the vitals on employment taxes and medical resident fica

22nd Annual Health Sciences Tax Conference The vitals on employment taxes and medical resident FICA December 3, 2012

The vitals on employment taxes and medical resident FICA

Disclaimer

► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


Disclaimer

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client serving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit www.ey.com. This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP.


Presenters

► Robert P. Christopher Executive Director McGaw Medical Center of Northwestern University Chicago, IL

► Larry Abowitz Ernst & Young LLP Iselin, NJ +1 732 516 4223 [email protected]

► Jennie DeVincenzo Ernst & Young LLP Iselin, NJ +1 732 516 4572 [email protected]

► Ken Hausser Ernst & Young LLP Iselin, NJ +1 732 516 4558

[email protected]

► Tom Meyerer Ernst & Young LLP

Washington, DC +1 202 327 8380 [email protected]


Agenda – employment tax update

► Medical resident Federal Insurance Contributions Act (FICA) ► Background ► Recent timeline ► What’s next? ► McGaw case study

► Employment tax update ► Unemployment insurance (UI) ► Short-term business travelers ► Home office workers ► Federal/State information sharing ► New York MTA payroll tax ► 2013 federal employment tax changes

► Rates/limits


Agenda – employment tax update

► Employment tax update (cont’d.) ► Tax extenders ► Wage recharacterizations ► Medicare tax ► W-2 reporting of health benefits ► FICA on severance pay – Quality Stores case ► Voluntary classification settlement program ► HIRE Act reminder

Medical resident FICA


Medical resident FICA background

► Student FICA exception – Section 3121(b)(10) – applies to: ► Service in employ of ► “School, college or university” (or supporting organization thereof) ► By a “student” regularly enrolled and attending classes

► Pre-April 1, 2005 ► Facts and circumstances determinations ► Many cases went both ways

► Post-March 31, 2005 ► Regulations took effect April 1, 2005 ► Excluded those working 40+ hours a week from “student” status

► Services are not “incident to and for the purpose of pursuing a course of study.”



► Mayo case

► District court ruled Internal Revenue Service (IRS) regulation invalid

► 8th Circuit held regulation valid

► Supreme Court upheld 8th Circuit decision

► Regulation is within Treasury Department authority to issue if it is not arbitrary, capricious or contrary to the statute.

► Regulation is within Treasury Department’s authority to distinguish between students who are working and workers who are studying.

► Distinguishing based on hours worked is reasonable and is easily administrable, thereby avoiding uncertainty.

► Therefore, under the regulations, effective April 1, 2005, medical residents are generally not considered “students” and do not qualify for student FICA exception.



► March 2010 – IRS News Release 2010-25 ► “Administrative determination” that medical residents excepted

from FICA tax under student exception for periods prior to date the new regulations took effect (April 1, 2005)

► Correspondence packages from IRS regarding perfection of claims ► Securing consents of residents ► Revising amounts of claims


Medical resident FICA timeline

► March 2010 – IRS administrative decision to allow medical resident FICA refunds for periods prior to April 1, 2005.

► Mayo case – effective April 1, 2005, medical residents are generally not considered “students” and do not qualify for student FICA exception.

► November 2010 – March 2011 – employers filed refund claims

► August 2011 – IRS begins review of claims.

► January 2012 – IRS begins to approve claims by issuing Settlement Letters.

► February 2012 – IRS begins to issue FICA refunds.

► June 2012 – IRS halts refunds due to questions surrounding interest rates for employer refunds.

► August 2012 – IRS begins issuing refunds again and assigns two agents to work the backlog of “skipped” periods .


Medical resident FICA What’s next?

