President’s budget contains some payroll items

The President’s 2017 budget contains some payroll-related items, which are highlighted below.

Minimum wage

The Administration supports raising the minimum wage. In addition to “ensuring that those working on new and replacement federal contracts receive a higher minimum wage,” the Administration said it was “encouraged that 17 States and the District of Columbia have passed increases in their minimum wage since the President called for a minimum wage increase during his State of the Union address in February 2013.” The budget message indicates the Administration is “ready to work with the Congress to pass legislation to increase the minimum wage for the rest of the workforce as soon as possible.”

Wage insurance

Wage insurance would provide a safety net for workers who lose their jobs and become reemployed at lower wages at least initially, often in new industries. The budget proposes establishing wage insurance for all workers with at least three years of job tenure who are laid off and become reemployed in a lower-paying job at less than $50,000 per year. Wage insurance would pay half of the difference between the previous wage and the new wage, up to a maximum of $10,000 over a period of two years. The goal of the program is two-fold: (1) help workers who return to work at lower wages on a temporary basis as they gain a foothold in their new jobs; and (2) provide workers an incentive to return to work, even if they must take a pay cut relative to their former employment.

Tip credit repeal

The proposal would repeal the income tax credit for FICA taxes an employer pays on tips, effective for taxable years beginning after December 31, 2016.

FUTA surtax

The 0.2% surtax would be reinstated and made permanent, effective for wages paid after December 31, 2016.

FUTA wage base and credits

The UI wage base would be broadened, while reducing the effective FUTA rate. The FUTA wage base would be raised in 2018 to $40,000 per worker paid annually, index the wage base to wage growth for subsequent years, and reduce the net Federal UI tax from 0.8% (after the proposed permanent reenactment and extension of the FUTA surtax) to 0.167%. States with wage bases below $40,000 would need to conform to the new FUTA base in order to receive the full FUTA credit. In addition, new protections would be put in place to ensure that states maintain sufficient revenues and reserves in their state UI trust funds to be able to provide unemployment insurance protections to workers during times of economic stress. There would be a minimum requirement on state employer tax rates equivalent to roughly $70 per employee beginning in 2018. Lastly, the proposal would change the FUTA credit reduction rules. Instead of incurring a reduction in the credit rate after failing to repay outstanding loans for two years, States would be assessed a reduction if they have an average high cost multiple (AHCM) of less than 0.5 for two consecutive years. The reduction would be assessed each year until the minimum solvency standard of 0.5 AHCM is reached. The proposal would be effective as of the date of enactment.

Information returns

A contractor receiving payments of $600 or more in a calendar year from a particular business would be required to furnish to the business (on Form W-9) the contractor’s certified TIN. A business would be required to verify the contractor’s TIN with the IRS, which would be authorized to disclose, solely for this purpose, whether the certified TIN-name combination matches IRS records. If a contractor failed to furnish an accurate certified TIN, the business would be required to withhold a specified flat-rate percentage of gross payments. Contractors receiving payments of $600 or more in a calendar year from a particular business could elect to require the business to withhold a flat-rate percentage of their gross payments, with the flat-rate percentage of 15, 25, 30, or 35% being selected by the contractor.

The due date for filing information returns would be accelerated and the extended due date for the returns when electronically filed would be eliminated. Information returns would be required to be filed with the IRS by January 31, except that Form 1099-B would be required to be filed with the IRS by February 15. The due dates for the payee statements would remain the same, effective for returns required to be filed after December 31, 2016.

Form W-2 reporting

Employers would be required to report the amounts contributed to an employee’s accounts under a defined contribution plan on the employee’s Form W-2, effective for information returns due for calendar years beginning after December 31, 2016.

