EY - Employment tax year-end planning essentials

Year-in-review webcast at a glance

Employment tax year-end planning essentials

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On November 30, 2016, a six-member panel of Ernst & Young LLP’s experienced Employment Tax Services professionals shared their perspectives and insights on new developments and compliance considerations for year-end and 2017.

2016 webcast at a glance 2016

  • Form W-2 filing due dates are sooner across the US
  • Federal penalties increase for Form W-2 and other information reporting errors
  • The safe-harbor from correcting de minimis Form W-2 errors has significant limitations
  • Some Affordable Care Act information reporting due dates are delayed again
  • Earlier Form W-2 filing due date starts this year

    Starting with 2016 returns required to be filed in 2017, Forms W-2 and Forms 1099-MISC reporting non-employee compensation, whether filed on paper or electronically, are due January 31. The filing deadline for other information returns, including Forms 1099-MISC other than those for non-employee compensation, is unchanged.

    Also starting with filings due after January 1, 2017, extensions of the deadline to file Forms W-2 with the Social Security Administration (SSA) are no longer automatic, and only one 30-day extension will be granted. In reviewing Form 8809, Application for Extension of Time to File Information Returns, the IRS will grant extensions only in extraordinary circumstances or catastrophe, and employers granted extensions must demonstrate that employees paid the tax by using Form 4669, Statement of Payments Received, and Form 4670, Request for Relief of Payment of Certain Withholding Taxes. (2016 General Instructions for Forms W-2 and W-3, page 1.)

    A number of states conformed to the new federal rule by also accelerating their Form W-2 filing due dates. The chart of 2016 state Form W-2 filing due dates is shown in our special report

  • Form W-2 verification code pilot

    The IRS announced that it is expanding its efforts to combat tax-related identity theft for the 2017 filing by, among other activities, continuing its Form W-2 verification code program.

    The verification code pilot was first conducted in the 2016 filing season and involved 2 million employees whose 2015 Forms W-2 contained a 16-digit alphanumeric code. If the verification code appeared on employees’ Form W-2, they were required to provide the code when filing their Forms 1040 electronically. The 2017 pilot will expand to 50 million Forms W-2 filed in 2017 (for tax year 2016).

    For now, only certain payroll service providers (PSPs) will participate in the pilot.

    The verification code is 16 digits formatted as four groups of alphanumeric characters (XXXX-XXXX-XXXX-XXXX). This code will appear in a separate box on some versions of the Form W-2 prepared by PSPs participating in the pilot.

    Employees will see the verification code on Copies B and C of Form W-2. But it will not be included on Copy A filed with the Social Security Administration, nor will it affect state and local income tax returns or paper federal returns.

    The IRS states that for the purposes of this pilot, omitted and incorrect W-2 verification codes will not delay the processing of a tax return.

    Forms W-2 containing the new verification code will include special instructions for taxpayers and tax preparers, specifically:

    • If the verification code field is populated, enter this code when your tax return preparation software requests it. It is possible your software or preparer will not request the code. The code is not entered on paper-filed returns.
    • Some Forms W-2 that employees receive will have a blank “Verification Code” box. These taxpayers do not need to enter any code data into their tax software product.

    The IRS will analyze this pilot data in a “test-and-learn” review to see whether it is useful in evaluating the integrity of W-2 information.

    Puerto Rico was first to use authentication codes to combat tax fraud. The IRS is not the first to consider using system-generated codes to validate the authenticity of a Form W-2. Effective for tax year 2013 (filed in 2014), the Puerto Rico Department of Treasury requires that Form W-2PR, filed electronically with the Department, include a confirmation number given by the system after the electronic submission. The confirmation number consists of six digits starting with one letter. The file must be uploaded first to obtain the confirmation number from the system. The Department does not accept Forms W-2PR without the confirmation number. Handwritten confirmation numbers automatically render the forms invalid.

  • Penalties increase for Form W-2 reporting errors

    On June 29, 2015, President Barack Obama signed into law the Trade Preferences Extension Act of 2015 (H.R. 1295; Public Law No: 114-27), which included provisions that more than doubled the penalties for late or incorrectly filed information returns, including Forms W-2, 1099 and those required under the Affordable Care Act (i.e., the 1094 and 1095 series).

    The increased penalties were effective with returns filed after December 31, 2015, and are indexed each year for inflation.

    The penalties that apply to payee statements and information returns required to be filed in 2016 and 2017 are shown in the chart below.

    If filed: Maximum for forms due Jan. 1, 2016, to Dec. 31, 2016 Maximum for forms due Jan. 1, 2017, to Dec. 31, 2017 Maximum annual for forms due Jan. 1, 2016, to Dec. 31, 2016 Maximum annual for forms due Jan. 1, 2017, to Dec. 31, 2017
    1 to 30 days late $50 $50 $529,500 $532,000
    More than 30 days late but before Aug. 1 $100 $100 $1,589,000 $1,596,500
    On or after Aug. 1 $260 $260 $3,178,500 $3,193,000

    Notes: The penalty for intentional disregard increased from $520 to $530 per return. There is no maximum penalty. Penalties are indexed annually for inflation.

