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20 th Annual IL Statewide APA Conference. August 22, 2013 The IRS is Coming! The IRS is Coming!. Mike Mudroncik Internal Revenue Service Small Business/Self-Employed Division Communications and Stakeholder Outreach Senior Stakeholder Liaison 312-292-3529 michael.j.mudroncik@irs.gov.

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20 th annual il statewide apa conference

20th Annual IL Statewide APA Conference

August 22, 2013

The IRS is Coming! The IRS is Coming!

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Mike Mudroncik

Internal Revenue Service

Small Business/Self-Employed Division

Communications and Stakeholder Outreach

Senior Stakeholder Liaison

312-292-3529

michael.j.mudroncik@irs.gov

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Today’s Presentation

Employment Tax History & Statistics

2013 Changes to Form 941 & Additional Medicare Tax Information

IRS Resources for Income Tax Withholding on Supplemental Wages

IRS Resources for Payroll Professionals

Resources Available to Payroll Tax Professionals to Learn About IRS Employment Tax Examinations

form 941 line 5d taxable wages tips subject to additional medicare tax withholding

Form 941 – Line 5d Taxable Wages & Tips Subject to Additional Medicare Tax Withholding

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New for 2013

.124 is an increase from the .104 from 2012 and reflects increase in the employee rate from 4.2% to 6.2%

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47 total Q&As broken down into the categories “Basic FAQs,” “Individual FAQs” and “Employer and Payroll Service Provider FAQs”

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Internal Revenue Code (IRC), Subtitle C – Employment Taxes, Chapter 24 – Collection of Income Tax at Source on Wages

Section 3401 – Definitions

Section 3402 – Income Tax Collected at Source

Treasury Regulations - Title 26 (Internal Revenue), Chapter 1 (IRS), Subchapter C (Employment Taxes and Collection of Income Tax at Source, Part 31, Subpart E

Treasury Regulations - Sections 31.3401 and 31.3402

Treasury Regulation Section 31.3402(g)-1 – Supplemental Wage Payments

You can find the online Internal Revenue Code and Treasury Regulations at http://www.irs.gov/Tax-Professionals/Tax-Code,-Regulations-and-Official-Guidance#26cfr

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Treasury Regulation Section 31.3402(g)-1(a)(1)(i) provides the definition of Supplemental Wages

An employee’s remuneration may consist of regular wages and supplemental wages. Supplemental wages are all wages paid by an employer that are not regular wages. Supplemental wages include wage payments made without regard to an employee’s payroll period, but also may include payments made for a payroll period.

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Per Treasury Regulation 31.3402 (g)-1(a)(i) Examples of Wage Payments that are Included in Supplemental Wages

  • Reported Tips (see exception documented in 31.3402(g)-1(a)(1)(v))
  • Overtime Pay (see exception documented in 31.3402(g)-1(a)(1)(iv))
  • Bonuses
  • Back Pay
  • Commissions
  • Wages paid under reimbursement of other expense allowance arrangements
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Per Treasury Regulation 31.3402 (g)-1(a)(i) Examples of Wage Payments that are Included in Supplemental Wages

  • Non-qualified deferred compensation includible in wages
  • Wages paid as noncash fringe benefits
  • Sick pay paid by a third party as an agent of the employer
  • Amounts that are includible in gross income under Section 409A (Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans)
  • Income recognized on the exercise of a nonstatutory stock option
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Per Treasury Regulation 31.3402 (g)-1(a)(i) Examples of Wage Payments that are Included in Supplemental Wages

  • Wages from imputed income for health coverage for a nondependent
  • Wage income recognized on the lapse of a restriction on restricted property transferred from an employer to an employee.
  • Treasury regulation 31-3402(g)-1(a)(ii) defines regular wages.
  • Treasury Regulation 31-3402(g)-1(a)(iii) defines amounts that are not wages subject to income tax withholding.
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IRS Publication 15 – Employer’s Tax Guide

  • Section 7 of Publication 15 discusses the treatment of and provides examples of how income taxes should be withheld on Supplemental Wages paid to employees. The section breaks the information down into the following categories:
  • Income tax withholding on Supplemental Wages Paid to an Employee When the:
  • (1) Employee Receives More Than $1 million of Supplemental Wages From an Employer During a Calendar Year
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IRS Publication 15 – Employer’s Tax Guide

  • If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 39.6% (or the highest rate of income tax for the year).
  • Withhold using the 39.6% rate without regard to the employee’s Form W-4.
  • In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control. For more information, see Treasury Decision 9276, 2006-37 I.R.B 423, available at www.irs.gov/irb/2006-37_IRB/ar09.html
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IRS Publication 15 – Employer’s Tax Guide

(2) Income Tax Withholding on Supplemental Wages Paid to an Employee When the Employee Receives Less Than or Equal to $1 million of Supplemental Wages During a Calendar Year

(a) Supplemental Wages Combined with Regular Wages - if the employer pays supplemental wages with regular wages but does not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period.

(b) Supplemental Wages Identified Separately from Regular Wages - if the employer pays supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax

withholding method depends partly on whether the employer withheld income tax from the employee’s regular wages.

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Income Tax Withholding on Supplemental Wages Paid to Employee Who Does Not Receive $1 million of Supplemental Wages During a Calendar Year – Supplemental Wages Are Identified Separately from Regular Wages (cont.)

(1) If the employer withheld income tax from an employee’s regular wages in the current or immediately preceding calendar year, use one of the following methods for the supplemental wages:

(a) Withhold a flat 25% (no other percentage allowed).

(b) If supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment.

