Your SlideShare is downloading. ×
0
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
The vitals on employment taxes and medical resident FICA
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

The vitals on employment taxes and medical resident FICA

1,122

Published on

This session will explore recent developments in employment taxes and address issues such as withholding and reporting for telecommuting employees and employees working in more than one state.

This session will explore recent developments in employment taxes and address issues such as withholding and reporting for telecommuting employees and employees working in more than one state.

Published in: Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
1,122
On Slideshare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
19
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. 22nd Annual Health SciencesTax ConferenceThe vitals on employment taxes and medicalresident FICADecember 3, 2012
  • 2. Disclaimer► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.Page 2 The vitals on employment taxes and medical resident FICA
  • 3. DisclaimerErnst & Young refers to the global organization of member firms of Ernst & YoungGlobal Limited, each of which is a separate legal entity. Ernst & Young LLP is a clientserving member firm of Ernst & Young Global Limited operating in the US. For moreinformation about our organization, please visit www.ey.com.This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of thisdocument may be reproduced, transmitted or otherwise distributed in any form or byany means, electronic or mechanical, including by photocopying, facsimiletransmission, recording, rekeying, or using any information storage and retrievalsystem, without written permission from Ernst & Young LLP. Any reproduction,transmission or distribution of this form or any of the material herein is prohibited andis in violation of US and international law. Ernst & Young LLP expressly disclaimsany liability in connection with use of this presentation or its contents by any thirdparty.Views expressed in this presentation are not necessarily those of Ernst & Young LLP.Page 3 The vitals on employment taxes and medical resident FICA
  • 4. Presenters► Robert P. Christopher ► Jennie DeVincenzo Executive Director Ernst & Young LLP McGaw Medical Center of Iselin, NJ Northwestern University +1 732 516 4572 Chicago, IL jennie.devincenzo@ey.com ► Ken Hausser► Larry Abowitz Ernst & Young LLP Ernst & Young LLP Iselin, NJ Iselin, NJ +1 732 516 4558 +1 732 516 4223 kenneth.hausser@ey.com larry.abowitz@ey.com ► Tom Meyerer Ernst & Young LLP Washington, DC +1 202 327 8380 thomas.meyerer@ey.comPage 4 The vitals on employment taxes and medical resident FICA
  • 5. Agenda – employment tax update► Medical resident Federal Insurance Contributions Act (FICA) ► Background ► Recent timeline ► What’s next? ► McGaw case study► Employment tax update ► Unemployment insurance (UI) ► Short-term business travelers ► Home office workers ► Federal/State information sharing ► New York MTA payroll tax ► 2013 federal employment tax changes ► Rates/limitsPage 5 The vitals on employment taxes and medical resident FICA
  • 6. Agenda – employment tax update► Employment tax update (cont’d.) ► Tax extenders ► Wage recharacterizations ► Medicare tax ► W-2 reporting of health benefits ► FICA on severance pay – Quality Stores case ► Voluntary classification settlement program ► HIRE Act reminderPage 6 The vitals on employment taxes and medical resident FICA
  • 7. Medical resident FICA
  • 8. Medical resident FICA background► Student FICA exception – Section 3121(b)(10) – applies to: ► Service in employ of ► “School, college or university” (or supporting organization thereof) ► By a “student” regularly enrolled and attending classes► Pre-April 1, 2005 ► Facts and circumstances determinations ► Many cases went both ways► Post-March 31, 2005 ► Regulations took effect April 1, 2005 ► Excluded those working 40+ hours a week from “student” status ► Services are not “incident to and for the purpose of pursuing a course of study.”Page 8 The vitals on employment taxes and medical resident FICA
  • 9. Medical resident FICA background► Mayo case ► District court ruled Internal Revenue Service (IRS) regulation invalid ► 8th Circuit held regulation valid ► Supreme Court upheld 8th Circuit decision ► Regulation is within Treasury Department authority to issue if it is not arbitrary, capricious or contrary to the statute. ► Regulation is within Treasury Department’s authority to distinguish between students who are working and workers who are studying. ► Distinguishing based on hours worked is reasonable and is easily administrable, thereby avoiding uncertainty. ► Therefore, under the regulations, effective April 1, 2005, medical residents are generally not considered “students” and do not qualify for student FICA exception.Page 9 The vitals on employment taxes and medical resident FICA
