The Latest on Tax Reform and Maintaining Compliance

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1 The Latest on Tax Reform and Maintaining Compliance April 4, 2018

John Myett Director Government Affairs, ADP, LLC John is responsible for developing and maintaining collaborative relationships with the IRS,

Prior to ADP, John spent 23 years working for the IRS, most recently as the National Account Manager for the IRS s payroll and practitioner

As a result of his experience, he has earned his Enrolled Agent credential, allowing him to practice before the IRS on behalf of clients

2 John Myett Director Government Affairs, ADP, LLC John is responsible for developing and maintaining collaborative relationships with the IRS, SSA, and other government bodies and agencies 30 years of experience managing these relationships and focusing on employment tax compliance Prior to ADP, John spent 23 years working for the IRS, most recently as the National Account Manager for the IRS s payroll and practitioner partners. As a result of his experience, he has earned his Enrolled Agent credential, allowing him to practice before the IRS on behalf of clients Member of the National Payroll Reporting Consortium (NPRC), the American Payroll Association (APA), and meets regularly with his Federal agency associates to propose improvements to employment tax systems, 2 forms, and regulations 2 Copyright 2018 ADP, LLC. All rights reserved.

3 Agenda Tax Cuts and Jobs Act State Tax Reform Legislation Expected Emerging Employment Tax Risk Areas Keeping up with Legislative/Regulatory Changes 3

4 Tax Cuts and Jobs Act Major Personal Income Tax Elements Personal exemptions $4,050 per person $0 Tax rates 10, 15, 25, 28, 33, 35, 39.6% 10, 12, 22, 24, 32, 35, 37% State and local taxes Deductible $10,000 deduction limit Child Tax Credit $1,000 $2,000 (refundable up to $1,400) 4

5 Revised 2018 Form W-4 Released 2/28/2018 Highlights No major changes IRS will not require all employees to file new Forms W-4 - However, for some employees it may be advisable Personal exemptions eliminated Increased child tax credit 5

6 IRS Online W-4/Withholding Calculator Designed to help employees determine the correct number of withholding allowances Simple question and answer format See also W-4 instructions and worksheets 6

7 Re: Your 2018 Income Tax Withholding Consider a notice to employees. One example:... You may have noticed lower federal income tax deductions and a corresponding increase in net pay in your recent paychecks. The recent Tax Cuts and Jobs Act (TCJA) changed federal income tax rates and brackets, among other things, beginning in New IRS withholding tables were put into effect in late January. You may want to consider updating your withholding allowances at this time. The IRS recently released the 2018 Form W-4, Employee s Withholding Allowance Certificate, which you can find at The IRS also offers an online W-4 Calculator, at which may help you determine the correct number of withholding allowances to claim. The IRS will not require all employees to file a new Form W-4 for However, for some people it may be advisable. The TCJA made many other changes that could affect your 2018 income taxes. For questions regarding your personal tax situation, talk with your tax advisor or visit 7

8 Will the 2019 Form W-4 Be Any different? The TCJA substantially changed the factors for withholding - Adjustments to income are de-emphasized - Tax credits take greater prominence Will all employees need to file a new Form W-4 for 2019? 8

Tax Cuts and Jobs Act Impact to ACA* Effectively eliminates the ACA Individual Mandate by reducing the penalty to zero Effective January 2019, penalty remains in effect for 2018 Employer mandate and

9 Tax Cuts and Jobs Act Impact to ACA* Effectively eliminates the ACA Individual Mandate by reducing the penalty to zero Effective January 2019, penalty remains in effect for 2018 Employer mandate and reporting remain in effect In otheraca news (IRS Notice )... Deadline to furnish forms delayed to March 2 from January 31 Good faith transition relief extended for 2017 reporting 9 *Not an exhaustive list

10 States May Retain Individual Mandate California Connecticut District of Columbia Hawaii Maryland Minnesota New Jersey Rhode Island Vermont Washington 10

11 ACA Taxes Delayed Continuing budget resolution (H.J. Res 125) delays three ACA taxes: Medical device tax the 2.3 percent medical device tax that took effect at the beginning of this year after a two-year suspension is delayed by an additional two years. Cadillac tax - the 40 percent non-deductible excise tax on highcost employer-sponsored health plans, which was set to take effect in 2020, is delayed by two years to Health insurance tax an annual fee on health insurance providers is delayed by one year. 11

