Employment Tax Updates and Common Audit Issues Sheree Cunningham Federal State & Local Government

INTRODUCTION  1974 University of South Florida graduate  Worked for the Internal Revenue Service for 37 years

 Worked for the Collection Division, the Examination Division, and most recently the Tax Exempt/Government Entities Division  Specialized in Employment Taxes for the last 24 years  Appointed the North Florida District Employment Tax subject matter expert in 1996  Became a Federal State & Local Government Specialist (FSLG) in 1999  One of 3 Federal State Local Government Specialists (FSLG) covering the state of Florida

 Responsible for assisting governmental agencies in complying with the Federal employment tax laws

Topics:  Reporting of Employer-Sponsored Health Care Coverage on Form W-2  Employee or Independent Contractor  Wage Issues  Form 1099-Misc Requirements & Filing  Fringe benefits  Misc. Items

Reporting of Employer-Sponsored Health Care Coverage on Form W-2 The information contained in this presentation is current as of the date it was presented. It should not be considered official guidance

Health Care Coverage on Form W-2  Amounts continue to be not taxable, just as in the past

 Value continues to be excludable from the employees income  Is for informational purposes only  Box 12 of the Form W-2, Code DD

When to Include the Benefits  Optional for all employers in 2011  Mandatory for certain employers starting in 2012

 Transitional relief may apply to small employers in 2012 (and only ends when further guidance is issued)

Employers Subject to Reporting  Employers who provide applicable coverage  Includes federal, state and local entities

 Does not include coverage for military and their families  Does not include federally recognized Indian tribal governments

Transition Relief  Interim guidance in Notice 2012-09 provides temporary relief

 In effect until IRS publishes further guidance  Will apply, at a minimum, for 2012 Forms W-2 issued in 2013

Transition Relief (But May Report)  Filed fewer than 250 Forms W-2 for the prior year

 Forms W-2 to terminated employees who request Forms W-2 before the end of the year  Forms W-2 from third-party sick pay provider

Transition Relief (But May Report)  Multi-employer plans  Health Reimbursement Arrangements  Dental and vision plans not integrated into another plan  Dental and vision plans which give choice:

 Decline  Elect and pay additional premium

Transition Relief (But May Report)  Self-insured plans of employers not subject to COBRA continuation coverage or similar requirements  Not Required if employer does not charge a COBRA premium:  Employee assistance plans  Wellness programs  On-sight medical clinics

Reporting on the Form W-2  Code “DD” in Box 12  No reporting on Form W-3  Not required if not otherwise issuing a W-2 to the individual

 Common paymaster  Related employers  Predecessor / Successor

What to Report on the Form W-2  Aggregate reportable cost of the coverage  Any employer-sponsored coverage except:  Archer Medical Savings Accounts  Health Savings Accounts  Salary reductions for flexible spending arrangements

Exclusions  Coverage for long-term care  HIPAA “excepted benefits”  Specialized coverage if paid on an “after tax” basis

Exclusions (continued)  Excess reimbursement to highly compensated individual, included in gross income

 Payment or reimbursement of health insurance premiums for 2% S Corporation shareholder employee, included in gross income

Amount to Report on Form W-2  Aggregate amounts paid by employer and employee

 Reporting does not impact coverage taxability

Valuation Process  Methods of Valuation:  Premium Charged Method

 COBRA Applicable Premium Method  Modified COBRA Premium Method  Composite Rates

Changes in Coverage or Cost    

During the year Middle of a period Periods which cross calendar years Notification of change in coverage after close of calendar year

Summary  General Information  Required reporting  Employers subject to reporting  Transition Relief  Effects on Form W-2  Coverage to include  Amounts to include  Valuation process

Question 1  Employers who file 300 Forms W-2 for 2011 will not be required to report the health care coverage in the Forms W-2 they issue for 2012 in January 2013.  A. True  B. False

More Information ACA pages on IRS.gov:  Information on Provision 9002  Frequently asked questions

 Notice 2012-09

Employee or Independent Contractor ???