  • 10. Medical resident FICA background► March 2010 – IRS News Release 2010-25 ► “Administrative determination” that medical residents excepted from FICA tax under student exception for periods prior to date the new regulations took effect (April 1, 2005)► Correspondence packages from IRS regarding perfection of claims ► Securing consents of residents ► Revising amounts of claimsPage 10 The vitals on employment taxes and medical resident FICA
  • 11. Medical resident FICA timeline► March 2010 – IRS administrative decision to allow medical resident FICA refunds for periods prior to April 1, 2005. ► Mayo case – effective April 1, 2005, medical residents are generally not considered “students” and do not qualify for student FICA exception.► November 2010 – March 2011 – employers filed refund claims► August 2011 – IRS begins review of claims.► January 2012 – IRS begins to approve claims by issuing Settlement Letters.► February 2012 – IRS begins to issue FICA refunds.► June 2012 – IRS halts refunds due to questions surrounding interest rates for employer refunds.► August 2012 – IRS begins issuing refunds again and assigns two agents to work the backlog of “skipped” periods .Page 11 The vitals on employment taxes and medical resident FICA
  • 12. Medical resident FICAWhat’s next?► Obtain refund checks from IRS (two checks per quarter) ► Interest verification – several errors identified ► Interest allocation – watch for rounding► Prepare and mail checks to consenting physicians ► Interest paid to foreign persons► Prepare and mail Forms W-2c to consenting physicians ► Submit Forms W-2c and W-3c to SSA► Prepare and mail Forms 1099-INT to consenting physicians with interest greater than $600 ► Interest paid to foreign persons ► Submit Forms 1099-INT and 1096 to IRSPage 12 The vitals on employment taxes and medical resident FICA
  • 13. McGaw Medical Center of NorthwesternUniversity
  • 14. Northwestern University Feinberg School of Medicine Ann & Robert Norwegian H. Lurie American Children’s Hospital Hospital of Chicago McGaw Medical Center Jesse Brown Northwestern VA Medical Memorial Center Hospital The Rehabilitation Institute of ChicagoPage 14 The vitals on employment taxes and medical resident FICA
  • 15. Members► Northwestern University Feinberg School of Medicine► Ann & Robert H. Lurie Children’s Hospital of Chicago► Northwestern Memorial Hospital► The Rehabilitation Institute of Chicago► *Jesse Brown VA Medical Center► *Norwegian American HospitalPage 15 The vitals on employment taxes and medical resident FICA
  • 16. Consortium history► “The development of a well-rounded, coordinated teaching program by the Medical Center should enable us to attract a much higher caliber of interns and residents over a period of time. This, in turn, will result in improving patient care in each of our institutions.” Erwin A. Stuebner, President, Board of Directors, Passavant Memorial Hospital.Page 16 The vitals on employment taxes and medical resident FICA
  • 17. History► Established 1966 as NU Medical Center ► NUMS ► Children’s Memorial Hospital ► Evanston Hospital Corporation ► Passavant Memorial Hospital ► Wesley Memorial Hospital ► Chicago Maternity Center ► Rehabilitation Institute of Chicago ► Lakeside VA Medical Center► Name changed to McGaw in 1972Page 17 The vitals on employment taxes and medical resident FICA
  • 18. Mission► To sponsor, organize, coordinate and supervise the graduate medical education programs and activities maintained by the members.► Original mission also included joint purchasing, shared facilities, development of group practices and joint planning efforts toward a unified medical center.Page 18 The vitals on employment taxes and medical resident FICA
  • 19. Consortium roles and functions► ACGME sponsoring institution for all GME programs offered by its members► Administrative home of GME Committee and GME Office► Associate Dean for GME serves as DIO► Administers payroll and benefits for all residents and fellows► All house staff appointed by McGawPage 19 The vitals on employment taxes and medical resident FICA
  • 20. Governance► Members of the Board of Directors of the Medical Center shall serve not as representatives of their institutions, but as members concerned with the overall welfare and development of the Center. They would act as liaison between the Board of Directors of the Center and their respective institutions.” The original McGaw Constitution, February 1967Page 20 The vitals on employment taxes and medical resident FICA
  • 21. Board of Directors► Governed by Board of Directors► Board determines compliance with the corporation’s stated purpose► Board approves corporate officers► Board approves annual budgetPage 21 The vitals on employment taxes and medical resident FICA
