Tax Researcher
Automatic Data Processing, Inc.
Contact Debbie Zengerl at ADP
Statutory Research Department Reporting
ph: 410-933-6468 e-mail: [email protected]
___________________________________________________________________________________________
VOLUME XX
ISSUE 9
EMPLOYER SERVICES -- ROSELAND, N.J.
NEW HIRE REPORTING --An Additional Assignment For Employers,
But One With Proven Value
Several states passed laws in the early 1990s requiring
employers to report their newly-hired employees to the state child
support agency, or the state employment security agency. For
child support purposes, new hire reporting is a method of notifying
the state that an obligor (that is, someone who owes child support)
has either become employed or has changed jobs. Then the state
serves a child-support withholding order on the individual's
employer, and collects child support at the source----the paycheck.
SEPTEMBER, 2003
Multi-state employers. An employer that has employees working
in more than one state may designate a single state (in which it
has employees) to receive all of its new hire reports. Any
employer taking advantage of this option must notify the U.S.
Department of Health and Human Services as to which state it has
selected. Also, any employer selecting this option MUST report
electronically. The National Directory of New Hires maintains a list
of employers using the multi-state option.
The designated
reporting locations of those employers are made available to all
states so that a state may discover where all of its new hires are
being reported.
Further, for unemployment compensation insurance
purposes, new hire reporting is a method of reducing fraud by
notification to the state that an individual is no longer eligible for
unemployment benefits because of re-employment.
Penalties. Federal law allows states to assess fines for an
employer's failure to report its newly hired employees. Standard
fines may not exceed $25 for each employee the employer fails to
report. But, if the failure to report is due to a conspiracy between
employer and employee, the fine may be $500 per employee.
New hire reporting was so successful at the state level
that Congress decided to mandate its use nationwide in an effort to
reform the welfare system. One goal behind the Federal mandate
was to shift the burden of supporting welfare children back to the
non-custodial parents by enforcing court-ordered child support.
*****
PAY-BACK FOR RESTAURANT
EMPLOYERS: The FICA Income Tax Credit
With few exceptions, new hire reporting was mandatory
in every state beginning October 1, 1997, as required by the
Personal Responsibility and Work Opportunity Reconciliation Act.
This Federal law set certain minimum guidelines for states, but
within those guidelines states have considerable leeway. States
which already had reporting programs as of October 1, 1997 were
given until October 1998 to meet the Federal guidelines.
Who is affected. All employers, without exception, are required to
report all newly hired employees. Previously, various states limited
the reporting requirements to specific industries that may have a
high turnover rate or that suffer from a high degree of
unemployment fraud, while other states had exempted certain
individuals from being reported due to their age or their low
income. Under the Federal requirements effective in October
1998, these exemptions ended, except as to any state or Federal
employee performing intelligence or counter-intelligence work.
Information to be reported. New hire reports must contain
information related to both the employer and the employee. At a
minimum, each report is to contain the employer's name, address
and Federal employer identification number, and the employee's
name, address, and Social Security number. Some states require
the reporting of additional items of information about the employee.
Deadlines. Reports must be filed within 20 days of the date of
hire. Employers that report electronically or by magnetic media
may limit their reports to two per month. Such reports are to be
submitted no more than 16 days apart and no fewer than 12 days
apart.
Federal law directs that the required
Reporting format.
information shall be reported on Form W-4 (Employee's
Withholding Allowance Certificate) or its equivalent, at the
discretion of the employer. While the Federal Form W-4 contains
spaces for all of the Federally-mandated information, it does not
contain spaces for additional information that a state may require
(such as date of birth or date of hire). Employers are free to
develop their own forms and should note that several states have
developed forms of their own for employers to use.
Delivery. New hire reports may be transmitted on paper or
magnetic media (via first-class mail), or they may be transmitted by
electronic means. Many states accept fax transmissions, internet
filing, private delivery services and other means of reporting.
Before 1988, restaurant operators with tipped employees
paid Social Security and Medicare (FICA) tax on ONLY those tip
amounts deemed to be "wages" since they were being used to
support a tip credit. Generally, these employers claimed a tip
credit for part of the minimum wage rate they were required to pay.
So, if NO tip credit were claimed, there would have been NO FICA
tax on the employee's reported tips.
However, effective January 1, 1988, the law was
changed to make ALL reported tips subject to FICA tax. The tax
was paid by the employee (subject to the taxable wage limit for
Social Security tax, but not limited for Medicare tax), and matched
by the employer.