Employment Under the Internal Revenue Code  IRC Sec. 3121(d)(2) Common law test  IRC Section 3121(d)(3) Other employees by statute  IRC 3401(c) Officer, employee, or elected official of government  Reg. 1.1402(c)-2(b) Holder of public office is not self-employed

Types of Employees  Common law or specific tax statute  Identified as an employee under a Section 218 Agreement  Identified as employee under state or local law  Status may differ for FICA and for Federal income tax withholding

COMMON LAW STANDARD  Employer-employee relationship exists when the business for which the services are performed has the right to direct and control the worker who performs the services  Not only as to what work shall be done but also  How work shall be done

Categories of Evidence Facts that provide evidence of the degree of control and independence fall into three categories Behavioral

Control Financial Control Relationship of the parties

Section 218 Agreement  What is a Section 218 Agreement Agreement entered into between Governmental Agency and the Social Security Administration

 Who is covered Any individual who performs services that are included under an agreement entered into under Section 218 of Social Security Act

Examples of Public Officials         

Mayor Board members Judge/justice of the peace County commissioner Registrar of deeds Tax collector or assessor Road commissioner Legislator or elected representative County or city attorney, marshal, sheriff

Fee-Based Public Officials  Individuals who receive their income solely from fees received directly from the public are subject to self-employment tax and are not employees  If fees are received by government and paid over to the official, they are considered wages paid to an employee

Consequences of Misclassification of Employees If you misclassify an employee as an independent contractor, you may be held liable for the worker’s payroll taxes

Independent Contractor vs. Employee  Publication 1779 Provides factors used to help determine worker status as either an independent contractor or an employee  Publication 1976 Contains information on Section 530 Relief  SS-8 Can be filed by firm or worker with Internal Revenue Service to determine worker status

Sources of Funding The source of the funds cannot dictate the status of the worker

Volunteers  Employee or Independent contractor  Payments under Domestic Volunteer Service Act (Title II and III)  Reporting payments to Volunteers  Stipends  Reimbursements under accountable plan  Reimbursements not under an accountable plan

Question 2  Under IRC Section 3401(c), elected officials of governments are specifically identified as employees for income tax purposes.  A. True  B. False

Form 1099-Misc. Requirements and Filing

Form 1099-MISC     

Box 1- Rents Box 3- Other Income Box 6- Medical & Health Care Payments Box 7- Non-Employee Compensation Box 14- Gross Proceeds Paid to an Attorney

Reporting Gross Proceeds  If you do not pay the attorney fees separately, report all of gross proceeds in Box 14  If you pay the attorney fees separate from the payment to the payee report as follows:

Report the attorney fee in Box 14 Report gross proceeds in Box 3 to claimant (separate 1099-MISC.)

Form W-9, Request for Taxpayer Identification Number and Certification Purpose of form  Secure W-9  Solicit TIN even for 1 time transactions  Develop your own form  May incorporate into other business forms

Taxpayer Identification Number (TIN) and Certification ~ Form W-9  Sole proprietor uses SSN or EIN  Corporations, partnerships & estates use EIN  Enter business name as shown on required Federal tax documents on “Name” line  Can enter DBA or business name on “Business Name” line

LLC’s and Reportable Payments  An LLC may be taxed as either a sole proprietorship, a partnership, or a corporation  Obtain a W-9 from the payee to determine its status  Name must match with SSN or EIN  Enter business name as shown on required Federal tax documents on “Name” line  Can enter DBA or business name on “Business Name” line  Certify TIN is correct

Fringe Benefits

FRINGE BENEFITS  WHAT IS A FRINGE BENEFIT? ANY PROPERTY, SERVICE OR CASH (Other than Salary, Provided by Employer)  TAXABLE UNLESS EXCLUDED SPECIFICALLY BY LAW  Example: Medical Premiums IRC 106

ACCOUNTABLE PLAN  Allowance or reimbursement plan where amounts can be non-taxable  IRC Section 62(c)  Three requirements for a qualified Accountable Plan

