22nd Annual Illinois Statewide APA
Conference
08/13/2015 and 08/14/2015
Lombard, IL
Payroll Tax Compliance, Efficiencies and Penalty
Reduction Provisions
Presented by: Martin D. Rule, CPA
Presentation Topics
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U.S. tax perspective
Credits
Employment tax efficiencies (Pareto Principle)
Employment tax compliance procedures
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Deposits
Filings
Reconciliation
Research
• Worker classification
• Penalties
– Mitigation techniques
– Abatement requests
• Tax consequences of employer provided fringe benefits
Perspective
U.S. Tax Policy
Adding Value With General
Business Credits
• General Business Credit Examples:
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Tax credit for rehabilitation expenditures
Work opportunity tax credit
Research activities credit
Low-income housing credit
Disabled access credit
Credit for small employer pension plan startup costs
Credit for employer-provided child care
• Reported on Schedule 3800 and attached to the
business return
Employment Tax Credits
• Employment Tax Credit Examples:
– Hiring Incentive to Restore Employment Act
(HIRE Act expired)
– Enacted on March 18, 2010
– Social Security tax credit of 6.2% for:
• Employees hired after February 3, 2010, and before
January 1, 2011
• Were unemployed during the 60-day
• Completed a Form W-11,
Employment Tax Credits
(Continued)
• American Recovery and Reinvestment Act of 2009
(ARRA expired)
– COBRA Subsidy
• Employees involuntarily termed 09/01/2008-12/31/2009
and who elected COBRA
• Provided credit of 65% of COBRA premiums
• Subsidy continued for 9 months
Work Opportunity Tax Credit
• Applies to first 12 months of wages paid to
individuals falling within target groups
– Credit limited to a percentage of first $6,000
wages paid per eligible employee
• 40% if employee has completed at least 400 hours of
service to employer
• 25% if at least 120 hours of service
– Deduction for wages is reduced by credit amount
Work Opportunity Tax Credit
(Continued)
• Targeted individuals generally subject to high
rates of unemployment, including
– Qualified ex-felons, high-risk youths, food stamp
recipients, veterans, summer youth employees, and
long-term family assistance recipients
• Summer youth employees: Only first $3,000 of wages
paid for work during 90-day period between May 1 and
September 15 qualify for credit
Work Opportunity Tax Credit: Long-Term
Family Assistance Recipient
• Applies to first 24 months of wages paid to
individuals who have been long-term
recipients of family assistance welfare benefits
– Long-term is at least an 18 month period ending on
hiring date
Work Opportunity Tax Credit: Long-Term
Family Assistance Recipient (Continued)
• Maximum credit is a percentage of first
$10,000 qualified wages paid in first and
second year of employment
– 40% in first year
– 50% in second year
• Maximum credit per qualified employee is
$9,000
– Deduction for wages is reduced by credit amount
Credit For Pension
Plan Startup Costs
• Small businesses can claim nonrefundable tax credit for admin
costs of establishing and maintaining a qualified retirement
plan
– Small business has < 100 employees who have earned at
least $5,000 of compensation
• Credit amount = 50% of qualified startup costs limited to max
credit of $500 per year for 3 years
– Deduction for startup costs is reduced by amount of credit
Credit For Employer-Provided
Child Care
• Employers can claim a credit for providing
child care facilities to their employees during
normal working hours
– Limited to $150,000 per year
• Credit amount:
– 25% of qualified child care expenses
– 10% of qualified child care resource and referral
services
Credit For Employer-Provided
Child Care (Continued)
• Deductible qualifying expenses must be
reduced by the credit amount
• Basis of qualifying property must be reduced
by credit amount
• Credit may be subject to recapture if child
care facility ceases to be used for qualifying
purpose within 10 years of being placed in
service
The Pareto Principle (The 80-20 Rule)
• About 80% of the effects come from 20% of the causes
80 Hours in Pay Period
32 Hours
32 hours
16 hours
32 Hours Special Pays (e.g. Settlement Payments, Deceased Employees, Complex Payroll Corrections etc.)
32 Hours Unique Projects (e.g. Significant Terminations/Hires, Mergers/Acquisitions)
16 Hours Payroll Maintenance
Time Clock Review and Payroll Interface
Payroll Processing
Posting Payroll to G/L
Preparation of Routine Payroll Reports
Check Distribution
The Pareto Principle (The 80-20 Rule)
(continued)
• How do you manage the 80-20 rule?