12 States May Implement ACA-Related Reporting A Massachusetts supplemental budget bill passed in November re-established an annual employer healthcare coverage form, similar to the IRS Form 1095-C. Employers with six or more employees will report whether they offer health coverage and details such as premium cost, benefits offered, cost sharing details, eligibility criteria and other information. An employer who knowingly falsifies or fails to file any information required by this section, or its implementing regulation, shall be subject to a penalty of not less than $1,000 or more than $5,000 for each violation. 12

13 Massachusetts EMAC Employer Medical Assistance Contribution Beginning April 2018, Massachusetts DUA will assess $750 per employee, for employees enrolled in either Medicaid or subsidized ACA coverage for a continuous period of at least 56 days. Except employees with permanent and total disability ADP spoke at the hearing as to implementation concerns and filed comments to the agency as to regulations and systems Final regulations provide that assessments are due one month after each quarter (April 30 for 1Q) Employers have ten days to object to assessments Yet assessments are based on employer wage reports, which are due at the same time (i.e., April 30 for 1Q). 13

14 TCJA Impact on State Tax CT DC DE AK WA OR NV CA HI ID AZ UT MT WY CO NM ND SD NE KS OK TX MN WI IA IL MO AR MS LA NY MI PA OH IN WV VA KY NC TN SC AL GA FL ME MA MD NH NJ RI VT Legend Rolling Conformity Static Conformity No Conformity (state calculation) No Income Tax Source: Tax Foundation, Report No. 242, Jan

definitions Most states (30) use federal AGI as the starting point for state taxable income Some

15 States Largely Conform to Federal Tax Law What is conformity? Most state tax laws are closely tied to federal tax law to facilitate tax compliance Primarily income definitions Most states (30) use federal AGI as the starting point for state taxable income Some states use federal taxable income, which include TCJA standard deductions and personal exemptions - E.g., CO, MN, ND, SC Source: Tax Policy Center 15

16 States Largely Conform to Federal Tax Law Conformity... as of when? Seventeen states and DC have continuous conformity; i.e., automatically adopt relevant provisions of federal tax law changes In these states, tax law changes are already in effect - - but many have not issued guidance Nineteen adopt the IRC as of a specific date Others selectively adopt federal changes 16

17 Qualified Moving Expenses Prior to the TCJA, employers could exclude from income qualified moving expense reimbursements Now included in federal taxable wages and subject to employment tax Depending on state law, may still be exempt for state purposes What if state legislation is enacted in mid-2018 or 2019 to modify state treatment? 17

18 Example: NC DOR Notice February 16, 2018 North Carolina uses federal AGI in determining state taxable income. The reference to federal law is to the Internal Revenue Code as of January 1, Each year the General Assembly determines whether to update its reference to the Code. The Assembly convenes on May 16, Even if the General Assembly enacts legislation to update the Code reference to February 9, 2018* or later, it may elect to decouple from some federal provisions. * The Bipartisan Budget Act of 2018 (2/9/2018) also contained numerous tax law changes 18

19 Kentucky and Federal Tax Reform Kentucky income tax law is nearly as practicable identical to the IRC in effect on December 31, Until the Commonwealth updates its IRC reference date and determines which, if any, of the federal tax law changes will apply in Kentucky, taxpayers must follow KRS (1) using the Internal Revenue Code in effect on December 31, 2015 KY DOR Announcement, January 12,

20 What Happens to Employment Taxes if a State Does NOT Conform? Example: Moving expense reimbursements may be taxable at federal level but not in Kentucky. Impact to Federal Unemployment Tax Act (FUTA)? FUTA includes strong incentives for states to closely adhere to federal standards Wages that are subject to FUTA but not State Unemployment Insurance are taxed at the full 6.0% FUTA rate (rather than the normal 0.6%) Look for additional FUTA taxes due in January 2019 for % times the value of moving expenses reimbursed for KY employees KY DOR Announcement, January 12,

21 Example Moving Expenses in New York 33,000 New York taxpayers claimed $113 million in federal moving expense deductions in 2015 The (TCJA) repealed the deduction for moving expenses New York s treatment of moving expenses conforms to federal law The State could consider decoupling from federal law to preserve deductibility for New York taxpayers NY Department of Taxation and Finance, PRELIMINARY REPORT ON THE FEDERAL TAX CUTS AND JOBS ACT, January

State Policy Concerns Some see significant revenue impact on top of alreadystressed budgets > 25 states face budget shortfalls going into 2018 > States generally

22 State Policy Concerns Some see significant revenue impact on top of alreadystressed budgets > 25 states face budget shortfalls going into 2018 > States generally must balance budgets In other states, doing nothing will result in large tax increases > But there will be great political pressure to protect state residents 22

