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.
I attended the October 5th payroll industry telephone conference call. On the call Scott Mezistrano, with the IRS Industry Stakeholder Engagement and Strategy, provided the listeners with updated information on the W-2 Verification Code Pilot Program for the 2018 filing season (2017 Forms W-2).
First just a quick review of the program itself. It was implemented during the 2016 filing season. Its purpose is to combat tax-related identity theft and tax refund fraud. It requires a 16-character code be input into box 9 so that the tax filer can be verified when filing taxes electronically. It only appears on the Form W-2 copies B (filed with the employee’s federal tax return) and C (the employee’s copy). If the Verification Code (VC) is deemed valid, then the IRS treats the W-2 data submitted with the Form 1040 to be valid, thereby reducing false fraudulently filed tax returns.
For the 2016 Forms W-2 only ADP, Ceridian, Intuit, Paychex, Payroll People, Prime Pay and Ultimate Software participated in the test pilot program. If the taxpayer had a VC it was entered 34% of the time. However, when it was entered, it was validated 97% of the time.
For the 2017 Forms W-2 there will be 10-12 service bureaus or payroll software companies participating in the program. This includes the same companies as in 2016 along with the National Finance Center and a few more payroll service providers. This should result in approximately 66 million Forms W-2 containing the code. That results to about 1 in 4 forms that will be filed.
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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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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Massachusetts Governor Charlie Baker included a plan to reinstate the “fair-share contribution” formerly assessed against employers without a health insurance plan in his fiscal year 2018 budget. The assessment would recommence as of January 1, 2018 if passed. They are intended to partially cover the $600 million shortfall in the state healthcare system (Mass Health) for low-income residents. The fair-share contributions were repealed in 2013 with the advent of the Affordable Care Act. For more detailed information check out the Associated Industries of Massachusetts blog.