The House and Senate passed a package of tax extenders, the Protecting Americans from Tax Hikes (PATH) Bill of 2015 (HR 2029). The payroll-related provisions are highlighted below:
Truncated SSNs on Form W-2
Code Sec. 6051 is revised to require employers to include an “identifying number” for each employee, rather than an employee’s SSN, on Form W-2. The change permits the Department of the Treasury to promulgate regulations requiring or permitting a truncated SSN on Form W-2, under authority currently provided in Code Sec. 6109(d), effective on the date of enactment.
Form W-2 due date
The provision requires that certain information returns be filed by January 31, generally the same date as the due date for employee and payee statements, and are no longer eligible for the extended filing date for electronically filed returns under Code Sec. 6071(b). Specifically, the filing of information on wages reportable on Form W-2 and nonemployee compensation will be accelerated. The due date for employee and payee statements remains the same. Nonemployee compensation generally includes fees for professional services, commissions, awards, travel expense reimbursements, or other forms of payments for services performed for the payor’s trade or business by someone other than in the capacity of an employee, effective for calendar years beginning after the date of enactment.
Mass transit parity
Background. Before February 17, 2009, the amount that could be excluded as qualified transportation fringe benefits was subject to one monthly limit for combined transit pass and vanpool benefits and a higher monthly limit for qualified parking benefits. Effective for months beginning on or after February 17, 2009, and before January 1, 2015, parity in qualified transportation fringe benefits was provided by temporarily increasing the monthly exclusion for combined employer-provided transit pass and vanpool benefits to the same level as the monthly exclusion for employer-provided parking. As of January 1, 2015, a lower monthly limit again applies to the exclusion for combined transit pass and vanpool benefits. Specifically, for 2015, the amount that can be excluded as qualified transportation fringe benefits is limited to $130 per month in combined transit pass and vanpool benefits and $250 per month in qualified parking benefits. For 2016, the monthly exclusion limit for combined transit pass and vanpool benefits remains at $130; the monthly exclusion limit for qualified parking benefits increases to $255.
The provision reinstates parity in the exclusion for combined employer-provided transit pass and vanpool benefits and for employer-provided parking benefits and makes parity permanent. Thus, for 2015, the monthly limit on the exclusion for combined transit pass and vanpool benefits is $250, the same as the monthly limit on the exclusion for qualified parking benefits. Similarly, for 2016 and later years, the same monthly limit will apply on the exclusion for combined transit pass and vanpool benefits and the exclusion for qualified parking benefits, effective for months after December 31, 2014.
For the extension to be effective retroactive to January 1, 2015, expenses incurred for months beginning after December 31, 2014, and before enactment, by an employee for employer-provided vanpool and transit benefits may be reimbursed (under a bona fide reimbursement arrangement) by employers on a tax-free basis to the extent they exceed $130 per month and are no more than $250 per month. Congress intends that the rule that an employer reimbursement is excludible only if vouchers are not available to provide the benefit continues to apply, except in the case of reimbursements for vanpool or transit benefits between $130 and $250 for months beginning after December 31, 2014, and before enactment. Reimbursements of the additional amount for expenses incurred for months beginning after December 31, 2014, and before enactment of the provision, may be made in addition to the provision of benefits or reimbursements of up to the applicable monthly limit for expenses incurred for months beginning after enactment.
Employment tax treatment for motion picture projects
Background. If an employee works for multiple employers during a year, a separate wage base generally applies in determining the employer share of OASDI tax and FUTA tax with respect to remuneration for employment with each employer, even if the wages earned with all the employers are paid by the same third party.
For purposes of the OASDI and FUTA wage bases, remuneration paid by a “motion picture project employer” during a calendar year to a “motion picture project worker” is treated as remuneration paid with respect to employment of the motion picture project worker by the motion picture project employer. As a result, all remuneration paid by the motion picture project employer to a motion picture project worker during a calendar year is subject to a single OASDI wage base and a single FUTA wage base, without regard to the worker’s status as a common law employee of multiple clients of the motion picture project employer during the year. A person must meet several criteria to be treated as a motion picture project employer.
The person (directly or through an affiliate) must (1) be a party to a written contract covering the services of motion picture project workers with respect to motion picture projects in the course of the trade or business of a client of the motion picture project employer, (2) be contractually obligated to pay remuneration to the motion picture project workers without regard to payment or reimbursement by any other person, (3) control the payment (within the meaning of the Code) of remuneration to the motion picture project workers and pay the remuneration from its own account or accounts, (4) be a signatory to one or more collective bargaining agreements with a labor organization that represents motion picture project workers, and (5) have treated substantially all motion picture project workers whom the person pays as employees (and not as independent contractors) during the calendar year for purposes of determining FICA, FUTA and other employment taxes.