Work Opportunity Tax Credit

The WOTC would be permanently extended to apply to wages paid to qualified individuals who begin work for the employer after December 31, 2019. In addition, for individuals who begin work for the employer after December 31, 2016, the definition of a qualified veteran would be expanded. Qualified veterans would now include disabled veterans who use G.I. Bill benefits to attend a qualified educational institution or training program within one year of being discharged or released from active duty, and are hired within six months of ending attendance at the qualified educational institution or training program. Qualified first-year wages of up to $12,000 paid to such individuals would be eligible for the WOTC. For taxable years beginning after December 31, 2016, the credit would be equal to 20% of the excess of qualified wages and health insurance costs paid or incurred by an employer in the current taxable year over the amount of such wages and costs paid or incurred by the employer in the base year. The base year costs would equal the average of such wages and costs for the two taxable years prior to the current taxable year.

Dependent care FSA repeal

The proposal would repeal dependent care flexible spending accounts, increase the child and dependent care credit, and create a larger credit for taxpayers with children under age five. The income level at which the current-law credit begins to phase down would be increased from $15,000 to $120,000, such that the rate reaches 20% at income above $148,000. Taxpayers with young children could claim a child care credit of up to 50% of expenses up to $6,000 ($12,000 for two young children). The credit rate for the young child credit would phase down at a rate of one percentage point for every $2,000 (or part thereof) of AGI over $120,000 until the rate reaches 20 percent for taxpayers with incomes above $178,000. The expense limits and income at which the credit rates begin to phase down would be indexed for inflation for both young children and other dependents after 2017. The proposal would be effective for taxable years beginning after December 31, 2016.

Education items

Make Pell Grants excludable from income. To further simplify education benefits for low-income students, Pell Grants would be excluded from gross income and the American Opportunity Tax Credit (AOTC) calculation, such that taxpayers can claim an AOTC without reducing eligible expenses for claiming the credit by the amount of their Pell Grant.

Modify reporting of scholarships on Form 1098-T. Any entity issuing a scholarship or grant in excess of $500 (indexed for inflation after 2017) that is not processed or administered by an institution of higher education would be required to report the scholarship or grant on Form 1098-T.
Loan forgiveness. The forgiven or discharged portion of a Federal student loan would be excluded from gross income in cases where the loan was forgiven or discharged as part of a program administered by the Department of Education.

The proposal generally would be effective for taxable years beginning after December 31, 2016, except that the provisions regarding student loan forgiveness would be effective for discharges of loans after December 31, 2016.

Worker reclassification

The IRS would be permitted to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. The reduced employment tax liabilities for misclassification provided under current law would be retained, except that lower penalties would apply only if the service recipient voluntarily reclassifies its workers before being contacted by the IRS or another enforcement agency and if the service recipient had timely filed all required information returns (Forms 1099) reporting the payments to the misclassified workers. For service recipients with only a small number of employees and a small number of misclassified workers, even reduced penalties would be waived if the service recipient (1) had consistently filed timely Forms 1099 reporting all payments to all misclassified workers and (2) agreed to prospective reclassification of misclassified workers. It is anticipated that, after enactment, new enforcement activity would focus mainly on obtaining the proper worker classification prospectively, since in many cases the proper classification of workers may not have been clear. (Statutory employee or nonemployee treatment as specified under current law would be retained.)

The Department of the Treasury and IRS also would be permitted to issue generally applicable guidance on the proper classification of workers under common law standards. This would enable service recipients to properly classify workers with much less concern about future IRS examinations. The Department of the Treasury and IRS would be directed to issue guidance interpreting common law in a neutral manner recognizing that many workers are, in fact, not employees. The Department of the Treasury and IRS also would develop guidance that would provide safe harbors and/or rebuttable presumptions, both narrowly defined. To make that guidance clearer and more useful for service recipients, it would generally be industry- or jobspecific. Priority for the development of guidance would be given to industries and jobs in which application of the common law test has been particularly problematic, where there has been a history of worker misclassification, or where there have been failures to report compensation paid.