  • Form W-2 de minimis error safe harbor has significant limitations

    In general, businesses are subject to penalties under IRC §6721 and §6722 for errors on information returns and statements they fail to correct. (See page 5 for the information reporting penalties that currently apply.)

    In consideration of the likely increase in corrected Forms W-2 as a result of accelerating the filing due date to January 31 effective with forms required to be filed after December 31, 2016 (see page 2), the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) contains a provision waiving the penalties for incorrect information returns and statements if the errors are de minimis. Specifically, the de minimis error safe harbor applies to an incorrect dollar amount of no more than $100 and a withholding tax error amount of no more than $25.

    The PATH Act stipulates, however, that taxpayers may veto the use of safe harbor by the business. If they do, the business must file corrected information returns and provide corrected statements for such taxpayers.

    In Notice 2017-09, the IRS provides long-awaited guidance on the safe harbor from the requirement to file corrected information returns and provide corrected statements (e.g., Forms W-2) for de minimis errors. This guidance highlights the significant limitations in taking advantage of the safe harbor, particularly a taxpayer’s right to require the correction of de minimis errors.

    The guidance applies to information returns required to be filed and information statements required to be provided after December 31, 2016. Written comments are requested by April 24, 2017.

    Not correcting Forms W-2, whether or not allowed under the safe harbor, can create matching differences with employment tax returns (e.g., Form 941), resulting in notices from the Social Security Administration and IRS under the Combined Annual Wage Reporting (CAWR) program. In fact, the IRS states in Notice 2017-09 that in consideration of the CAWR program, employers are encouraged to correct all Form W-2 reporting errors, even those that are de minimis.

    Circumstances under which the safe harbor does not apply

    The IRS clarifies that the de minimis error safe harbor applies only to inadvertent errors on information returns and statements and not when the business has intentionally misreported a dollar amount, whether or not it is de minimis. A pattern of noncompliance indicates intention to misreport for these purposes.

    In addition, the de minimis error safe harbor applies only to errors on information returns filed or statements provided. It does not apply if the business failed entirely to file a return or furnish a statement, even if the statement or information return would report dollar amounts ºf $100 or less or tax withheld of $25 or less.

    Before choosing to take advantage of this safe harbor, businesses must consider the administrative costs associated with managing and accommodating taxpayer “opt out” elections.

    IRS guidance governing taxpayer election for correction of de minimis errors

    In Notice 2017-09, the IRS clarifies the rules and guidelines governing the use of the safe harbor relief penalties for information statements and returns as follows.

    • 30 days to make de minimis corrections requested by taxpayers. Unless other filing deadlines apply, if the payee (e.g., employee) elects to have de minimis errors corrected, the business has 30 days from the day such election is made to furnish a corrected statement and file a corrected return. Corrections made within the 30-day deadline are not subject to penalties under IRC §6721 and §6722.
    • Manner for taxpayer election to receive corrections. Businesses may prescribe any reasonable manner for taxpayers to elect to have de minimis errors corrected, including phone, written statements or online; however, online may not be the exclusive method available. If the business has not prescribed a manner for making the election, the taxpayer should provide a written statement to the businesses using the business name and address furnished on the information statement. Additionally, the business may not impose prerequisites, conditions or time limits on the payee’s ability to request a corrected statement, other than prescribing a reasonable manner for making the election.
    • Revocation of election to receive corrections. Payees can revoke their election to receive corrections of de minimis errors by providing written notice to the business.
    • Timing to make elections to receive corrections. Payees may make an election to receive correction of de minimis errors pursuant to statements required to be filed in the calendar year of the election and succeeding calendar years. Payees are also allowed to make the election in a calendar year preceding the calendar year when the payee makes the election.
    • Corrections allowed even if not elected. Businesses may file corrected information returns and provide corrected statements even if employees do not elect to receive them.
    • Information required within the payee election. To provide notice of the election to receive corrections of de minimis errors, the payee must provide the business with the following information:
      • A clear statement that the payee is making the election
      • The payee’s name, address and taxpayer identification number (TIN)
      • Identification of the type of payee statement(s) and account number(s), if applicable to which the election applies (e.g., Form W-2, Form 1099-DIV) if the payee wants the election to apply only to specific statements
      • A statement that the election applies only to payee statements required to be furnished in that calendar year if the payee wants the election to apply only to the year when the payee makes the election

    If the payee does not identify the type of payee statement and account number or the calendar year to which the election relates, the payer must treat the election as applying to all types of payee statements the payer is required to furnish to the payee and as applying to payee statements required to be furnished in the calendar year when the payee makes the election and in any succeeding calendar years.

    Notice 2017-09 does not explicitly state that businesses must notify payees each time they intend to apply the de minimis error safe harbor. Instead, the IRS states that future regulations will include the requirement that businesses notify taxpayers of the de minimis error safe harbor and the election for the safe harbor not to apply. In advance of the upcoming regulations, businesses should take a conservative approach and notify taxpayers in each instance they intend to apply the safe harbor and provide time for taxpayers to make their elections.