In addition, at least 80% of all FICA remuneration paid by the person in the calendar year must be paid to motion picture project workers. A motion picture project worker means any individual who provides services on motion picture projects for clients of a motion picture project employer that are not affiliated with the motion picture project employer, applies to remuneration paid after December 31, 2015. Nothing in the amendments made by the provision is to be construed to create any inference as to the law before the date of enactment.
Work colleges program exclusion
Background. Currently, an individual who is a candidate for a degree at a qualifying educational organization may exclude amounts received as a qualified scholarship from gross income and wages. In addition, the law provides an exclusion from gross income and wages for qualified tuition reductions for certain education provided to employees of certain educational organizations. The exclusions for qualified scholarships and qualified tuition reductions do not apply to any amount received by a student that represents payment for teaching, research, or other services by the student required as a condition for receiving the scholarship or tuition reduction. Payments for such services are includible in gross income and wages. An exception to this rule applies in the case of the National Health Services Corps Scholarship Program and the F. Edward Herbert Armed Forces Health Professions Scholarship and Financial Assistance Program. The bill exempts from gross income any payments from a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in such section). Specifically, a work college must require resident students to participate in a work-learning-service program that is an integral and stated part of the institution’s educational philosophy and program, effective for amounts received in taxable years beginning after the date of enactment.
Employer-provided health reimbursements
Background. Reimbursements under an employer-provided accident or health plan for medical care expenses for employees, their spouses, their dependents, and adult children under age 27 are excludible from gross income. However, in order for these reimbursements to be excluded from income, the plan may reimburse expenses of only the employee and the employee’s spouse, dependents, and children under age 27. In the case of a deceased employee, the plan generally may reimburse medical expenses of only the employee’s surviving spouse, dependents and children under age 27. If a plan reimburses expenses of any other beneficiary, all expense reimbursements under the plan are included in income, including reimbursements of expenses of the employee and the employee’s spouse, dependents and children under age 27 (or the employee’s surviving spouse, dependents and children under age 27).
Under a limited exception, reimbursements under a plan do not fail to be excluded from income solely because the plan provides for reimbursements of medical expenses of a deceased employee’s beneficiary, without regard to whether the beneficiary is the employee’s surviving spouse, dependent, or child under age 27. In order for the exception to apply, the plan must have provided, on or before January 1, 2008, for reimbursement of the medical expenses of a deceased employee’s beneficiary. In addition, the plan must be funded by a medical trust (1) that is established in connection with a public retirement system, and (2) that either has been authorized by a State legislature, or has received a favorable ruling from the IRS that the trust’s income is not includible in gross income by reason of the exclusion for income of a State or political subdivision. The exception preserves the exclusion for reimbursements of expenses of the employee and the employee’s spouse, dependents, and children under age 27 (or the employee’s surviving spouse, dependents, and children under age 27). Reimbursements of expenses of other beneficiaries are included in income.
The exception (above) is expanded to apply to plans funded by medical trusts in addition to those covered under present law. As expanded, the exception applies to a plan funded by a medical trust (1) that is either established in connection with a public retirement system or established by or on behalf of a State or political subdivision thereof, and (2) that either has been authorized by a State legislature or has received a favorable ruling from the IRS that the trust’s income is not includible in gross income by reason of either the exclusion for income of a State or political subdivision or the exemption from income tax for a voluntary employees’ beneficiary association (“VEBA”). The plan is still required to have provided, on or before January 1, 2008, for reimbursement of the medical expenses of a deceased employee’s beneficiary, without regard to whether the beneficiary is the employee’s surviving spouse, dependent, or child under age 27. The provision also clarifies that this exception preserves the exclusion for reimbursements of expenses of the employee and the employee’s spouse, dependents, and children under age 27, or the employee’s surviving spouse, dependents, and children under age 27 (referred to under the provision as “qualified taxpayers”) and that reimbursements of expenses of other beneficiaries are included in income. The provision is effective for payments after the date of enactment of the provision.
OASDI research tax credit
For taxable years beginning after December 31, 2015, a qualified small business may elect for any taxable year to claim a certain amount of its research credit as a payroll tax credit against its employer OASDI liability, rather than against its income tax liability. If a taxpayer makes an election under this provision, the amount so elected is treated as a research credit for purposes of section 280C. A qualified small business is defined, with respect to any taxable year, as a corporation (including an S corporation) or partnership (1) with gross receipts of less than $5 million for the taxable year, and (2) that did not have gross receipts for any taxable year before the five taxable year period ending with the taxable year. An individual carrying on one or more trades or businesses also may be considered a qualified small business if the individual meets the conditions set forth in (1) and (2), taking into account its aggregate gross receipts received with respect to all trades or businesses. A qualified small business does not include an organization exempt from income tax under Code Sec. 501.
