The IRS recently released Notice 2020-3, which provides interim guidance on default federal income tax withholding rates applicable to certain periodic payments of deferred income. The Notice also provides clarity as to how the IRS will accommodate a change that affects the form used to elect federal income tax withholding from wages, but not the form used to make those elections for deferred income distributions. Continue Reading
Treasury Finalizes Section 871(m) Regulations and Further Extends Transitory Relief
On December 16, 2019, the Treasury and the IRS released final regulations under section 871(m) of the Internal Revenue Code. The regulations finalize the 2017 temporary and proposed section 871(m) regulations without any substantive change. On the same day, the Treasury and the IRS released Notice 2020-2 to extend through 2022 the relief provided in Notice 2018-72. Continue Reading
Proposed 162(m) Regulations are a “Lump of Coal”
To corporations hoping for a holiday reprieve from the IRS’s narrow interpretation of the grandfathering rules included in the Tax Cut and Jobs Act (“TCJA”) amendment of section 162(m), the IRS has said “Bah… Humbug!” To those foreign private issuers, publicly traded partnerships, and issuers of public debt hoping for relief from the expanded definition of publicly held corporation, the IRS has said the same. On December 16, the IRS released proposed regulations addressing the changes made to section 162(m) of the Internal Revenue Code as part of TCJA, which are certain to disappoint many taxpayers. The regulations also address the definitions of covered employee and “predecessor of a publicly held corporation,” as well as, the treatment of amounts paid by a partnership in which a publicly held corporation is a partner and director compensation. The regulations are generally proposed to apply to compensation that is otherwise deductible for taxable years beginning on or after December 20, 2019, the date of expected publication in the Federal Register.
Notice 2019-63 Delivers Relief for Providers of Minimum Essential Coverage
Holding true to its holiday tradition, the IRS yet again decided to extend the deadline by which providers of minimum essential coverage (including certain applicable large employers (“ALEs”)) must furnish information statements to individuals regarding their 2019 insurance coverage. However, due to the effective elimination of the ACA’s individual mandate penalty through the Tax Cuts and Jobs Act (“TCJA”), the IRS went one step further than in past years by allowing certain providers to forgo the individual furnishing requirement, if certain notice requirements are met instead. Continue Reading
The IRS Introduces More Informative Backup Withholding Notices for Payers
On November 14, 2019, the IRS announced that it has redesigned Notices CP2100 and CP2100A with the goal of providing more information to affected payers. These Notices are used to alert payers that the IRS received Forms 1099 containing incorrect or missing Taxpayer Identification Numbers (TINs) for payees and that the payer may need to contact payees regarding their name and TIN information and/or backup withhold at a rate of 24% as a result. Payments potentially subject to backup withholding are reportable payments, such as interest (including tax-exempt interest), dividends, broker and barter exchange transactions, rents, royalties, nonemployee compensation, payments made in settlement of payment card and third party network transactions, and certain payments from fishing boat operators. Continue Reading
Significant TCJA Guidance Due Before End of Year, Kautter Says
Treasury Assistant Secretary for Tax Policy David Kautter attended the AICPA National Tax Conference on November 13, 2019, and commented that significant TCJA-related guidance should be expected to be released before the end of 2019. Such guidance is likely to include proposed regulations addressing (1) federal income tax withholding under section 3402, (2) the executive compensation deduction limitation under section 162(m), and (3) computation of unrelated business taxable income (UBTI) under section 512. Continue Reading
November 15 Deadline Approaching for 2019 Qualified Intermediary Applications
On November 6, the IRS issued its final reminder alert that the deadline for all Qualified Intermediary (“QI”) (including Qualified Derivatives Dealer (“QDD”)), Withholding Foreign Partnership (“WP”) and Withholding Foreign Trust (“WT”) applications for the 2019 year is November 15, 2019. Continue Reading
Hiring Employees vs. Independent Contractors: Navigating Classification Issues in a Drastically Altered California Legislative Landscape
Recently enacted California Assembly Bill 5 (“AB-5”) is a game changer for businesses that use independent contractors in California — and a warning shot for employers nationwide. Subject to exemptions for certain occupations and professions, AB-5 imposes a strict “ABC” test that appears to put a thumb on the scale of classifying workers as employees rather than independent contractors.
