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Code Sec. 403(b) plans may be able to offer participants the opportunity to contribute the dollar equivalent of unused paid time off, Rhonda Migdail, manager, IRS Employee Plans, said on October 28, 2009. Migdail also clarified the FICA tax treatment of unused paid time off contributions. Migdail spoke during an IRS teleconference on recent retirement plan news.
Paid time off
In September, the Obama administration and the IRS announced several initiatives to encourage retirement savings. Rev. Rul. 2009-31, I.R.B. 2009-39, 395, explains how a qualified plan may permit certain annual contributions of the dollar equivalent of an employee's unused paid time off. Rev. Rul. 2009-32, I.R.B. 2009-39, 398, provides that a qualified plan may allow employees on the termination of employment to contribute the dollar equivalent of unused paid time off to the plan.
Many employers have a "use or lose" policy for paid time off. Some employers permit employees to carry over unused paid time off from year-to-year, Migdail noted. An employee may be able to cash-out accumulated unused paid time off when he or she separates from employment.
403(b) plans
The provisions in Rev. Rul. 2009-31 and Rev. Rul. 2009-32 would not apply as currently stated to Code Sec. 403(b) plans, Migdail said. However, the IRS is considering extending the rules to Code Sec. 403(b) plans, she added. Migdail did not indicate when the IRS may issue additional guidance.
FICA
When Rev. Rul. 2009-31 and Rev. Rul. 2009-32 were announced, many employers, plan sponsors, and practitioners questioned if paid time off contributions would be subject to FICA tax. The guidance did not address FICA tax treatment. "If it (the contribution of unused paid time off) goes in as a nonelective contribution, it will not be subject to payroll taxes," Migdail explained.
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The earnings that a law firm paralegal received through her independent process-serving and court-filing business could not be combined with her paralegal salary to satisfy the Fair Labor Standards Act's (FLSA's) "highly compensated employee" exemption from overtime pay, a federal district court in New York held. The law firm argued the paralegal was an exempt employee because her paralegal salary, combined with her earnings as an independent contractor, amounted to total annual compensation in excess of $100,000 per year, and as such, she was an exempt employee. However, since the paralegal's process-serving and court-filing services were not rendered in her capacity as an employee of the law firm (as the firm conceded), any compensation she received in performing those functions was not part of her total annual compensation as a firm employee.
"It would be antithetical to the spirit of the FLSA to consider payment received as an independent contractor to constitute `employee' compensation," wrote the court, "particularly given the mandate that exemptions should be narrowly construed against employers." The paralegal thus was not a highly compensated employee under the FLSA, ruled the court, denying the law firm's motion to dismiss her claim for unpaid overtime. (Magnoni v Smith & LaQuercia, LLP, SDNY, 158 LC ¶35,638.)
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The IRS has issued guidance providing the procedure that qualified employers must follow to request to file Form 944, Employer's ANNUAL Federal Tax Return, or to opt out of filing Form 944 and request to file Forms 941, Employer's QUARTERLY Federal Tax Return, instead. The guidance is effective on January 1, 2010.
Qualified employers
The procedure applies to qualified employers. Qualified employers are those with an estimated annual employment tax liability of $1,000 or less for the entire calendar year, except employers required to make a return on Form 943, Employer's Annual Federal Tax Return For Agricultural Employees, or on Schedule H (Form 1040), Household Employment Taxes. The IRS may increase the amount of the estimated annual employment tax liability for this purpose through published guidance.
Filing Form 944
Upon request by qualified employers, the IRS will notify employers in writing of their qualification to file Form 944. Employers may request to file Form 944 by contacting the IRS at the telephone number or mailing address specified in the Instructions for Form 944, Instructions for Form 944-SS, Instructions for Form 944(SP), or Instructions for Form 944-PR, as applicable, by the applicable due date provided in the procedure. Employers must not file Form 944, unless they receive notification that they are eligible to do so. Employers who previously received notification of their qualification to file Form 944 must continue to file Form 944, unless the IRS notifies them that they no longer qualify to file Form 944 or they opt out of filing Form 944 using this procedure.
Opting out
Employers who previously were notified to file Form 944, but want to file Forms 941 instead, must call or write the IRS stating that they want to opt out of filing Form 944 at the telephone number or mailing address specified in the Instructions for Form 944, Instructions for Form 944-SS, Instructions for Form 944(SP), or Instructions for Form 944-PR, as applicable, before the applicable due date provided in the procedure. The IRS will send written notification to employers that their filing requirement was changed to Forms 941. Employers who were notified of their qualification to file Form 944, and do not receive notification that their filing requirement was changed to Forms 941, must file Form 944 rather than Forms 941.
Due dates
Employers who have previously filed Forms 941 or Form 944 (or the related Spanish-language returns or returns for U.S. possessions) and who want to call to request to opt in or out of filing Form 944 for the current tax year must call the IRS on or before April 1st of the current tax year (e.g., April 1, 2010, for tax year 2010 returns). Employers who want to write to request to opt in or out of filing Form 944 for the current tax year must have their written correspondence postmarked on or before March 15th of the current tax year (e.g., March 15, 2010, for returns for tax year 2010).
New employers who have recently received an employer identification number or who were not previously required to file Forms 941 or Form 944 (or the related Spanish-language returns or returns for US possessions) and who want to call to request to opt in or out of filing Form 944 for the current tax year must call the IRS on or before the first day of the month that the first required Form 941 for the current tax year is due (e.g., for tax year 2010 returns, employers must call on or before April 1, 2010, July 1, 2010, October 1, 2010, or January 1, 2011). Employers who want to write to request to opt in or out of filing Form 944 for the current tax year must have their written correspondence postmarked on or before the 15th day of the month before their first required Form 941 for the current tax year is due (e.g., for tax year 2010 returns, the correspondence must be postmarked on or before March 15, 2010, June 15, 2010, September 15, 2010, or December 15, 2010). If the due date falls on a Saturday, Sunday, or legal holiday, the last day employers may call the IRS or have their written correspondence postmarked is the next business day following that Saturday, Sunday, or legal holiday. (Rev. Proc. 2009-51, I.R.B. 2009-45, October 26, 2009.)
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The Senate on Oct. 27 easily overcame a procedural hurdle by an 87-13 margin that clears the way for lawmakers to take-up a bill (H.R. 3548) extending unemployment benefits and several tax-related amendments. Senate Majority Leader Harry Reid (D., Nev.) was forced to call for a vote to take-up the measure after Republicans repeatedly blocked attempts to approve the House-passed unemployment benefits extension by unanimous consent.
Reid and Senate Finance Committee Chairman Max Baucus (D., Mont.) now plan to offer an amendment to the legislation extending the first time home-buyer tax credit and expanding the net operating loss carry-back period.
The Senate unemployment extension substitute amendment, unlike the House bill, would provide 14 additional weeks of benefits to unemployed people in all states who exhaust their benefits. It would also give six additional weeks of benefits to unemployed people who exhaust their benefits in states with 8.5 percent unemployment or more. The total cost of the package is $2.4 billion and would be paid for with an extension of the Federal Unemployment Tax until June 30, 2011.
The White House issued a written statement in support of the underlying bill, but made no mention of the tax amendments.
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