The payroll tax credit portion is the least of (1) an amount specified by the taxpayer that does not exceed $250,000, (2) the research credit determined for the taxable year, or (3) in the case of a qualified small business other than a partnership or S corporation, the amount of the business credit carryforward under Code Sec. 39 from the taxable year (determined before the application of this provision to the taxable year). All members of the same controlled group or group under common control are treated as a single taxpayer. The $250,000 amount is allocated among the members in proportion to each member’s expenses on which the research credit is based. Each member may separately elect the payroll tax credit, but not in excess of its allocated dollar amount. A taxpayer may make an annual election under this section, specifying the amount of its research credit not to exceed $250,000 that may be used as a payroll tax credit, on or before the due date (including extensions) of its originally filed return.
A taxpayer may not make an election for a taxable year if it has made such an election for five or more preceding taxable years. An election to apply the research credit against OASDI liability may not be revoked without the consent of the Secretary of the Treasury. In the case of a partnership or S corporation, an election to apply the credit against its OASDI liability is made at the entity level.
Application. The payroll tax portion of the research credit is allowed as a credit against the qualified small business’s OASDI tax liability for the first calendar quarter beginning after the date on which the qualified small business files its income tax or information return for the taxable year. The credit may not exceed the OASDI tax liability for a calendar quarter on the wages paid with respect to all employees of the qualified small business. If the payroll tax portion of the credit exceeds the qualified small business’s OASDI tax liability for a calendar quarter, the excess is allowed as a credit against the OASDI liability for the following calendar quarter. The provision to allow the research credit against FICA taxes is effective for taxable years beginning after December 31, 2015. It appears that this may cause changes to the Form 94X series.
Work opportunity tax credit
The present-law employment WOTC credit provision (through taxable years beginning on or before December 31, 2019) is extended for five years. Additionally, the WOTC is expanded to employers who hire individuals who are qualified long-term unemployment recipients. For purposes of the provision, such persons are individuals who have been certified by the designated local agency as being in a period of unemployment of 27 weeks or more, which includes a period in which the individual was receiving unemployment compensation under state or federal law. For wages paid to such individuals, employers are eligible for a 40% credit on the first $6,000 of wages paid to the individual, for a maximum credit of $2,400 per eligible employee, generally effective for individuals who begin work for the employer after December 31, 2014. The provision relating to wages paid to qualified long-term unemployment recipients is effective for individuals who begin work for the employer after December 31, 2015.
Information return de minimis errors
A safe harbor is created from the application of the penalty for failure to file a correct information return and the penalty for failure to furnish a correct payee statement in circumstances in which the information return or payee statement is otherwise correctly filed but includes a de minimis error of the amount required to be reported on such return or statement. In general, a de minimis error of an amount on the information return or statement need not be corrected if the error for any single amount does not exceed $100. A lower threshold of $25 is established for errors with respect to the reporting of an amount of withholding or backup withholding. Brokers are required to be consistent with amounts reported on uncorrected returns which are eligible for the safe harbor. If any person receiving payee statements requests a corrected statement, the penalty for failure to file a correct information return and the penalty for failure to furnish a correct payee statement would continue to apply in the case of a de minimis error, effective to information returns required to be filed and payee statements required to be furnished after December 31, 2016.
Earned Income Tax Credit
Background. Low- and moderate-income workers may be eligible for the refundable earned income tax credit (EITC). Eligibility for the EITC is based on earned income, adjusted gross income, investment income, filing status, number of children, and immigration and work status in the U.S.. The amount of the EITC is based on the presence and number of qualifying children in the worker’s family, as well as on adjusted gross income and earned income. The EITC generally equals a specified percentage of earned income up to a maximum dollar amount. The maximum amount applies over a certain income range and then diminishes to zero over a specified phaseout range. For taxpayers with earned income (or adjusted gross income (AGI), if greater) in excess of the beginning of the phaseout range, the maximum EITC amount is reduced by the phaseout rate multiplied by the amount of earned income (or AGI, if greater) in excess of the beginning of the phaseout range. For taxpayers with earned income (or AGI, if greater) in excess of the end of the phaseout range, no credit is allowed. The EITC rate of 45% is permanent for taxpayers with three or more qualifying children. In addition, the higher phase-out thresholds for married couples filing joint returns is made permanent, effective for taxable years beginning after December 31, 2015.
Visit our News Library to read more news stories.