The ABC test was adopted last year by the California Supreme Court in its Dynamex decision to determine classification of workers for purposes of the state’s Industrial Welfare Commission Wage Orders. For 20 years before Dynamex, worker classification was governed by the more relaxed “Borello” multi-factor test, which focuses on the hiring entity’s right to control an individual’s work and other secondary factors. AB-5 now makes the ABC test the default standard for determining worker classification — not just under the Wage Orders, but also for all California Labor Code, unemployment insurance, and workers’ compensation claims. Continue Reading
Proposed Regulations Provide Guidance for Classification of Digital Content Transactions and Cloud Transactions
On August 9, 2019, Treasury and the IRS issued proposed regulations under section 861 of the Code to clarify how transactions involving digital content and cloud computing are classified for tax purposes. The new rules propose to revise and expand upon Treasury Regulation § 1.861-18 regarding digital content transactions and establish new Treasury Regulation § 1.861-19 regarding cloud computing transactions. The proposed regulations also propose changes to Treasury Regulation § 1.861-7 regarding the source rules for sales of personal property. Collectively, the rules are intended to address whether a digital transaction is characterized as a sale, lease, license, or provision of services for purposes applying various provisions of the Code, including the source rules, which are critical for purposes of determining whether withholding is required under Chapter 3 and reporting obligations under sections 6041 and 6050N, and Subpart F.
MyPayrollHR Scandal Serves as Reminder to Verify Employment Tax Deposits
Although the facts are still unfolding, recent developments surrounding the collapse of payroll firm MyPayrollHR serve as a reminder to employers to regularly verify the actions of payroll service providers. This should be a routine practice, regardless of the provider’s reputation and the longevity of the relationship. In particular, employers should open their own EFTPS accounts with the IRS and verify that all deposits are being made on-time to their payroll tax accounts with tax authorities. If deposits are not timely reflected on accounts, it is incumbent on employers to promptly determine the source of the problem. The IRS does not regulate payroll service companies, but the Department of Justice has prosecuted a number of people for embezzlement of payroll taxes over the years.
Nearly 8,000 employees at 400 small businesses across the country were affected by the collapse of MyPayrollHR. The company, which shuttered earlier this month, is being investigated by the Federal Bureau of Investigation. It is unclear exactly what happened, but reports indicate that money that should have been sent from MyPayrollHR to a third-party direct-deposit processor was instead diverted to another account under MyPayrollHR’s control. The direct-deposit processor, which had originally deposited worker’s paychecks, reversed the transactions when it discovered it had not received the funds from MyPayrollHR. Subsequently, due to a processing error, the transactions were reversed a second time. Questions have been raised regarding whether the reversal of the payroll deposits was appropriate under rules governing ACH transactions.
Although employees did not receive their net pay, some reports indicate that associated payroll taxes, including federal and state income tax withholding and FICA taxes, may also have been diverted. If that proves to be true, the employers may be on the hook for those missing taxes. Employees, however, are protected from the consequences of diverted payroll taxes as they are entitled to a credit against their personal income tax regardless of whether the Treasury Department received the withheld taxes under section 31 of the Code.
In addition to the missing taxes, employers may also be liable for potential failure-to-deposit penalties under section 6656 and related interest. Courts have historically considered the typical authorities that arise in reasonable cause determinations and concluded that an employer’s reliance on a payroll company, an agent, does not establish reasonable cause. To avoid such a result, employers should proactively take steps to ensure payroll deposits are being timely made by their payroll service provider. If the employer discovers late or missing deposits, steps should be taken to deposit promptly any late taxes in an effort to avoid or mitigate any potential penalties.
The key takeaway is that employers will not automatically be absolved of the tax obligations on wages paid to their employees because of the illegal acts committed by third-party agents. With the tools available from the IRS through EFTPS, employers should independently verify that their payroll service providers are timely performing the tasks they agreed to perform.