► Obtain refund checks from IRS (two checks per quarter) ► Interest verification – several errors identified

► Interest allocation – watch for rounding

► Prepare and mail checks to consenting physicians ► Interest paid to foreign persons

► Prepare and mail Forms W-2c to consenting physicians ► Submit Forms W-2c and W-3c to SSA

► Prepare and mail Forms 1099-INT to consenting physicians with interest greater than $600 ► Interest paid to foreign persons

► Submit Forms 1099-INT and 1096 to IRS

McGaw Medical Center of Northwestern University


McGaw Medical Center

Northwestern University Feinberg School of Medicine

Ann & Robert H. Lurie

Children’s Hospital of Chicago

Northwestern Memorial Hospital

The Rehabilitation

Institute of Chicago

Jesse Brown VA Medical

Center

Norwegian American Hospital


Members

► Northwestern University Feinberg School of Medicine ► Ann & Robert H. Lurie Children’s Hospital of Chicago ► Northwestern Memorial Hospital ► The Rehabilitation Institute of Chicago ► *Jesse Brown VA Medical Center ► *Norwegian American Hospital


Consortium history

► “The development of a well-rounded, coordinated teaching program by the Medical Center should enable us to attract a much higher caliber of interns and residents over a period of time. This, in turn, will result in improving patient care in each of our institutions.” Erwin A. Stuebner, President, Board of Directors, Passavant Memorial Hospital.


History

► Established 1966 as NU Medical Center ► NUMS ► Children’s Memorial Hospital ► Evanston Hospital Corporation ► Passavant Memorial Hospital ► Wesley Memorial Hospital ► Chicago Maternity Center ► Rehabilitation Institute of Chicago ► Lakeside VA Medical Center

► Name changed to McGaw in 1972


Mission

► To sponsor, organize, coordinate and supervise the graduate medical education programs and activities maintained by the members.

► Original mission also included joint purchasing, shared facilities, development of group practices and joint planning efforts toward a unified medical center.


Consortium roles and functions

► ACGME sponsoring institution for all GME programs offered by its members

► Administrative home of GME Committee and GME Office ► Associate Dean for GME serves as DIO ► Administers payroll and benefits for all residents and

fellows ► All house staff appointed by McGaw


Governance

► Members of the Board of Directors of the Medical Center shall serve not as representatives of their institutions, but as members concerned with the overall welfare and development of the Center. They would act as liaison between the Board of Directors of the Center and their respective institutions.” The original McGaw Constitution, February 1967


Board of Directors

► Governed by Board of Directors ► Board determines compliance with the corporation’s

stated purpose ► Board approves corporate officers ► Board approves annual budget


GME Committee

► Chaired by DIO (GME Dean) ► GMEC membership composed of standing and rotating

members: PD’s, Member executive leadership, house staff

► Establishes and implements policies and procedures in compliance with ACGME institutional and program requirements

► Hear and determine challenges to any reallocation of residents among programs

► Accountable to the Board ► Two subcommittees: non-standard Programs Committee

and Diversity Council


House staff payroll and benefits

► All house staff sign appointment contracts with McGaw ► House staff payroll and benefits organized by McGaw ► McGaw invoices members (and other funding sources) for

stipends, benefits and admin fees ► McGaw ratio of benefits to stipend: 9.7% (add 5% for

admin fees) ► *National ratio of benefits to stipend: 31%

*AAMC Survey of Resident/Fellow Stipends and Benefits, 2011


Strengths

► Authority for GME centralized across all member institutions

► Recruiting advantages ► Financial advantages ► Administrative/coordinating advantages


Challenges

► Potential for competing interests among members

Employment tax update


Unemployment insurance


Direct reimbursement vs experience rate Considerations

► Overall financial conditions of the organization and impact to reductions in work force (current and prospective)

► Length of commitment to changing method ► State unemployment trust fund balance

► Surcharges, interest assessments, etc.

► State taxable wage base (current and prospective) ► State new business rate

► Sometimes industry specific ► Prior experience rate if applicable

► If currently under experience rate method – any elections


Two state components to federal UI loans that can increase employment tax expense Federal Unemployment Insurance tax (FUTA) credit reduction ► Title XII allows states to take

federal loans for the payment of SUI benefits

► Businesses are subject to additional FUTA if state has not repaid loan according to statutory schedule (FUTA credit reduction).

Interest on unpaid balance

► Interest accrues daily on a fiscal year basis (October 1 – September 30)*

► Interest payments cannot be made from state UI trust funds.

► Interest payments are due on September 30.

► States often impose special interest assessments on employers for the payment of interest on Title XII loans.