Service recipients would be required to give notice to independent contractors, when they first begin performing services for the service recipient, that explains how they will be classified and the consequences thereof, e.g., tax implications, workers’ compensation implications, wage and hour implications. The IRS would be permitted to disclose to the Department of Labor information about service recipients whose workers are reclassified. To ease compliance burdens for independent contractors, independent contractors receiving payments totaling $600 or more in a calendar year from a service recipient would be permitted to require the service recipient to withhold for Federal tax purposes a flat rate percentage of their gross payments, with the flat rate percentage being selected by the contractor. In addition, the proposal would clarify the rules with respect to Tax Court jurisdiction in proceedings involving the classification or reclassification of workers and make technical and conforming changes to those rules. The proposal would be effective upon enactment, but prospective reclassification of those covered by the current special provision would not be effective until the first calendar year beginning at least one year after date of enactment. The transition period could be up to two years for workers with existing written contracts establishing their status.

Electronic reporting

Regulatory authority would be expanded to allow reduction of the 250-return threshold in the case of information returns such as Forms 1042-S, 1099, 1098, 1096, 5498, 8805, 8955-SSA, and 8966. Any new regulations would be required to balance the benefits of electronic filing against any burden that might be imposed on taxpayers, and implementation would take place incrementally to afford adequate time for transition to electronic filing. Taxpayers would be able to request waivers of this requirement if they cannot meet the requirement due to technological constraints, if compliance with the requirement would result in undue financial burden, or as otherwise specified in regulations. The proposal would generally be effective for taxable years beginning after the date of enactment.


All civil tax penalties with a fixed penalty amount (including floors and caps imposed with respect to penalties) would be indexed to inflation and round the indexed amount to the next hundred dollars, effective upon enactment.

Mileage rate

The standard mileage rate for the charitable contribution deduction would equal to the rate set by the IRS for purposes of the medical and moving expense deduction. It would likewise be adjusted annually to reflect the estimated variable costs of operating a vehicle. The proposal would be effective for contributions made in taxable years beginning after December 31, 2016.

Child support

The proposal would amend Code Sec. 6103(l) to: (1) consolidate the child support enforcement disclosure rules into a single provision; (2) define key terms for purposes of this proposal such as “child support enforcement agency” and “agent” (3) permit disclosure to Tribal child support enforcement agencies and other critical entities; and (4) update and streamline the items of tax return information that may be disclosed to each party depending on the purpose and need for the disclosure. The proposal clarifies the use of tax data for child support purposes and the safeguarding responsibilities of agency and agent recipients, effective as of the date of enactment.

DOL enforcement

The budget includes $1.9 billion in discretionary resources “to ensure that DOL’s worker protection agencies can meet their responsibilities to defend the health, safety, wages, working conditions, and retirement security of American workers.”

Ensuring fair pay. The budget provides $277 million to enforce laws that establish the minimum standards for wages and working conditions, “particularly in industries where workers are most at risk.” It “expands funding for efforts to ensure that workers receive back wages they are owed and cracks down on the illegal misclassification of some employees as independent contractors, a practice that deprives workers of basic protections like unemployment insurance, workers’ compensation, and overtime pay.”

Keeping workers safe. The budget provides almost $1 billion for OSHA and MSHA, including to provide resources to enhance safety and security at chemical facilities and improve response procedures when major incidents at these sites occur. It includes funds for OSHA “to enforce the more than 20 whistleblower laws that protect workers from discrimination and retaliation when they report unsafe and unscrupulous practices.” It also provides MSHA the resources it needs to meet its statutory obligation to inspect every mine and address the risks posed to miners.

Paid leaves

Encouraging state paid leave initiatives. A handful of states and localities have enacted policies to offer paid family leave, and the budget includes more than $2 billion for the Paid Leave Partnership Initiative to assist up to five states to launch paid leave programs, following the example of California, New Jersey, and Rhode Island. States that choose to participate in the Paid Leave Partnership Initiative would be eligible to receive funds for the initial set-up and three years of benefits. The budget also includes funding for grants to help states and localities conduct analyses to inform the development of paid family and medical leave programs.

Creating paid leave for federal workers. The budget also proposes legislation that would offer federal employees six weeks of paid administrative leave for the birth, adoption, or foster placement of a child. In addition, the proposal would make explicit the ability for mothers and fathers to use sick days to bond with a healthy new child. This proposal is part of a broader effort to expand the availability of paid family leave for the federal workforce, and establish a federal family leave policy on par with leading private-sector companies and other industrialized nations.

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