Peering Into the Government Tax Law

Peering Into the Government Tax Law

PROGRAM GOALS Peer Into the Telescope to Get the Big Picture Regarding Government Tax Issues Peer Into the Microscope to Learn the Detailed Tax Laws, Rules and Regulations Present New Developments Identify Action Items/Take Aways 9

Correction of Errors (Page 7) File Form 941-X When the Error Is Discovered Correcting Under Reported Taxes Refunds of Overpaid Taxes Filing Protective Refund Claims Correcting Overpaid Wages Correcting Errors Going Forward

TAX LAW HIERARCHY (PAGE 9) Congress The Code Overrides U.S. Supreme Court IRS Position IRS Position IRS Position Final Regulations Temporary Regs Rev Rulings Rev Procedures Announcements Notices Proposed Regs Publications Private Letter Rulings Circuit Courts U.S. Tax Court Other Trial Courts 9 th Circuit Taxpayers Fight Back! 11

IRS Employment Tax Audits (PAGE 12) How Are Agencies Selected for Audit? Media Attention Special IRS Compliance Projects Target List Random Selection Whistleblowers 12

IRS Audits (Page 13) Key Issues the IRS May Raise: Employee v. Independent Contractor Reconciliation of Agency s Payroll Records to Quarterly Payroll Tax Returns Form W-9 Compliance Procedures Compensation of Highly-Paid Officials Travel, Meals and Entertainment Fringe Benefit Reporting Cafeteria Plan Compliance Taxation of Pension Contributions Accrued Leave Cash Out Arrangements

Appeal Procedures (Page 15) Fast Track Settlement Program Non-Binding Mediation Process Uses Neutral IRS Appeals Officer File Form 14017 to Initiate Process Regular Appeals Procedures Notice of Deficiency (30-Day Letter) Statutory Notice (90-Day Letter) 14

EMPLOYEE VS. INDEPENDENT CONTRACTOR (PAGE 22) Facts and Circumstances Three-Part, Common Law Test: Behavioral Control Financial Control Relationship of the Parties 15

Relationship of Parties (Page 30) A Long-Term Relationship May Indicate Employee Status Is There a Written Agreement? Does It Specify Employee or Independent Contractor Status? What Was the Intent of Belief that the Parties Contemplated When Forming the Relationship?

Special Issues Returning Workers (Page 31) Workers Acting in Two Capacities (Page 32) Elected Officials Are Employees (Pages 33 to 35) Appointed Officials Are Generally Employees (Pages 36 to 38) Election Workers (Page 39)

Recreation Workers (PAGE 41) What Does the Contract Say? Does Agency Have Direct Control? Part-Time or Full-Time? Separate Business? Business License Tax? Insurance Certificates? 18

VCSP (Page 42) Special IRS Program to Report Employees Misclassified as Independent Contractors. Employer Pays 10% of Tax Liability that Would Have Been Due; No Interest or Penalties. Treat Workers as Employees Going Forward. Use Form 8952 to Enroll in the Program. 19

EXPENSE REIMBURSEMENT PLANS (PAGE 44) Accountable Plans Substantiation Documentation Return of Excess Advances 20

EXPENSE REIMBURSEMENT PLANS Approved Per Diem Rates for 2014 (Pages 46 & 47) 2014 Rates for High-Low Method (Page 47) 21

EXPENSE REIMBURSEMENTS TO MEMBERS OF LEGISLATIVE BODIES (PAGE 48) Law Applies to City Council Members, County Board of Supervisors and Special District Board Members Expenses Must Be Actual and Necessary IRS Pub 463 Can Be Used to Determine the Reasonableness of Expense Reimbursements. Receipts Required for All Expenses 22

AUTOMOBILE FRINGE BENEFITS (PAGE 50) Personal vs. Business Travel Annual Lease Value $1.50 Per Commute Cents Per Mile Substantiation/ Documentation 23

