American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
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The President has released the 2014 budget proposal. The payroll-related items are summarized below.
Federal Unemployment Tax Act (FUTA) surtax
The 0.2% surtax would be reinstated and made permanent, effective for wages paid on or after January 1, 2014.
Federal Unemployment Tax Act (FUTA) credit reductions
The proposal would provide short-term relief to employers by suspending interest payments on state UI debt and suspending the FUTA credit reduction for employers in borrowing states in 2013 and 2014. The FUTA wage base would also be raised in 2016 to $15,000 per worker paid annually, index the wage base to wage growth for subsequent years, and reduce the net Federal UI tax from 0.8% (after the proposed permanent reenactment and extension of the FUTA surtax) to 0.37%. States with wage bases below $15,000 would need to conform to the new FUTA base. States would maintain the ability to set their own tax rates, as under current law. The proposal would be effective upon the date of enactment.
Code Sec.6051 would be revised to require employers to include an “identifying number” for each employee, rather than an employee’s SSN, on Form W-2. By revising the Code to require an identifying number, the general rules under Code Sec. 6109 would apply and allow Treasury and the IRS to exercise regulatory authority to require or permit a truncated SSN on Form W-2, effective upon enactment.
Work opportunity Tax Credit (WOTC)
The proposal would permanently extend the WOTC to apply to wages paid to qualified individuals who begin work for the employer after December 31, 2013.The proposal would permanently extend the Indian employment credit to apply to wages paid to qualified employees in tax years beginning after December 31, 2013. In addition, the proposal would modify the calculation of the credit. For tax years beginning after December 31, 2013, the credit would be equal to 20 percent of the excess of qualified wages and health insurance costs paid or incurred by an employer in the current tax year over the amount of such wages and costs paid or incurred by the employer in the base year. The base year costs would equal the average of such wages and costs for the two tax years prior to the current tax year.
Small business wage credit
Qualified employers would be provided a tax credit for increases in wage expense, whether driven by new hires, increased wages, or both. The credit would be equal to 10% of the increase in the employer’s eligible wages paid during the credit period over the employer’s eligible wages paid during the base period. Base period wages are calculated using wages paid in 2012. The credit period is the twelve month period following the date of enactment. Eligible wages are the employer’s Old Age Survivors and Disability Insurance (OASDI) wages. The maximum amount of the increase in eligible wages would be $5 million per employer, for a maximum credit of $500,000. For employers with no OASDI wages in the base period, eligible wages would be 80 percent of their OASDI wages paid in the credit period. To focus the benefit on small businesses, the credit would be limited to employers with less than $20 million in OASDI wages in 2012. The credit would be a general business credit. A similar credit would be provided for qualified tax-exempt employers. The Secretary would have the authority to prescribe rules with respect to eligible wages.
The credit would only apply with respect to the wages of employees performing services in a trade or business of a qualified employer or, in the case of a qualified employer exempt from tax under Code Sec. 501(a), in furtherance of the activities related to the purpose or function constituting the basis of the employer’s exemption under Code Sec. 501. Self-employment income would not be considered eligible wages.
A qualified employer means any employer other than the United States, any State or possession of the United States, or any political subdivision thereof, or any instrumentality of the foregoing. A qualified employer also includes any employer that is a public institution of higher education. For purposes of determining the $5 million limit on the maximum amount of OASDI wages available for the credit, all employees of all corporations that are members of the same controlled group (using the 80% ownership test for filing a consolidated return) would be treated as employed by a single employer. For partnerships, proprietorships, etc., all employees under common control would be treated as employed by a single employer. The Secretary would have the authority to prescribe rules with respect to predecessor and successor employers.
The credit also would be available for increases in earnings subject to tier 1 Railroad Retirement taxes subject to OASDI rates. Similar benefits would be extended to non-mirror code possessions (Puerto Rico and American Samoa) through compensating payments from the U.S. Treasury. The proposal would be effective for qualified wages paid during the twelve-month period beginning on the date of enactment.