23 Will States Agree with Repeal of Personal Exemption? Repeal of personal exemptions could raise taxes largely from low-income families. Does the higher standard deduction or higher child tax credit apply, and offset the loss of exemptions? States that conform to the federal personal exemption: CO, ID, ME, NM, ND, SC, MN, VT* * Source: Tax Foundation 23

NY, San Francisco For non-profit employers, payment of transportation fringe benefits would create new Unrelated Business Taxable

24 Qualified Transportation Fringe Benefits Employer provided benefits can no longer be deducted But pre-tax contributions for employees are still allowed ($260/month for 2018) Several cities continue to require commuting benefits from some employers DC, NY, San Francisco For non-profit employers, payment of transportation fringe benefits would create new Unrelated Business Taxable Income Qualified Bicycle Commuting Expenses Up o $20/month could previously be offered as a tax-free benefit Eliminated 1/1/18 through

25 State Tax Legislation May be Retroactive States will consider tax changes in light of TCJA Some legislatures have short windows, so 2019? Effective when? Conformity facilitates income tax administration Not so much for employers/payroll Expect January 1, 2018 effective dates 25

26 or Immediately Effective 26

27 New York Payroll Tax Under Consideration Employer Compensation Expense Tax - On wages over $40,000/annually - Can not be deducted from employee s pay - Employers opt-in annually (October 1 for 2019) - Employees state withholding would be reduced by the amount of the employer payroll tax Transition % % and after - 5% 27

(But Withholding is reduced to $2,870 ($5,870 minus $3,000 tax credit)) Could the employer reduce wages by the same amount ($3,000) to

28 Example An employee earning $100,000 annually pays $6,105 in NYS tax today. Employer would pay $3,000 in payroll tax (ECET) Employee would get a tax credit of $3,000 Revised NYS tax to the employee = $5,870 - (But Withholding is reduced to $2,870 ($5,870 minus $3,000 tax credit)) Could the employer reduce wages by the same amount ($3,000) to $97,000? Total tax savings to the employee = $1,124 - FIT = $660 - Social Security/Medicare = $230 - NYS tax = $235 The employer would also save Social Security/Medicare ($3,000 x 7.65% = $230) 28

29 New York Payroll Tax Under Consideration Issues with Optional Payroll Tax Annual Opt-in process - Who decides? Would likely involve new employer reporting - E.g., how would employees be credited? - Some employees would work for employers that are in and some that are out Can/will employers really reduce wages? Would the IRS view this arrangement as employer-paid taxes (which would constitute taxable wages)? 29

30 Emerging Employment Tax Risk Areas 30

Significant Risks in Employment Tax Compliance On average, almost every U.S. employer can expect to receive at least one IRS penalty assessment for errors in employment tax administration, every year.

31 Significant Risks in Employment Tax Compliance On average, almost every U.S. employer can expect to receive at least one IRS penalty assessment for errors in employment tax administration, every year. Almost all such penalties relate to delinquency, failure to pay or federal tax deposits (95% by volume and 99% of the dollars assessed.) In FY2016, the IRS issued more than 5.8 million penalty notices for employment tax, totaling over $6 billion, or roughly $1,000 per notice. Federal Tax Deposit requirements are not always well understood by employers, but are stringently - - and automatically - - enforced by the IRS o E.g., when next-day deposit obligations supersede semi-weekly tax periods o Requirements for equity compensation tax deposits 31

Information Reporting Penalties More than Doubled Failure to file correct, complete statements on time Penalties are reduced if corrected forms are filed

5 million/year Changed by the Trade Preferences Extension Act of 2015 (P.L. No 114-27, June 29, 2015) Also Indexed by IRS Rev. Proc.

32 Information Reporting Penalties More than Doubled Failure to file correct, complete statements on time Penalties are reduced if corrected forms are filed shortly after the due date Now $260 per form not to exceed $3,193,000/year Was $100 per form not to exceed $1.5 million/year Changed by the Trade Preferences Extension Act of 2015 (P.L. No , June 29, 2015) Also Indexed by IRS Rev. Proc Returns filed within 30 days after due date $50 per return, up to $532,000 After 30 days from due date, but before August 2 $100 per return, up to $1,596,500 annually After August 1 $260 per return, up to $3,193,000 annually 32

ACA Form 1095-C Reporting Penalties Names/SSNs that don t match IRS database are the most common error condition How should employers manage name/ssn accuracy?

