Payroll Insights
May 2008
About This Newsletter
Payroll Insights is a publication from KPMG LLP's Employment
Tax Practice. It is designed to provide you with current developments in
the payroll and employment tax arena and will be published periodically
throughout the year as developments warrant.
New York's Joint Enforcement
Task Force on Worker Misclassification Issues First Report
The Joint Enforcement Task Force on Worker Misclassification (the Task
Force), established in September 2007, issued its initial findings,
identifying misclassifications that resulted in more than $19 million in
unreported wages, $3 million in underpayments owed to workers, and more
than $1.2 million in taxes and penalties owed to New York's Unemployment
Insurance Trust Fund.
Background
On September 5, 2007, New York's governor signed Executive
Order #
17, establishing the Task Force. The Task Force consists of the
Commissioner of Labor, the Chair of the Workers' Compensation Board, the
Workers' Compensation Fraud Inspector General, the Commissioner of
Taxation and Finance, the Comptroller of the City of New York, and the
Attorney General.
The Task Force was charged with coordinating the investigation and
enforcement of employee misclassification. To this end, the Task Force has
the power and duty to:
- Facilitate the sharing of information among Task Force members
- Pool investigative resources
- Assess existing methods for preventing and investigating
classification violations and for enforcing worker classification laws
- Develop strategies for investigating misclassification in industries
where the issue is common
- Facilitate the filing of complaints and identification of potential
violators
- Identify misclassification cases and create joint enforcement teams
to investigate
- Establish protocols for investigating cases of misclassification
- Work with local district attorneys and other agencies, and establish
procedures for referring cases for prosecution
- Work with business, labor, and community groups to prevent
misclassification, distribute educational materials, and enhance
mechanisms for identifying and reporting employee misclassification
- Increase public awareness
- Work with social service agencies that provide assistance to
vulnerable populations
- Consult with business, organized labor, and state agencies to
improve the Task Force's operations.
The Task Force is required to file a report with the governor on
February 1 of each year to set forth the Task Force's accomplishments;
identify any administrative or legal barriers impeding the Task Force's
effective operations; propose administrative, legislative, and regulatory
changes; and identify strategies to prevent misclassification. The first
report, issued only four months after the Task Force was created, details
findings to date and goals for the coming year.
The Report
In its report, the Task Force discussed its activities and
accomplishments to date, including:
- Establishing an Oversight Committee and six subcommittees to address
enforcement issues, coordinate compliance efforts, and develop
strategies for achieving increased employer compliance.
- Continued participation in the IRS's Questionable Employment Tax
Practices (QETP) program.
- Establishing an employment fraud hotline, Web site, and e-mail
address, through which the Task Force received approximately 570 calls
and e-mails, resulting in the commencement of 200 Unemployment Insurance
Tax audits.
- Conducting 15 interagency enforcement efforts, known as "sweeps,"
between August and December 2007, resulting in the identification of 117
employers.
- Coordinating 35 unemployment insurance tax investigations, of which
16 were concluded in 2007. The completed investigations uncovered 2,078
misclassified workers, $19.4 million in unreported remuneration paid to
employees, and over $856,000 in unpaid Unemployment Insurance taxes.
Many of these investigations came from inspecting construction and other
sites, including retail establishments and a restaurant.
- Initiating 17 Labor Standards investigations, resulting in the
identification of $3,020,000 in underpaid wages due to 646 employees,
and the assessment of $5,000 in fines for child labor law violations
based on interviews of 545 employees.
- Providing technical assistance to Illinois, Massachusetts, and Ohio
regarding New York's efforts, and discussing state and federal labor law
matters with several states, including California, Florida, and Texas.
The report also contains information relating to the Task Force's
investigative and community outreach efforts, materials and processes that
have been developed for conducting investigations, as well as separate
reports from the participating agencies.
The Task Force noted in the report that in 2008, it will focus on
developing proposals in the following five areas:
- The development of a consistent standard for
determining employee status.
- Extending or clarifying individual liability of
corporate officers and/or shareholders, members of LLCs and LLPs, as
well as successor or substantially owned affiliated entities for
misclassification actions.
- Legislation to authorize the Department of Taxation
and Finance to participate in sweeps, and to share audit results, thus
expanding the department's ability to share data for these purposes.
- Resolving the multistate issue of employers
crossing state lines and relocating employees while avoiding taxation
and accountability.
- Possible changes to create a consistent set of
penalties applicable to all Task Force member agencies, in addition to
criminal sanctions, with regard to employers' provision of books and
records.
During 2008, the Task Force expects to continue meeting its mandate by
further developing its enforcement strategies through expanding its
investigations to Northern New York State, Long Island, Utica and Rome,
Western New York, and the Southern Tier. The Task Force will consider the
merits of the common law and ABC employee classification tests, achieving
consistent classification criteria, designating a single agency to
determine classification, and discussions with labor and business groups
regarding consistent criteria. Finally, the Task Force expects to increase
information sharing between the agencies and with other states by doing a
better job of mining existing data; sharing leading practices with other
states; coordinating enforcement actions with other states; formalizing
information sharing with federal, state, and local agencies; and possibly
expanding joint enforcement efforts.
