Ernst & Young LLP’s 2014 employment tax year in review

Additional Medicare Tax corrections ...................... 1

Form W-2 reporting changes ................................ 2

Update your responsible party information............ 3

Businesses gear up for Affordable Care Act information reporting .......................................... 3

Congress could accelerate Form W-2 filing deadlines to combat tax refund fraud .................... 4

Dynamic marriage equality laws challenge employment tax processes .................... 5

When is severance pay exempt from FICA?............ 6

Courts and states take tougher stance on independent contractors ................................. 7

2014 state roundup ............................................. 8

Unemployment insurance costs slowly decline with improved economy ............................ 9

Top 10 webcast questions .................................. 10

Webcast polling results ....................................... 12

cont

ents

For all of our payroll year-end essential visit us at:

http://www.ey.com/US/en/Services/Tax/State-and-Local-Tax/Employment-tax-year-end-planning-essentials---Year-end-checklist

or use the search term “EY year-end checklist”

Highlights of Ernst & Young LLP’s “2014 employment tax year in review” webcast

Several significant legal decisions and the midterm elections take top billing as important developments in tax year 2014 that are certain to set the stage for new employer challenges in the years ahead. Also noteworthy are numerous federal, state and local reporting and tax payment changes that will require consideration this year-end.

On November 13, 2014, a six-member panel of Ernst & Young LLP’s experienced Employment Tax Services professionals shared their perspectives and insights concerning these developments for participants of its webcast, “2014 employment tax year in review.”

Highlights from the webcast and its key takeaways follow.

2014 employment tax webcast at a glance • From an employer’s perspective, the Additional Medicare Tax

follows rules similar to federal income tax withholding.

• 2014 Form W-2 reporting changes include a greater risk that the SSA will reject Form W-2 files with certain errors and a new form for third-party payers of sick pay.

• Don’t forget to update your EIN responsible-party information.

• Employers are gearing up for new Affordable Care Act information reporting requirements.

• Congress could soon accelerate the Form W-2 filing due date.

• Dynamic state marriage equality laws continue to create payroll tax confusion and compliance challenges.

• Supreme Court rules that lump-sum severance is subject to FICA, but tax-saving Supplemental Unemployment Benefit (SUB) plans are still viable.

• 2014 sees tougher stance by courts and states on classifying workers as independent contractors.

• Ernst & Young LLP’s state roundup demonstrates the importance of having a local compliance focus.

• Top 10 questions asked by webcast participants.

• Results of the webcast polling questions.

A replay of the “2014 employment tax year in review” webcast is available here.

Download our 2014 payroll checklist and access other year-end essentials here.

Why Additional Medicare Tax is similar to federal income tax withholding Late last year, the IRS issued final regulations (TD 9645) explaining the requirements for employer withholding and reporting of the Additional Medicare Tax that was effective with wages paid on and after January 1, 2013. The final regulations explain the important difference between Social Security/Medicare (FICA) and the Additional Medicare Tax of 0.9% applicable to wages in excess of $200,000 — namely, the prohibition on adjusting withholding amounts after the close the year. If an employer withholds too much or too little FICA tax from wages, a correction can be made to the withholding amount on Forms 941 and W-2 for the statute of limitations (generally, three years). However, similar to federal income tax withholding, no adjustment is allowed to the amount of Additional Medicare Tax withheld if the error is discovered after the close of the tax year.

Consequently, if employers discover in 2015 that they withheld too much Additional Medicare Tax in 2014, they will need to instruct affected employees to claim a refund when they file their federal income tax returns. If a 2014 withholding shortage is discovered in 2015, employers are liable to pay the shortfall over to the IRS. All or a portion of the withholding liability can be abated to the extent employees provide a statement (Form 4669) showing they paid the tax to the IRS.

Note: The IRS has not yet updated Forms 4669/4670 to include the Additional Medicare Tax.

Recently, the IRS issued an announcement clarifying the instructions for reporting corrections to Additional Medicare Tax wages and contributions on Form 941-X, Adjusted Employer’s Quarterly Federal Tax or Claim for Refund. Read the IRS notice here.

For more tips and facts about the Additional Medicare Tax, read our special report here.