Contractor Taxpayer Identification Numbers (TINs)
Contractor who receive payments of $600 or more in a calendar year from a particular business would be required to furnish to the business (on Form W-9) the contractor’s certified TIN. A business would be required to verify the contractor’s TIN with the IRS, which would be authorized to disclose, solely for this purpose, whether the certified TIN-name combination matches IRS records. If a contractor failed to furnish an accurate certified TIN, the business would be required to withhold a flat-rate percentage of gross payments. Contractor receiving payments of $600 or more in a calendar year from a particular business could require the business to withhold a flat-rate percentage of their gross payments, with the flat-rate percentage of 15, 25, 30, or 35 percent being selected by the contractor, effective for payments made to contractors after December 31, 2013.
Information return electronic reporting
Regulations would be expanded to to allow reduction of the 250-return threshold in the case of information returns such as those required by Subpart B, Part III, Subchapter A, Chapter 61, Subtitle F, of the Internal Revenue Code (generally Forms 1099, 1098, 1096, and 5498), effective for taxable years ending after December 31, 2013.
Information return electronic filing penalty
The proposal would establish an assessable penalty for a failure to comply with a requirement of electronic (or other machine-readable) format for a return that is filed. The amount of the penalty would be $25,000 for a corporation or $5,000 for a tax-exempt organization. For failure to file in any format, the existing penalty would remain, and the proposed penalty would not apply, effective for returns required to be electronically filed after December 31, 2013.
The proposal would set forth standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes. The proposal would also provide standards for holding employee leasing companies solely liable for such taxes if they meet specified requirements. The provision would be effective for employment tax returns required to be filed with respect to wages paid after December 31, 2013.
The IRS could require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. The reduced penalties for misclassification provided under current law would be retained, except that lower penalties would apply only if the service recipient voluntarily reclassifies its workers before being contacted by the IRS or another enforcement agency and if the service recipient had filed all required information returns (Forms 1099) reporting the payments to the independent contractors. For service recipients with only a small number of employees and a small number of misclassified workers, even reduced penalties would be waived if the service recipient (1) had consistently filed Forms 1099 reporting all payments to all misclassified workers and (2) agreed to prospective reclassification of misclassified workers. It is anticipated that, after enactment, new enforcement activity would focus mainly on obtaining the proper worker classification prospectively, since in many cases the proper classification of workers may not have been clear. (Statutory employee or nonemployee treatment as specified under current law would be retained.)
The Department of the Treasury and the IRS also would be permitted to issue generally applicable guidance on the proper classification of workers under common law standards. This would enable service recipients to properly classify workers with much less concern about future IRS examinations. Treasury and the IRS would be directed to issue guidance interpreting common law in a neutral manner recognizing that many workers are, in fact, not employees. Further, Treasury and the IRS would develop guidance that would provide safe harbors and/or rebuttable presumptions, both narrowly defined. To make that guidance clearer and more useful for service recipients, it would generally be industry- or job-specific. Priority for the development of guidance would be given to industries and jobs in which application of the common law test has been particularly problematic, where there has been a history of worker misclassification, or where there have been failures to report compensation paid. Service recipients would be required to give notice to independent contractors, when they first begin performing services for the service recipient, that explains how they will be classified and the consequences thereof, e.g., tax implications, workers’ compensation implications, wage and hour implications.
The IRS would be permitted to disclose to the Department of Labor information about service recipients whose workers are reclassified. To ease compliance burdens for independent contractors, independent contractors receiving payments totaling $600 or more in a calendar year from a service recipient would be permitted to require the service recipient to withhold for Federal tax purposes a flat rate percentage of their gross payments, with the flat rate percentage being selected by the contractor. The proposal would be effective upon enactment, but prospective reclassification of those covered by the current special provision would not be effective until the first calendar year beginning at least one year after date of enactment. The transition period could be up to two years for independent contractors with existing written contracts establishing their status.
The federal minimum wage would be increased from $7.25 to $9.00 per hour by the end of 2015, and indexed to inflation thereafter.
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