THREE RULES  Business Connection  Adequate Accounting  Excess returned on a timely basis

NON-ACCOUNTABLE PLAN  DOES NOT MEET ALL 3 REQUIREMENTS FOR AN ACCOUNTABLE PLAN  BENEFIT IS FULLY TAXABLE WHEN PAID

SPECIAL ACCOUNTING RULES  Employer can elect to defer withholding  Employer can withhold at 25%  November and December benefits may be treated as paid in next year  Employer can elect not to withhold FIT  Available for employer provided vehicles only  Employer must tell employee  Employer includes in wages/ W-2

UNIFORMS  Excluded from wages if clothing/uniform  Specifically required as a condition of employment AND  Not worn or adaptable to general usage as ordinary clothing

UNIFORMS  Uniforms must be qualified in order to be exempt from tax  Plain pants and shirt do not qualify as uniform  Suits, sports coats, etc worn by plain clothes officers do not qualify as uniforms

Cell Phones  Section 2043 of The Small Business Jobs Act of 2010  Removes Cell Phones from definition of listed property under IRC § 280F(d)(4)(v)

 Effective for years beginning after December 31, 2009  Notice 2011-72 clarifies treatment

Group-Term Life Insurance  Coverage under $50,000- not taxable  Coverage over $50,000  Determine taxable cost (See Pub 15-B)  Report in boxes 1, 3, and 5  Report in box 12 with code C

Health Club Memberships  Employer provided on-premises facility is not a taxable fringe  Must be located on employer premises  Must be operated by the employer  Substantially all use is by employees of the employer, employee spouses, and dependent children  Employer must submit a copy of W-4 only if directed to do so by written notice  If employer pays for a fitness program at off-site hotel, athletic club, etc., the value is included in compensation

Overnight Rule  Must be away from tax home substantially longer than an ordinary day’s work  Sleep or rest required to meet demands of work  Specific time for rest not in IRC or Regs  RevRuls 75-170 and 75-432  IRS Pub 463

NO TAXABLE INCOME

Class C Meal Reimbursements  Allowed by Florida Statute 112.061  Should be reported as wages or other compensation if no overnight travel expenses are incurred Ref: IRC 162(a)(2) Pub 463 RevRuls 75-170 and 75-432 Regs. 1.274-2(c) and (d)

Question 3  An accountable plan only has to meet 2 of the 3 requirements of an accountable plan.  A. True  B. False

EMPLOYERPROVIDED VEHICLE DOT

EMPLOYER - PROVIDED VEHICLES  Personal use is Taxable  Commuting  Vacation, weekend, use by spouse

 Taxable use  Withhold and Report on W-2

SUBSTANTIATION REQUIREMENTS  Business vs. Personal Miles  Must Be Recorded

 IF NO RECORDKEEPING:  Value of All Auto Use is Wage

 IF RECORDS ARE PROVIDED:  Only Personal Use is Wage

Methods of Substantiation  Adequate Records or Other Sufficient Corroborating Evidence  Qualified Non-personal Use Vehicle  Substantiation Safe Harbor

Adequate Records/Other Sufficient Corroborating Evidence Employees must substantiate:  Mileage per business trip  Date  Business purpose (Temp. Reg. §1.274-5T(c)(6)) Employees may substantiate business use by maintaining mileage logs, account books, diaries, or similar records.

Qualified Non-Personal Use Vehicles * personal use is non taxable if all requirements are met

QUALIFIED NON-PERSONAL USE VEHICLES  Clearly marked police and fire vehicles  Clearly marked public safety officer vehicles  Unmarked vehicle used by law enforcement officer if the use is officially authorized  Ambulance or hearse used for its specific purpose  School bus

QUALIFIED NON-PERSONAL USE VEHICLES (cont)  Any vehicle designed to carry cargo with a loaded gross vehicle weight > 14,000 lbs  Delivery truck with seating for the driver, or the driver plus a folding jump seat  A passenger bus with a capacity of at least 20 passengers used for its specific purpose  Tractor and other special purpose farm vehicles

QUALIFIED NON-PERSONAL USE VEHICLES Provided all requirements are met, the employee’s personal use of a qualified non-personal use vehicle will not result in taxable income to the employee.