* Note that interest was waived for 2009

and 2010


FUTA credit reduction How it works

► If a state with an outstanding federal loan balance on January 1 of two consecutive years fails to repay the entire loan amount by November 10 of the second year, employers in that state are subject to a FUTA credit reduction of 0.3%.

► The credit reduction increases by an additional 0.3% each year (special computation of the credit reduction in subsequent years).

► In 2012, the FUTA rate for employers entitled to the full FUTA credit is 0.6%. ► A loss in the FUTA credit of 0.3%, results in a net FUTA rate of 0.9%. ► A loss in the FUTA credit of 0.6%, results in a net FUTA rate of 1.2%,

and so on.


FUTA credit reduction Actual and projected

Year of original loan

Year FUTA credit reduction applies

States applicable

2007 2009 Michigan 2008 2010 Indiana, Michigan and

South Carolina

2009 2011 18 states (plus Indiana, Michigan and South Carolina resulted in 21 total FUTA credit reduction states for 2011)

2010 2012 21 states projected as of September 13, 2012

* Michigan repaid its loan balance in 2012 by issuing bonds.


Our pick of the five states most likely to have significant future UI cost increases

► A number of factors were considered in determining the states most at risk for significant future SUI cost increases. ► Higher than usual claimant benefits ► Employer contributions that are low in relationship to state trust fund debt. ► Wage base below $15,000 (an increase in FUTA wage base is likely.)

► For 2012, the top five, based on the risk factors evaluated are: ► California ► Delaware ► Massachusetts ► Ohio ► Pennsylvania


Short-term business traveler (STBT) issues

Shaun, please show graphic of car moving into a new state or something


Current domestic landscape

► Proposed federal legislation (H.R. 1864/S. 3485) ► Mobile Workforce Simplification Act

► Allows employees to work outside their home states for up to 30 days without being subject to nonresident state income tax and withholding.

► Similar to earlier proposed bills that have not received support or traction historically.

► Significant support from Council on State Taxation (COST) ► Legislation has opposition in several states where the revenue

impact would be significant.


Current domestic landscape

► States actively seeking to generate revenue ► Aggressive electronic state audits ► States changing deferred compensation taxation ► States consider wages/salary and equity compensation ► Local tax jurisdictions also now auditing nonresident

workforce

Issues employer currently face:

► Income tax not withheld in nonresident work state for short-term business traveling workforce

► Statute of limitations (employer or employee)

► Limited system capabilities to track STBTs and to calculate the appropriate nonresident wage allocation and income tax withholding

► Complicated withholding tax calculation for deferred and equity-based compensation


Businesses are acting sooner rather than later

Why now? Companies who address STBT compliance proactively realize benefits

► This can be a multi-jurisdictional, multi-agency and multi-year issue.

► Potential risk of domino effect — one audit can open other related issues.

► More jurisdictions will focus on it in the future

► Data is widely available.

► Audit readiness

► Controlling reputational risk

► Greater confidence around STBT deployments

► Taking control of relationships with authorities

► Right people, right place, right time with greater certainty

No surprises


Issues, considerations and leading practices

Considerations ► Human Resources Information Systems

(HRIS) and payroll system capabilities ► Travel documentation (expense reports,

calendars, airline reservations, etc.) ► Telecommuters ► Foreign jurisdiction travel

► Communication vehicle ► Explanation of the issue and risks

associated with noncompliance ► Tax equalization and return preparation

assistance

► Ease of implementation ► System constraints ► Employee perception ► Reputational risk

► Threshold baseline for withholding ► Definition of workday ► Definition of compensation ► Prior year exposure ► Which states to focus on

Leading practice ► Focus on travel to most aggressive states ► Quarterly travel projections/true-up ► Repercussions/rewards aligned with corporate culture (reimbursement,

performance, etc.)

