IRS Releases Publication 4268 (12/2016), Employment Tax for Indian Tribal Governments

 

• Employment Tax

• Gaming Tax

• Tip Reporting & Tip Agreements

• Title 31 (Bank Secrecy Act Overview & Compliance)

 

• Form W-2 -- Wage and Tax Statement

• Form W-2G -- Certain Gambling Winnings

• Form W-3 -- Transmittal of Wage and Tax Statements

• Form W-4 -- Employee's Withholding Allowance Certificate

• Form W-9 -- Request for Taxpayer Identification Number and Certification

• Form 11-C -- Occupational Tax and Registration Return for Wagering

• Form 720 -- Quarterly Federal Excise Tax Return

• Form 730 -- Monthly Tax Return for Wagers

• Form 940 -- Employer's Annual Federal Unemployment (FUTA) Tax Return

• Form 941 -- Employer's Quarterly Federal Tax Return

• Form 941-X -- Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund

• Form 941-X -- Instructions

• Form 944 -- Employer's Annual Federal Tax Return

• Form 944 -- Instructions

• Form 945 -- Annual Return of Withheld Federal Income Tax

• Form 1042 -- Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

• Form 1042-S -- Foreign Person's U.S. Source Income Subject to Withholding

• Form 1096 -- Annual Summary and Transmittal of U.S. Information Returns

• Form 1099-INT -- Interest Income

• Form 1099-MISC -- Miscellaneous Income

• Form 5754 -- Statement by Person(s) Receiving Gambling Winnings

• Form 8027 -- Employer's Annual Information Return of Tip Income and Allocated Tips

• Form 8845 -- Indian Employment Credit

• Form 13551 -- Application to Participate in the IRS Acceptance Agent Program

 

• Publication 15 -- (Circular E), Employer's Tax Guide

• Publication 15-A -- Employer's Supplemental Tax Guide

• Publication 15-B -- Employer's Tax Guide to Fringe Benefits

• Publication 515 -- Withholding of Tax on Nonresident Aliens and Foreign Entities

• Publication 509 -- Tax Calendars

• Publication 526 -- Charitable Contributions

• Publication 531 -- Reporting Tip Income

• Publication 1281 -- Backup Withholding for Missing and Incorrect Name/TIN(s)

• Publication 3908 -- Gaming Tax Law and Bank Secrecy Act Issues for Indian Tribal Governments s

 

• SSA/IRS Reporter -- Information for employers who file business returns

• EFTPS: The Electronic Federal Tax Payment System -- The easiest way to pay your federal taxes

• Electronic Filing Options for Business and Self-Employed Taxpayers -- Information for businesses and self-employed taxpayers who file and pay electronically

 

1. behavioral control,

2. financial control, and

3. relationship of the parties.

1. Behavioral control--Facts that show whether there is a right to direct or control how the worker does the work include:

 

• Financial control--Facts that show whether there is a right to direct or control the business part of the work include:

 

• Relationship of the parties--Facts that illustrate how the business and worker perceive their relationship include:

 

• drivers who distribute certain food products or deliver laundry or dry cleaning,

• full-time life insurance sales agents,

• individuals who work at home on materials and goods you supply and must be returned to you, and

• full-time traveling or city salespersons who turn in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants or other similar establishments.

 

• The worker has filed Form SS-8 and received a determination letter from the IRS stating they are an employee of the firm.

• The worker has been designated as a Section 530 employee by their employer or by the IRS prior to January 1, 1997.

• The worker has received other correspondence from the IRS that states they are an employee.

• The worker was previously treated as an employee by the firm and they are performing services in a similar capacity and under similar direction and control.

• The worker's co-workers are performing similar services under similar direction and control and are treated as employees.

• The worker's co-workers are performing similar services under similar direction and control and filed Form SS-8 for the firm and received a determination that they were employees.

• The worker has filed Form SS-8 with the IRS and has not yet received a reply.

 

• Pharmacist -- Hired on contract. Worked only for the tribe.

• Bus driver -- Worked as a janitor during the day. This is an additional wage to this employee.

• Janitor -- Worked when instructed to and used supplies provided by the tribe. Paid a flat fee per month.

• Speech teacher -- Hired on contract but worked only for the tribal school.