In 1993, Congress changed the law again, to reduce the
FICA tax burden on employers operating food and beverage
establishments ("restaurants"). However, Congress did not simply
repeal the employer-paid FICA tax on tips. Instead, an INCOME
TAX CREDIT was established to offset the employer's alreadypaid FICA tax on any reported tips in excess of tips used to
support a tip credit. The change became effective for taxes paid
after December 31, 1993, and provided potential tax relief for 1994
and in subsequent years.
How the Employer's FICA Income Tax Credit Works
The Internal Revenue Code already allows business tax
credits for various purposes, which reduce Federal income tax
liability. The amount of the FICA Income Tax Credit is the
employer's FICA tax rate (currently 7.65%) multiplied times any
employee-reported tip income which was not used to support tip
credit for minimum wage purposes.
For example, under current Federal minimum wage
requirements, if an employee is paid a cash wage of $2.13 per
hour, and he or she reports tips of $6.02 (on average) per hour, the
first $3.02 per hour of reported tips may be considered "wages" to
bring the employee to the required Federal minimum wage rate of
$5.15 per hour ($2.13 cash wage + $3.02 tip credit = $5.15). In
this example, the remaining $3.00 per hour of reported tips ($6.02 $3.02) is not considered "wages" under the Fair Labor Standards
Act, and the FICA tax paid by the employer on this portion of
reported tips is eligible for the FICA Income Tax Credit.
Like other general business tax credits under the Internal
Revenue Code, this tax credit is not refundable. An employer must
have Federal income tax liability (present, past or future) to use the
credit. If there is no Federal income tax liability in a particular year
or if the available credits exceed the Federal income tax liability,
the unused credit can be carried back one year or forward up to
twenty years, to years in which there is a Federal tax liability
against which the credit can be applied.
Also, the matching FICA tax payments an employer
makes are a business expense deduction against Federal taxable
income. To the extent that the employer claims the FICA Income
Tax Credit, the employer will not be able to receive a business
expense deduction for that amount of FICA tax. However, the
value of a tax CREDIT for Federal income tax purposes may be
several times the value of the FICA tax as a business expense
DEDUCTION.
Computing the Credit
Importantly, if state minimum wage rate laws were
applied when the payroll calculations were made, and the state
wage rate and maximum tip credit differ from Federal, then the
payroll tip credit must be re-calculated using FEDERAL standards,
if the FICA Income Tax Credit is to be calculated correctly.
Regardless of how the payroll was calculated, the employer must
compute the reported tips which qualify by using Federal minimum
wage and tip credit standards --- that is, a minimum wage rate of
$5.15 per hour and maximum tip credit of $3.02 per hour. Here is
an illustration:
employees. Later, the employer can change that date, provided it
treats all benefits furnished in a calendar year as paid no later than
December 31 of that calendar year. IRS approval of such changes
is not required, and notification to the IRS of such elections is not
necessary.
There are two methods the employer may use for
withholding taxes upon payment of the benefit. First, the employer
may add the value of the fringe benefit to the regular wages for a
payroll period and compute the employment taxes on the total
amount. Alternatively, the employer may withhold Federal income
tax on the value of the benefit at the 25% flat rate that now applies
to supplemental wages.
Generally, by January 31 of the following year,
employers must determine the ACTUAL value of fringe benefits
furnished to employees. But, under a special rule, the employer
may elect to treat fringe benefits that actually are provided in
November and December, as paid in the following year.
Naturally, employers who make this election must notify
affected employees, since the employees must use the same rule
in accounting for related deductions. The notification must occur at
or before the time that Form W-2 is provided to the employees.
Again, the employer does not have to notify the IRS of the election,
and the election can be changed without IRS approval, as long as
the appropriate amount of income is reported for the change
period, and the applicable taxes are withheld and deposited.
STEP I -- Assume a cash wage of $3.00 per hour paid by the
employer, totaling $120 ($3.00 X 40 hours), and tips reported by
the employee of $320 ($8.00 tips per hour X 40 hours). Therefore,
with total earnings of $440 ($120 + $320), the employer-paid FICA
tax is $33.66 ($440 X 7.65%).
Note that for certain types of non-cash fringe benefits the
IRS provides special valuation rules.
For example, special
valuation rules exist for personal use of a company car, chauffeur
services, personal flights on company aircraft, and meals provided
at an employer-operated eating facility.