What Is Personal Use? (Page 54) Commuting Travel From a Residence to a Regular Business Location is Personal Use. Business Travel Travel Between Two Places of Business Is Not Commuting. Travel from a Residence to a Temporary Work Location : Generally Not Taxable Will Be Taxable If: 1) the Employee Has No Regular Business Location and 2) the Temporary Work Location Is Inside the Metropolitan Area. 24

$3.00 Per Day (Page 58) Control Employees (2014 Wages Equal or Exceed $147,200) Are Not Eligible Gross Wages, Form W-2, Box 1 Plus: Employee Elective Deferrals Cafeteria Plan Contributions Transportation Fringe Benefits 457 Plan Contributions 403(b) Annuity Contributions 25

Cents Per Mile Method Page 60 Cents Per Mile Method May Be Used If Vehicle Value Is $16,000 or Less for 2014 Pickup Truck or Van Value Must Be $17,300 or Less for 2014 Definition of a Truck or Van 26

Special Exemptions (PAGE 62) Nature of the Vehicle (What Does It Look Like?) Qualified Nonpersonal Use Vehicles (Pages 62-63) Police and Fire Vehicles (Page 63) Special Rules for Pick-up Trucks (Pages 64-66) No Special Exemption for Utility Workers (Page 66) Public Safety Officer Vehicles (Pages 66-67) 27

Group-Term Life Insurance (PAGE 68) Basic Rules (Page 68) Nondiscrimination Rules (Page 69) Dependent Coverage (Pages 70-71) Special Reporting for Retired or Former Employees (Page 71) 28

WORKERS COMPENSATION (PAGE 73) California Workers Compensation Act A Statute in the Nature of Workers Compensation Act Can Be Created For Occupational Injury or Sickness Matter of State Law (Not Tax Law) 29

FSLG Guidance (Page 78) Three Criteria for Creating a Statute In the Nature of a Workers Compensation Act : Must Be a Statute (a State, County or Municipal Law); Cannot Be Just a Union Contract or MOU Must Be for Employment-Related Injury or Sickness; the Existence of the Injury Must Be Rebuttable Based on Evidence Benefits Cannot Be Determined Based on Age, Length of Service or Prior Contributions; However, if the Benefit is Determined Partly By Other Factors, a Portion of the Benefits May be Excluded from Taxation. Various Examples Were Provided by the FSLG. 30

Affordable Care Act (Page 80)

Big Picture (Page 80) Employers Should Now Be Working With the IT Department & Payroll Vendors to: Track Employee Hours and Other Data Compile and Translate Data Into Reports for the IRS and Employees Provide Full-Time Employees with Health Insurance which is Minimum Essential Coverage (MEC). 32

Big Picture (Continued) Existing Health Benefit Plans: May Be In Compliance with Income Tax Laws, But May Be in Violation of the Market Reform Provisions of the Affordable Care Act (ACA). 33

ACA Market Reforms Generally, Stand-Alone Health Reimbursement Arrangements or Plans: Cannot Place Limits on Essential Health Benefits, and Must Provide Free Preventive Care. Such Plans Must Be Integrated with the Group Health Plan, or Face ACA Penalties of $100 Per Day Per Employee ($36,500 Per Year Per Employee). 34

Universal Health Coverage (Page 81) Beginning in 2014, U.S. Citizens and Legal Residents Must Obtain Minimum Essential Coverage, or Pay a Penalty Tax. Exemptions (Individuals Who Will Not Pay a Penalty Tax): - Individuals Who Can t Afford Coverage (Where Insurance Premium Payment Would Exceed 8 % of Household Income) - Religious Exemptions - Individuals Residing Outside the U.S. - Native Americans/Certain Others Penalty Tax Lesser of: - Sum of Monthly Penalty Amounts, or - Sum of Monthly Average Premiums for Bronze Coverage Penalty Reported on Form 1040, Line 61 35