  • 22. GME Committee► Chaired by DIO (GME Dean)► GMEC membership composed of standing and rotating members: PD’s, Member executive leadership, house staff► Establishes and implements policies and procedures in compliance with ACGME institutional and program requirements► Hear and determine challenges to any reallocation of residents among programs► Accountable to the Board► Two subcommittees: non-standard Programs Committee and Diversity CouncilPage 22 The vitals on employment taxes and medical resident FICA
  • 23. House staff payroll and benefits► All house staff sign appointment contracts with McGaw► House staff payroll and benefits organized by McGaw► McGaw invoices members (and other funding sources) for stipends, benefits and admin fees► McGaw ratio of benefits to stipend: 9.7% (add 5% for admin fees)► *National ratio of benefits to stipend: 31%*AAMC Survey of Resident/Fellow Stipends and Benefits, 2011Page 23 The vitals on employment taxes and medical resident FICA
  • 24. Strengths► Authority for GME centralized across all member institutions► Recruiting advantages► Financial advantages► Administrative/coordinating advantagesPage 24 The vitals on employment taxes and medical resident FICA
  • 25. Challenges► Potential for competing interests among membersPage 25 The vitals on employment taxes and medical resident FICA
  • 26. Employment tax update
  • 27. Unemployment insurancePage 27 The vitals on employment taxes and medical resident FICA
  • 28. Direct reimbursement vs experience rateConsiderations► Overall financial conditions of the organization and impact to reductions in work force (current and prospective)► Length of commitment to changing method► State unemployment trust fund balance ► Surcharges, interest assessments, etc.► State taxable wage base (current and prospective)► State new business rate ► Sometimes industry specific ► Prior experience rate if applicable► If currently under experience rate method – any electionsPage 28 The vitals on employment taxes and medical resident FICA
  • 29. Two state components to federal UI loansthat can increase employment tax expenseFederal Unemployment Interest on unpaid balanceInsurance tax (FUTA) creditreduction► Title XII allows states to take ► Interest accrues daily on a fiscal year federal loans for the payment of basis (October 1 – September 30)* SUI benefits ► Interest payments cannot be made► Businesses are subject to additional from state UI trust funds. FUTA if state has not repaid loan ► Interest payments are due on according to statutory schedule September 30. (FUTA credit reduction). ► States often impose special interest assessments on employers for the payment of interest on Title XII loans. * Note that interest was waived for 2009 and 2010Page 29 The vitals on employment taxes and medical resident FICA
  • 30. FUTA credit reductionHow it works► If a state with an outstanding federal loan balance on January 1 of two consecutive years fails to repay the entire loan amount by November 10 of the second year, employers in that state are subject to a FUTA credit reduction of 0.3%.► The credit reduction increases by an additional 0.3% each year (special computation of the credit reduction in subsequent years).► In 2012, the FUTA rate for employers entitled to the full FUTA credit is 0.6%. ► A loss in the FUTA credit of 0.3%, results in a net FUTA rate of 0.9%. ► A loss in the FUTA credit of 0.6%, results in a net FUTA rate of 1.2%, and so on.Page 30 The vitals on employment taxes and medical resident FICA
  • 31. FUTA credit reductionActual and projected Year of Year FUTA credit States original loan reduction applies applicable 2007 2009 Michigan 2008 2010 Indiana, Michigan and South Carolina 2009 2011 18 states (plus Indiana, Michigan and South Carolina resulted in 21 total FUTA credit reduction states for 2011) 2010 2012 21 states projected as of September 13, 2012 * Michigan repaid its loan balance in 2012 by issuing bonds.Page 31 The vitals on employment taxes and medical resident FICA
  • 32. Our pick of the five states most likely to havesignificant future UI cost increases► A number of factors were considered in determining the states most at risk for significant future SUI cost increases. ► Higher than usual claimant benefits ► Employer contributions that are low in relationship to state trust fund debt. ► Wage base below $15,000 (an increase in FUTA wage base is likely.)► For 2012, the top five, based on the risk factors evaluated are: ► California ► Delaware ► Massachusetts ► Ohio ► PennsylvaniaPage 32 The vitals on employment taxes and medical resident FICA
  • 33. Short-term business traveler (STBT)issues Shaun, please show graphic of car moving into a new state or somethingPage 33 The vitals on employment taxes and medical resident FICA
  • 34. Current domestic landscape► Proposed federal legislation (H.R. 1864/S. 3485) ► Mobile Workforce Simplification Act ► Allows employees to work outside their home states for up to 30 days without being subject to nonresident state income tax and withholding. ► Similar to earlier proposed bills that have not received support or traction historically. ► Significant support from Council on State Taxation (COST) ► Legislation has opposition in several states where the revenue impact would be significant.Page 34 The vitals on employment taxes and medical resident FICA
