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As 2018 draws to a close, employers across the country are preparing to embark on yet another W-2 season. To help promote a smooth year-end, BDO would like to advise employers on the impact of what is known as the Tax Cuts and Jobs Act of 2017 (TCJA) relevant to U.S. employment tax matters.
On December 22, 2017, President Trump signed the TCJA into law. The TCJA represents the most significant tax overhaul in over 30 years.
This legislation, as with any substantial legislation, contains areas of uncertainty that will require resolution through IRS regulations and guidance. These areas include, but are not limited to, qualified relocation expense reimbursements, bicycle commuting benefits, new rates for federal income tax, supplemental wage, and backup withholding, redesigned Form W-4, and transportation fringe benefits.
As a result, employers will need to reevaluate internal processes and procedures to ensure compliance amid the “tax reform” changes. In addition to procedural changes, many employers may be required to change their tax configuration settings with the payroll system for some of the items noted above to reflect inclusion in wages subject to Federal Income Tax Withholding (FITW), Federal Income Contribution Act (FICA), and Federal Unemployment Tax Act (FUTA) effective January 1, 2018.
BDO’s year-end employment tax guide discusses these matters and more, and also provides employers with recommendations and best practice insights to support year-end planning and compliance activities.
Tax Reform Changes for Payroll Tax
Under the TCJA, employer reimbursements for relocation expenses made to an employee or paid directly to third parties on or after January 1, 2018, are includible in the employee’s wages and subject to FITW, FICA, and FUTA, with the exception of relocation expenses related to Armed Forces members on active duty.
Notably, on September 20, 2018, IRS released Notice 2018-75 providing that qualified relocation expenses incurred in connection with a move occurring prior to January 1, 2018, but which are reimbursed to an employee or paid directly to third parties in 2018, are excluded from the employee’s wages and therefore are not subject to FITW, FICA, and FUTA.
For more information on the TCJA changes to qualified relocation expenses, please see BDO’s alert article titled Corrections to 2018 Payroll may be Appropriate for Payments of Prior Years’ Job Related Relocations.
Bicycle Commuting Benefits
Prior to the TCJA, qualified bicycle commuting expenses of up to $20 per month could be excluded from the employee’s wages for FITW, FICA, and FUTA purposes. However, the TCJA suspends the exclusion from gross income such that any bicycle commuting benefits received by an employee on or after January 1, 2018, are includible in the employee’s wages and subject to FITW, FICA, and FUTA.
Federal Income Tax Withholding, Supplemental Wages, Backup Tax, and Form W-4 On January 11, 2018, IRS released Notice 1036, which provides updated FITW tables and procedures that incorporate changes made by the TCJA. With regard to FITW from supplemental wages, pursuant to Notice 1036, employers using the optional flat rate method must withhold 22 percent of the supplemental wages paid to an employee during a calendar year (for supplemental wages up to $1 million); and 37 percent on supplemental wages exceeding $1 million. Notice 1036 instructed employers to implement the updated withholding tables and procedures no later than February 15, 2018.
For nonwage withholding, Notice 1036 mandates that the rate for backup withholding when the payee fails to furnish a correct taxpayer identification number is now 24 percent.
Notably, on January 29, 2018, IRS issued Notice 2018-14, which reaffirmed much of the information provided in Notice 1036 and provided additional guidance regarding Form W-4. Notice 2018-14 indicated that because the updated 2018 FITW tables were designed to work with the Forms W-4 that employees have already furnished their employers, employees were not required to furnish a new Form W-4 upon IRS release of the 2018 Form W-4.
For more information on IRS Notice 2018-14, please see our BDO alert titled IRS Issues Additional Payroll Guidance Addressing Tax Reform Changes.
According to a September 20, 2018, press release from the U.S. Department of Treasury, for tax year 2019, the IRS will release an update to the Form W-4 that is similar to the 2018 version currently in use. The 2019 form will be released in the coming weeks according to the usual practice for annual updates. The IRS will eventually implement a fully redesigned Form W-4 for tax year 2020.
Transportation Fringe Benefits
After the TCJA’s passage, the Internal Revenue Code is amended to disallow an employer’s deduction for any expense incurred for providing any transportation, or any payment or reimbursement for transportation fringe benefits provided in § 132(f) (i.e., qualified van pools, qualified parking at or near the workplace, and transit benefits), except as necessary to ensure the employee’s safety.
Employers should note that there is no change to the federal employment tax treatment of van pool, employee parking, and transit benefits. In other words, employers may continue to offer transportation fringe benefits and may continue to exclude the allowable amount of qualified transportation fringe benefits from employee wages.
2018 Information Return Due Dates and Filing Requirements
Form & Title
Furnish to Recipient by:
W-2, Wage and Tax Statement
Social Security Administration
January 31, 2019,whether filing paper or electronic returns,
January 31, 2019
E-file required if filing 250 or more Forms W-2
1099-MISC, Miscellaneous Income
February 28, 2019, if filing paper
January 31, 2019
E-file required if filing 250 or more Forms 1099-MISC
3921, Exercise of an Incentive Stock Option Under Section 422(b)
February 8,2019, if filing paper
January 31, 2019
E-file required if filing 250 or more Forms 3921 or 3922
Year End Best Practices, Reminders and Considerations
Fringe benefits are defined as a form of pay for performance of services given by an employer to its employees as a benefit. The value of fringe benefits must be included in an employee’s wages unless specifically excluded by law. In general, taxable fringe benefits are subject to withholding when they are made available. However, employers may elect to treat taxable fringe benefits as paid in a pay period, or on a quarterly, semiannual, or annual basis, but no less frequently than annually.