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2014 Form W-2 reporting changes include greater risk of SSA rejecting your Form W-2 files and new third-party sick pay form Form W-2 files the SSA will now rejectBeginning in tax year 2014, the SSA will reject Forms W-2 for correction where Medicare wages are less than the total reported Social Security wages and tips, where the Social Security wages and tips are zero but there is Social Security tax withheld, or where Medicare wages are zero but there is Medicare tax withheld. Household employers’ Forms W-2 will also be rejected if the Social Security and Medicare wages are equal to or less than the annual amount exempt from Social Security and Medicare tax (i.e., $1,900 for 2014).

The rejection of Form W-2 files puts employers at risk for late or non-filing penalties, making it important that electronic files are tested before filing them. AccuWage is a free service the SSA makes available to test Form W-2 files for identifiable reporting and record layout errors. Businesses that rely on a third party to file their Forms W-2 should consider asking their vendors to provide them with confirmation that their Form W-2 files were successfully cleared through AccuWage.

New IRS form applies to certain third-party payers of sick payInsurance providers and other third-party payers of sick pay are required to file a “third-party sick pay recap” to reconcile their Forms 941 to Forms W-2 in those instances where their client employers file the Forms W-2 to report third-party sick pay. Prior to 2014, the “third-party sick pay recap” was filed using a “dummy” Form W-2 and Form W-3.

Effective for tax year 2014, the Form 8922 is instead used for this purpose. The IRS will be updating Publication 15-A sometime in December to reflect this reporting change.

Highlights of Ernst & Young LLP’s “2014 employment tax year in review” webcastContinued

“The SSA’s decision to reject Form W-2 files with certain wage and tax errors increases the importance of testing electronic files through SSA’s AccuWage before filing them.”

— Deborah Spyker Executive Director, Employment Tax Services

Test Form W-2 files using SSA’s AccuWage

Review the SSA’s Form W-2 file layout requirements here

Verify that you are using the correct rates and limits for 2014; our special report is here

Watch for more information about the third-party sick pay recap in IRS Publication 15-A

For more information concerning the 2014 Form W-2 reporting changes, see our blog

Form W-2 reporting

2 | 2014 employment tax year in review

Don’t forget to update your Employer Identification Number responsible-party information Beginning January 1, 2014, any person or entity with an Employer Identification Number (EIN) is required to report a change in the responsible party on IRS Form 8822-B, boxes 8a through 9b, within 60 days of such change. If the change in responsible party occurred before 2014, a Form 8822-B was required to be filed by March 1, 2014, reporting only the most recent change.

The instructions for Form 8822-B state that while reporting a change in the responsible party is mandatory, there are no penalties for failing to do so. However, it is important to keep in mind that neglecting to provide this information puts the responsible party at risk of not receiving IRS notices concerning his or her personal liability for tax deficiencies, and penalties and interest will accrue against the responsible party notwithstanding the failure to receive these IRS documents.

The responsible party named on the Form 8822-B is not determinative of the individual who will ultimately bear personal liability for trust fund tax. Rather, the IRS identifies responsible parties based on all of the facts and circumstances. For this reason, it is important to carefully consider who is named the responsible party on Form 8822-B as these are the persons who will need to be immediately aware of any IRS inquiries or collection efforts that personally affect them.

For more information concerning who is a responsible party, see the IRS website here.

Businesses are gearing up for Affordable Care Act information reporting Under the Affordable Care Act (ACA) and starting next year (for filing in 2016), large employers are required to provide information statements to employees and information returns to the IRS that contain details about employees’ health coverage benefits.

This new information reporting effort is substantial in scope and requires a coordinated effort between payroll departments and benefits enrollment and insurance plan administrators.

On the other hand, the reporting infrastructure necessary to produce employee statements and IRS returns is similar to the annual filing of federal Forms W-2. Consequently, while payroll departments will be dependent on data from other internal and external systems to meet the reporting requirements, they will likely be integral in the compliance effort.

On July 24, 2014, the Department of the Treasury and the IRS released long-awaited draft tax forms for the ACA’s information-reporting requirements for employers and health insurers under IRC §6055 (Forms 1094-B and 1095-B) and IRC §6056 (Forms 1094-C and 1095-C).

Under §6056, employers must provide information to the IRS and employees about coverage that employers offer to their employees. IRC §6055 requires insurers and employers with self-insured plans to report to the IRS information on individuals enrolled in health coverage plans. The information-reporting requirements generally apply to large employers as defined under the ACA (i.e., employers with at least 50 full-time equivalent employees).

