Employee or independent contractor? State audits to heat up

umbrella and business suitThe U.S. Department of Labor’s Employment and Training Administration (ETA) recently notified state workforce agencies of $10 million in supplemental funding available to them to address worker misclassification within the federal-state unemployment insurance (UI) program. (UIPL #18-14.)

At the same time, two high-profile cases  involving California and Oregon employers show a trend of the courts ruling against employers when they assert their workers are independent contractors and not employees.

With much more focus on the underground economy and “wage theft,” businesses should re-evaluate the population of workers they treat as independent contractors with an eye to the state guidelines that are sometimes more stringent than the IRS common-law test.

For more about the different tests states use in determining if workers are employees and how they enforcing those rules, read our special report.

 

Illinois tax refunds may apply to same-gender married couples

IRSDuring the IRS payroll industry telephone conference, Scott Mezistrano, IRS Industry Stakeholder Engagement, announced on 7 August 2014, that Illinois same-gender partners who elect to convert their Illinois civil unions to marriage will be deemed married according to the retroactive date applicable under Illinois law.

Background

Illinois allowed same-gender couples to enter into a civil union effective 1 June 2011 (Public Act 096-1513). Effective 1 June 2014, same-gender couples were granted the lawful right to marry. Accordingly, civil union partners are given the choice to convert their civil unions to marriage, the date of such marriage recorded as the date of the original civil union (Public Act 098-0597).

Income tax refunds

Individuals who have converted their civil unions to marriage may have an opportunity to file for federal income tax refunds if the original date of the civil union was on or before 31 December 2013.

In contrast to federal law, Illinois provides that civil union partners may choose to file as “married filing jointly” or as “married filing separately” when preparing their Illinois Individual Income Tax forms. (Illinois Income Tax news.)

FICA refunds

Subsequent to the Supreme Court decision in Windsor, the Treasury Department and the IRS ruled in Revenue Ruling 2013-17 that same-gender couples who are legally married in state and foreign jurisdictions recognizing same-gender marriages will be treated as married for US federal tax purposes.

The IRS issued Notice 2013-61 to provide guidance for employers and employees making claims for refund or adjustments of FICA taxes and income tax withholding resulting from Windsor and the holdings of the Revenue Ruling 2013-17. That guidance includes a special administrative procedure allowing employers to file one Form 941-X for each tax year (rather than one Form 941-X for each quarter, which is the normal rule).

FICA refunds may be claimed for all open years and quarters, currently (and pursuant to Illinois taxpayers affected by its law change), for periods beginning 1 June 2011.

Ernst & Young LLP insights

Upon enacting legislation to allow same-gender couples to marry, a few states with civil union provisions automatically converted those civil unions to marriage (e.g., Connecticut, effective 1 October 2010; Delaware, effective 1 July 2014; and New Hampshire, effective 1 January 2011).

Illinois’ provision is unique in that individuals must choose to convert their civil unions to marriage, and in doing so, the marriage date is retroactive to the original civil union date.

For questions contact Debby Salam at debera.salam@ey.com.

EY polling shows room for employer improvement in unemployment tax performance

ey-rhf-ui-awareness-month-highlightsDuring Ernst & Young LLP’s 7 August 2014 webcast, “Unemployment insurance: how do you rate?,” participants were given the opportunity to respond to four questions about their management of unemployment insurance tax and whether they have experienced a merger or acquisition activity in this last three years.

Worth noting is that 44% of responders said the tax director requests information concerning the company’s unemployment insurance tax performance, and another 16% believe this is an approach worth considering.

Of concern is the large number of responders (54%) who don’t plan to project the impact of their claims activity on the upcoming year’s unemployment tax rates/costs and another 45% who don’t plan to review the accuracy of unemployment insurance contributions for the prior three years, although 56% of the same responders said they had business acquisition activity in the same period.

These polling results indicate the potential for unemployment tax performance improvement by a significant population of employers not currently embracing leading practices, such as tax director oversight and holistic program oversight.

Read details concerning the 2014 polling results.

Benchmark your unemployment insurance performance with our groundbreaking survey

Businesses interested in benchmarking their unemployment tax performance with others in their states or industries are encouraged to participate in the Ernst & Young LLP national survey.

Watch our introductory video.

Watch out when reimbursing employees for health insurance

Health plan reimbursementsFor various reasons, employees may not be able to take advantage of health insurance benefits offered through their employer’s group plan. Employers may accommodate such employees by agreeing to reimburse them for all or a portion of the cost incurred in purchasing their own individual health insurance policies.

Provided reimbursed employees submit receipts substantiating their out-of-pocket expenses for their health insurance purchases, these reimbursements retain their tax-favored status as a health and welfare benefit.

Although the income tax withholding and employment tax rules have not changed, new rules effective 1 January 1 2014, will cause large employers to think differently about how they offer health insurance benefits to employees who are not participating in the company’s group plan.

The Affordable Care Act

The IRS recently posted a frequently asked questions (FAQ) to its website reminding employers subject to the health market reforms of the Affordable Care Act (ACA) that effective January 1, 2014, reimbursing employees for their purchase of an individual health insurance policy could result in penalties under IRC §4980D of up to $100 per day/$36,500 per year for each employee participating in the employer’s group health plan.

For instance, assume that an employer has 1,000 participants in its group health plan and one of its employees is reimbursed for health insurance that he or she individually purchases. The potential penalty in this case is $100,000 per day.

Income tax withholding and employment tax rules have not directly changed

The federal employment and income tax withholding rules have not changed. It is still the case that if employees substantiate the cost of their individually purchased health insurance, such reimbursement receives tax-favored treatment under IRC §105 as follows:

  • Nondiscriminatory health plans. If the health policy reimbursement is made pursuant to an employer’s nondiscriminatory health plan, it is excluded from wages subject to federal income tax, federal income tax withholding, Social Security/Medicare and federal unemployment insurance.
  • Discriminatory plan. Reimbursements for individually purchased health insurance made to non-highly-compensated employees follow the rules applicable to nondiscriminatory plans (see above). However, reimbursements made to highly compensated employees are subject to federal income tax but are exempt from federal income tax withholding, Social Security, Medicare and federal unemployment insurance tax. (IRC §3401(a)(20); Reg. §31.3401(a)(19)-1; IRC §3121(a)(2)(B); Reg. §31.3121(a)(2)-1(a)(3); IRC §3306(b)(2)(B), (b)(4) and Reg. §31.3306(b)(2)-1(a)(3).)