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Income Tax Withholding on Supplemental Wages Paid to Employee Who Does Not Receive $1 million of Supplemental Wages During a Calendar Year – Supplemental Wages Are Identified Separately from Regular Wages (cont.)

(1)(b) (cont.) Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax.

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Income Tax Withholding on Supplemental Wages Paid to Employee Who Does Not Receive $1 million of Supplemental Wages During a Calendar Year – Supplemental Wages Are Identified Separately from Regular Wages (cont.)

2) If the employer did not withhold income tax from the employee’s regular wages in the current or immediately preceding calendar year, use method (1)( b). This would occur, for example, when the value of the employee’s withholding allowances claimed on From W-4 is more than the wages.

Regardless of the method used to withhold income tax on supplemental wages, supplemental wages are subject to social security, Medicare and FUTA taxes.

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IRS Revenue Ruling 2008-29

Can be found athttp://www.irs.gov/pub/irs-irbs/irb08-24.pdf

  • In this revenue ruling nine different situations are described to help an employer determine the amount of income tax required to be withheld under Section 3402 of the Internal Revenue Code (Collection of Income Tax at Source on Wages – Income Tax Collected at Source) with respect to certain supplemental wages the employer pays to an employee.
  • Commissions paid at fixed intervals with no regular wages paid to the employee.
  • Commissions paid at fixed intervals in addition to regular wages paid at different intervals.
  • Draws paid in connection with commissions.
  • Commissions paid to the employee only when the accumulated commission credit of the employee reaches a specific numerical threshold.
  • A signing bonus paid prior the commencement of employment.
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IRS Revenue Ruling 2008-29 (cont.)

  • In this revenue ruling nine different situations are described to help an employer determine the amount of income tax required to be withheld under Section 3402 of the Internal Revenue Code with respect to certain supplemental wages the employer pays to an employee.
  • Severance pay paid after the termination of employment.
  • Lump sum payments of accumulated annual leave.
  • Annual payments of vacation and sick leave.
  • Sick pay paid at a different rate than regular pay.
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Supplemental Wages – IRS Resources

  • IRS Information Returns Branch (IRB)
  • (866-455-7438)
  • Regular Hours of Operation
  • Hours:
    • M-F, 8:30 a.m. - 4:30 p.m. Eastern Time
  • Services:
        • Answers electronic filing processing and tax law questions regarding the filing of information returns such as 1096, 1097, 1098, 1099, 3921, 3922, 5498, 8027, 8935, W-2G and W-4 of payers, transmitters and employers.
        • Answers tax law and filing questions about Forms W-2, Backup Withholding due to missing and incorrect names/TINs
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www.irsvideos.gov

See a List of Employment Tax Related Presentations Available on irsvideos.gov on the Next Two Slides

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Avoiding Information Reporting Problems for Government Entities - Webinar (September 20, 2012)Watch this webinar to learn about common mistakes government entities can make regarding filing information returns; how to obtain correct taxpayer identification numbers; and more.

Backup Withholding

If a business pays a “non-employee”, such as an independent contractor $600 or more in a year, that business must file Form 1099 Miscellaneous, and may be required to backup withhold on the payments.

Collecting Employer Taxes on Tips - Webinar (September 29, 2010)Learn the aspects of employer's share of employment taxes that employees report on Form 4137, Social Security and Medicare Tax on Unreported Tip income

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Common Employment Tax Issues - Webinar (November 3, 2010)Learn about several common employment tax issues.

Employing Family MembersA big advantage to operating your own business is the ability to hire family members. The rules vary, depending on the family relationship and the business entity type such as sole proprietorship, partnership, etc.

Hiring People Who Live in the U.S. But Are Not U.S. CitizensThis workshop helps small business owner understand their tax obligations when hiring people who are not U.S. citizens. At the end of this lesson, small business owners should be able to: Verify the employee’s identity and status with proper documentation; Withhold federal taxes at the proper withholding or treaty rate; Properly deposit or pay the tax withheld; and File accurate and timely withholding tax returns and provide copies to the individual.

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Individual Taxpayer Identification Number: 2013 Program Changes - Webinar (February 26, 2013)Learn about such things as: Why we changed the ITIN procedures, The Five-year Expiration Period, ITIN Certification Changes and Exceptions, The C A A Application Process, and, New Training requirements.

Proper Worker Classification

Worker classification determinations are made on a case-by-case basis that depend on the specific facts and circumstances.

Proper Worker Classification - Webinar (February 15, 2012)Explain how to properly classify workers as employees or independent contractors and related topics and to go over the Voluntary Classification Settlement Program

Reporting of Employer Healthcare Coverage on Form W-2 - Webinar (October 31, 2011)The Reporting of Employer-Sponsored Health Plan Coverage on Form W-2 webinar explains what employers and employees need to know about the Affordable Care Act provision.

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Taxability of Certain Fringe Benefits for State and Local Governments - Webinar (August 25, 2010)

The proper taxing of Fringe Benefits is a hot topic for government employers. View this educational presentation on what a fringe benefit is. Also, learn which fringe benefits are non-taxable and how to enter taxable fringe benefits properly on a W-2.

The Examination Process for Employment Tax Returns - Webinar (June 22, 2011)The panel of IRS experts and industry professionals discuss what to expect from an employment tax examination.

Unique Employment Tax Classification Issues in Government Entities

A critical issue for all government employers is properly classifying workers as employees or independent contractors. This phone forum addresses key concepts in worker classification decisions.

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Thank You for Attending!

20th Annual IL Statewide APA Conference – August 22-23, 2013