Employers must begin collecting information required to be reported when the employer mandate takes effect on January 1, 2015, and information returns will be filed for the first time in 2016. The final regulations apply the same filing schedule used for Forms 1099 to the filings required under IRC §6055 and IRC §6056. That is, annual returns for the calendar year must be filed with the IRS electronically by the following March 31, or by February 28 if filed on paper. Statements to employees must be provided annually by January 31.

For more information read our special report here.

Take a look at the IRS draft forms: Form 1094 series Form 1095 series

Read about the data you will need to gather

Watch the replay of our ACA webcast

Meet with prospective vendors that will potentially support your compliance efforts

Learn about Ernst & Young LLP’s ACACompassSM and read more about our services here

ACA reporting

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Congress could accelerate Form W-2 filing deadlines to combat tax refund fraud In August 2014, the US Government Accountability Office (GAO) issued a report to Congress examining steps that can be taken to curb the “large, evolving threat of (IRS tax) refund fraud.” The report focused on the type of tax refund fraud involving an individual’s theft of valid taxpayer identifying information (e.g., Social Security Number and Employer Identification Number) when submitting tax returns.

While the full extent of the issue is unknown, the IRS estimates it paid $5.2 billion in fraudulent identity theft (IDT) refunds in filing season 2013, while preventing $24.2 billion (based on what it could detect).

On July 31, 2014, Senator Orrin Hatch (R-UT) introduced the Tax Refund Theft Prevention Act of 2014 (S.2736) that would support IRS tax fraud prevention efforts by making a number of changes in the procedures governing the filing of Form W-2 and 1099-MISC.

The bill, containing many of the fraud prevention measures included in the Administration’s budget for fiscal year 2015, proposes to make a number changes affecting businesses, including a change in due date for filing Forms W-2 with the SSA and Form 1099-MISC with the IRS to February 15, whether the forms are filed on paper or electronically. Further, by January 1, 2017, the Department of Treasury would be required to submit a report to Congress with recommendations pertaining to whether the Forms W-2, 1099-MISC or other return filing due dates should be further accelerated to January 31.

Some businesses are already meeting challenging deadlines for filing their Forms W-2 as the number of states (and localities) imposing a January 31 due date continues to grow.

Highlights of Ernst & Young LLP’s “2014 employment tax year in review” webcastContinued

Here’s where the Form W-2 filing due date is already January 31 Alabama

(proposed for 2015)

District of Columbia

Kentucky

Nebraska

New York

Pennsylvania

Puerto Rico

Virginia

Wisconsin

4 | 2014 employment tax year in review

Dynamic state marriage equality laws continue to present challenges in fringe benefit taxation Last year’s ruling in United States v. Windsor resulted in changing the definition of marriage to include a same-gender couple. In Revenue Ruling 2013-17, the IRS clarified that a “place of celebration” standard applies in determining whether a same-gender couple is lawfully married. Under this standard, couples who are married in a state that recognizes same-gender marriages are treated as married for federal purposes even if they reside in a state that does not. The federal marriage definition continues to exclude from the marriage definition domestic partners and those with civil union and registered domestic partner licenses that may be lawful under state law.

For federal purposes (e.g., Social Security, Medicare, unemployment insurance and income tax), the revenue ruling was effective September 16, 2013.

The decision in Windsor deals only with the federal marriage definition, leaving the matter of marriage rights under the control of the states. The decision triggered a legal challenge of state laws preventing same-gender marriage across the US. On October 6, 2014, the US Supreme Court declined to weigh in on a number of these cases and by November 20, 2014, the number of states allowing same-gender couples to marry rose to 35.

Confusion and complexities arise in determining whether same-gender partner benefits are subject to state income tax withholding and employment tax (e.g., unemployment and disability insurance). For instance, a state’s marriage laws are not necessarily determinative of the withholding and employment tax rules governing a same-gender partner’s benefits. For example, some states that don’t issue civil union licenses to same-gender couples will exclude from wages health benefits provided to couples who obtained a civil union license in another state.

Additionally, the date that a state begins issuing marriage licenses to same-gender couples is not necessarily determinative of the date on which same-gender spousal benefits are excluded from state taxable wages. Rather, the tax effective date is based on the totality of the facts and the circumstances and any specific tax guidance issued by the state.