  • 35. Current domestic landscape► States actively seeking to generate revenue► Aggressive electronic state audits► States changing deferred compensation taxation► States consider wages/salary and equity compensation► Local tax jurisdictions also now auditing nonresident workforceIssues employer currently face:► Income tax not withheld in nonresident work state for short-term business traveling workforce► Statute of limitations (employer or employee)► Limited system capabilities to track STBTs and to calculate the appropriate nonresident wage allocation and income tax withholding► Complicated withholding tax calculation for deferred and equity-based compensationPage 35 The vitals on employment taxes and medical resident FICA
  • 36. Businesses are acting sooner rather thanlater Companies who address STBT Why now? compliance proactively realize benefits ► This can be a multi-jurisdictional, ► Audit readiness multi-agency and multi-year issue. ► Controlling reputational risk ► Potential risk of domino effect — one audit ► Greater confidence around can open other related issues. STBT deployments ► More jurisdictions will focus on it in ► Taking control of relationships the future with authorities ► Data is widely available. ► Right people, right place, right time with greater certainty No surprisesPage 36 The vitals on employment taxes and medical resident FICA
  • 37. Issues, considerations and leadingpractices Issue Considerations Leading practice How do we get our ► Human Resources Information Systems ► Focus on travel to most aggressive states arms around the (HRIS) and payroll system capabilities ► Quarterly travel projections/true-up ► Travel documentation (expense reports, ► Repercussions/rewards aligned with corporate culture (reimbursement, traveling population? calendars, airline reservations, etc.) performance, etc.) ► Telecommuters ► Foreign jurisdiction travel ► Setting the tone/risk tolerance from the top How and what ► Communication vehicle ► Communicate employer/employee issues and risks associated with should be ► Explanation of the issue and risks noncompliance communicated to associated with noncompliance ► Implement an accountability framework to drive compliance employees? ► Tax equalization and return preparation (i.e., tracking participation and completion of trainings) assistance ► Communicate differences between employer and employee requirements (e.g., NY 14-day rule) ► Ease of implementation What type of ► System constraints ► Single policy for tax equalization company policy ► Employee perception ► Reimbursement policy for assistance with tax return preparation is best? ► Reputational risk ► Ten-day threshold except for New York and Connecticut ► Four hours = workday ► Threshold baseline for withholding ► Includes all “wage” types How are companies ► Definition of workday ► Deal with prior year issues when and if they arise, vs. retroactively dealing creating and/or ► Definition of compensation with prior years adapting their ► Prior year exposure ► Implement in most aggressive states first then follow with other states, focus policies? ► Which states to focus on on states where business travel to the state is highest, apply 80/20 approach to implementation. ► Management audit verification with compliancePage 37 The vitals on employment taxes and medical resident FICA
  • 38. Enforcement of nonresident incomerequirements► States are aggressively enforcing their nonresident income tax requirements. Frequently, audits are triggered by the mailing of an information request. ► Case in point – Minnesota This year, the Minnesota Department of Revenue began mailing letters to large US employers requesting documents and information relevant in identifying income tax underpayments. Within three days of receiving the letter, employers must acknowledge its receipt by email or phone, and provide the requested information within 20 days. The data requested of employers spans four years (2008 through 2011).Page 38 The vitals on employment taxes and medical resident FICA
  • 39. Nonresident income tax may apply even ifcorporate income tax does not► A state’s requirements for establishing liability to file and pay corporate income tax may differ from those that apply to nonresident income tax withholding. ► Case in point – Virginia In response to a request for ruling, the Virginia Department of Revenue held on September 21, 2012 that although there were insufficient facts to establish Nexus for Virginia corporate income tax purposes, the presence of employees within the state constituted the requisite nexus to impose nonresident withholding tax collection responsibilities in accordance with Virginia law.Page 39 The vitals on employment taxes and medical resident FICA
