IRS Official Talks About Employment Tax Issues
John Tuzynski, IRS chief of employment tax policy, spoke at the 2013 Capital Summit of the American Payroll Association (APA) on IRS employment tax matters, including IRS activities designed to increase compliance.
Medicare tax takes effect
The 0.9 percent additional Medicare tax, which took effect in 2013, is estimated to raise $130 billion over 10 years, Tuzynski said. Even though a 0.9 percent tax does not sound like much, he said the employer is responsible for withholding tax on compensation over $200,000, without regard to the filing status of the employee. An employer that does not withhold the tax may be liable for penalties, but it is necessary to see what the employee pays before the IRS can determine what the employer owes.
A new line 5(e) on revised Form 941 is for employers to report the tax withheld, Tuzynski noted. The tax is also reported on Form W-2, Box 6. If the tax withheld exceeds the tax owed, the employee can file Form 8959 to “true up” the tax owed. The IRS has not yet posted a final version of this form.
Voluntary Classification Settlement Program
Tuzynski discussed the IRS’s Voluntary Classification Settlement Program (VCSP), which allows employers to reclassify their workers as employees for future years, provided certain conditions are met. He noted the complexity of determining whether a worker is an employee or an independent contractor, and said IRS Publication 15 has some information on the factors. He added that the IRS’s determinations are not binding on the Department of Labor or on state governments.
The program was revised so that employers can come in for relief if they are under audit, as long as it is not an employment tax audit. Rebecca Harshberger, the APA’s representative to the IRS Information Reporting Program Advisory Committee (IRPAC), said that this is a welcome change; the old rule, eliminating employers under any type of audit, was a “great inhibitor,” she said. The old rule prevented IRS large-case taxpayers under continuous audit from participating in the program, Tuzynski noted.
Tuzynski said that the IRS has received more than 1,000 applicants for VCSP since the program started in 2011. He reminded taxpayers that the program is available to household employers. He also advised taxpayers to consider applying for relief under VCSP if the IRS starts an income tax audit.
Officers of S corporations
Another IRS compliance initiative looks at officers of S corporations who also provide substantial services, where the S corporation has substantial income. According to Tuzynski, the IRS normally performs 2,000 to 3,000 audits per year on this issue. He said the IRS has the power to look at the services performed and recharacterize corporate dividends as compensation, subject to employment taxes.
Accountable plan rules
Another problem area involves the accountable plan rules, Tuzynski said. Employers may recharacterize compensation as a reimbursement of expenses in an attempt to reduce income subject to employment taxes. This is a particular problem for travel reimbursements and tool/equipment reimbursements. The IRS is seeing lots of issues in the tool rental area, he said, adding that he hopes to see additional guidance in this area.
Tuzynski said the IRS is doing a lot of matching of information forms. Many employers are not issuing proper Forms 1099, providing either a bad taxpayer identification number (TIN) or no TIN. If this occurs, backup withholding applies at a rate of 28 percent. Payors should perform due diligence and verify compliance on the forms being submitted on their behalf. He said penalties have also increased.
The Patient Protection and Affordable Care Act imposed a $2,500 limit on employee contributions to health flexible spending accounts (FSAs), Harshberger said, but the IRS did not issue guidance on this provision until May 2012. Under the guidance, the provision did not take effect until 2013, but she explained that early adopters who acted before the IRS issued guidance adopted FSAs that imposed the limit for 2012. IRPAC has asked the IRS to allow early adopters to increase their plan limits for 2012, but the IRS has not responded to this suggestion.
©2013 CCH. All Rights Reserved.