If businesses have not carefully evaluated their benefit enrollment process, studied the adequacy of their pay and deduction codes, and consulted with their employment tax advisors about state taxability configurations, chances are high that compliance gaps exist requiring immediate attention.

Does your benefit enrollment process identify which employees are covering a same-gender spouse?

Are employees given a clear way of telling you if their spouse or partner is a qualified dependent?

Are you separately tracking employees with civil union or registered domestic partner licenses?

Do you have tax research supporting your system taxability configurations, or are you relying on a tax advisor to provide this information to you?

Find out how Ernst & Young LLP can assist

Marriage equality

“Businesses frequently underestimate the complexity of same-gender partner benefit taxability and mistakenly rely on outdated processes and system configurations to get the job done. Whether many or few employees are affected, a comprehensive tax-focused review is necessary to meet the changing landscape of state marriage equality laws.”

— Debby SalamDirector of Payroll Information Services

52014 employment tax year in review |

Supreme Court rules lump-sum severance is FICA taxable, but a SUB plan is still a viable tax-savings option For many years, beginning with a case brought before the courts by CSX Corporation, it was argued that severance pay provided to involuntarily terminated employees should not be subject to Social Security/Medicare (FICA) tax, whether paid periodically as a supplemental unemployment benefit (SUB) or paid in a lump sum.

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.

In 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 FICA that it collected and paid on severance payments. Because the courts were divided on the matter, the government requested that the Supreme Court agree to hear the case. (United States of America v. Quality Stores Inc., et al., No. 10-1563.)

On March 25, 2014, the US Supreme Court decided the Quality Stores case, ruling that severance payments that fail to satisfy the IRS criteria for SUBs are subject to Social Security and Medicare (FICA). The 8 to 0 ruling by the justices was a decisive victory for the government, ending more than a decade of legal challenges triggered by CSX.

In its closing remarks, the Court noted that severance payments tied to the receipt of state unemployment benefits (SUBs) continue to be exempt from FICA tax under current IRS guidance (Rev. Rul. 90-72, 1990–2).

For more information about SUB plans and other ways to manage tax expenses associated with severance pay, read our special report.

Highlights of Ernst & Young LLP’s “2014 employment tax year in review” webcastContinued

Consider supplemental unemployment benefit (SUB) plans

Properly report severance and salary continuation payments to state employment agencies

Exclude severance and similar payments from wages covered by state unemployment insurance where allowed by law

Consider the advantages of state work-share programs

Severance pay

“While the US Supreme Court removed the possibility of FICA refund claims on lump-sum severance payments, employers continue to have the opportunity to design programs in the event of mass layoffs that can reduce the tax burden on them and their employees.”

— Kristie Lowery Principal, Employment Tax Services

6 | 2014 employment tax year in review

Courts and states take tougher stance on classifying workers as independent contractors Worker misclassification occurs when a business treats a worker meeting a law’s employment test as an independent contractor. As compared to independent contractors, employees are generally protected by various labor laws, and payments made to them are covered wages for income tax, unemployment insurance and other payroll taxes. Worker misclassification occurs not only when an employer erroneously classifies an employee as an independent contractor, but also when the worker is not classified at all and becomes part of the underground economy.

Misclassified and “underground” workers reduce revenues necessary for paying unemployment benefits while adversely affecting an employee’s ability to receive UI benefits, workers’ compensation coverage, Social Security benefits, health insurance coverage, retirement benefits, and protection under the federal, state and local wage-hour laws. Additionally, businesses that don’t properly treat workers as employees unfairly compete against those businesses that do.

Two trends have converged in 2014 to heighten employer awareness of the standards they use in treating workers as independent contractors rather than employees: a tougher stance by some of the courts and an increased audit focus stimulated in large part by federal funding to the states.

Courts take tougher stance

• California:The Ninth Circuit, reversing the Multidistrict Litigation Court’s grant of summary judgment for FedEx, has held that under California law FedEx drivers are employees, not independent contractors. (Dean Alexander, et al. v FedEx Ground Package System; August 27, 2014.)

• Kansas: The Kansas Supreme Court held that FedEx’s full-time drivers are employees and not independent contractors under the Kansas Wage Payment Act. (FedEx Ground Package System, Inc. No. 108,526; October 3, 2014.)

• Oregon: The Oregon Court of Appeals, on September 4, 2014, held that taxicab drivers under contract with Broadway Cab LLC were employees, not independent contractors, and their compensation was therefore subject to unemployment insurance tax. (Broadway Cab LLC v. Employment Department; September 4, 2014.)

