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July 2007 | ||
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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. In This Issue | |
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IRS Finalizes Section 409A Guidance The IRS has issued final section 409A regulations addressing the treatment of nonqualified deferred compensation plans and arrangements under section 409A, and accompanying guidance (Notice 2007-34), addressing the application of section 409A to split-dollar life insurance programs. Section 409A generally provides that, unless certain requirements are met, amounts deferred under a nonqualified deferred compensation plan for all tax years are currently includible in gross income provided the amounts are not subject to a substantial risk of forfeiture and not previously included in gross income. In addition, section 409A includes rules for certain trusts or other arrangements associated with a nonqualified deferred compensation plan when the arrangements are located outside the United States or are restricted to providing benefits in connection with a decline in the financial health of the sponsor. The final regulations provide compliance rules and address how employers can identify nonqualified deferred compensation plans and arrangements that are subject to section 409A. For example:
Notice 2007-34 provides guidance regarding the application of section 409A to split-dollar life insurance arrangements, and provides that certain amendments to split-dollar life insurance arrangements made to comply with section 409A will not be treated as a material modification. The notice addresses the identification of the types of arrangements subject to section 409A, and discusses the application of section 409A’s statutory effective date rules. | |||
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Texas Begins Issuing Employment Tax Refunds The Texas Workforce Commission (the Commission) has begun mailing $320 million in refunds to Texas employers who pay into the Unemployment Compensation Trust Fund (the Fund). The Commission reports that the refunds are a result of strong job growth and reduced demands on the Fund. Amounts in the Fund have risen above levels mandated by state law. Thus, the Commission is sending Texas employers surplus tax credits. In order to receive the refunds, employers must meet certain requirements, including having payroll during 2007, and paying all due taxes. The employers must also be experience rated (in business with a payroll for at least 18 months prior to January 1, 2007). The average refund amount is $800. | |||
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Worker Classification Developments Recent developments from the IRS and the state courts suggest that misclassification of employees is coming under greater focus, suggesting that employers may want to begin reviewing their worker classification policies for compliance with state and federal laws in light of this increased scrutiny. IRS Reconsiders Employment Tax Determination Letter; Finds Worker was an Employee In a determination letter dated February 27, 2007, the IRS responded to the National Football League Management Council’s (NFLMC) request to reconsider the IRS’s determination that a worker was an employee of a third party for purposes of FICA, FUTA, and income tax withholding, and that the NFLMC controlled payment of the wages, and therefore was liable for related employment taxes on the worker’s income. The IRS affirmed in its review that the NFLMC controlled the payment of wages, but modified its position to indicate that the NFLMC – not the third party – was the worker’s employer. The key issue before the IRS was determining who has the right to control and direct the individual who performs the services, including the tasks to be performed, and how they are to be performed. The IRS noted that it is not necessary that the employer actually direct or control the individual, but it is sufficient that the employer has the right to direct or control the individual. The worker’s designation as an agent, subcontractor, or independent contractor is irrelevant. The IRS determined that no new facts had been presented to change or alter its conclusion that the worker was an employee, but did find that the worker was not an employee of the third-party retained by the NFLMC in relation to its drug-testing program, but was an employee of the NFLMC because the NFLMC controlled the payment of wages and maintained enough direction and control to be considered the worker’s common law employer. Congress Holds Hearings on Worker Classification The misclassification of workers has attracted the interest of Congress. In May, the Subcommittee on Income Security and the Family and the Subcommittee on Select Revenue Measures of the House Ways and Means Committee held a joint hearing on the effects of misclassifying workers as independent contractors. At the hearing, subcommittees received testimony and comments on the effect of misclassification on business competition, workers, and the economy. State Courts Address Misclassification The Commonwealth Court of Pennsylvania has ruled that an unemployment insurance claimant was an employee for unemployment compensation purposes, even though she had a signed independent contractor agreement. The employer did not show that the claimant worked free of the employer's control or that she was customarily engaged in an independent trade. She was paid a fixed wage, and the employer supplied her with tools, equipment, initial training, and instruction. The employer also approved any days that the claimant took off. The claimant did not have a proprietary interest in the employer's enterprise, and there was no evidence that she held herself out as an independent contractor. Sharp Equipment Co. v. Unemployment Compensation Board of Review, 808 A.2d 1019 (Pa. Commw. Ct. February 21, 2007) Air Couriers International lost its appeal of a case involving the California Employment Development Department’s (the Department) determination that the company was not entitled to a refund