How and when to file the new Third-Party Sick Pay Recap

alarm clock and plannerIn Notice 2015-6 the IRS explains the requirement starting in tax year 2014 to use new Form 8922, Third-Party Sick Pay Recap, to reconcile sick pay wages and taxes reported on the Forms 941 and Forms W-2.

Prior to tax year 2014, a Form W-2 and Form W-3 third-party sick pay recap were filed with the Social Security Administration (SSA) for this purpose; however, Form 8922 is now filed with the IRS instead. Currently, Form 8922 must be filed on paper.

Notice 2015-16 also explains the federal withholding, employment tax and reporting requirements governing sick pay under various arrangements and third-party agreements. This information is also contained in IRS Publication 15-A. Notice 2015-16 supersedes Notice 91-26 (1991-2 C.B. 619).

The Third-Party Sick Pay Recap isn’t new

The requirement to file a Third-Party Sick Pay Recap isn’t new. If you have not filed a Third‑Party Sick Pay Recap in the past, chances are you don’t need to file Form 8922 now.

Because the payment of sick (or disability) pay is frequently the responsibility of a third party, such as an insurance company, agreements may be in place that facilitate the withholding of payroll taxes (e.g., federal income tax, Social Security and Medicare) by the payer.

IRS regulations take into account these third-party arrangements by permitting employers and their insurers/agents to share in the responsibility of paying employment tax and withholding tax over to the IRS and filing the related returns and information statements.

The result of these arrangements may be that the entity reporting sick pay wages on Form 941 under its federal Employer Identification Number (EIN) is not also issuing Forms W-2 under that same EIN. Consequently, wages and taxes reported on the Forms 941 do not agree with the wages and taxes on the Forms W-2, a situation that results in the IRS issuing an assessment of tax, interest and penalty.

The Third-Party Sick Pay Recap prevents these assessments by accounting for the reporting differences that are caused by sick pay.

Who files the Third-Party Sick Pay Recap?

In Notice 2015-16, the IRS explains that a Form 8922 is required under the following three situations:

1. A third party is required to file Form 8922 when the third party is liable for the employee FICA tax (whether or not the third party is also liable for income tax withholding) but the liability for the employer FICA tax and for reporting the sick pay on Forms W-2 has been transferred to the employer.

2. An employer is required to file Form 8922 when the third party is liable for the employee FICA tax and income tax withholding, the liability for the employer FICA tax has been transferred to the employer, and the employer and third party have entered into an agreement to have the third party act as the employer’s agent for reporting on Forms W-2.

3. A third party that is an agent is required to file Form 8922 when the agency agreement provides that (a) the agent will withhold and pay employee FICA tax and report the taxes on its Form 941, and (b) the employer will pay the employer FICA tax, report the employer FICA tax on its Form 941, and report the employee’s wages on Forms W-2.

When there is no split reporting of sick pay on Forms 941, there is no obligation to file Form 8922. Accordingly, except as provided in (3) above, there is generally no obligation to file Form 8922 with respect to sick pay paid by an agent. There is also no obligation to file Form 8922 when the third party paying the sick pay is not an agent and does not transfer liability for the FICA employer tax on the sick pay to the employer.

Special instructions for completing Form 8922

The IRS points out that until such time as Form 8922 can be electronically filed, these special rules will apply in completing the boxes “Other party’s name” and “Other party’s employer identification number.”

Employer. If the employer files Form 8922, the employer shows the name and EIN of the third party paying the sick pay for which there is split reporting.

Third party. To ease the transition from Form W-2 and Form W-3 third-party sick pay recaps to the Form 8922, the third party (i.e., insurer, agent) currently has three choices for filing this form:

      (1) Submit one Form 8922 that completes all information on the form other than the boxes for other party’s name and other party’s EIN
      (2) Provide the other party’s name and the other party’s EIN with respect to all third-party sick pay that it pays for all employers. Under this choice, a separate Form 8922 is filed for the sick pay wages and taxes related to each employer.
      (3)  Provide the other party’s name and other party’s EIN for the third-party sick pay that it pays for some but not all employers. Under this choice, a separate Form 8922 for the sick pay wages and taxes related to each employer for which it is supplying the name and EIN, and it files one Form 8922 for the wages and taxes related to the employers for which it is not supplying the name and EIN.

Employment tax provisions expire in 2015, what to do now

Capitol building

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

Medical stethescope

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.