Legal Developments (Page 82) 16 States Have State Exchanges 34 States Use the Federal Exchange Treasury Regulations Allow Premium Tax Credits through Either a State or Federally-Sponsored Exchange Literal Language Under the ACA: Premium Tax Credits Are Allowed through an Exchange Established by the State. Court Challenges Will Be Resolved by the U.S. Supreme Court in 2015. 36

Insurance Exchanges (Page 83) California Insurance Exchange Opened in 2013. Individuals (U.S. Citizens and Legal Residents) and Small Employers (100 or Fewer Employees) May Purchase Insurance through the Exchange. Five Tiers of Coverage: - Bronze (Lowest Level of Coverage) - Silver (Second Lowest Level of Coverage) - Gold - Platinum - Catastrophic Beginning in 2017, if State Agrees, Large Employers (101 or More Employees) Will Be Able to Purchase Insurance through the Exchange. 37

Insurance Exchanges (Page 84) Enrollees Submit Information to the Exchange, Including Information Obtained from Employers The Exchange Must Now Report Information to Enrollees on Form 1095-A Enrollees Can Receive: - Advance Premium Tax Credits, or - Obtain Credits When Filing Form 1040

Play or Pay Mandate (Page 85) Effective Date : January 1, 2016 (Delayed One Year) Large Employers (50 or More FTEs) Must Offer Their Full-Time Employees and Dependents a Health Plan with Minimum Essential Coverage (MEC) that Is Affordable and Has Minimum Value ( Play ). Otherwise, the Employer Is Subject to a Monthly Assessment ( Pay ). An FTE s Required Contribution to the Health Plan Is Considered Affordable if the Contribution Does Not Exceed 9.5% of Household Income. An Employee s Health Coverage Has Minimum Value if the Employer Pays 60% or More of the Cost of Covered Claims. 39

2014 Developments (Pages 86 and 87) Special Rules for Mid-Size Employers (50 to 99 Employees) Penalty Relief for Employers With 100 or More Employees (70% Test) Even though the Play or Pay Penalty Tax May Not Apply in 2015, Employers Are Not Exempt from the 2015 IRS Reporting Requirements Employers Can t Dump Employees on Exchanges, and Reimburse Premiums. 40

Full-Time Employees (Pages 89 and 90) Rules for Ongoing Employees: Establish Measurement Period, Administrative Period and Stability Period. Employees that Work an Average of at Least 30 Hours Per Week During the Measurement Period Are Considered Full-Time During the Stability Period.

New Employees (Page 91) Persons Generally Employed for Less than One Standard Measurement Period If Employee Is Expected to Average 30 Hours or More Per Week (1,560 Hours or More Per Year) On Hire Date, then Employee Is a Full- Time Employee If Hours Are Uncertain, Employers Can Select and Initial Measurement Period of from 3 to 12 Months to Determine Status. Special Waiting Period Rules Apply. Special Exemptions for Volunteer Firefighters and Student Employees.

Household Income (Pages 93 and 94) A Full-Time Employee s Required Contribution to a Health Plan is Considered Affordable If it Does Not Exceed 9.5% of Household Income. The IRS Has Established Three Safe Harbor Methods for Determining Household Income: Form W-2 Wages Method Rate of Pay Method Federal Poverty Level Method Year 2014 Development

Information Reporting (Page 94) IRC Section 6055 - MEC Reporting IRC Section 6056 Information Reporting to the IRS and Employees Optional for Calendar Year 2014 Required for Calendar Year 2015 44

New IRS Forms (Page 96) Form Numbers Form 1095-B Form 1094-B Form 1095-C Form 1094-C Alternative Reporting Methods 98% Offer Method Qualifying Offer Method 45

Special ACA Rules Related Government Entities (Page 97) CalPERS Plans (Pages 97 and 98) Limited Excepted Benefits (Page 99) Administrative Simplification(Page 99) Nondiscrimination Rules (Page 101) Premium Tax Credits (Page 101) 46

PCORI Fees (Page 103) Purpose: To Fund Health Research Certain Self-Insured Group Health Plans Must Pay the Fee Fee Is Paid by the Plan Sponsor A Plan is Self-Insured If Any Portion of the Health Coverage Is Provided By Other Than an Insurance Policy. Special Rules for FSAs and Dental and Vision Plans. Fee: $1.00 per Covered Member in 2012-2013 Plan Years, $2.00 per Covered Member in 2013-2014 Plan Years. Fee Paid as an Excise Tax on Form 720.