► Setting the tone/risk tolerance from the top ► Communicate employer/employee issues and risks associated with

noncompliance ► Implement an accountability framework to drive compliance

(i.e., tracking participation and completion of trainings) ► Communicate differences between employer and employee requirements

(e.g., NY 14-day rule) ► Single policy for tax equalization ► Reimbursement policy for assistance with tax return preparation

► Ten-day threshold except for New York and Connecticut ► Four hours = workday ► Includes all “wage” types ► Deal with prior year issues when and if they arise, vs. retroactively dealing

with prior years ► Implement in most aggressive states first then follow with other states, focus

on states where business travel to the state is highest, apply 80/20 approach to implementation.

► Management audit verification with compliance

Issue

How do we get our arms around the traveling population?

How and what should be communicated to employees?

What type of company policy is best?

How are companies creating and/or adapting their policies?


Enforcement of nonresident income requirements

► States are aggressively enforcing their nonresident income tax requirements. Frequently, audits are triggered by the mailing of an information request. ► Case in point – Minnesota This year, the Minnesota Department of Revenue began mailing

letters to large US employers requesting documents and information relevant in identifying income tax underpayments. Within three days of receiving the letter, employers must acknowledge its receipt by email or phone, and provide the requested information within 20 days. The data requested of employers spans four years (2008 through 2011).


Nonresident income tax may apply even if corporate income tax does not

► A state’s requirements for establishing liability to file and pay corporate income tax may differ from those that apply to nonresident income tax withholding. ► Case in point – Virginia In response to a request for ruling, the Virginia Department of

Revenue held on September 21, 2012 that although there were insufficient facts to establish Nexus for Virginia corporate income tax purposes, the presence of employees within the state constituted the requisite nexus to impose nonresident withholding tax collection responsibilities in accordance with Virginia law.


Understand the implications of home office workers ► Many states take the position that when employees regularly work

from home, their home is a place of business. ► Having a place of business in a state triggers not only an income tax

withholding obligation, but other business taxes as well. ► Case in point – New Jersey In a recent decision of the New Jersey Superior Court, Appellate Division,

it was determined that a foreign corporation with a principal place of business in Maryland was subject to New Jersey’s corporate income tax requirements because one of its employees was allowed to work on a full-time basis from her New Jersey home office (Telebright Corporation v. Director, N.J. Super. Ct. App. Div., Dkt. No. A-5096-09T2, March 2, 2012).

► Case in point – California The California State Board of Equalization held in 2012 that a recruiter

working from her home in California for a Massachusetts business created Nexus for California franchise tax purposes (even though she was classified as an independent contractor).


Federal-state agreements to share audit information are paying off ► The IRS has entered into agreements with a number of

states to share audit information. Consequently, employers have a greater incentive to disclose findings in all jurisdictions. ► Case in point – New York The New York Department of Taxation and Finance (the

Department) is imposing automatic income tax withholding audit assessments on employers that made wage reporting adjustments as the result of an IRS employment tax audit. The Department asserts that these income tax withholding audit assessments are not subject to the normal three year statute of limitations.


New York MTA payroll tax held unconstitutional

► On August 22, 2012, a New York Supreme Court judge upheld Nassau County’s assertion that New York state’s Metropolitan Commuter Transportation Mobility Tax (MCTMT or MTA Payroll Tax) is unconstitutional (Mangano v. Silver, No. 14444/10 (N.Y. Sup. Ct., Nassau County)).

► Taxpayers must continue to pay the tax until a final decision is reached.

► Should the final outcome result in a repeal of the MTA payroll tax, most taxpayers could be entitled to refunds for periods beginning in 2009, provided they file protective refund claims now.


Potential implications to 2013 net pay

2012 2013 projected Total change

Medicare tax is 1.45% of all covered wages

Additional Medicare tax of 0.9% on wages in excess of $200,000

0.9% of wages in excess of $200,000

Social Security tax of 4.2% Social Security tax of 6.2% 2.0% of all covered wages up to the annual limit

Graduated federal income tax rates of 25%, 28%, 33% and 35%

Graduated federal income tax rates of 28%, 31%, 36% and 39.6%, respectively

Increase of 3%, except those in highest tax bracket have increase of 4.6%

Social Security wage base of $110,100

Social Security wage base projected to increase to $113,700

Increase in wage base of $3,600 or tax of $223.20


Limit on flexible spending accounts

► Effective in 2013, to be qualified under a cafeteria plan, an employee’s health flexible spending account contributions cannot exceed $2,500 per year (with the annual amount indexed each year thereafter for inflation).