– Set procedures to escalate special pays, outliers
and research
• Discuss with manager
• Discuss with tax department or in-house counsel
• Outsource to advisor
– Monitor these procedures
– Modify as necessary
Employment Tax Compliance Procedures
• Deposit requirements
– Generally, all employers are required to make
payroll tax deposits electronically using the
Electronic Federal Tax Payment System (EFTPS)
– Contingent upon the amount of an employer’s
withholding and employment tax liabilities, the
employer must remit deposits on either a:
• Monthly;
• Semiweekly or;
• Next banking day
Employment Tax Compliance Procedures
• Deposit requirements (continued)
– If a deposit is required to be made on a day that is not
a business day, the deposit is considered timely if it is
made by the close of the next business day
– The timing and frequency of an employer’s payroll tax
deposits are determined annually and;
• based on the employer’s deposit history during a lookback
period
– The lookback period for each calendar year is the 12-month period
ending on the preceding June 30th
– For example, the 2015 lookback period for Form 941 filers began
on July 1, 2013, and ended on June 30, 2014
Employment Tax Compliance Procedures
• Deposit requirements (continued)
– An employer is a monthly depositor for the entire
calendar year if:
• The aggregate amount of employment taxes reported for the
lookback period is $50,000 or less
– An employer is a semiweekly depositor for the entire
calendar year if:
• The aggregate amount of employment taxes reported for the
lookback period exceeds $50,000
– Note, a special one-day rule applies to employers with
$100,000 or more of accumulated employment taxes
Employment Tax Compliance Procedures
• Deposit penalties
– Deposit penalties are some of the harshest penalties in
the Internal Revenue Code and are computed based on
the following schedule:
• 2% if not more than five days after the due date,
• 5% if more than five days but not more than 15 days after
the due date,
• 10% if more than 15 days after the due date, or
• 15% if tax is not deposited by the earlier of the 10th day
after the IRS issues its first notice and demand for payment,
or the date that notice and demand for immediate payment is
given under the jeopardy assessment rules
Employment Tax Compliance Procedures
• Deposit penalties (continued)
– Trust fund recovery penalty (100% of the tax due)
• Assessed on a “responsible person”
– For purposes of the trust fund recovery penalty, a responsible
person includes anyone connected or associated with an
employer who has the power to see that the trust fund taxes are
paid
• Separate and distinct from the employer’s liability for
the taxes
• The IRS need not seek payment from the employer
before attempting to collect from a responsible person
Employment Tax Compliance Procedures
• Reconciliation
– Think of a reconciliation as a review of two sets of
records (e.g., your personal bank checkbook and
the bank statement)
– You should reconcile:
• Tax deposits and filed returns (obtain tax jurisdiction
transcripts)
• Withholdings and third party payments (e.g., employee
benefit administrators, 401(k), qualified transportation
benefits etc.)
Employment Tax Compliance Procedures
• Employment tax returns
– Create a tax calendar to manage this process
– Guidance can be found in IRS Pub. 509
– Federal
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Form 941 (Quarterly)
Form 940 (Annually)
Form 945 (Annually)
Form W-2 (Annually)
– State
• Withholding (Monthly/Quarterly)
• Unemployment (Quarterly)
• Form W-2 (Annually)
Employment Tax Compliance Procedures
• Tax Research
– Commercial tax research resources
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LexisNexus, www.lexisnexis.com
CCH, www.cch.com/
RIA, www.ria.thomsonreuters.com/taxresearch/
Westlaw, www.westlaw.com/
BNA, www.bna.com
APA, www.americanpayroll.org
– Free tax research resources
• IRS website, www.irs.gov
• Taxsites.com www.taxsites.com
• Legal bitstream, www.legalbitstream.com/
Employment Tax Compliance Procedures
• Tax Research (continued)
– The tax research process
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Obtain all the facts
Diagnose the problem from the facts
Locate the authority
Evaluate the authority
Derive the solution
Communicate the answer
Employment Tax Compliance Procedures
• Employment tax audit selection process
– Employment tax audit triggers
• Form SS-8 (Determination of Worker Status)
• Form 8919 (Uncollected Social Security and Medicare
Tax on Wages)
• Form 4852 (Substitute Form W-2)
• State unemployment tax audit
• DOL audits
Employment Tax Compliance Procedures
• Employment tax audit selection process
(continued)
– IRS Identification of Employment Tax Examinations
IRM 4.23.3.2 states in pertinent part:
• “Strong emphasis is placed on the required filing check
program. Thus, during an examination of an income tax,
excise tax, or exempt organization return, the examiner will
inspect retained copies of employment tax returns (verifying
filing through IDRS where appropriate) and, based on
available information, will decide if an examination of
employment tax returns is warranted. If warranted, the
employment tax examination will be conducted
concurrently.”
Worker Classification
• Federal and state jurisdictions have placed an
emphasis on worker classification issues
– ACA employer mandate provisions
• Employers with 50 FTEs must comply
– Depleted state unemployment funds
• State Departments of Employment Security are becoming
more aggressive
– The IRS has entered into data-sharing agreements with
most state workforce agencies to share the results of
employment tax examinations in an effort to deter
misclassification of workers
Worker Classification
• Employment tax exposure related to worker
classification:
– Additional tax related to underreported wages
– Failure to file correct information returns ( up to
$500 for each incorrect Form W-2, 1099 etc.)