of employment taxes. A lower court held that the Department correctly determined that the company’s drivers were employees, even though they signed independent contractor agreements, because the company controlled the worker’s schedules and routes. The Court of Appeals for the Third District of California affirmed the lower court’s decision. Air Couriers International v. Employment Development, 150 Cal. App. 4th 923 (Third App. Dist., April 12, 2007). In a case appealed from the Employment Security Board, the Vermont Supreme Court affirmed that home knitters and sewers who created clothing by the piece for a company were not free from the company’s control or direction over the performance of services for unemployment tax purposes, and therefore their services constituted employment. Among the factors considered were that (a) the company dictated knitting instructions and supplied patterns, and (b) every piece of clothing sold by the company was created by home knitters and sewers. Fleece on Earth v. Vermont Dept. of Employment Training, 2007 VT 29 (May 4, 2007) | |||
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Federal Worker Empowerment Act Would Add Reemployment Adjustment Assistance The Worker Empowerment Act (HR 2202), introduced by Rep. Jim McDermott (D-WA), would amend the Social Security Act by adding provisions to implement a reemployment adjustment assistance program to provide additional unemployment benefits. Under the legislation, when workers are forced to take lower-paying jobs, wage insurance would help cover some of the difference between their new wages and their old wages. The legislation would provide relief by replacing 50 percent of a worker’s lost wages (up to $10,000 per year) for up to two years, provided that the worker meets certain qualifications (e.g., they were employed by their former employer for at least two years). The benefit amount would be recalibrated as a worker’s wages rise in the new job. Workers who earn less than half of the median income in their area would receive a slightly higher benefit, with wage insurance replacing more than 50 percent of their old wages. | |||
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IRS Issues New “Non-Penalty” Notices for Minor Errors on Returns IRS Notice CP 276 is issued by the IRS to notify taxpayers that penalties will be assessed for errors on their payroll-related returns. Now, the IRS will be issuing two new notices to inform taxpayers of errors on their returns that do not rise to the level of a penalty. The IRS intends for the notices to serve as a way of helping taxpayers correct problems before they become severe enough to warrant a penalty. Notice CP 276A will be issued to advise taxpayers that there were mistakes on the return that were too small to generate a penalty, but which could, over time, result in a penalty. Notice CP 276B will be used to notify taxpayers of situations where their filing is correct, but there are problems with their deposits. | |||
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MultiState Update Telecommuter Tax Fairness Act Introduced in Congress The Telecommuter Tax Fairness Act (S. 785 and H.R. 1360) would prohibit a state from imposing an income tax on the compensation of a nonresident individual for any period in which the individual is not physically present in or working in the state, and would prohibit a state from deeming the nonresident individual as present in or working in the state on the grounds that the individual is present or working at home for convenience, or the work at home fails any convenience of the employer test, or any similar test. The legislation, introduced by Sens. Chris Dodd and Joseph Lieberman (D-CT) in the Senate, and Rep. Frank Wolf (R-VA) in the House, appears to specifically target New York’s aggressive interpretation of its “convenience of the employer” rule. In his introductory comments, Sen. Dodd described the effect of New York’s enforcement of the rule on his constituents, noting that they were subject to “double taxation” on the part of their income earned from home. Pointing to the need for encouraging telecommuting as a means of preserving transportation infrastructure, reducing pollution, lowering costs for employers, and allowing employees to balance work and family, Dodd cited cases of residents of Connecticut, Tennessee, and New Hampshire who worked from home for New York employers, and emphasized the need to address this issue on a national basis. Payroll Legislation Introduced in California Two bills have been introduced in California that could have a great impact on payroll departments that deal with California employees. AB 689 would require employers in California to verify each new employee’s social security number and provide specific reports to the Employment Development Department detailing the name and social security number of each employee. The bill would establish a quarterly fine of $20 for each employee for whom the employer has not provided a valid social security number, as well as a $10,000 fine for an employer that commits a specified fraud. The bill also provides a $5 tax credit to an employer for each employee for whom a valid social security number has been provided. The other bill, AB 651, would add an additional circumstance under which an individual would be ineligible for unemployment compensation. Under the bill, an individual would be ineligible for unemployment compensation if the director finds that the individual was discharged for gross misconduct connected with the most recent work, and that the individual would forfeit any rights to benefits for the week in which the misconduct occurred and for the 51 consecutive calendar weeks immediately thereafter. The bill would also define gross misconduct for this purpose. Minnesota: Legislation Would Modify the Taxation of Nonresident Compensation. The bill, H.F. 2259, would eliminate the exclusion from taxable income for wages that were earned when the taxpayer was a Minnesota resident and received when the taxpayer was not a Minnesota resident. | |||
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