Audit and enforcement

• The US Department of Labor notified state workforce agencies in 2014 that federal funds of $10 million are available to them for their worker classification audit and enforcement efforts. (UIPL #18-14.)

• Pennsylvania:Senate Bill 1454 would authorize Pennsylvania district attorneys to prosecute violations of the law (including jail time) governing the classification of workers and reimburse counties for their enforcement expense. Enforcement remedies include jail time for violators.

• Kentucky: In its September 2014 online newsletter, the Kentucky Labor Cabinet states that wage theft is more than double all robberies in the state warranting enforcement efforts that include collecting $4.5 million in wage restitution from employers each year for an average of 12,200 Kentucky workers. Wage theft includes misclassifying workers as independent contractors.

Two worker classification trends to note in 2014

72014 employment tax year in review |

2014 state roundup Numerous ballot initiatives were passed in the 2014 midterm elections that will require a greater employer focus on local compliance issues in the months and years ahead. Of significant note is the addition of two cities (District of Columbia and New York City) that will join San Francisco in requiring employers with 20 or more employees to provide transit benefits to their employees.

Mobile workforce tax compliance is a continued concern as several states maintain their aggressive nonresident income tax withholding audits. State rules vary considerably in terms of the amount of time or wages, if any, that can be overlooked in determining if a nonresident income tax obligation applies. It appears that Congress will not enact federal legislation (HR 1129) this year that would prohibit states from imposing an income tax on wages earned by employees who have spent 30 or fewer days in the calendar year working in a state.

State tax filing and tax payment requirements were also revised in a number of states. Maine, for instance, will end combined reporting effective January 1, 2015, and a number of states are imposing electronic filing and tax payment requirements on all employers.

2014 state changes in tax withholding, filing and payment requirements

AlaskaEffective July 1, 2014, employers with 50 or more employees must file unemployment insurance returns and wage reports electronically.

New JerseyProposed legislation would require employers of 50 or more employees to file unemployment wage reports each month by the 20th day of the following month. (AB 3156.)

California Effective July 1, 2014, income and employment tax payment and filing penalties increase from 10% to 15% and from $10 to $20 for wage-reporting errors.

New YorkEffective in 2015 (returns due April 30, 2015), all employers must file withholding and unemployment returns electronically. The requirement applies to NYS-45, NYS-ATT and NYS-1. More information is available here.

ConnecticutEffective January 1, 2014, all employers must file unemployment insurance returns and wage reports electronically.

Michigan Effective January 1, 2015, all employers are required to file unemployment insurance returns and wage reports and pay the associated tax electronically.

District of ColumbiaEffective October 1, 2014, employers with five or more employees must file unemployment insurance returns and wage reports electronically. Also, employers must report hours worked by employees.

MinnesotaRetroactive to January 1, 2013, the state adopts the federal tax-free limits for transit benefits ($130 per month in 2014), educational assistance ($5,250 per year for 2014) and adoption assistance ($13,190 per year for 2014).

Delaware Electronic filing capabilities for unemployment insurance returns and wage reports will soon be available.

Ohio Effective July 1, 2014, revised income tax

withholding tables apply. See here.

Effective January 1, 2015, all employers are required to file their state and school district withholding tax returns and pay the corresponding tax electronically through the Ohio Business Gateway system. (Ohio Administrative Code rule 5703-7-19, effective November 13, 2014.)

MaineEffective January 1, 2015, income tax withholding and unemployment insurance will be filed separately. The due dates are not changing. More information is available here.

TexasEffective January 1, 2014, all employers are required to file returns and wage reports and pay the associated tax electronically.

Idaho

Effective June 24, 2014, revised income tax withholding tables applied. See here.

Effective July 1, 2014, all employers must file unemployment insurance returns and wage reports electronically.

West VirginiaEffective July 1, 2014, employers withholding an average monthly amount of $100,000 or more for preceding calendar year must pay withholding tax for the first 15 days of June by June 23. See SB 331 here.

LouisianaEffective January 1, 2014, all employers must file unemployment insurance returns and wage reports electronically.

VermontEffective July 1, 2014, all employers are required to file unemployment insurance returns and wage reports electronically.

Wisconsin Effective April 1, 2014, revised income tax withholding tables apply. See here.