STEP II -- Assume the same cash wages of $3.00 per hour paid by
the employer, or $120 ($3.00 X 40 hours), and reported tips used
to reach the Federal minimum wage rate ($5.15), of $86 ($5.15 $3.00 cash wage = $2.15 tip credit X 40 hours). Therefore, the
"tips deemed wages" under the Fair Labor Standards Act is $86.
Employment taxes withheld on taxable fringe benefits
must be deposited in the same manner as taxes withheld on cash
wages. The employer may make a reasonable estimate of the
value of fringe benefits provided by the payment date in order to
make timely deposits. Also, the actual value of the fringe benefit
and its related tax liability must be reported on Form 941 (or other
employment tax return) for the reporting period in which it treats
the benefits as paid.
*****
STEP III -- The reported tips in EXCESS of "tips deemed wages" is
$234 (using $5.15 as the Federal minimum wage rate), derived by
subtracting "tips deemed wages" ($86) from total reported tips of
$320.
STEP IV -- The amount eligible to be claimed as income tax credit
is $17.90 ($234 X 7.65%). Potential ANNUAL employer savings
from the tipped employee described above would be $930.80
($17.90 X 52 weeks).
The FICA Income Tax Credit is computed the same way
whether the employer is an individual, a partnership, an "S"
corporation or a "C" corporation. The employer claims the income
tax credit by completing Form 8846 (Credit for Employer Social
Security and Medicare Taxes Paid on Certain Employee Tips) and
attaching it to the annual business income tax return.
*****
TAXABLE BENEFIT PAYMENTS . . .
Taxation Timing and Taxable Value
Taxable fringe benefits may be CASH or NON-CASH
benefits, but either way they are normally subject to income and
employment tax withholding. The question then is WHEN to
withhold the taxes.
The employer may elect to treat fringe benefits as paid
by the pay period, quarterly, semi-annually, or on another basis,
but withholding on the fringe benefit must occur no less frequently
than annually. Conversely, the employer may also treat the value
of a single fringe benefit as paid on one or more dates within the
same calendar year, even if the employee receives the entire
benefit at one time.
The employer has other options, too, provided the fringe
benefit is not a transfer of tangible or intangible personal property
of a kind normally held for investment, or the transfer of real
property. For example, the payment date selected for a particular
type of fringe benefit does not have to be the same for all
IF THE EMPLOYER IS A PARTNERSHIP . . .
This form of business entity indicates a relationship
between two or more persons who join to carry on a trade or
business, with each person contributing money, property, labor or
skill, and each expecting to share in the profits or losses of the
business.
There are several advantages to the partnership form of
entity. The legal requirements and expenses are fewer than those
involved in forming a corporation.
Compared to the sole
proprietorship, a partnership makes it possible to obtain more capital
and to tap into more skills. Also, partnerships have more freedom
from government control and special taxation than the corporation.
On the other hand, the partners are personally responsible
for the debt of the business, which may have to be satisfied from
their personal assets. A partnership is not a separate entity --- profits
must be included in each partner's individual tax return according to
their percentage of interest in the business. Partners are not paid
through the payroll of the firm, but usually receive a periodic "draw"
in anticipation of the distribution of business profits. The partner will
pay income tax and Self-Employment Tax on the profits received
from the business. Like the sole proprietorship, the partnership
terminates upon the death or withdrawal of a general partner, unless
the partnership agreement provides otherwise.
*****
TAX RESEARCHER is distributed with the understanding that the
publisher is not rendering legal, accounting or other professional
services. If legal advice or other assistance is required, an
attorney or accountant should be consulted. This newsletter is
published monthly by Statutory Research, a department of the
Employer Services Division. Address comments to: ADP, Inc.,
Statutory Research Department, One ADP Boulevard (M/S 364),
Roseland, New Jersey 07068.
Copyright 2003 ADP, Inc.
12-MONTH INDEX
ADP's Tax Researcher
(October, 2002 through September, 2003)
TOPIC
MONTHLY
ISSUE
Accountable Business Expense
Reimbursements
Adoption Assistance Fringe Benefit
Advance Payment of Earned Income Credit
(SEE Earned Income Credit, advance
payment of)
Alien Workers (SEE Foreign Nationals Employed
In the U.S.)