Temporary Reinsurance Fees Paid By Certain Self-Insured Group Health Plans that Offer Major Medical Coverage Purpose: Spread Insurance Risk Amount of Annual Fee: $63.00 Per Covered Person Fees Will Be Paid through Pay.gov The $63.00 Fee Will Be Remitted in Two Installments - $52.50/Person in January 2015 and $10.50/Person in the 4 th Quarter of 2015.

ACCIDENT AND HEALTH PLANS (PAGE 105) Employer-Provided Coverage Is Nontaxable (Page 105) Medical Reimbursements Nontaxable (Page 105) 49

HRAs (Page 109) Established to Reimburse Employees for Medical Expenses and Health Care Premiums Generally Funded by Employer Contributions or Mandatory Employee Contributions Used by Governmental Agencies to Place a Limit on Health Care Costs May Be In Violation of ACA Market Reforms. 50

Employee Contributions (Page 110) Mandatory Contributions Are Pre-Tax Voluntary Contributions Are After-Tax, Unless the Premiums are Paid through a Section 125 Cafeteria Plan. Example: Voluntary Deductions for a Specific Disease, such as Cancer Coverage, Are After-Tax (Unless Offered Through a Cafeteria Plan). 51

HEALTH SAVINGS ACCOUNTS (HSAs) (PAGE 111) Can Be Established By All Americans Under 65 Used For High-Deductible Health Plans (HDHP) 2014 Contribution - $3,300 for Individual, $6,650 for Family Can be Added to a Cafeteria Plan California Does Not Conform 52

Payment or Reimbursement of Health Insurance Premiums for Retired Employees (Pages 114 and 115) Generally Not Taxable, If: Government Issues Check Directly to Outside Party (Insurance Carrier, Medicare, Etc.), or Government Obtains Proof of Payments Reimbursements to Employees When CalPERS Deducts Premiums from Employee s Pension 53

Domestic Partner Rules (Pages 116 and 117) U.S. Supreme Court Decisions in Windsor and Hollingsworth (Prop 8) All Same-Sex Marriages Now Recognized for Federal Tax Purposes (But Not Registered Domestic Partners) Health Plan Contributions for Same-Sex Spouse Now Receive Favorable Tax Treatment Employers Not Required to File Amended Returns New California Rules 54

DISABILITY BENEFIT PROGRAMS (Page 118) Employer-Paid Premiums Nontaxable to Employees Disability Benefits Nontaxable to Employees If: Employees Pay Premiums With After-Tax Contributions IRC Section 105 (c) Requirements Met Revenue Ruling 2004-55: Plans Can Be Structured as After-Tax (Page 122) 55

CAFETERIA PLANS (Page 123) Choose Between Cash (or Other Taxable Benefit) and Qualified Nontaxable Benefits Cash Option Does Not Trigger Constructive Receipts 56

New Developments Permitted Election Changes (Page 133) Health FSAs Recovering Improper Reimbursements to Participants (Page 134) Health FSAs Limit for 2015 Increases to $2,550 (Page 135) Health FSAs Arrangements with Employer Flex Credits Could Be in Violation of ACA Market Reforms.

