Employment Tax

On May 22, 2020, the IRS released a Generic Legal Advice Memorandum, GLAM 2020-004, which addresses the timing of the taxation and withholding of payroll taxes on certain stock-settled awards issued to employees.  Specifically, the GLAM focuses on the treatment of stock options, stock-settled stock appreciation rights (SARs), and stock-settled restricted stock units (RSUs).

Employers should be aware that the GLAM does not appear to alter the Service’s existing position with respect to such awards — the fair market value of the stock underlying the award is includible in gross income when the stock is deemed transferred to the employee.  However, the GLAM does appear to offer some additional insight into the timing of income inclusion with respect to RSUs.  Perhaps most importantly, the GLAM reiterates the IRS’s 2003 administrative position regarding the application of late deposit penalties to payroll tax deposits due on the exercise of nonqualified stock options.  A question had arisen regarding whether SEC guidance shortening the standard settlement cycle for securities transactions to two business days had the effect of shortening the period for depositing payroll taxes.  Deposits owed with respect to option exercises will continue to be deemed timely if deposited within one day of settlement, so long as settlement occurs within three days of the exercise date.Continue Reading Much Ado About Nothing Much New: IRS Issues GLAM Addressing Payroll Taxation of Equity Compensation

Withholding and paying FICA tax on nonqualified deferred compensation can be a tricky business.  Because special timing rules apply to FICA tax, employers can’t simply withhold and pay FICA tax when they pay deferred compensation to the employee.  Instead, FICA tax is due when the deferred compensation vests (or, in some cases, when the amount of the deferred compensation can be determined).

It is not always easy to tell when these triggering events occur.  In fact, it is sometimes hard to tell whether compensation is “deferred compensation” that is subject to the special timing rules.  Employers faced with these complications often discover long after the fact that they have failed to withhold and pay FICA tax on deferred compensation when the tax was due.  The additional 0.9% Medicare tax introduced in 2013 makes these errors much more difficult to correct.
Continue Reading New Medicare Tax Makes FICA Errors Harder to Correct

Earlier today, the Supreme Court issued its opinion in United States v. Quality Stores.  The opinion, authored by Justice Kennedy, reverses the Sixth Circuit and concludes that the supplemental unemployment benefit payments (or “SUB” payments) at issue in the case are subject to tax under the Federal Insurance Contribution…
Continue Reading Supplemental Unemployment Benefits Subject to FICA Tax, Supreme Court Holds

The Affordable Care Act created two new taxes for individuals whose income exceeds $200,000 ($250,000 for married couples filing joint returns).  Employees must pay an additional 0.9% Medicare tax on wages in excess of these dollar thresholds.  Individuals whose adjusted gross income exceeds the dollar thresholds also must pay a 3.8% tax on their net investment income.

Both taxes became effective in 2013, but high-income employees will pay the taxes for the first time next year, when they file their 2013 tax returns.  Employers are required to withhold the 0.9% additional Medicare tax, and are liable for any amount they fail to withhold.

The IRS recently published a final regulation and an updated set of FAQs interpreting the additional Medicare tax.  The IRS also published a final regulation, a new proposed regulation, and updated FAQs interpreting the tax on net investment income.
Continue Reading IRS Issues Guidance on New Medicare Taxes for High-Income Employees

Earlier today, the Supreme Court agreed to review the Sixth Circuit’s decision United States v. Quality Stores.  In that decision, the Sixth Circuit sided with taxpayers and concluded that certain severance payments that qualify as supplemental unemployment benefit payments (or “SUB” payments) for federal income tax purposes are not…
Continue Reading Supreme Court To Resolve Whether Severance Pay for Layoffs Is Subject to FICA Tax

The IRS issued a notice today setting forth special procedures by which employers may claim a refund of FICA taxes that were paid on employee benefits solely because of the application of the Defense of Marriage Act (“DOMA”).  Section 3 of DOMA prohibited the IRS from recognizing same-sex marriages for federal tax purposes and was struck down by the Supreme Court last June in a case called United States v. Windsor.  Prior to the Windsor decision, employers paid the employer’s share of FICA tax, withheld the employee’s share of FICA tax, and withheld income tax with respect to benefits for same-sex spouses of employees when the benefits could be provided tax-free to employees’ opposite-sex spouses.  In large part, the benefits at issue are health benefits, although certain tuition and other benefits also might have been taxed solely on account of DOMA.  Following the Windsor decision, refunds now may be obtained.
Continue Reading IRS Issues Special Administrative Procedures for DOMA Tax Refund Claims by Employers

Earlier today in United States v. Windsor, the Supreme Court struck down section 3 of the federal Defense of Marriage Act (“DOMA”).  Section 3 of DOMA limits the definition of marriage for purposes of federal law to marriage between individuals of the opposite sex.   The Court held that DOMA deprives same sex couples of due process in violation of the Fifth Amendment.   The Court’s ruling applies to marriages recognized under state law;   the Court did not address whether the Constitution requires states to recognize same sex marriage.

The Court’s opinion notes that DOMA affects over “1,000 statutes and numerous federal regulations.”   Many of the affected statutes and regulations relate to employee benefits.  As a result, the decision is likely to affect the benefits provided under employee benefit plans and the tax treatment those benefits receive.  In some cases, the Court’s decision could have implications for benefits that have already been paid. We encourage employers to review their benefit plans and plan administration to identify changes that might be required or desirable as a result of the ruling.
Continue Reading Supreme Court’s DOMA Decision Has Significant Implications for Employers and Employee Benefit Plans

Earlier this year we described the IRS’s Voluntary Classification Settlement Program (VCSP), which substantially reduces an employer’s liability for back taxes when the employer voluntarily reclassifies employees who have been treated as independent contractors.  Through June 30, the relief program is available even if the employer did not file Forms 1099 reporting the compensation paid to the workers.  Starting in July, however, an employer will be eligible for the program only if the employer filed all required Forms 1099 for the previous three years with respect to the workers it wishes to reclassify.

What does worker classification have to do with health reform?  Quite a lot, as it turns out.  Starting in 2014, employers with more than 50 full-time employees will owe a “shared responsibility” excise tax if they fail to offer group health coverage on every day of the month to at least 95% of their full-time employees and the employees’ dependent children.  A “full-time employee” is a common-law employee who works an average of at least 30 hours per week.  (You will find a more detailed description of the shared responsibility rules here and here.)
Continue Reading Misclassified Workers Create Penalty Risks Under Health Reform

If the Supreme Court holds that the Defense of Marriage Act (“DOMA”) is unconstitutional, those involved with the administration of employee benefits plans will be very busy.  Under DOMA, a benefit plan is not required to recognize same-sex marriage and, in many cases, must treat same-sex spouses differently than opposite-sex spouses.  If DOMA is struck down, employers might need to amend their benefit plans, and plan administration will necessarily change.  Many changes will need to be implemented quickly.
Continue Reading While the Supreme Court considers DOMA’s fate, what’s an in-house benefits lawyer or HR professional to do?

Misclassification of workers remains a hot button issue.  The IRS continues to scrutinize employers’ worker classification practices, and it is likely that health reform will cause the Department of Labor to review classification issues even more closely than it has in the past.  

In an effort to encourage employers to reclassify independent contractors as employees, the IRS created the Voluntary Classification Settlement Program in 2011.  The program limits the tax liabilities of employers who voluntarily reclassify independent contractors.  Recently, the IRS expanded the program to cover a wider range of situations and provided additional clarifications.
Continue Reading Worker (Mis)Classification: IRS Expands Voluntary Settlement Program