Auto Mileage Rates (IRS)
--for 2002 and 2003
Business Expense Reimbursements
--Generally
--Non-accountable expenses
--Per diem expense amounts
--Travel expenses
Cafeteria Plan (SEE Section 125 plan)
"Catch-Up" Contributions (SEE Pension Plan
Contribution Limits)
Child, payroll taxation of
Clergy, taxation of
Deferred Compensation Plans (See Pension
Plan Contribution Limits)
“De Minimis” Fringe Benefits
Detroit Income Tax Rate Reduction
Discrimination Testing Limits
Earned Income Credit, advance payment of
EFTPS
Electronic Federal Tax Payment System
(SEE EFTPS)
Employee, definition of
Family Members, payroll taxation of
Federal Income Tax
FICA Income Tax Credit
Flexible Spending Accounts
Foreign Nationals Employed in the U.S.
Form W-2
Jun. '03
Dec. '02
Dec. '02
Jun.
Jun.
Jun.
Jun.
'03
'03
'03
'03
Mar. '03
July ‘03
Aug. ‘03
May '03
Dec. '02
Feb. '03
Dec. '02
Jan. '03
Mar. '03
July ‘03
Sept.’03
Mar. '03
Feb. '03
Dec. '02
Oct. '02
Dec. '02
Jan. '03
Feb. '03
Dec. '02
Dec. '02
Dec. '02
Dec. '02
Dec. '02
Dec. '02
Sept.’03
Jan. '03
Dec. '02
Oct. '02
Nov. '02
Dec. '02
Form W-3
Form W-4
Form W-5
Form 940
Form 941
Form 945
Form 1096
Form 1099-MISC
Form 1099-R
Fringe Benefits, taxable
Independent Contractor, definition of
"Highly-Compensated" Employee
Household Employee
Job Changes
"Key" Employee
Local Income Taxes
--Detroit Income Tax Rate Reduction
May '03
--Philadelphia Wage Tax Reduction
May '03
--Pennsylvania "locals," important
taxability changes
May '03
Maximum Tip Credit
--Changes
--Hawaii
(eff. 1/1/03)
Oct. '02
--New Mexico (eff. 6/20/03) July ‘03
--"Tip Credit" explained
Apr. '03
Mergers
Nov. '02
Military Pay
May '03
MONTHLY
ISSUE
TOPIC
Minimum Wage Rates
--Changes
--Alaska
(eff. 1/1/03)
--Hawaii
(eff. 1/1/03)
--New Mexico (eff. 6/20/03)
--Oregon
(eff. 1/1/03)
--Washington
(eff. 1/1/03)
Ministers (SEE Clergy)
New Hire Reporting
Overtime Premium Pay
Parent, payroll taxation of
Parking Benefit
(SEE Qualified Parking Benefit)
Partnership
Pension Plan Contribution Limits
--2003/2002 contribution limits
Per Diem Allowances
Philadelphia Wage Tax Reduction
Predecessor Employer
Qualified Deferred Compensation Plans
(SEE Pension Plan Contribution Limits)
Qualified Parking Benefit
Reciprocity
(SEE State income tax)
Retirement (SEE Social Security
Retirement Benefits)
"S" Corporations
Section 125 Plan
--Effect on SUI taxable wages
Social Security Number
Social Security Retirement Benefits
Social Security Taxable Wages
Spouse, payroll taxation of
State Unemployment Insurance
--Multi-state workers
--Taxable wage limits table for
2001, 2002 and 2003
--Arkansas wage limit
increased for 2003
--Washington State & Virgin Islds.
2003 taxable wage limits
--Idaho retroactively increases 2003
taxable wage limit
Students, exemptions from employment taxes
Successor Employer
SUI (SEE State Unemployment Insurance)
Summer Workers, exemptions from tax
Taxable Fringe Benefits
Tip Credit (SEE Maximum Tip Credit)
Transportation Fringe Benefit
--2003 Update
Unclaimed Wages
USERRA Guarantees Certain Employee Rights
Vacation Pay
*****
Oct. '02
Oct. '02
July ‘03
Dec. '02
Nov. '02
Sept.’03
Jun. '03
Mar. ‘03
Sept. ‘03
Nov.
Jun.
May
Nov.
'02
'03
'03
'02
May '03
Dec. '02
Dec. '02
Mar. '03
Apr. '03
Oct. '02
Apr. '03
Nov. '02
Mar. '03
Aug. '03
Jan. '03
Apr. '03
Feb. '03
Mar. '03
Jun. '03
Nov. '02
Jun. '03
Sept.’03
May
Aug.
May
Aug.
'03
‘03
'03
‘03