EDUCATIONAL ASSISTANCE PROGRAMS (PAGE 143) Section 127 Plans Job-Related Education Reimbursements 58

MASTERS PROGRAMS (Page 146) 2002 IRS Letter Ruling Selected MBA Course Reimbursements Excludable From Income Tax Court Cases: All MBA Course Reimbursements Excludable From Income 59

QUICK REFERENCE TABLE (PAGE 149) Formal Written Plan Needed Employee Notification Required Dollar Limit on Reimbursements Nondiscrimination Rules Must Be Met Education Must Be Job-Related Covers Transportation Expenses 127 Plans Yes Yes Job-Related Reimbursements No No $5,250 None Yes No No No Yes Yes 60

Prizes and Awards (Page 150) General Rules Employee Achievement Awards 61

WORKING CONDITION FRINGE BENEFITS (PAGE 152) Concept-Employee Is In a Trade or Business Substantiation Requirements Nontaxable to Employees 62

Employee Meals (PAGE 153) Travel Away from Home Bona Fide, Business-Related Entertainment Local Conferences, Conventions and Meetings Sponsored by Professional Organizations All-Day Training Courses Meals On Business Premises Occasional Meals for Overtime Work Meals at Government Events or Parties Meals for Law Enforcement Officers 63

Lodging Expenses (Page 160) Employer-Provided Lodging Employee Must Be Required to Accept as a Condition of Employment Lodging Must Be On the Business Premises of the Employer. Local Lodging Final Regulations Issued Nontaxable Reimbursements Allowed if Certain Safe Harbor Rules Are Met 64

Cell Phones (Page 162) Personal Use of Employer-Provided Cell Phone Is Nontaxable, If Used Primarily for a Non-Compensatory Business Use. Reimbursements for Personal Cell Phone Use Are Also Nontaxable. May Need to Adopt or Update Written Cell Phone Policy to Include Specific Examples of Business Use. Cash Allowances May Be Partially Taxable If Allowances Exceed the Cost of the Phone. Note: Portable Laptop Computers and Notebooks Remain Listed Property. However, TABLET DEVICES (such as ipads) are not Listed Property, and Are Treated Like Cell Phones. 65

DE MINIMIS FRINGE Small Dollar Amount BENEFITS (PAGE 166) Occasional, Not Regular Bookkeeping: Unreasonable? Administratively Impractical? Gift Cards/Gift Certificates/Gift Coupons Prizes Provided by Outside Parties (Pg. 168) 66

TRANSPORTATION FRINGE BENEFITS (Page 169) 2014 Commuter Highway Vehicles and Transit Passes - $130 2014 Value of Parking - $250 Bicycle Benefit - $20 New Carpool Rules (Pages 169 and 170) 67

457 DEFERRED COMP PLANS (Page 173) 2014 Contribution Limit - $17,500 2015 Contribution Limit - $18,000 Normal Retirement Age (Page 175) Catch-Up Amounts - $5,500 for 2014, $6,000 for 2015 68

DEFERRED COMPENSATION Nonqualified Plans (Page 177) When Taxed for FICA Purposes (Page 177) Payroll Tax Treatment (Pages 179 to 181) Qualified Longevity Annuity Contracts (QLACs) (Page 183) 69

ACCRUED VACATION/ SICK LEAVE (PAGE 187) Generally Taxable When Paid (Page 187) Employee Elections to Cash Out Accrued Leave Time (Page 189) 70

ACCRUED LEAVE CONVERSION ARRANGEMENTS (PAGE 187) Medical Reimbursement Plans Cafeteria Plans VEBA Trusts 457(b) Deferred Comp Plans 401(a) Qualified Retirement Plans 71

PENSION CONTRIBUTIONS (PAGE 196) California Public Employee s Pension Reform Act (PEPRA) Employer Contributions - Not Taxable Employer s Pick-up of Employee Contributions Not Subject To Income Tax Withholding, With Valid Section 414(h)(2) Election. 72