Highlights of Ernst & Young LLP’s “2014 employment tax year in review” webcastContinued

“Navigating the current state and local payroll compliance landscape begins with an effective system

for monitoring change and verifying timely implementation.”

— Peter Berard, Senior Manager, Employment Tax Services

For more information on the state electronic filing requirements for unemployment insurance and Forms W-2, see our 2014 payroll year-end checklist.

8 | 2014 employment tax year in review

2014 unemployment insurance roundup The markets’ collapse of 2007 and 2008 placed an unusual strain on state unemployment insurance (SUI) trust funds, so much so that, at the peak of the recession in 2009, 21 states had taken loans from the federal government. In addition to higher federal unemployment insurance taxes (FUTA) that apply to employers in states with an outstanding federal unemployment insurance (UI) loan balance, higher SUI taxes can also apply.

SUI taxes have declined somewhat in response to the improved economy. For tax year 2014, for instance, 24 states lowered their base SUI tax rates and two states lowered their SUI wage base.

Recovery, however, has been much slower for many of those states with sizeable federal UI loans. Employers in states with an outstanding federal UI loan balance as of November 10 of the calendar year are subject to a FUTA credit reduction that increases the FUTA tax rate that applies to them. In 2013, employers in 13 states were subject to a higher FUTA tax due to the FUTA credit reduction, compared to eight in 2014. Several states will continue to have federal loan balances on November 10, 2015, and employers in those states face FUTA tax rates of 2.6% or more (as compared to the normal net FUTA tax rate of 0.6%).

For several years, the Administration has proposed raising the federal wage base from $7,000 to $15,000, a move that would automatically increase the state SUI wage base in more than 30 states with a wage base below $15,000. It is speculated that forcing these states to maintain a higher wage base will pave the way for future solvency and reduce the higher costs employers incur when SUI benefit payouts are financed.

“ Proactive management of SUI claims, tax rate review and effective implementation

of statutory elections, such as voluntary contributions and joint accounts, continue to be employer leading practices for holding down SUI costs.”

— Kenneth Hausser, Executive Director, Employment Tax Services

Local transit benefit requirements District of Columbia (effective January 1, 2016)

Businesses with more than 20 employees are required to offer their employees access to the IRS allowed pretax transit deduction, transit subsidies or employer-provided vanpools. (Sustainable DC Omnibus Act of 2014.)

New York City (effective January 1, 2016)

Businesses with 20 or more New York City employees must give employees the option of purchasing their transit benefits with pretax contributions. (Intro 205-A.)

San Francisco (effective in 2009)

Businesses having a location in San Francisco (including nonprofit organizations) that have 20 or more employees nationwide must offer one of the following benefits: (1) a monthly pretax deduction, up to $130/month in 2014, to pay for transit or vanpool expenses; (2) a monthly subsidy for transit or vanpool expenses equivalent to the price of the San Francisco Muni Fast Pass (including BART travel), currently $80/month; (3) a company-funded bus or van service to and from the workplace; or (4) any combination of (1) through (3).

Employers should be certain that their transit benefit plans meet IRS requirements.

Watch a replay our 2014 unemployment insurance webcast

Download our 2014 Guide to unemployment insurance and other reference tools

Get essential state facts and participate in our benchmark survey at http://uifactfinder.ey.com

Unemployment insurance

92014 employment tax year in review |

The top 10 questions from Ernst & Young LLP’s year-end webcast

Webcast participants this year again submitted a record number of questions, reflecting the volume and complexity of the many employment tax developments. Here we feature the panelists’ top 10.

Responsible-party reporting 1. If a business has multiple subsidiaries, is a Form 8822-B

required for each of them?

Answer: Form 8822-B is used to update responsible-party information provided on the original application (Form SS-4) for a federal Employer Identification Number (EIN). Accordingly, you are required to report a change in responsible party for each EIN affected by that change.

2. Is there information available concerning what the IRS means by “responsible party”?

Answer: Yes, the IRS offers some guidance here. Always speak to your tax advisor if you have questions about responsible parties and their personal liability for trust fund taxes.

Additional Medicare tax3. Is third-party sick pay subject to the Additional Medicare Tax?

Answer: Yes, the Additional Medicare Tax applies to all Medicare-covered wages, including third-party sick pay. However, keep in mind that Social Security and Medicare tax, including the Additional Medicare Tax, don’t apply after the first six months of disability. For more information on the taxation of third-party sick pay, see IRS Publication 15-A.