► The $2,500 limit applies without regard to employees’ marital status, and each may elect the statutory limit.

► The limit does not apply to employer non-elective contributions (i.e., flex credits).


Extender legislation hopefuls in 2012

Provision Description Expiration date Undergraduate and graduate-level education assistance

Exclusion of up to $5,250 per year

31 December 2012

Adoption assistance Effective in 2012, exclude up to $12,170 per year, indexed for inflation

31 December 2012

Work Opportunity Tax Credit (WOTC)

Other than certain veteran groups

31 December 2011

Mass transit benefits Renew or reinstate the parity between parking and transit benefits

31 December 2011

Expense tax credit for employer child care assistance

A credit of up to $150,000 for acquiring, constructing, refurbishing or expanding child care facility

31 December 2012

Bush-era tax rate reductions The tax rates are set to automatically increase in 2013 to 28%, 31%, 36% and 39.6% (currently 25%, 28%, 33% and 35%, respectively)

31 December 2012


In the face of uncertainty

► Be certain to make educational reimbursements in 2012 ► Payments that fall into 2013 could be fully taxable (because the

$5,250 would no longer apply)

► Continue to certify WOTC eligible employees with the state employment agency ► A retroactive reinstatement to January 1, 2012 is still likely and will

apply only to employees properly certified

► Continue to monitor developments and expect last-minute Congressional action

► Consider the state/local decoupling issues ► Consider all of the ramifications of accelerating to 2012

bonus payments scheduled for 2013


Wage recharacterization Rev. Rul. 2012-25 ► Section 62(a)(2)(A) provides that an employee may deduct

certain business expenses paid by the employee in connection with the performance of services as an employee under a reimbursement or other expense allowance arrangement.

► Section 62(c) provides that for purposes of Section 62(a)(2)(A), an arrangement will not be treated as a reimbursement or other expense allowance arrangement if: (1) the arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement; or (2) the arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement.


Wage recharacterization Rev. Rul. 2012-25

► Under Section 1.62-2(c), if a reimbursement or other expense allowance arrangement meets the requirements of business connection, substantiation and returning amounts in excess of substantiated expenses, all amounts paid under the arrangement are treated as paid under an accountable plan.

► Amounts treated as paid under an accountable plan are excluded from an employee’s gross income, are exempt from withholding and payment of employment taxes and are not reported as wages on the employee’s Form W-2.



► Section 1.62-2(d)(1) provides that an arrangement satisfies the business connection requirement if it provides advances, allowances or reimbursements only for deductible business expenses that are paid or incurred by the employee in connection with the performance of services as an employee for that employer.

► Thus, not only must an employee actually pay or incur a deductible business expense, but the expense must arise in connection with the employment for that employer.



► Section 1.62-2(d)(3)(i) provides that the business connection requirement will not be satisfied if a payor pays an amount to an employee regardless of whether the employee incurs or is reasonably expected to incur deductible business expenses.

► Failure to meet this reimbursement requirement of business connection is referred to as wage recharacterization, because the amount being paid is not an expense reimbursement but rather a substitute for an amount that would otherwise be paid as wages.

► Generally, wage recharacterization is present when the employer structures compensation so that the employee receives the same or a substantially similar amount whether or not the employee has incurred deductible business expenses related to the employer’s business.


Medicare tax to increase in 2013

► Effective in 2013, employers are required to withhold an additional Medicare tax of 0.9% on wages in excess of US$200,000 for all employees regardless of marital status.

► There is no matching employer contribution, and employees are required to pay the additional tax based on a threshold of income and their filing status.

► Taxpayers with combined income in excess of US$250,000 pay the remaining Medicare tax on their Federal Form 1040.

► The additional Medicare tax is not separately reported on Form W-2. ► Form 941 will include a separate line for additional Medicare tax. ► Also effective in 2013, investment income is subject to Medicare tax. ► A number of employees may need to revise their Form W-4 in 2013 to

take into account this additional tax.