Employee Payment of Employer Pension Contributions (PAGE 199) Assumed Facts 2013 Contributions, As Required Under Existing Contract with CalPERS: Employer Contribution 22% Employee Contribution 8% (EPMC) Total Pension % 30% In 2014, Employee Agrees to Pay 8% Employee Contribution, plus 2% of the Employer Contribution (Total of 10%). 73

How Do You Make the 2% Pre-Tax? (PAGE 200) Meet the Economic Substance Test. Adopt New MOU, Requiring Employees to Pay the 2%. Amend Section 414(h)(2) Resolution or Ordinance, Designating the 2% as an Employee Contribution, and that it Will Be Picked-Up by the Employer (for Payroll Tax Purposes). Deduct the 2% from the Employee s Paycheck. 74

FICA TAXES ON 414(h)(2) PICK-UPS (PAGES 201 THROUGH 204) OASDI? HI? Employee Contributions: Section 218 Agreement Assume Salary Reduction Agreement : Hired After 4-1-86 Yes No Yes Yes 75

Employer s Payment of Employee s FICA (Page 206) Taxed Based on IRS Formula May Need to Adjust the Formula if Only Social Security or Only Medicare Taxes Are Being Paid by the Employer Payment of Employee s Share May Be an Impermissible Gift of Public Funds ; May Need to Send Letter to Employee Requesting Reimbursement.

REPORTING OF COMPENSATION Supplemental Wage Payments (Page 207) Form W-2 (Page 210) 77

Form W-4 Reporting (PAGE 222) Not Required to Police Form W-4s; the IRS Monitors Exemptions through the Use of Lock-In Letters Can Reject Invalid W-4s Different California Rules (Page 223) Possible Policy to Curb Excessive Form W-4 Submittals (Page 228) 78

Form 1099 Reporting (PAGE 229) General Rules Special Rules for Payment to Attorneys (Page 232) Form 1099-MISC (Page 233) Form 1099-G (Page 235) Form 1099-C (Page 237) Form W-9 and Backup Withholding (Page 239) 79

SOCIAL SECURITY (PAGE 240) Section 218 Agreements Employees Hired On or After April 1, 1986 Employees Not Covered By a Public Retirement System 80

FICA (Page 242) Social Security Wage Base - $117,000 for 2014, $118,500 for 2014. Beginning in 2013, Employee Wages in Excess of $200,000 Were Subject to an Additional.9%. Employer Not Required to Match. Applies Regardless of Employee s Filing Status, Income of Spouse or Income from Other Employer. Medicare Wages Include Noncash Compensation. Special Rules for Former Employees Who Receive Group-Term Life Insurance in Excess of $50,000. 81

Action Items? Affordable Care Act (ACA) Have My Agency s IT and Payroll Systems Been Upgraded to Track Employee Hours and Other Data During 2015 for IRS Reporting Purposes? Does My Agency Have Stand-Alone Health Reimbursement Arrangements that May Be Subject to ACA Market Reform Penalties? Has My Agency Established Measurement, Administrative and Stability Periods for All Employee Groups? Does My Agency Need to Enter Into Any Written Agreements with Related Government Entities for ACA Reporting? 82

Action Items? (Continued) Affordable Care Act (Continued): Does My Agency Have a Health FSA With Employer- Flex Credits in Excess of $500 Per Employee that May Be Subject to ACA Market Reform Penalties? Does My Agency Have a Self-Insured Group Health Plan that May Be Subject to Administrative Simplification, PCORI Fees and Temporary Reinsurance Fees? Has My Agency Adopted a Policy to Limit Part-Time Employees to Less than 30 Hours Per Week? 83

Action Items? Is My Agency Filing Form 542 with the EDD to Report Independent Contractors? Does My Agency Need to Adopt a Statute in the Nature of Workers Compensation? Should My Agency Allow 457 Plan Participants to Purchase Annuity Contracts Using a QLAC? Do My Agency s Accrued Leave Cash Out Arrangements Need to Be Revised to Withstand an IRS Challenge? 84