4. Just to confirm, is it correct that for withholding errors caught after the close of the year, we adjust only Additional Medicare Tax wages and not the tax on Form 941-X?

Answer: Yes, that is correct. The IRS recently confirmed that prior year errors, unless they are administrative, are reported on Form 941-X only in the column for Additional Medicare Tax wages. You do not correct Additional Medicare Tax withheld.

Third-party sick pay recap 5. Our employees receive disability pay through the New Jersey

disability insurance fund. Are we required to file a third-party sick pay recap in this case?

Answer: No. New Jersey employers are not required to file a Form 8922 pursuant to third-party sick payments made from New Jersey’s disability insurance fund. In fact, generally, a third-party sick pay recap is required of the insurance provider only if the client employer is filing Forms W-2 to report the third-party sick pay. See Publication 15-A for more information concerning the third-party sick pay recap.

If you provided disability benefits to New Jersey employees through a private plan, keep in mind that you may need to give them Form NJ-2440.

FICA on severance 6. Is it safe to conclude that severance pay that is paid in

installments is exempt from FICA tax?

Answer: Not necessarily. Clearly, severance pay that is paid in a lump sum is subject to FICA; however, to be excluded from FICA tax the payments must be made from a qualified supplemental unemployment benefit (SUB) plan. Making the payments in installments is just one of the requirements of a qualified SUB plan. For more on the requirements of a SUB plan, read our special report here.

Same-gender partner benefits 7. What does “state of celebration” mean?

Answer: The state of celebration is where the employee was married. For instance, let’s say that a Louisiana resident wants to marry his same-gender partner. Louisiana doesn’t allow same gender partners to marry. In order to get married, the Louisiana resident would have to go to a state that will allow the marriage (e.g., Minnesota). In this example, Minnesota is the state of celebration. If this employee were to marry in Minnesota, health insurance benefits provided to his same-gender spouse are subject to Louisiana resident state income and unemployment insurance tax but are exempt from federal income tax withholding and employment tax (Social Security, Medicare and federal unemployment insurance).

10 | 2014 employment tax year in review

8. Are domestic partner benefits always taxable?

Answer: Generally, yes. The IRS explains that in meeting the definition of “spouse” for federal tax purposes, the couple must be lawfully married under state law. The IRS does not consider domestic partners or other licenses states may provide, such as civil union or registered domestic partner, as meeting the spousal definition. State rules can differ from federal and should be discussed with your employment tax advisor. For IRS frequently asked questions about the federal tax rules governing same-gender couples, go here.

Nonresident income tax withholding 9. If an executive travels to various states and works for a week

at a time in those states, is he or she subject to income tax in those states?

Answer: It depends on the state where the executive is working. State rules concerning nonresident income tax requirements vary. For instance, some states won’t require nonresident income tax if the employee works in the state for a short time (e.g., 14 days). For this reason, it is a leading practice to track employees’ work locations and to comply with the nonresident tax and reporting rules that apply. You should check with your employment tax advisor about the state requirements that apply to your mobile workforce.

10. One of our New York employees works from his home in Alabama. Are his wages subject to New York income tax?

Answer: It depends on the reason why the New York employee is working from Alabama. Under the New York income tax rules, if an employee works outside of New York for his own convenience, rather than the convenience of the employer, wages he earns working in Alabama are subject to New York state (and, where applicable, local) income tax and withholding. For more information on New York’s convenience of the employer rule, read here.

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2014 year-end webcast polling results

Our 2014 webcast participants provided valuable feedback about three of the year’s hot topics: Affordable Care Act information reporting, taxation of same-gender partner benefits and preparedness for meeting new local transit benefit mandates.

Here’s what we learned:

• A large majority of responders, 69%, said they will look to their payroll and employment tax departments to meet the new Affordable Care Act information reporting requirements.

• Close to half of the responders have not yet reviewed the accuracy of their state payroll tax treatment of same-gender spousal and partner benefits.

• Over 30% of responders have not yet confirmed that their transit and parking benefit plans meet IRS requirements, putting them and their employees at risk of losing tax-favored status for these benefits.

For more of our 2014 year-end essentials, visit our website.

Will the payroll or employment tax department of your company play a role in complying with the new Affordable Care Act information reporting requirements?