  • 40. Understand the implications of homeoffice workers► Many states take the position that when employees regularly work from home, their home is a place of business. ► Having a place of business in a state triggers not only an income tax withholding obligation, but other business taxes as well. ► Case in point – New Jersey In a recent decision of the New Jersey Superior Court, Appellate Division, it was determined that a foreign corporation with a principal place of business in Maryland was subject to New Jersey’s corporate income tax requirements because one of its employees was allowed to work on a full- time basis from her New Jersey home office (Telebright Corporation v. Director, N.J. Super. Ct. App. Div., Dkt. No. A-5096-09T2, March 2, 2012). ► Case in point – California The California State Board of Equalization held in 2012 that a recruiter working from her home in California for a Massachusetts business created Nexus for California franchise tax purposes (even though she was classified as an independent contractor).Page 40 The vitals on employment taxes and medical resident FICA
  • 41. Federal-state agreements to share auditinformation are paying off► The IRS has entered into agreements with a number of states to share audit information. Consequently, employers have a greater incentive to disclose findings in all jurisdictions. ► Case in point – New York The New York Department of Taxation and Finance (the Department) is imposing automatic income tax withholding audit assessments on employers that made wage reporting adjustments as the result of an IRS employment tax audit. The Department asserts that these income tax withholding audit assessments are not subject to the normal three year statute of limitations.Page 41 The vitals on employment taxes and medical resident FICA
  • 42. New York MTA payroll tax heldunconstitutional► On August 22, 2012, a New York Supreme Court judge upheld Nassau County’s assertion that New York state’s Metropolitan Commuter Transportation Mobility Tax (MCTMT or MTA Payroll Tax) is unconstitutional (Mangano v. Silver, No. 14444/10 (N.Y. Sup. Ct., Nassau County)).► Taxpayers must continue to pay the tax until a final decision is reached.► Should the final outcome result in a repeal of the MTA payroll tax, most taxpayers could be entitled to refunds for periods beginning in 2009, provided they file protective refund claims now.Page 42 The vitals on employment taxes and medical resident FICA
  • 43. Potential implications to 2013 net pay 2012 2013 projected Total change Medicare tax is 1.45% of all Additional Medicare tax of 0.9% of wages in excess of covered wages 0.9% on wages in excess of $200,000 $200,000 Social Security tax of 4.2% Social Security tax of 6.2% 2.0% of all covered wages up to the annual limit Graduated federal income tax Graduated federal income tax Increase of 3%, except those rates of 25%, 28%, 33% and rates of 28%, 31%, 36% and in highest tax bracket have 35% 39.6%, respectively increase of 4.6% Social Security wage base of Social Security wage base Increase in wage base of $110,100 projected to increase to $3,600 or tax of $223.20 $113,700Page 43 The vitals on employment taxes and medical resident FICA
  • 44. Limit on flexible spending accounts► Effective in 2013, to be qualified under a cafeteria plan, an employee’s health flexible spending account contributions cannot exceed $2,500 per year (with the annual amount indexed each year thereafter for inflation).► The $2,500 limit applies without regard to employees’ marital status, and each may elect the statutory limit.► The limit does not apply to employer non-elective contributions (i.e., flex credits).Page 44 The vitals on employment taxes and medical resident FICA
  • 45. Extender legislation hopefuls in 2012 Provision Description Expiration date Undergraduate and graduate- Exclusion of up to $5,250 per 31 December 2012 level education assistance year Adoption assistance Effective in 2012, exclude up 31 December 2012 to $12,170 per year, indexed for inflation Work Opportunity Tax Credit Other than certain veteran 31 December 2011 (WOTC) groups Mass transit benefits Renew or reinstate the parity 31 December 2011 between parking and transit benefits Expense tax credit for A credit of up to $150,000 for 31 December 2012 employer child care acquiring, constructing, assistance refurbishing or expanding child care facility Bush-era tax rate reductions The tax rates are set to 31 December 2012 automatically increase in 2013 to 28%, 31%, 36% and 39.6% (currently 25%, 28%, 33% and 35%, respectively)Page 45 The vitals on employment taxes and medical resident FICA
  • 46. In the face of uncertainty► Be certain to make educational reimbursements in 2012 ► Payments that fall into 2013 could be fully taxable (because the $5,250 would no longer apply)► Continue to certify WOTC eligible employees with the state employment agency ► A retroactive reinstatement to January 1, 2012 is still likely and will apply only to employees properly certified► Continue to monitor developments and expect last-minute Congressional action► Consider the state/local decoupling issues► Consider all of the ramifications of accelerating to 2012 bonus payments scheduled for 2013Page 46 The vitals on employment taxes and medical resident FICA