• Doctor -- Paid by both tribe and IHS on a contract. Worked at the hospital. Whether wages were paid by either or both, Form 1099 is not acceptable.

 

• Publication 15, (Circular E), Employer's Tax Guide

• Publication 15-A, Employer's Supplemental Tax Guide

• Publication 51, (Circular A), Agricultural Employer's Tax Guide

• Publication 1779, Independent Contractor or Employee

• Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding

• Form 8919, Uncollected Social Security and Medicare Tax on Wages

• Form 8952, Application for Voluntary Classification Settlement Program (VCSP)

 

• Verify your status as a qualified Indian entity.

• Verify your employee's proof of tribal membership.

• Verify time allocated to fishing versus non-fishing activity. For example, consider a game warden that is responsible for protecting other wildlife and has other duties, as well as patrolling the treaty waters of his tribe. His employer should verify the percentage of time he engages in fishing rights-related activities of his tribe.

• Maintain records to support each employee's time allocation.

• Maintain records to support the 90 percent gross receipts rule (defined later in this chapter).

 

• Do not include exempt wages on Form 941, Form 940 or Form W-2.

• Wages paid for non-fishing activities are subject to all applicable employment taxes and employment tax reporting, including Form W-2.

• If only fishing rights-related income is paid to an individual, no Form W-2 is required.

• A letter stating the amount and tax-exempt nature of an employee's wages may be issued to the employee to be used for various non-tax purposes, such as bank loans.

 

• Fishers, processors (including smoking), transporters

• Hatchery workers

• Environmental and conservation workers

• Enforcement staff and tribal court personnel

• Support staff, for example, secretary, accounting, payroll

• Program director, executive director

• Fishery biologist

• Fishery aide

• Fishery and habitat policy analyst

• Water quality biologist

• Habitat inventory and assessment technician

• Legislative analyst

• Information and education services

• Data analyst

• Policy analyst

• Public information staff

a. Withhold a flat 25 percent (no other percentage allowed).

b. Add the bonus and regular wages for the most recent payroll period this year. Figure the income tax withholding as if the total were a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from the bonus.

 

1. Add the bonus amount to the amount of wages from the most recent pay date ($2,000 + $2,000 = $4,000).

2. Determine the amount of withholding on the combined $4,000 ($521 using the wage bracket tables).

3. Subtract the amount withheld from wages on the most recent pay date from the combined withholding amount ($521 - $200 = $321).

4. Withhold $321 from the bonus payment.

 

1. behavioral control;

2. financial control; and

3. the relationship of the parties.

 

1. If wages paid during the year are less than $600, no Form W-2 is required. The wages are not subject to FICA or federal income tax withholding. The election worker must report the earnings as wages.

2. If wages paid during the year are between $600 and $1,699, file a Form W-2. FICA and federal income tax withholding are not required. The election worker must report the earnings as wages.

3. If wages are equal to or greater than $1,700 (this amount is indexed for inflation) a W-2 must be issued. The wages are subject to FICA, but not federal income tax withholding. The election worker must report the earnings as wages.

 

• Internal Revenue Code Section 7873

• Publication 15, (Circular E), Employer's Tax Guide

• Publication 15-A, Employer's Supplemental Tax Guide

• Revenue Ruling 59-354 (Attachment A at the end of this guide)

• Revenue Ruling 63-136 (Attachment B at the end of this guide)

• Revenue Ruling 2000-6 (Attachment C at the end of this guide)

• Form 843, Claim for Refund and Request for Abatement

• Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund

 

• large party charge (restaurant),

• bottle service charge (restaurant and night-club),

• room service charge (hotel and resort),

• contracted luggage assistance charge (hotel and resort), and

• mandated delivery charge (pizza or other retail deliveries).

 

• food and beverages are provided for consumption on the premises,

• tipping is a customary practice, and

• there are more than 10 employees who work more than 80 hours on a typical business day.

 

• Casino buffets are included if tipping is customary.

• Ten or more employees include all employees at the establishment, not just the tipped employees.

• If you own more than one establishment, you must file a separate Form 8027 for each establishment.

• If there is more than one business operating within a single building, and if the receipts for the businesses are recorded separately, then each business should file a separate Form 8027.