Form W-2 – reporting of health benefits

► Effective in tax year 2012, employers are required to report the aggregate cost of employer-sponsored health coverage on Form W-2. ► Box 12, code DD is used for this purpose.

► The requirement to report employer-sponsored health coverage costs is informational only. ► Amounts reported in Box 12, Form W-2 are also not included in

employees’ taxable income (for now).

► Until the issuance of further guidance, an employer is not subject to the reporting requirement for a calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year.


Form W-2 – reporting of health benefits (cont’d)

► Terminated employees

► An employer may apply any reasonable method of reporting the cost of coverage for an employee who terminated employment during the calendar year, as long as the method is used consistently for all employees covered under the plan.

► An employer is not required to issue a Form W-2 reporting the aggregate reportable cost of insurance to a terminated employee who requests the Form W-2 within 30 days of severance.

► Successor employer ► If an individual transfers to a new successor employer, generally

both the predecessor and successor employers must report the employer-sponsored group health plan coverage that each provided, unless the successor reports using the alternate procedure (Revenue Procedure 2004-53).



► Multiple employers/common paymaster ► Generally, each employer of an employee must report the cost of

coverage that it provides. However, if the employers are related employers and one such employer is a common paymaster under IRC Section 3121(s), the common paymaster must include the aggregate reportable cost of the coverage provided to that employee by all the employers for whom it serves as the common paymaster.



► The following are required to be included in aggregate cost: ► Major medical ► Health FSA value for the plan year in excess of employees’

cafeteria plan salary reductions for all qualified benefits ► Hospital indemnity or specified illness (insured or self insured) paid

through salary reduction (pre-tax) or by employer ► Employee Assistance Plan (EAP) providing employer-sponsored

health care coverage (if employer charges COBRA premium) ► Wellness programs providing employer-sponsored health care

coverage (if employer charges COBRA premium) ► On-site medical clinics providing employer-sponsored health care

coverage (if employer charges COBRA premium) ► Domestic partner coverage included in taxable wages



► The following are optionally included in aggregate cost: ► Dental or vision plan not integrated into another medical or

health plan ► Health Reimbursement Arrangement (HRA) contributions ► Employee Assistance Plan (EAP) providing employer-sponsored

health care coverage (if employer does not charge COBRA premium) ► On-site medical clinics providing employer-sponsored health care

coverage (if employer does not charge COBRA premium) ► Wellness programs providing employer-sponsored health care

coverage (if employer does not charge COBRA premium) ► Multi-employer plans ► Self-funded plans not subject to COBRA ► Forms W-2 provided by third-party sick pay provider to employees

of other employers



► The following are not included in aggregate cost: ► Health FSA funded solely by salary reductions for all qualified

benefits ► Health Savings Arrangement (HSA) contributions (employer or

employee) ► Archer Medical Savings Account (Archer MSA) contributions

(employer or employee) ► Hospital indemnity or specified illness (insured or self insured) and

paid on after-tax basis ► Governmental plans providing coverage primarily for members of

the military and their families



► The following are not included in aggregate cost: ► Federally recognized Indian tribal government plans and plans of

tribally charted corporations wholly owned by a federally recognized Indian tribal government

► Accident or disability income ► Long-term care ► Liability insurance ► Supplemental liability insurance ► Workers’ compensation ► Automobile medical payment insurance ► Credit-only insurance ► Excess reimbursement to highly compensated individual included

in gross income ► Payment/reimbursement of health insurance premiums for 2%

shareholder-employee included in gross income


FICA on severance pay

► On September 7, 2012, the Sixth Circuit Court of Appeals affirmed the 2010 decision of the Michigan District Court that Quality Stores is entitled to a refund of the Social Security/Medicare tax that it collected and paid on severance payments (United States of America v. Quality Stores Inc., et al., No. 10-1563).

► In 2008, the Federal Circuit ruled in favor of the IRS in CSX, concluding that similar severance type payments were subject to FICA (CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir.2008)) . CSX did not request a rehearing, and on August 11 ,2008, the opinion was considered final.

► The recent Quality Stores decision creates a split in the circuits.