SAFE HARBOR METHOD Auto used solely for official business  Requires written policy Personal use permitted/commuting only  Requires written policy Vehicle used in farming  Business use is deemed 75% Total (full) value inclusion  100% of annual lease value of vehicle is reported to employee as income

VALUATION RULES FOR EMPLOYER-PROVIDED TRANSPORTATION

General Valuation Rule Employer-Provided Vehicles Unless the employer elects one of the special valuation rules, personal use of a government

auto is valued at the fair market value (FMV). FMV is the amount an employee would pay to 3rd party to purchase or lease the same or comparable auto in the geographic area in which the auto is available for use.

General Valuation Rule  Fair Market Value - Amount paid to a third party to obtain the same type of vehicle  Determine percentage between business and personal miles  Multiply FMV by percentage of personal use

Special Valuation Rules  Commuting rule  Cents-per-mile rule  Lease value rule  Unsafe conditions commuting rule

SPECIAL VALUATION RULES ELECTION - NOTIFICATION - USE    

Election is made on auto by auto basis No IRS notification required Same rule not required for all autos Once used for an auto, should be used for all subsequent years for that auto  May switch to commuting rule for any year that auto qualifies

Special Valuation Rules Commuting Rule  Can only be used if employee is required to commute in vehicle  Written policy required  Cannot be used for a control employee / highly compensated employee  $3.00 per round-trip commute Regs 1.61-21(f)

Who is a Governmental “CONTROL” EMPLOYEE?  Elected Official, or  Employee at Executive Level V  2011 & 2012 -$145,700 or

 Highly-Compensated Employee  2012 - $115,000 (Employer election)

EMPLOYER-PROVIDED VEHICLE Cents-Per-Mile Rule:  Cannot be used for a luxury vehicle  Cars with FMV greater than $15,900 (2012)  Trucks with FMV greater than $16,700 (2012)  Use until car no longer meets

requirements

Special Valuation Rules  Cents-Per-Mile Rule  Must pass Regular Use or Mileage test  Maintenance, insurance, and employer-provided fuel included in rate  Personal miles times rate (currently .555 for 2012) Regs 1.61-21(e)

Special Valuation Rules  Lease Valuation Rule     

May be used for any vehicle and employee Must adhere to consistency requirements Insurance and maintenance included in rate Fuel not included in rate Must be recalculated as of Jan 1 following end of every four full calendar years Regs 1.61-21(d)

Question 4  Provided all requirements are met, the employee’s personal use of a qualified non-personal use vehicle will not result in taxable income to the employee.  A. True  B. False

Misc. Items (hot topics)

IRC SECTION 3402(t) REQUIRED WITHHOLDING ON GOVERNMENT PAYMENTS REPEALED Public Law 112-56

Voluntary Classification Settlement Program (VCSP)  Announcement 2011-64  Allows eligible taxpayers to voluntarily reclassify workers as employees  Not currently under examination  Not available to government employers for workers covered by a Section 218 Agreement

 Reclassify for future tax periods with limited tax liability for past nonemployee treatment

Affirmation of Tax-Exempt Status Government entities are frequently asked to provide a tax-exempt number or “determination” letter to prove its status as a “tax-exempt” entity.  IRS does not provide a tax-exempt number.  A government entity can receive a determination of its status as a political subdivision, instrumentality of government, etc. under IRC §115  Fee for letter ruling  IRS will issue a “government affirmation letter”  Call 1-877-829-5500 to request the letter

Questions?

Contacts  FSLG Specialists  Sheree CunninghamSt. Petersburg 727-568-2505  Fernando Echevarria- Plantation 954-423-7406  Michael Moore – West Palm Beach 561-616-2092

 To ask a question email us at [email protected]

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