 

1. All taxes (FICA, federal withholding, and state and local) on regular pay, exclusive of tips

2. Social Security and Medicare taxes on reported tips

3. Federal, state and local taxes on reported tips

 

1. Withholding on regular wages (FICA, federal income, state income) ($156.60)

2. FICA withholding tax on tips ($91.80)

3. Federal income tax withholding ($151.60 of the $200 due)

 

• Include tips as wages, withholding FICA and federal income tax, and include on Form 941 and Form W-2

• Allocate tips when required

• File the information report, Form 8027, if required

 

• The name, address and SSN of the employee.

• The name and address of the employer.

• The period for which, and the date on which, the statement is furnished. If the statement is for a calendar month, the month and year should be specified. If the statement is for a period of less than one calendar month, the beginning and ending dates of the period should be shown (for example, January 1 through January 8, 201X).

• The total amount of tips received by the employee during the period covered by the statement, which are required to be reported to the employer.

 

• The form is to be used solely for the purpose of reporting tips,

• It meets the requirements of subparagraph (1) (of the regulations as listed above), and

• A blank copy must be made available to the employee for completion and retention by the employee.

 

• Publication 15, (Circular E), Employer's Tax Guide

• Publication 531, Reporting Tip Income

• Instructions for Form W-2, Box 1 and box 8

• Publication 3144, Tips on Tips -- A Guide to Tip Income Reporting for Employers in Businesses Where Tip Income is Customary

• Instructions for Form 941, Line 5b, Taxable Social Security Tips

• Form 8027 and instructions, Employer's Annual Information Return of Tip Income and Allocated Tips

• Publication 1239, Specifications for Electronic Filing of Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips

 

• Publication 1244, Employee's Daily Record of Tips and Report to Employer (This publication includes Form 4070, Employee's Report of Tips to Employer, and Form 4070A, Employee's Daily Record of Tips.)

• Form 4137, Social Security and Medicare Tax on Unreported Tip Income

 

1. an accountable plan, and

2. a nonaccountable plan.

 

• The employee's expenses must be incurred in connection with services as an employee with no personal expenses.

• The employee must substantiate expenses to the employer within a reasonable period of time from when the expenses were incurred.

• The employer must require that any excess advance or reimbursement over the actual substantiated expense be returned within a reasonable period of time.

 

1. Receive the advance within 30 days of the time they incur the expense.

2. Adequately account for the expenses within 60 days after the expenses were paid or incurred.

3. Return any amounts in excess of expenses within 120 days after the expense was paid or incurred.

 

• Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, or

• You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount not used for business expenses.

 

1. An employee can submit periodically to the employer a log of business miles driven. The expense is deemed substantiated to the extent of the standard mileage rate (see table above).

2. An employee can submit documentation of actual vehicle expenses (gas, maintenance, insurance and so on) with support for the percentage of business use of the vehicle (for example, a log showing both business and personal mileage).

 

• Publication 15, (Circular E), Employer's Tax Guide

• Publication 15-B, Employer's Tax Guide to Fringe Benefits

• Publication 5137, Fringe Benefit Guide

• Instructions for Forms W-2 and W-3

 

1. Identify the particular fringe benefit and start with the assumption that its value will be taxable as compensation to the employee.

2. Check to see if there are any statutory provisions that exclude the fringe benefit from the employee's gross income.

3. Value any portion of the benefit that is not excludable for inclusion in the employee's gross income.

 

• Accident/health benefits

• Allowances not accounted for (for example, clothing)

• Automobile allowances

• Awards and prizes

• Back pay awards

• Bonuses

• Cafeteria plans

• Club memberships

• Dependent care assistance programs

• Educational reimbursements

• Employee discounts

• Frequent flier credits

• Group term life insurance

• Law enforcement housing assistance

• Legal counseling

• Local transportation for commuting

• Lodging on the employer's premises

• Meal money

• Moving expense reimbursements

• Parking

• Professional licenses or dues for professional organizations

• Severance pay

• Scholarships and fellowships

• Sick pay

• Stipends

• Travel reimbursement

• Use of vacation homes

• Vacations

 

1. Commuting value rule,

2. Cents-per-mile rule, or

3. Automobile lease rule.

 

• Clearly marked police and fire vehicles

• Unmarked vehicles used by law enforcement officers - the officer must be authorized to carry a firearm, execute search warrants and make arrests

• An ambulance or hearse used for its specific purpose

• Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds

• Delivery trucks with seating for the driver only or driver plus a folding jump seat

• A passenger bus with a capacity of at least 20 passengers used for a specific purpose

• School buses

• Tractors and other special purpose farm vehicles

 

• It is furnished on your business premises,

• It is furnished for your convenience, and

• The employee accepts it as a condition of employment.