33 ACA Form 1095-C Reporting Penalties Names/SSNs that don t match IRS database are the most common error condition How should employers manage name/ssn accuracy? A filer may receive an error message indicating that a TIN and name provided on the return do not match IRS records. An error message is neither a Notice 972CG, Notice of Proposed Civil Penalty, nor a requirement that the filer must solicit a TIN in response to the error message. IRS REG , August 2, SSNVS? E-Verify? IRS TIN Matching? (not available for 1095-C reporting) Check into each IRS name/tin error message Check employee files, documentation (was name/tin reported correctly?) Gently ask employees if they might have had name changes (e.g., marriage, divorce) not reported to SSA See IRS Publication 1586 for details

34 IRS May Enforce W-2 Filing Deadline Risk Constantly-Changing Regulations Complex Regulations To combat refund fraud, Congress ordered employers to file W-2s by Jan. 31 "IRS received over twice as many (over 214 million) Forms W-2... by February 15 compared to the same time in 2016 IRS did not get all W-2 data in time Nearly 300,000 employers missed the deadline GAO recommended that IRS enforce late-filing penalties *GAO report , November 28,

35 States Also Accelerated W-2 Filing Deadlines 2014 Only 4 states (plus DC, PR) had a W-2 filing deadline of January All but 6 states moved W-2 filing deadline of January 31filing deadline of January 31 35

36 More Electronic Filing Mandates Employer W-2 data in electronic format: Simplifies validation by agency Reduces refund fraud STATES requiring some or all employers to e-file W-2s/annual withholding totals 36

37 37

Varying compliance Greater attention by states 38 Technology and accumulation of more data have simplified withholding

38 Mobile Workforce Tax Compliance Definition of Mobile Worker Employees traveling outside their state of residence for business purposes Tax Treatment of Mobile Worker Varying standards for employees to file and for employers to withhold Varying compliance Greater attention by states 38 Technology and accumulation of more data have simplified withholding audits Changes in W-2 reporting Also have helped states identify non-compliance Mobile workforce compliance becoming greater issue

non-resident income tax if employee worked in state 30 or less days in year Bill moves

39 Mobile Workforce Tax Compliance Legislation Status/ Outlook House Passed HR 1393 in June 2017 Would provide clarity in requirement Would prohibit state s ability to impose non-resident income tax if employee worked in state 30 or less days in year Bill moves to Senate where S 386 had previously been introduced Continue to monitor for Senate action 39

40 Keeping up with Legislative/Regulatory Changes 40

41 Keeping up with Legislative/Regulatory Changes ~ 15,000-20,000 legislative bills annually affecting employers 5,000 6,000 Federal bills are introduced annually, with 100 to 150 enacted. Plus a similar volume of regulations ADP monitors all legislation and regulations that could affect employers responsibilities ADP makes over 1,000 programming changes every year, to help clients comply with evolving laws and regulations affecting the workplace 41

42 One Example: Maryland Paid Family Leave Enacted, and effective WHEN?!? All Maryland employers are covered (less than 15 employees can provide unpaid leave) All employees are covered except those who work less than 12 hours/week; Construction industry covered by a collective bargaining (except not janitors, cleaners, security officers, concierges, doorpersons, handypersons, or building superintendents ), contingent workers, under 18, agricultural Accrual: 1 hour for every 30 hours worked Special rules for exempt employees, tipped employees No accrual if an employee worked less than 24 hours in a two-week pay period carryover unused leave up to 40 hours Written statements of available leave each time wages are paid Notice to employees of leave entitlement Keep records of accrued and used leave for each employee for three years Does not preempt existing local mandates (Montgomery County Earned Sick and Safe Leave Act) Q: Enacted Jan 12, effective February 11 - When did you learn about it? Family Leave January 12 override of the Governor s 2017 veto of the paid leave law, HB 1 Surprise! This law takes effect on February 11,

43 How ADP Manages Legislative and Regulatory Volume Agency Relations Statutory Research Group Government Relations Association Relationships Federal & State Lobbyists/Law Firms Specialized Research and Analysis At each step 43

44 ADP Participates With Virtually Every Relevant Organization 44 44

45 What To Do Now Refer employees to the IRS W-4 Calculator online: Watch for state legislation affecting withholding and reporting How does your organization maintain awareness of legislative changes? Consider changes to employee benefits such as transportation benefits! Make sure Finance is aware that expenses may not be deductible! Or for non-profits, may trigger new unrelated business income taxes Watch for state legislation that may change the tax treatment of employee benefits! If retroactive, update payroll systems to re-characterize prior compensation as exempt or taxable 45

PRODUCER ANNUITY SUITABILITY TRAINING REQUIREMENTS BY STATE As of September 11, 2017

PRODUCER ANNUITY SUITABILITY TRAINING REQUIREMENTS BY STATE As of September 11, 2017 This document provides a summary of the annuity training requirements that agents are required to complete for each