Under a special rule, benefits provided in November and December, or a shorter period in the last two months of the year, may be treated as paid in the following year. Only the value of benefits actually provided during the last two months may be treated as paid in the subsequent year. Employers do not have to notify the IRS that they are using this special accounting rule.
An employer may use this rule for some fringe benefits but not others. The special accounting period need not be the same for each fringe benefit. However, if an employer uses the special accounting period rule for a particular benefit, the rule must be used for that benefit for all employees who receive it.
Earnings and Deduction Code Review
The overall accuracy of an employer’s employment tax filings and an employee’s Form W-2 are dependent on proper tax treatment of the underlying compensation and benefits items. For most employers, all compensation and benefits items offered throughout the year are broken out in a series of earnings codes and deduction codes within the payroll system, whereby each code is assigned specific attributes that direct the tax treatment of the code (e.g., whether a specific earnings is taxable or nontaxable, or whether a specific deduction is pre-tax or after-tax). It is critical, especially given the recent changes brought about by the TCJA, that employers review their earnings and deduction codes for proper configuration and proper mapping to Form W-2 boxes. Performing an annual earnings and deduction code review in advance of year-end may allow an employer to make any necessary adjustments prior to issuing Forms W-2, and will help promote a clean start for the new year.
Observation: Many errors in qualified retirement plans involve the plan using compensation that does not agree with the definition of compensation in the written plan document. These errors are often traceable back to incorrect compensation codes in the payroll system and errors in the systems instructions to accumulate the compensation eligible for plan contribution. Errors in compensation used for plan contributions typically require a written application to the IRS’ voluntary compliance program, the payment of a user fee to the IRS and a corrective contribution to the retirement plan to make up the error and earnings to each affected plan participant.
Whether payroll is processed in-house or by a third-party provider, reconciliation is vital to ensuring accurate reporting and year-end balancing. As a best-practice employers should perform a reconciliation of Forms W-2 to federal and state employment tax returns at year-end, before such returns are filed, to identify and investigate out-of-balance issues. IRS and SSA compare 941 and W-2 wage and tax totals, and IRS can assess additional tax and penalties if out-of-balances exist and are not resolved. If possible, employers should reconcile employment tax return year-to-date totals against pro-forma W-2 totals on a quarterly basis to identify and remediate issues well in advance of year-end when things may be less hectic.
Mergers and Acquisitions
Mergers and acquisitions, and other reorganizations generally fall into one of three types for purposes of reporting employment taxes: i) statutory mergers and consolidations, ii) acquisitions qualifying under predecessor-successor rules, and iii) acquisitions that are neither i) nor ii). Where such acquisition, statutory merger, or consolidation creates a discrepancy between Form W-2 and Form 941 in social security wages and tips, Medicare wages and tips, and federal income tax withheld, employers should file Form 941 Schedule D, Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations. If the employer’s business is continuing to operate, the employer should file Form 941 Schedule D with their Form 941 no later than the due date of their Form 941 for the first quarter of the year after the calendar year of the transaction (i.e., April 30). Alternatively, if the employer’s business is not continuing to operate, such employer should file Form 941 Schedule D with their final Form 941.
FUTA Credit Reduction
Employers with employees in the Virgin Islands should be aware that for 2018 and 2019, the amount of FUTA paid may be higher because such jurisdiction has not repaid its’ federal unemployment insurance loan balance in full by the November 10, 2018, repayment deadline.
Third-Party Sick Pay
Sick pay is any amount paid to an employee for any period during which the employee is temporarily absent from work due to injury, sickness, or disability, except disability retirement payments or payments for medical and hospitalization expenses. Third-party sick pay is sick pay that is paid to an employee by some person (i.e., a third party) other than the employer for whom services are normally performed. Reporting requirements for third-party sick pay are contingent upon whether the third-party is treated as the employer for purposes of liability and reporting both employer and employee FICA, FUTA, and income tax withholding.
Looking Ahead 2019
W-4s for Exempt Employees
If an employee qualifies, they can instruct their employer not to deduct federal income tax from his or her wages. To qualify for exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. To claim exempt status in the subsequent year, an employee must submit a new Form W-4 to his or her employer by February 15 of such year (e.g., employees who claimed an exemption from federal income tax withholding in 2018 must furnish to such employer a new Form W-4 by February 15, 2019). If the employee fails to provide a new Form W-4, the employer should withhold tax as if the employee is single, with no withholding allowances. Employers should send a notification to employees no later than January 31, 2019.
SUI rate review
The 2019 state unemployment insurance (SUI) tax rate season has already begun in some states. Employers should be on the lookout for 2019 contribution rate notices in the states with which they are registered as an employer for SUI purposes. It is important that employers review contribution rates as soon as possible after receiving them because there is a limited amount of time to protest the rate calculation if the employer deems it to be incorrect.
Additionally, employers should be aware of two potential SUI tax savings opportunities: voluntary contributions and joint accounts.
New Limits and new wage bases
Employers should begin to input or confirm payroll system utilization of 2019 Social Security, state unemployment, state disability and other similar taxable wage-limits and tax rate information. Employers using third-party providers should test the third-party’s system requirements before the first live payroll in 2019.
For more information, contact your Marvin and Company, P.C. representative.