  • 47. Wage recharacterizationRev. Rul. 2012-25► Section 62(a)(2)(A) provides that an employee may deduct certain business expenses paid by the employee in connection with the performance of services as an employee under a reimbursement or other expense allowance arrangement.► Section 62(c) provides that for purposes of Section 62(a)(2)(A), an arrangement will not be treated as a reimbursement or other expense allowance arrangement if: (1) the arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement; or (2) the arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement.Page 47 The vitals on employment taxes and medical resident FICA
  • 48. Wage recharacterizationRev. Rul. 2012-25► Under Section 1.62-2(c), if a reimbursement or other expense allowance arrangement meets the requirements of business connection, substantiation and returning amounts in excess of substantiated expenses, all amounts paid under the arrangement are treated as paid under an accountable plan.► Amounts treated as paid under an accountable plan are excluded from an employee’s gross income, are exempt from withholding and payment of employment taxes and are not reported as wages on the employee’s Form W-2.Page 48 The vitals on employment taxes and medical resident FICA
  • 49. Wage recharacterizationRev. Rul. 2012-25► Section 1.62-2(d)(1) provides that an arrangement satisfies the business connection requirement if it provides advances, allowances or reimbursements only for deductible business expenses that are paid or incurred by the employee in connection with the performance of services as an employee for that employer.► Thus, not only must an employee actually pay or incur a deductible business expense, but the expense must arise in connection with the employment for that employer.Page 49 The vitals on employment taxes and medical resident FICA
  • 50. Wage recharacterizationRev. Rul. 2012-25► Section 1.62-2(d)(3)(i) provides that the business connection requirement will not be satisfied if a payor pays an amount to an employee regardless of whether the employee incurs or is reasonably expected to incur deductible business expenses.► Failure to meet this reimbursement requirement of business connection is referred to as wage recharacterization, because the amount being paid is not an expense reimbursement but rather a substitute for an amount that would otherwise be paid as wages.► Generally, wage recharacterization is present when the employer structures compensation so that the employee receives the same or a substantially similar amount whether or not the employee has incurred deductible business expenses related to the employer’s business.Page 50 The vitals on employment taxes and medical resident FICA
  • 51. Medicare tax to increase in 2013► Effective in 2013, employers are required to withhold an additional Medicare tax of 0.9% on wages in excess of US$200,000 for all employees regardless of marital status.► There is no matching employer contribution, and employees are required to pay the additional tax based on a threshold of income and their filing status.► Taxpayers with combined income in excess of US$250,000 pay the remaining Medicare tax on their Federal Form 1040.► The additional Medicare tax is not separately reported on Form W-2.► Form 941 will include a separate line for additional Medicare tax.► Also effective in 2013, investment income is subject to Medicare tax.► A number of employees may need to revise their Form W-4 in 2013 to take into account this additional tax.Page 51 The vitals on employment taxes and medical resident FICA
  • 52. Form W-2 – reporting of health benefits► Effective in tax year 2012, employers are required to report the aggregate cost of employer-sponsored health coverage on Form W-2. ► Box 12, code DD is used for this purpose.► The requirement to report employer-sponsored health coverage costs is informational only. ► Amounts reported in Box 12, Form W-2 are also not included in employees’ taxable income (for now).► Until the issuance of further guidance, an employer is not subject to the reporting requirement for a calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year.Page 52 The vitals on employment taxes and medical resident FICA
  • 53. Form W-2 – reporting of health benefits(cont’d)► Terminated employees ► An employer may apply any reasonable method of reporting the cost of coverage for an employee who terminated employment during the calendar year, as long as the method is used consistently for all employees covered under the plan. ► An employer is not required to issue a Form W-2 reporting the aggregate reportable cost of insurance to a terminated employee who requests the Form W-2 within 30 days of severance.► Successor employer ► If an individual transfers to a new successor employer, generally both the predecessor and successor employers must report the employer-sponsored group health plan coverage that each provided, unless the successor reports using the alternate procedure (Revenue Procedure 2004-53).Page 53 The vitals on employment taxes and medical resident FICA