► The Government is likely to petition for certiorari to the Supreme Court on the basis of the split, and on the fact of administrative importance citing the dollar amount of FICA claims at issue.


FICA on severance pay (cont’d)

► Employers are potentially eligible for a refund of FICA on severance pay pending the outcome of the Quality Stores. ► A protective claim must be filed within the statute of limitations. ► The tax must be paid according to the current tax rules, using the

protective claim process to request a refund after the fact. ► There must be at least a reasonable basis (a position with

disclosure) for filing the protective claim (e.g., a court decision, such as Quality Stores).

► The deadline for filing protective refund claims for severance payments made in 2009 is April 15, 2013. Protective refund claims may also be filed for any payments made in 2010, 2011 and 2012.


FICA on severance pay (cont’d)

► The IRS began disallowing CSX-type claims in 2010. ► This means that for certain taxpayers, the two-year period is

expiring.

► If taxpayers want to maintain their protective claims for refund without bringing suit, they can file Form 907, Agreement to Extend the Time to Bring Suit. Under IRC Section 6532(a)(2), the two-year period to bring suit can be extended to a specified date if the IRS and the taxpayer agree in writing to the extension and Form 907 is used for this purpose.

► The IRS has been signing these agreements for CSX-types of refund disallowances while the Sixth Circuit’s Quality Stores opinion was pending.


Voluntary Classification Settlement Program (VCSP)

► Entity must have consistently treated workers as nonemployees and must have filed all required Forms 1099-MISC for the past three years

► Properly apply for VCSP using Form 8952

► Pay 10% of the employment tax liability under IRC Section 3509 due on the compensation paid to the workers for the most recent year

► Agree to extend the period of assessment on employment by three calendar years beginning after the year during which the entity starts treating the workers as employers

► Execute a closing agreement that finalizes the terms of VCSP and make full payment of the employment tax liability


Voluntary Classification Settlement Program (VCSP) (cont.)

► As of October 15, 2012, XXX Forms 8952 have been filed with the IRS under the VCSP.

► These filed Forms 8952 pertain to more than XXX workers subject to reclassification.


HIRE Act reminder

► FICA holiday for employer’s share of FICA for part of 2010

► Applies to: ► Qualified employees

► Are able to certify that they have not been employed for more than 40 hours for 60 days ending on their start date

► Began their employment after February 3, 2010 and before January 1, 2011 ► Are not replacing current employees, unless the employees leave voluntarily

or are terminated for cause ► Are not individuals as described in IRC Section 51(i)(1) (such as the

employer’s relative)

► Qualified employers ► Public companies or private sector Section 501(a) employers ► Educational institutions ► Does not include the US government, state government or any political

subdivision thereof


HIRE Act reminder – retention credit

► Qualified employers can claim the credit on their Form 990-T for qualified employees who: ► Were employed by the employer for no less than 52 consecutive

weeks ► Received during the second 26 weeks of their employment at least

80% of the wages paid to them in the first 26 weeks

► The credit may be claimed for a retained worker for the first taxable year ending after March 18, 2010 (the date of enactment of the HIRE Act), for which the retained worker satisfies the 52 consecutive week requirement.

► Taxpayer with a 2010 fiscal year end after February 3, 2010 may use its 2010 Form 990-T to claim the credit.


HIRE Act reminder – UBI retention credit

► As long as an exempt organization (EO) is a qualified employer, it can claim the retention credit on any retained HIRE Act-qualified employees to offset its unrelated business income (UBI) tax liability.

► Retention credit ► The retention credit is calculated on Form 5884-B, New Hire

Retention Credit. ► The value of the retention credit as reported on Form 5884-B,

Line 13 is reported on Form 3800, Line 1aa, “New hire retention credit (Form 5884-B)” as a general business credit.

► Form 3800, Line 1aa then flows up to Form 990-T, Part IV, Line 40-c, “General Business Credit. Attach Form 3800,” where the credit can be claimed against any UBI generated by the EO.


HIRE Act reminder

► Why mention now? ► Applied to 2010 (hires) and 2011 (retainees)

► Statute of limitations still open to amend returns and claim credits


Thank you!

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