 

• Publication 15, (Circular E), Employer's Tax Guide

• Publication 15-A, Employer's Supplemental Tax Guide

• Publication 15-B, Employer's Tax Guide to Fringe Benefits

• Publication 521, Moving Expenses

• Publication 525, Taxable and Nontaxable Income

• Publication 970, Tax Benefits for Education

•  

Chapter 7. Pension Plans

This chapter provides basic information on the pension plans that Indian tribal governments may have, as well as annual reporting requirements that apply to these plans. Since the area of pension law can be quite complex, this chapter is not all-inclusive. Your pension plan administrator should address more detailed questions.

Pension Plans that Indian Tribal Governments May Maintain:

 

All these plans, with the exception of certain qualified plans, are deferred compensation plans that allow employees to save for retirement on a pre-tax basis.

Note: Indian tribal governments cannot maintain governmental deferred compensation plans under Code Section 457. They are not an eligible employer for 457 purposes.

Limits on Contributions and Benefits

There are limits to how much employers and employees can contribute to a plan (or IRA) each year. The plan must specifically state that contributions or benefits cannot exceed certain limits. The limits differ depending on the type of plan. Code Section 415 requires the limits to be adjusted annually for cost-of-living increases.

Definitions

Deferred Compensation - Deferred compensation is an amount the employer deducts from the employee's current compensation and pays to a retirement plan. Employees do not pay tax on qualified deferred compensation until distributions are received (except with Roth contributions). Participation in a deferred compensation plan allows employees to "defer" or delay, receiving a portion of their wages until a later date, generally when they retire or reach a distributable event.

Rollover - The contribution or direct transfer of a qualified plan distribution to another plan within 60 days. The plan receiving the rollover may be any of the following:

 

501(c)(3) Organization - Defined generally as one organized and operated exclusively for the following purposes:

 

These organizations include:

 

Grandfathered Indian Tribe - An Indian tribal government; a subdivision, agency or instrumentality of an Indian tribal government; or a corporation chartered under federal, state or tribal law that is owned in part by any of the foregoing is treated as an employer described in 501(c)(3) with respect to any annuity contract purchased in a plan year beginning before January 1, 1995.

Catch-Up Contributions - Elective deferrals that are made under Code Section 414(v) in excess of the limits under Code Sections 402(g), 403(b), 408(p) and 415 to 401(k), 403(b), SARSEPs (SEPs that include a salary reduction arrangement), SIMPLE IRA or SIMPLE 401(k) plans. Catchup contributions may be made only by participants who are at least age 50 by the end of the year in which the catch-up contributions are being made.

Qualified Plan - A qualified plan is a plan that meets the requirements of Code Section 401(a). These requirements are generally designed to ensure that the plan is established and operated for the benefit of a broad class of employees. Meeting the requirements entitles the plan sponsor, the trust or other funding vehicle and participants to certain income tax advantages.

Nonqualified Plan - A nonqualified plan is a plan that does not meet the requirements of Code Section 401(a). As a result, the plan sponsor, participants and trust or other plan funding vehicle are generally not entitled to income tax benefits, unless the plan is intended to be, and meets the requirements of, for example, section 403(b) plans, SEPs, SIMPLE plans and certain IRAs.

Salary Reduction Arrangement - An agreement where the employee chooses to have part of their pay contributed to a retirement plan rather than receive it in cash.

Elective Deferral - Contributions made by the employer at the election of the employee to a retirement plan via a salary reduction agreement. The elective deferrals are excluded from the employee's gross income (compensation) (except Roth contributions) and include deferrals under a 401(k), 403(b), SIMPLE IRA or a SARSEP plan.

Nonelective Contributions - Employer contributions made to any type of plan, excluding those employer contributions made under a salary reduction agreement. Employer contributions also do not include matching contributions.