  • 54. Form W-2 – reporting of health benefits(cont’d)► Multiple employers/common paymaster ► Generally, each employer of an employee must report the cost of coverage that it provides. However, if the employers are related employers and one such employer is a common paymaster under IRC Section 3121(s), the common paymaster must include the aggregate reportable cost of the coverage provided to that employee by all the employers for whom it serves as the common paymaster.Page 54 The vitals on employment taxes and medical resident FICA
  • 55. Form W-2 – reporting of health benefits(cont’d)► The following are required to be included in aggregate cost: ► Major medical ► Health FSA value for the plan year in excess of employees’ cafeteria plan salary reductions for all qualified benefits ► Hospital indemnity or specified illness (insured or self insured) paid through salary reduction (pre-tax) or by employer ► Employee Assistance Plan (EAP) providing employer-sponsored health care coverage (if employer charges COBRA premium) ► Wellness programs providing employer-sponsored health care coverage (if employer charges COBRA premium) ► On-site medical clinics providing employer-sponsored health care coverage (if employer charges COBRA premium) ► Domestic partner coverage included in taxable wagesPage 55 The vitals on employment taxes and medical resident FICA
  • 56. Form W-2 – reporting of health benefits(cont’d)► The following are optionally included in aggregate cost: ► Dental or vision plan not integrated into another medical or health plan ► Health Reimbursement Arrangement (HRA) contributions ► Employee Assistance Plan (EAP) providing employer-sponsored health care coverage (if employer does not charge COBRA premium) ► On-site medical clinics providing employer-sponsored health care coverage (if employer does not charge COBRA premium) ► Wellness programs providing employer-sponsored health care coverage (if employer does not charge COBRA premium) ► Multi-employer plans ► Self-funded plans not subject to COBRA ► Forms W-2 provided by third-party sick pay provider to employees of other employersPage 56 The vitals on employment taxes and medical resident FICA
  • 57. Form W-2 – reporting of health benefits(cont’d)► The following are not included in aggregate cost: ► Health FSA funded solely by salary reductions for all qualified benefits ► Health Savings Arrangement (HSA) contributions (employer or employee) ► Archer Medical Savings Account (Archer MSA) contributions (employer or employee) ► Hospital indemnity or specified illness (insured or self insured) and paid on after-tax basis ► Governmental plans providing coverage primarily for members of the military and their familiesPage 57 The vitals on employment taxes and medical resident FICA
  • 58. Form W-2 – reporting of health benefits(cont’d)► The following are not included in aggregate cost: ► Federally recognized Indian tribal government plans and plans of tribally charted corporations wholly owned by a federally recognized Indian tribal government ► Accident or disability income ► Long-term care ► Liability insurance ► Supplemental liability insurance ► Workers’ compensation ► Automobile medical payment insurance ► Credit-only insurance ► Excess reimbursement to highly compensated individual included in gross income ► Payment/reimbursement of health insurance premiums for 2% shareholder-employee included in gross incomePage 58 The vitals on employment taxes and medical resident FICA
  • 59. FICA on severance pay► On September 7, 2012, the Sixth Circuit Court of Appeals affirmed the 2010 decision of the Michigan District Court that Quality Stores is entitled to a refund of the Social Security/Medicare tax that it collected and paid on severance payments (United States of America v. Quality Stores Inc., et al., No. 10-1563).► In 2008, the Federal Circuit ruled in favor of the IRS in CSX, concluding that similar severance type payments were subject to FICA (CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir.2008)) . CSX did not request a rehearing, and on August 11 ,2008, the opinion was considered final.► The recent Quality Stores decision creates a split in the circuits. ► The Government is likely to petition for certiorari to the Supreme Court on the basis of the split, and on the fact of administrative importance citing the dollar amount of FICA claims at issue.Page 59 The vitals on employment taxes and medical resident FICA
