In case you hadn’t heard Congress is working on a tax bill! Yes, a bit snarky there. But this new tax bill does have a direct effect on payroll, especially our year end and year beginning updates. Normally by now we would have received the Notice that gives us the 2018 tax charts, the Form W-4 would have been finalized etc. But we were notified in the monthly IRS payroll industry phone conference call, on Thursday Dec. 7, that these items are on hold until the tax bill is passed or abandoned. Now since it is unlikely this bill will just be abandoned, the massive changes to tax charts, taxing of fringe benefits etc. is going to require extensive updates for the IRS to incorporate. So even if the bill is effective January 1, 2018, which it is indicated to be, don’t expect the new charts immediately. The IRS needs time to “review and implement” the required changes. So what will probably happen is that we will have an “implementation period” as we did in 2009, when new tax legislation was passed. Employers will continue to use the 2017 charts and guidance until the info is received. This may pose a problem as many of the fringe benefits that we currently offer such as transportation passes, educational assistance and relocation may have tax status changes from nontaxable to taxable. So be sure to track these payments or benefits so they can properly taxed if need be when the final bill is implemented.
Nina Olson is with the Taxpayer Advocate Service (TAS). This is an independent organization within the IRS that assists taxpayers who are experiencing “troubles” with the IRS in getting issued resolve through the “normal channels”. During recent congressional hearing she was asked what seemed like simple questions concerning the types of IRS guidance taxpayers can rely on. But the answer was not simple. She has written a blog; IRS Frequently Asked Questions Can be a Trap for the Unwary on July 26, 2017, that contains excellent information for those of us who need to research tax questions and rely on tax guidance from the IRS. I recommend reading it to ensure you know what you can and cannot rely on when researching the IRS website for tax guidance.
A recent article from RIA told of the following problem:
Mike McGuire from IRS Modernized e-File (MeF) told listeners to the May 4 payroll industry telephone conference call that the IRS has been rejecting “tens of thousands” of 2017 first quarter electronically-filed Forms 941, Schedule B (Report of Tax Liability for Semiweekly Schedule Depositors) because the total tax liability on Schedule B does not agree with the total tax liability on Form 941, line 12 (Total taxes after adjustments and credits). Prior to the 2017 tax year, the total tax liability on Schedule B had to agree with Form 941, line 10 (Total taxes after adjustments), or the IRS would reject it. However, the IRS revised some of the line numbers on Form 941, beginning with the 2017 tax year, to take into account that “qualified small businesses” may now elect to claim a portion of their research credit as a payroll tax credit against their employer FICA tax liability, rather than against their income tax liability. Beginning with the 2017 tax year, the total tax liability on Schedule B must agree with Form 941, line 12 (Total taxes after adjustments and credits) rather than line 10. Some electronic filers have not adjusted their programs to take this change into account. Rejected returns have to be resubmitted to the IRS.
Make sure your system has made this change.
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The IRS wants to make sure that employers understand tax ramifications of the various payments that they make to employees or that their employees might receive. So the IRS has posted a reminder for employers when it comes to tips verses service charges. The key difference between the two categories affect the taxation for employees as well as the reporting. So-called “automatic gratuities” and any amount imposed on the customer by the employer are service charges, not tips. Service charges are generally wages, and they are reported to the employee and the IRS in a manner similar to other wages. On the other hand, special rules apply to both employers and employees for reporting tips. Employers should make sure they know the difference and how they report each to the IRS.
- Cash tips received directly from customers.
- Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.
- The value of any noncash tips, such as tickets, or other items of value.
- Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangements.
Four factors are used to determine whether a payment qualifies as a tip. Normally, all four must apply. To be a tip:
- The payment must be made free from compulsion;
- The customer must have the unrestricted right to determine the amount;
- The payment should not be the subject of negotiations or dictated by employer policy; and
- Generally, the customer has the right to determine who receives the payment.
If any one of these doesn’t apply, the payment is likely a service charge.
What are service charges? Amounts an employer requires a customer to pay are service charges. This is true even if the employer or employee calls the payment a tip or gratuity. Examples of service charges commonly added to a customer’s check include:
- Large dining party automatic gratuity
- Banquet event fee
- Cruise trip package fee
- Hotel room service charge
- Bottle service charge (nightclubs, restaurants)
Generally, service charges are reported as non-tip wages paid to the employee. Some employers keep a portion of the service charges. Only the amounts distributed to employees are non-tip wages to those employees.