– Backup withholding 28% of payment (Form 1099)
– Worker reclassification assessments under IRC
Sec. 3509
Worker Classification
• Penalty reduction provisions related to worker
misclassification:
– Section 530 relief (See IRS Pub. 1976)
• Prevents the IRS from reclassifying a worker as an employee for
payroll tax purposes if the business has a reasonable basis for
consistently treating the worker (and every other worker
performing the same or a similar job) as an independent contractor.
– IRC § 3509
• If the employer properly issued Form 1099-MISC to the worker, the
tax due is 1.5% of wages as income tax withholding, plus 20% of the
employee’s share of FICA.
• If the employer did not issue Form 1099-MISC (and such failure is due
to willful neglect and not reasonable cause), the employer pays double
(3.0% of wages as FITW and 40% of the employee’s share of FICA)
Worker Classification
• Penalty reduction provisions related to worker
misclassification (continued):
– Forms 4669 & 4670
• An employer can claim credit for any federal income taxes, and if
applicable, additional Medicare taxes paid on the misclassified income
by the individual on his or her individual income tax return by having
the employee complete and sign (under penalties of perjury) Form
4669 (Statement of Payments Received)
• Additionally, if the statute of limitations on the employee’s income tax
return has run out, the employer may get credit for SECA taxes paid by
the individual on the income
• Forms 4669 received by the employer are sent to the IRS with Form
4670 (transmittal form)
• It is the employer’s responsibility to locate each worker and convince
him or her to complete Form 4669 for each year
Worker Classification
• Penalty reduction provisions related to worker
misclassification (continued):
– Classification Settlement Program (CSP)
• Offered by IRS examiners to employers under audit using a
standard closing agreement developed by the IRS National Office
• CSP features graduated settlement offers that vary based on the
taxpayer’s level of compliance
• Under its most favorable terms, CSP assesses the taxpayer 25% of
its employment tax liability for the audit year
• The employee’s share of FICA and FITW are computed using IRC
Sec. 3509
• The taxpayer must also agree to treat the workers as employees
prospectively.
Worker Classification
• Penalty reduction provisions related to worker
misclassification (continued):
– Voluntary Classification Settlement Program (VCSP)
• VCSP allows participating employers to prospectively treat workers as employees
• The VCSP is an optional program that eligible employers can apply to participate in.
In exchange for voluntarily treating workers as employees in future years, the
employer’s federal employment tax liability for the past non-employee treatment is
greatly reduced
• Advantages
– Gain clarity on worker status
– Reduce assessments to 10% of potential liability
• Disadvantages
– State and DOL exposure
– Employee benefit claims
Penalty Mitigation Techniques
• 98% Safe Harbor Rule
– No penalty applies if a deposit has a shortfall of the greater
of 2% of the deposit or $100. So, if a taxpayer has a
$10,000 liability, the 98% rule says there is no penalty if he
pays $9,800 on the due date. Similarly if a taxpayer had a
$1,000 liability, the $100 rule says there is no penalty if he
pays $900.
– For semiweekly taxpayers, the unpaid 2% or $100
must be paid on or the first Wednesday or Friday on
or after the 15th of the month following the month in
which the deposit was due. For monthly taxpayers,
the unpaid amount is due by the date the return is
due.
Penalty Mitigation Techniques
• IRS First Time Abate Policy (FTA)
– To qualify for relief, the taxpayer must not
have:
• Previously been required to file the return or;
• Had penalties assessed in the preceding three
years
– In addition, the taxpayer must have filed, or
filed a valid extension for, all currently
required returns and paid, or arranged to pay,
any tax due
Penalty Mitigation Techniques
• Reasonable Cause
– A taxpayer may be relieved of penalty
assessments if the failure to comply was
beyond the control of the taxpayer
– Each case must be based on the facts and
circumstances of the taxpayer
– There is a long line of case law that helps
define reasonable cause
Penalty Mitigation Techniques
• Reasonable Cause (continued)
– IRS examiners may consider the following
• What happened and when did it happen?
• During the period of time the taxpayer was non-compliant, what facts and
circumstances prevented the taxpayer from filing a return, paying a tax,
and/or otherwise complying with the law?
• How did the facts and circumstances prevent the taxpayer from
complying?
• How did the taxpayer handle the remainder of his or her affairs during this
time?
• Once the facts and circumstances changed, what attempt did the taxpayer
make to comply?