Income Tax Withholding

Generally, the participant's pretax contributions (deferred compensation) plus any earnings on these contributions will not be included in gross income until that amount is paid or made available to the participant or beneficiary.

Therefore, this amount will not be subject to income tax withholding at the time the contribution is made. However, the total amount contributed during the tax year will be reflected in box 12 on the participant's Form W-2.

Social Security, Medicare and FUTA Taxes

Qualified plans, TSAs, SEPs and SIMPLE IRA plans - Generally, elective deferrals made by an employee are excluded from the employee's gross income. However, they are included in wages for purposes of Social Security, Medicare and FUTA taxes.

Employer contributions to these plans are not included in the definition of wages and are not subject to Social Security, Medicare or FUTA taxes unless the payment is made for services rendered.

Nonqualified Deferred Compensation Plans - Annual deferrals under a nonqualified plan are treated as wages subject to Social Security, Medicare and FUTA taxes in the tax year in which the later of the following occurs:

 

A substantial risk of forfeiture exists where rights in property that are transferred are conditioned upon the future performance of services or the occurrence of a condition related to the purpose of the transfer. Annual deferrals mean the amount of compensation deferred under the plan whether by salary reduction or nonelective employer contribution during a taxable year.

Example: The tribe's nonqualified plan provides for elective deferrals from current salary, as well as a one percent of salary nonelective contribution for each employee who participates in the plan and who is employed with the tribe during the plan year. All deferrals and contributions, including the tribe's contributions, are fully and immediately vested.

Because these contributions are not subject to a substantial risk of forfeiture (and the services to which they relate have already been performed), the elective deferrals are required to be taken into account as wages for purposes of the Social Security, Medicare and FUTA tax at the time of the deferral. The tribe's nonelective contribution is required to be taken into account as wages at the time of the contribution for purposes of the Social Security, Medicare and FUTA tax.

Example: Assume the same facts as above, except the plan has two year vesting for the tribe's nonelective contribution. In this case, an employee's rights to the nonelective contributions (and the associated earnings) are subject to a substantial risk of forfeiture until the employee has been employed by the tribe for three years.

The tribe's nonelective contributions (and earnings thereon) are not wages for purposes of the Social Security, Medicare and FUTA taxes until the employee has completed three years of service. At that time, the aggregate amount of the tribe's nonelective contributions, plus earnings, is required to be taken into account as wages for purposes of the Social Security, Medicare and FUTA tax. Once an individual has met the vesting requirements, future nonelective contributions by the tribe are required to be taken into account as wages for these purposes when the contribution is made.

The following are examples of how you would prepare a Form W-2 to reflect deferred compensation depending on whether the plan is a qualified plan or a nonqualified plan.

Example -- Qualified Plan: Sarah earned $30,000 during the year. She elected to contribute 10 percent ($3,000) to her employer's qualified 401(k) plan. The employer also contributed 5 percent ($1,500) to the plan on Sarah's behalf. Sarah had federal withholding of $3,000, Social Security withholding of $1,860 and Medicare withholding of $435.

Sarah's W-2 will reflect the following amounts:

 

If your state has a state income tax, then box 16 on Form W-2 will normally be the same amount as the amount shown in box 1 provided the employee was a resident of the state for the entire year.

 

Example -- Nonqualified Plan: Assume the same facts as above except the plan is a nonqualified plan, and there is no substantial risk of forfeiture of the deferred amount.

 

Catch-Up Contributions

Participants age 50 and over may contribute additional elective deferrals "catch-up contributions" to 401(k), 403(b), SIMPLE IRA or SARSEP plans.

Catch-up contributions are combined with regular contributions for W-2 reporting.

Example: Jerry, age 52, earned $25,000 during the year. He contributed 10 percent ($2,500) of his salary to his employer's qualified 401(k) plan. In addition, Jerry contributed $500 in catch-up contributions during the year. His employer contributed $1,250 to the plan for Jerry. Jerry had federal withholding of $2,800, Social Security withholding of $1,550 and Medicare withholding of $363.

Jerry's W-2 will reflect the following amounts:

 

Distributions

Reporting of distributions from these plans must be made on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., rather than Form W-2. For each year the employee receives a payment from the pension plan, the plan administrator or annuity provider is required to issue the employee a Form 1099-R no later than January 31 of the following year.

Loans to employees from a plan may be considered distributions and taxable.