  • 60. FICA on severance pay (cont’d)► Employers are potentially eligible for a refund of FICA on severance pay pending the outcome of the Quality Stores. ► A protective claim must be filed within the statute of limitations. ► The tax must be paid according to the current tax rules, using the protective claim process to request a refund after the fact. ► There must be at least a reasonable basis (a position with disclosure) for filing the protective claim (e.g., a court decision, such as Quality Stores).► The deadline for filing protective refund claims for severance payments made in 2009 is April 15, 2013. Protective refund claims may also be filed for any payments made in 2010, 2011 and 2012.Page 60 The vitals on employment taxes and medical resident FICA
  • 61. FICA on severance pay (cont’d)► The IRS began disallowing CSX-type claims in 2010. ► This means that for certain taxpayers, the two-year period is expiring. ► If taxpayers want to maintain their protective claims for refund without bringing suit, they can file Form 907, Agreement to Extend the Time to Bring Suit. Under IRC Section 6532(a)(2), the two-year period to bring suit can be extended to a specified date if the IRS and the taxpayer agree in writing to the extension and Form 907 is used for this purpose. ► The IRS has been signing these agreements for CSX-types of refund disallowances while the Sixth Circuit’s Quality Stores opinion was pending.Page 61 The vitals on employment taxes and medical resident FICA
  • 62. Voluntary Classification SettlementProgram (VCSP)► Entity must have consistently treated workers as nonemployees and must have filed all required Forms 1099-MISC for the past three years► Properly apply for VCSP using Form 8952► Pay 10% of the employment tax liability under IRC Section 3509 due on the compensation paid to the workers for the most recent year► Agree to extend the period of assessment on employment by three calendar years beginning after the year during which the entity starts treating the workers as employers► Execute a closing agreement that finalizes the terms of VCSP and make full payment of the employment tax liabilityPage 62 The vitals on employment taxes and medical resident FICA
  • 63. Voluntary Classification SettlementProgram (VCSP) (cont.)► As of October 15, 2012, XXX Forms 8952 have been filed with the IRS under the VCSP.► These filed Forms 8952 pertain to more than XXX workers subject to reclassification.Page 63 The vitals on employment taxes and medical resident FICA
  • 64. HIRE Act reminder► FICA holiday for employer’s share of FICA for part of 2010► Applies to: ► Qualified employees ► Are able to certify that they have not been employed for more than 40 hours for 60 days ending on their start date ► Began their employment after February 3, 2010 and before January 1, 2011 ► Are not replacing current employees, unless the employees leave voluntarily or are terminated for cause ► Are not individuals as described in IRC Section 51(i)(1) (such as the employer’s relative) ► Qualified employers ► Public companies or private sector Section 501(a) employers ► Educational institutions ► Does not include the US government, state government or any political subdivision thereofPage 64 The vitals on employment taxes and medical resident FICA
  • 65. HIRE Act reminder – retention credit► Qualified employers can claim the credit on their Form 990-T for qualified employees who: ► Were employed by the employer for no less than 52 consecutive weeks ► Received during the second 26 weeks of their employment at least 80% of the wages paid to them in the first 26 weeks► The credit may be claimed for a retained worker for the first taxable year ending after March 18, 2010 (the date of enactment of the HIRE Act), for which the retained worker satisfies the 52 consecutive week requirement.► Taxpayer with a 2010 fiscal year end after February 3, 2010 may use its 2010 Form 990-T to claim the credit.Page 65 The vitals on employment taxes and medical resident FICA
  • 66. HIRE Act reminder – UBI retention credit► As long as an exempt organization (EO) is a qualified employer, it can claim the retention credit on any retained HIRE Act-qualified employees to offset its unrelated business income (UBI) tax liability.► Retention credit ► The retention credit is calculated on Form 5884-B, New Hire Retention Credit. ► The value of the retention credit as reported on Form 5884-B, Line 13 is reported on Form 3800, Line 1aa, “New hire retention credit (Form 5884-B)” as a general business credit. ► Form 3800, Line 1aa then flows up to Form 990-T, Part IV, Line 40-c, “General Business Credit. Attach Form 3800,” where the credit can be claimed against any UBI generated by the EO.Page 66 The vitals on employment taxes and medical resident FICA
  • 67. HIRE Act reminder► Why mention now? ► Applied to 2010 (hires) and 2011 (retainees) ► Statute of limitations still open to amend returns and claim creditsPage 67 The vitals on employment taxes and medical resident FICA
  • 68. Thank you! Questions?Page 68 The vitals on employment taxes and medical resident FICA

×