All cash tips and noncash tips should be included in an employee’s gross income and subject to federal income taxes.ployers are required to retain employee tip reports, withhold income taxes and the employee share of Social Security and Medicare taxes from the wages paid, and withhold income taxes and the employee share of Social Security and Medicare taxes on reported tips from wages (other than tips) or from other funds provided by the employee. In addition, employers are required to pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income. Employers must report income tax and Social Security and Medicare taxes withheld from their employees’ wages, along with the employer share of Social Security and Medicare taxes, on Form 941, Employer’s Quarterly Federal Tax Return, and deposit these taxes in accordance with federal tax deposit requirements.Tips reported to the employer by the employee must be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social Security tips) of the employee’s Form W-2, Wage and Tax Statement. Enter the amount of any uncollected social security tax and Medicare tax in Box 12 of Form W-2. See the General Instructions for Forms W-2 and W-3.
Reporting Service Charges: Employers who distribute service charges to employees should treat them the same as regular wages for tax withholding and filing requirements, as provided in Publication 15, Employer’s Tax Guide. Distributed service charges must be included in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips) of the employee’s Form W-2.
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Every so often the IRS solicits comments on its various forms. This is an excellent opportunity for payroll professionals to get their two cents in on the forms they must deal with on a regular or sometimes irregular basis. This time, the IRS is soliciting comments concerning Forms 941 (Employer’s Quarterly Federal Tax Return), 941-PR (Planilla Para La Declaracion Trimestral Del Patrono-LaContribucion Federal Al Seguro Social Y Al Seguro Medicare), 941-SS (Employer’s Quarterly Federal Tax Return-American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands), 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, 941-X(PR), Ajuste a la Declaracion Federal Trimestral del Patrono o Reclamacion de Reembolso, Schedule R, Allocation Schedule for Aggregated Form 941 Filers, Schedule B (Form 941) (Employer’s Record of Federal Tax Liability), Schedule B (Form 941-PR) (Registro Suplementario De La Obligacion Contributiva Federal Del Patrono), and Form 8974 Qualified Small Business Payroll Tax Credit for Increasing Research Activities.
What about the Form 941 or any of the series do you find difficult, needs better explanations, could be revamped or should just be left as is? Now is the time to speak up.
Written comments should be received on or before July 7, 2017 to be assured of consideration, and should be directed to Laurie Brimmer, Internal Revenue Service, room 6526, 1111 Constitution Avenue NW., Washington, DC 20224. Requests for additional information or copies of the form and instructions should be directed to Ralph Terry, at Internal Revenue Service, room 6526, 1111 Constitution Avenue NW., Washington, DC 20224, or through the internet at Ralph.M.Terry@irs.gov.
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With email scams now attacking payroll can in person scams be far behind? The IRS doesn’t think so! So is that person visiting your payroll office claiming to be from the IRS legitimate or an imposter? To answer that question the Internal Revenue Service has created a special new page on IRS.gov to help you determine which is which… Fake or real. First the IRS reminds us that IRS employees do make official, sometimes unannounced, visits to taxpayers or employers as part of their routine casework. But typically these visits fall into three categories:
- First to discuss taxes owed or tax returns due. You should be aware if you had tax returns due.
- Second to visit taxpayers or employers being audited. Again you would be aware of this audit.
- Finally if conducting an investigation. You might not be aware of this investigation, however these agents never demand any sort of payment and will present law enforcement credentials including a badge.
For more information visit the IRS page.
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The IRS is required, as part of its continuing effort to reduce paperwork (pause for giggles from Payroll Professionals) to invite the public to comment on either proposed or continuing information collections. This is all part of the Paperwork Reduction Act of 1995. This time around it is forms we all know and love. The IRS is currently taking comments the following forms: W-2, W-2c, W-2A, W-2GU, W-2VI, W-3, W-3c, W-3cPR, W-3PR, and W-3SS.
They want to know how to improve the form so it is less burdensome. One area that immediately comes to mind is the lack of space for reporting the Additional Medicare Tax. In my opinion it would be better to have a separate box for the wages and the taxes. Just a reminder that box 9 is already taken as of 2017 so you can’t suggest using that box for anything. You need to submit your comments directly to the IRS. They accept comments from any user so you don’t have to be an “accounting firm” or a “law firm”. They want to hear from users. Written comments must be received on or before December 12, 2016 to be assured of consideration. Written comments are directed to:
Tuawana Pinkston, Internal Revenue Service, Room 6526, 1111 Constitution Avenue NW, Washington, DC 20224
Requests for additional information or copies of the collection tools should be directed to Sara Covington, Internal Revenue Service, Room 6526, 1111 Constitution Avenue NW., Washington, DC 20224, or through the internet at Sara.L.Covington@irs.gov.