    Recordkeeping requirements

    Businesses must retain copies of any taxpayer election, or revocation of an election, for as long as this information is relevant in the administration of any internal revenue law.

  • 2016 Affordable Care Act information reporting relief

    In Notice 2016-70, the Treasury and the IRS provide an automatic extension of the due dates to comply with the Affordable Care Act (ACA) reporting requirements. The due date to furnish individuals the 2016 Form 1095-B, Health Coverage, and the 2016 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, is extended for 30 days from January 31, 2017, to March 2, 2017.

    Like the automatic extension granted for the 2015 information returns, the IRS will not entertain any requests for further extensions of this new blanket deadline.

    Unlike last year, the due date to file with the IRS the 2016 Form 1094-B, Transmittal of Health Coverage Information Returns, and the 2016 Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer, has not been extended. Those dates remain February 28, 2017, for those filing less than 250 forms on paper and March 31, 2017, for those filing electronically. Filers may, however, request an automatic 30-day extension of those deadlines.

    In addition, the IRS has stated that penalties will not be imposed on health insurers and employers that make a good-faith effort to comply with the reporting requirements, provided that statements were furnished to individuals and filings were made with the IRS in a timely fashion. This announcement automatically extending the ACA information reporting due dates provides welcome relief to employers and health insurers that are working diligently to comply with the reporting requirements but have found it challenging to collect the volume of data to be reported and imported into the systems by the statutory due dates. Moreover, the application of the good-faith standard to the 2016 information returns is also welcome relief to filers that have found it difficult to keep up with changes in this emerging area of information reporting.

    2016 ACA information reporting due dates

    ACA information reporting requirement Self-insured employers and insurance providers Forms 1094-B and 1095-B IRC §6055 ACA-covered employers Forms 1094-C and 1095-C IRC §6056
    Who receives the statement/return IRS; individuals who are enrolled in coverage; covered dependents may be included on report for primary insured IRS; all full-time employees (as defined in IRC §4980H and the underlying regulations); all employees who are offered coverage
    Due date to furnish statement to the recipient (i.e., employee or covered individual) Form 1095-B is due on the extended due date of March 2, 2017 (normally due January 31 of following year) Form 1095-C is due on the extended due date of March 2, 2017 (normally due January 31 of following year)
    Due date to file information return Form 1094-B is due by March 31, 2017, if filed electronically (or February 28, 2017, if filed on paper) Form 1094-C is due by March 31, 2017, if filed electronically (or February 28, 2017, if filed on paper)

    Mobile workforce tax compliance is a continued concern as several states maintain their aggressive nonresident income tax withholding audits. State rules vary considerably in terms of the amount of time or wages, if any, that can be overlooked in determining if a nonresident income tax obligation applies. It appears that Congress will not enact federal legislation (Mobile Workforce State Income Tax Simplification Act of 2015, H.R. 2315/S. 386) this year that would prohibit states from imposing an income tax on wages earned by employees who have spent 30 or fewer days in the calendar year working in a state.

    At the state and local level, there have been several developments that will simplify state and local income tax compliance for businesses and their mobile employees in the years ahead. These and other key state/local income tax developments are summarized in the chart below.

    2015 key state and local income tax changes

    Connecticut
    Under legislation approved by the House and Senate on December 10, 2015, and effective January 1, 2016, the compensation of Connecticut nonresident employees is exempt from state income tax and income tax withholding if employees are present in the state for 15 or fewer days in the calendar year. (Act No. 15-1)

    Nevada Effective July 1, 2015, S.B. 483 generally makes the following changes to the Modified Business Tax (MBT):

    •   Mining employers are subject to the same MBT as financial institutions.
    • The MBT is imposed on businesses other than a financial institution or a mining business at the rate of 1.475% (up from 1.17%) of the total wages paid by the business each calendar quarter that exceed $50,000 (down from $85,000).

    See the Department’s website here.

     

    Indiana
    A law effective in 2017 consolidates the three local income tax rates (COIT, CAGIT, CEDIT) into one but increases the tax that nonresidents pay. (Public Law 243.)

    Ohio
    Effective in 2016, the de minimis threshold for nonresident local income tax withholding is increased from 12 to 20 days. The provision applies only to employers that have offices or operations within Ohio. (Sub. H.B. 5.)

    Maryland 
    In 2015, the US Supreme Court held that Maryland’s law disallowing a tax credit against local income taxes for tax paid in other states is unconstitutional. The ruling will likely influence all local tax laws with similar restrictions. More information is available here.

    West Virginia 
    Effective in 2016, all employees working within the City of Morgantown, West Virginia, are subject to a service fee of $3 per week to a maximum of $156 per year. (Meeting Minutes, October 20, 2015, Common Council of the City of Morgantown.)


For more information

EY - 2016 employment tax year in review cover Download "Employment tax year in review" as a printable document.