IRS Renews Interim Guidance on
Excess Per Diem Payments
The IRS has reissued audit guidelines (based on Revenue Ruling 2006-56)
for examiners analyzing excess per diem payments (IRS SBSE-04-0108-003,
1/14/08). The initial guidance (IRS SBSE-04-1106-049) expired in November
2007.
Background
Revenue Ruling 2006-56 provided guidance regarding the appropriate
employment tax treatment of reimbursement allowances paid to employees in
excess of federal per diem rates. The appropriate treatment of excess per
diem payments varies depending on whether the employer utilizes an
accountable plan or a nonaccountable plan. Payments under an accountable
plan should be treated as nontaxable expense reimbursements. However,
payments made under a nonaccountable plan should be reported as wages
subject to employment taxes. The ruling held that a taxpayer's failure to
track excess reimbursements and its routine payment of excess
reimbursements provided sufficient evidence to conclude that a pattern of
abuse existed, resulting in all payments made under the expense allowance
arrangement being treated as made under a nonaccountable plan.
Guidelines
For taxable periods ending on or before December 31, 2006, examiners
are instructed not to treat a plan as entirely nonaccountable unless
egregious circumstances or intentional noncompliance is evidenced. Under
such circumstances, payments in excess of the federal per diem limit are
treated as wages. When determining whether a plan is abusive, for periods
ending after December 31, 2006, examiners are instructed to take into
account whether the employer properly utilized a system to track excess
payments and the extent to which such excess payments are treated as
wages.
Illinois Updates Form IL W-4 to
Conform to Federal
Form W-4
The Illinois Department of Revenue has adopted the federal guidelines
for accepting Form IL W-4 submissions electronically, bringing the Form IL
W-4 into compliance with the federal Form W-4 standards.
In accordance with Sec. 1801.1(B), Illinois employers may now transmit
Form IL W-4 via first class mail, by fax, magnetically, or effective
November 26, 2007, electronically. Illinois employers can receive and
transmit Form IL W-4 information electronically as long as they are in
accordance with the standards set by the IRS for the federal Form W-4.
The data should be electronically retained and easily accessible.
Procedures should be implemented to ensure that the information on Form IL
W-4 is obtained from the employee identified on the form. The electronic
W-4 should be printable and mirror the paper W-4. The electronic copy must
be signed by the employee under penalty of perjury.
IRS Issues Interim Guidance -
Waives Information Return Filing Requirement for 2007 Stock Option
Transfers
The IRS has issued interim guidance waiving employers' IRS 2007
information return filing requirements under Internal Revenue Code section
6039 in connection with stock option transfers. Notice 2008-8.
In accordance with the amendments to section 6039 made by the Tax
Relief and Health Care Act of 2006, the IRS now requires employers to file
information returns following a stock transfer. Employers must continue to
provide employees with an information statement. Information returns must
be filed for stock transfers occurring on or after January 1, 2007, and
filings must be made on or before January 1 of the following year.
The IRS and Department of Treasury expect to issue new regulations that
retain the existing rules applicable to the information statements for
employees and to require that the same information be included on the
information returns filed with the IRS. Because the new regulations have
not yet been issued, the IRS is waiving the obligation to file an
information return for 2007 stock transfers governed by section 6039. When
the new regulations are issued, they are expected to be retroactive to
January 1, 2007.
Washington Amends Regulations to
Clarify State Unemployment Insurance Tax Rates for Professional Employer
Organizations and Client Employers in a Coemployer Relationship
Washington has amended its regulations, effective January 1, 2008, to
provide that professional employer organizations (PEO) and their client
employer will each be assigned tax rates based on their own experience.
The revised regulations also explain how the unemployment tax rates apply
when the PEO and client employer have a coemployment relationship as of
January 1, 2008. Wash. Admin. Code 192-300-992.
Effective January 1, 2008, the tax rate for a PEO and client employer
is determined on the basis that the client employer transferred from the
PEO effective January 1, 2008. A client employer's proportional experience
during the first quarter beginning January 1, 2008 transfers to the client
employer, regardless of whether the PEO was the base year employer prior
to that date. The client employer's tax rate does not change for the
remainder of the rate year of the transfer.
The amendments provide two exceptions. Client employers who joined a
PEO after July 1, 2007 will be assigned their own tax rate for 2008 as if
they never joined the PEO. Any experience from July 1, 2007 to December
31, 2007 assigned to the PEO for those client employers will transfer to
the client employers for the purpose of determining future rates.
In addition, if an employer is registered for Washington State
Unemployment Insurance (SUI) purposes and has its own tax rate, but is
also a client employer for the purpose of some of its employees, the
employer's SUI tax rate will apply to all of the employer's employees. If
there is a coemployer relationship with the PEO, the employees covered by
that relationship will be considered a branch account under the registered
employer.
The regulations also explain how tax rates will be calculated for both
the client employer and the PEO the year after the transfer. The client
employer's tax rate for each rate year, beginning on January 1 of the year
after the transfer, will be based on a combination of the client
employer's payroll and benefits experience, and the experience assigned to
the PEO attributable to the client employer, based on the percentage of
employees transferred as of January 1, 2008, regardless of the date the
client employer joined the PEO. The PEO's tax rate on any payroll it
retains remains unchanged for the rest of the year in which the transfer
occurs. Beginning on January 1 after the year of the transfer, the PEO's
tax rate will be based on its payroll and benefits experience as of the
regular computation date for that rate year, excluding any experience
attributable to client employers.
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