0.9% tax rate). Use line 23 to explain in detail your corrections. The explanation must include the reasons for the corrections and a breakdown of the amount reported in column 3 into the amounts related to administrative errors and non-administrative errors.

2014 employment tax questions most frequently asked

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Participants of Ernst & Young LLP’s webcast, Employment tax year in  review, submitted numerous questions demonstrating the volume and complexity of the many employment tax developments in 2014.

Here we feature the webcast participants’ top 10 questions and their answers.

Responsible-party reporting

  1. If a business has multiple subsidiaries, is a Form 8822-B required for each of them?

Answer: Form 8822-B is used to update responsible-party information provided on the original application (Form SS-4) for a federal Employer Identification Number (EIN). Accordingly, you are required to report a change in responsible party for each EIN affected by that change.

  1. Is there information available concerning what the IRS means by “responsible party”?

Answer: Yes, the IRS offers some guidance here. Always speak to your tax advisor if you have questions about responsible parties and their personal liability for trust fund taxes.

Additional Medicare tax

  1. Is third-party sick pay subject to the Additional Medicare Tax?

Answer: Yes, the Additional Medicare Tax applies to all Medicare-covered wages, including third-party sick pay. However, keep in mind that Social Security and Medicare tax, including the Additional Medicare Tax, don’t apply after the first six months of disability. For more information on the taxation of third-party sick pay, see IRS Publication 15-A.

  1. Just to confirm, is it correct that for withholding errors caught after the close of the year, we adjust only Additional Medicare Tax wages and not the tax on Form 941-X?

Answer: Yes, that is correct. The IRS recently confirmed that prior year errors, unless they are administrative, are reported on Form 941-X only in the column for Additional Medicare Tax wages. You do not correct Additional Medicare Tax withheld.

Third-party sick pay recap

  1. Our employees receive disability pay through the New Jersey disability insurance fund. Are we required to file a third-party sick pay recap in this case?

Answer: No. New Jersey employers are not required to file a Form 8922 pursuant to third-party sick payments made from New Jersey’s disability insurance fund. In fact, generally, a third-party sick pay recap is required of the insurance provider only if the client employer is filing Forms W-2 to report the third-party sick pay. See Publication 15-A for more information concerning the third-party sick pay recap.

If you provided disability benefits to New Jersey employees through a private plan, keep in mind that you may need to give them Form NJ-2440.

FICA on severance

  1. Is it safe to conclude that severance pay that is paid in installments is exempt from FICA tax?

Answer: Not necessarily. Clearly, severance pay that is paid in a lump sum is subject to FICA; however, to be excluded from FICA tax the payments must be made from a qualified supplemental unemployment benefit (SUB) plan. Making the payments in installments is just one of the requirements of a qualified SUB plan. For more on the requirements of a SUB plan, read our special report.

Same-gender partner benefits

  1. What does “state of celebration” mean?

Answer: The state of celebration is where the employee was married. For instance, let’s say that a Louisiana resident wants to marry his same-gender partner. Louisiana doesn’t allow same gender partners to marry. In order to get married, the Louisiana resident would have to go to a state that will allow the marriage (e.g., Minnesota). In this example, Minnesota is the state of celebration. If this employee were to marry in Minnesota, health insurance benefits provided to his same-gender spouse are subject to Louisiana resident state income and unemployment insurance tax but are exempt from federal income tax withholding and employment tax (Social Security, Medicare and federal unemployment insurance).

8. Are domestic partner benefits always taxable?

Answer: Generally, yes. The IRS explains that in meeting the definition of “spouse” for federal tax purposes, the couple must be lawfully married under state law. The IRS does not consider domestic partners or other licenses states may provide, such as civil union or registered domestic partner, as meeting the spousal definition. State rules can differ from federal and should be discussed with your employment tax advisor. Read this IRS frequently asked questions about the federal tax rules governing same-gender couples.

Nonresident income tax withholding

  1. If an executive travels to various states and works for a week at a time in those states, is he or she subject to income tax in those states?

Answer: It depends on the state where the executive is working. State rules concerning nonresident income tax requirements vary. For instance, some states won’t require nonresident income tax if the employee works in the state for a short time (e.g., 14 days). For this reason, it is a leading practice to track employees’ work locations and to comply with the nonresident tax and reporting rules that apply. You should check with your employment tax advisor about the state requirements that apply to your mobile workforce.

  1. One of our New York employees works from his home in Alabama. Are his wages subject to New York income tax?

Answer: It depends on the reason why the New York employee is working from Alabama. Under the New York income tax rules, if an employee works outside of New York for his own convenience, rather than the convenience of the employer, wages he earns working in Alabama are subject to New York state (and, where applicable, local) income tax and withholding. Read more information on New York’s convenience of the employer rule.