No

Affordable Care Act information reporting

YesHaven’t yet evaluated

Results from 1,252 total responders

8% 23% 69%

Have you reviewed your parking and transit benefit plan to verify they comply with IRS requirements?

No

Local transit benefit mandates effective in 2016

YesWe will have to before 2016

Results from 825 total responders

11% 27% 62%

Have you (e.g., the employment tax department) reviewed the accuracy of your state payroll tax treatment of same-gender spouse and partner benefits?

No YesHaven’t yet evaluated

Results from 1,003 total responders

14% 32% 54%

State marriage equality

12 | 2014 employment tax year in review

132014 employment tax year in review |

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Mary Angelbeck mary.angelbeck@ey.com +1 215 448 5307

Anthony Arcidiacono anthony.arcidiacono@ey.com +1 732 516 4829

Peter Berard peter.berard@ey.com +1 212 773 4084

Gregory Carver gregory.carver@ey.com +1 214 969 8377

Bryan De la Bruyere bryan.delabruyere@ey.com +1 404 817 4384

Jennie DeVincenzo jennie.devincenzo@ey.com +1 732 516 4572

Richard Ferrari richard.ferrari@ey.com +1 212 773 5714

David Germain david.germain@ey.com +1 516 336 0123

Julie Gilroy julie.gilroy@ey.com +1 312 879 3413

Mary Gorman mary.gorman@ey.com +1 202 327 7644

Ken Hausser kenneth.hausser@ey.com +1 732 516 4558

Nicki King nicki.king@ey.com +1 214 756 1036

Kristie Lowery kristie.lowery@ey.com +1 704 331 1884

Thomas Meyerer thomas.meyerer@ey.com +1 202 327 8380

Chris Peters christina.peters@ey.com +1 614 232 7112

Matthew Ort matthew.ort@ey.com +1 214 969 8209

Stephanie Pfister stephanie.pfister@ey.com +1 415 894 8519

Debera Salam debera.salam@ey.com +1 713 750 1591

Debbie Spyker deborah.spyker@ey.com +1 720 931 4321

Mike S. Willett mike.willett@ey.com +1 404 817 4637

Ernst & Young LLP employment tax advisory contacts

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Are you ready for year-end?

Forms W-2 mapping

Taxa

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Reconciliation

ContactFor more information please contact:

Gregory CarverErnst & Young LLPNational Director, Employment Tax Services+1 214 969 8377gregory.carver@ey.com

Bryan De la BruyereErnst & Young LLPSenior Manager, Employment Tax Services+1 404 817 4384bryan.delabruyere@ey.com

Tax process review*

Through staff interviews, data analysis and random sampling, our team identifies areas of opportunities and risk involving:

• Cash management• Employee master file and pay/deduction transactions• Recordkeeping, data management and reporting• Federal, state, local and provincial tax reporting• Efficiency/accuracy safeguards• Reconciliation and third-party oversight

Employment Tax (ET) Rapid Assessment™ Tax configuration review

With our ET Rapid Assessment™, businesses can access our secure web-based portal, or schedule an on-location meeting to complete our assessment questionnaire and receive a report highlighting potential risks and opportunities within their employment tax operations. Our team of qualified tax professionals support the process by reviewing the flags, ranking their priority, and co-developing any follow-up action plans.

Employment tax processes are driven by configuration tables, payroll codes and attributes that direct the tax treatment of compensation and how it is ultimately mapped to returns and information statements. Our employment tax team reviews these data elements and assists businesses in designing and managing workflows to maintain their integrity.

System implementation support* Co-sourcing*

Adding our skilled resources to the system implementation team adds integrity to the employment tax processes while freeing staff resources to focus on their routine responsibilities. Implementation support is available in all phases including:

• Data migration planning and implementation• Design and specifications • Testing and data sampling

Our qualified professionals are available to meet your employment tax operational needs whether it be staffing, training or responding to one-off questions.

*The scope of the these services may be limited for Ernst & Young LLP SEC registrant audit clients

Our integrated services for assessing performance, enabling change and supporting your needs

A glitch in your payroll system or employment tax processes can easily go undetected and may result in costly errors in Forms W-2 and other employment tax returns.

Get the support you need for 2014!

Take a look at how Ernst & Young LLP’s employment tax professionals are assisting businesses in meeting their year-end requirements.

Access our free year-end resources here.