Penalty Mitigation Techniques
• Federal Tax Collection Service (FTCS)
Same day Fedwire
– If an employer fails to meet the EFTPS
payment deadline, they may use the same day
Fedwire procedures and avoid penalties
– Contact your financial institution for
instructions to complete a same day fedwire
deposit
Tax Consequences of Employer Provided
Fringe Benefits
• Definition of gross income
– All income from whatever source derived
– Less amounts specifically excluded under the IRC
• Valuation of taxable fringes
– Fair market value
– Statutory method
• When fringe benefits are considered paid
• Withholding on fringe benefits
Tax Consequences of Employer Provided
Fringe Benefits
• Excluded fringe benefits
– Accident and health benefits
• Employer contributions on behalf of an employee
– Achievement awards
• Must be either length of service or safety achievement based
• $1,600 limit for “qualified plan awards”
• $400 limit for “nonqualified plan awards”
– Adoption assistance excludes $13,190 in 2014, $13,400 in 2015
• Exempt for withholding purposes
• Subject to Federal Insurance Contributions Act (FICA) and Federal
Unemployment Tax Act (FUTA)
Tax Consequences of Employer Provided
Fringe Benefits
• Excluded fringe benefits
– Athletic facilities
• Exclude value of an employee’s use of an on-premises gym or other
athletic facility operated by the employer if substantially all the use
of the facility is by the employees, their spouses, and their children
– De minimis fringe benefits
• Described as an employer-provided fringe benefit that has so little
value, accounting for it would be unreasonable or administratively
impracticable
• Examples may include copy machine use, holiday gifts, life
insurance on spouse (if less than $2,000), meals, parties and
picnics, tickets for entertainment or sporting events, transportation
fare, typing
Tax Consequences of Employer Provided
Fringe Benefits
• Excluded fringe benefits
– Dependent care assistance
• Services an employer pays for directly or provides under a dependent care
assistance program
• Up to $5,000 each year (must be coordinated with spouses benefit)
• Excluded portion (up to $5,000) is reported in box 10 of Form W-2
• Dependent care benefits in excess of $5,000 are considered wages and should be
included in boxes 1, 3, and 5 of Form W-2
– Educational assistance
• Made permanent under the American Taxpayer Relief Act of 2012
• Up to $5,250
• Amounts over $5,250 possibly excluded as a working condition benefit
• Includes graduate and undergraduate classes
Tax Consequences of Employer Provided
Fringe Benefits
• Excluded fringe benefits
– No additional cost services
• Services provided must be offered in the employer’s line of business
• Services can be excluded from employee’s income
• Employer cannot incur substantial additional costs
• Cannot discriminate in favor of highly compensated employees
– Employee discounts
• Price reductions given to an employee on property or services offered
to customers in the ordinary course of business
• Services may be discounted up to 20 percent of the price you charge
nonemployee customers
• Merchandise may be discounted up to the employer’s profit percentage
multiplied by price you charge nonemployee customers for the property
Tax Consequences of Employer Provided
Fringe Benefits
• Excluded fringe benefits
– Group-term life insurance coverage
• You can exclude up to $50,000 in coverage from income, Social
Security, and Medicare taxes
• You can generally exclude all group-term life insurance
coverage from federal income tax withholding
– Lodging if:
• Furnished on employer’s premises
• Furnished for employer’s convenience
• Employee accepts the lodging as a condition of employment
Tax Consequences of Employer Provided
Fringe Benefits
• Excluded fringe benefits
– Meals
• De minimis meals have little value, are provided infrequently, and
would be administratively impracticable to account for (holiday lunch,
coffee, doughnuts, soft drinks, etc.)
• Meals for the convenience of employer or from employer-operated
eating facility for employees
– Moving expense reimbursement
• Excludible reimbursements generally include reasonable expenses for:
• Transporting personal effects from old home to new home
• Travel of employee and dependents from old home to new home
Tax Consequences of Employer Provided
Fringe Benefits
• Excluded fringe benefits
– Transportation benefits (commuting)
• De minimis transportation
• Qualified transportation benefits
• Parking $250 per month in 2015
• Public transportation $130 per month in 2015
– Working condition fringe benefit
• Property or service provided so that the employee can perform his or her
duties
• Mileage to provide service for customers or client
• Supplies
• Professional dues and subscriptions
Payroll Tax Compliance, Efficiencies and
Penalty Reduction Provisions
Summary
• Efficient payroll operations add value to
employers
• Payroll departments can take steps to:
– Reduce tax expense through utilization of credits
– Minimize exposure to compliance penalties and
interest assessments
– Utilize penalty mitigation strategies if penalties are
assessed
Payroll Tax Compliance, Efficiencies and Penalty Reduction Provisions
Q &A
Contact Info
Martin D. Rule, MST, CPA, CFP®
A: 309 E. Rand Rd, Suite 220, Arlington Heights, IL 60004
C: (847) 602-5178 F: (847) 637-1944
M: martin.rule@cpa.com W: www.mdrulecpa.com