Note: On occasion, the annuity provider may send withholding from pension distributions to the plan sponsor or employer. In these cases, the plan sponsor must file Form 945, Annual Return of Withheld Federal Income Tax, to report the withheld amounts.

Indian Tribes and 403(b) Plans

Indian tribes and wholly owned tribal entities (with the exception of tribally owned public schools and qualified 501(c)(3) organizations) do not currently qualify to establish a Code Section 403(b) plan for their employees. Contributions to a 403(b) plan are not allowable and are not excludable from gross income by the employees.

Tribes that entered into a contract for a 403(b) plan prior to January 1, 1995, are allowed to continue the plan and make current contributions for the employees who were participating before January 1, 1995, as if they were a 501(c)(3) organization. Current employee contributions are excludable from the employee's gross income as authorized in Code Section 403(b)(1).

If the tribe entered into a contract for a 403(b) plan after December 31, 1994, the plan is not qualified under the Code and the tribe should refer to the IRS Voluntary Correction Program, which explains acceptable methods to voluntarily correct the situation. If the tribe ceases contributions, this program explains how the tribe may receive a letter giving them 403(b) status for prior years. There is a fee to participate in the program.

Form 5500

Most pension plans covered by ERISA are required to file a Form 5500, Annual Return/Report of Employee Benefit Plan. An exception to this requirement is a "governmental plan."

Code Section 414(d) provides that a "governmental plan" includes a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.

Certain plans of Indian tribal governments (ITG) are also governmental plans under 414(d). Specifically, section 906(a)(1) of the Pension Protection Act of 2006 (PPA `06) amended Section 414(d), effective August 17, 2006, to provide that the term `governmental plan' includes a plan that is established and maintained by an Indian tribal government (as defined in Section 7701(a) (40)), a subdivision of an Indian tribal government (determined in accordance with Section 7871(d)), or an agency or instrumentality of either, and all of the participants of which are employees of such entity substantially all of whose services as such an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function).

Notice 2006-89 provides that the IRS and Treasury anticipate issuing guidance on Section 414(d) and that, until that guidance is issued, an ITG plan will be treated as satisfying the requirements to be a governmental plan under Section 414(d) if it complies with those requirements based on a reasonable and good faith interpretation of section 906(a)(1) of PPA '06. Section III.B. of the notice provides certain approaches that, if taken by September 30, 2007, permit separate plans to be established for commercial ITG employees and for other ITG employees who perform essential governmental functions (governmental ITG employees) under the reasonable and good faith compliance standard. Section III.E. indicated that the relief provided in Section III applied pending the issuance of further guidance relating to Section 414(d), including the amendment made by PPA section 906(a)(1). The notice also invited comments from the public on whether additional transition issues need to be addressed.

Since the issuance of Notice 2006-89, the IRS and Treasury have continued to consult with Indian tribal government representatives. Based on those consultations and the comments received in response to Notice 2006-89, and until future guidance is issued, the transition relief provided under Notice 2006-89 has been revised so that the date "September 30, 2007" in Section III.B. of Notice 2006-89 was replaced with "the date that is six months after guidance is issued under §414(d) of the Code, as amended by section 906 of the Pension Protection Act of 2006, on the determination of whether a retirement plan maintained by an ITG is a governmental plan with the meaning of §414 (d)."

This extension is conditioned on the plans involved not being amended, for periods before the extended date, to reduce benefits unless the reduction:

 

If a reduction occurs that does not meet either of these conditions, the extension provided under this notice ends on the date the reduction goes into effect.

References

 

Chapter 8. Cafeteria Plans

Section 125 of the Internal Revenue Code makes it possible for employers to offer their employees a choice between cash and a variety of nontaxable benefits.

A cafeteria plan is a written benefit plan maintained by an employer for the benefit of its employees. It provides participants an opportunity to receive certain benefits on a pretax basis. The plan must allow employees to choose between two or more benefits consisting of cash (or a taxable benefit which is treated as cash) and certain "qualified benefits."

The written plan must include:

 

Examples of qualified benefits of a cafeteria plan are:

 

Filing Requirements

Contributions to a cafeteria plan are usually made under salary reduction agreements between the employer and the employee in which the employee agrees to contribute a portion of his or her salary on a pretax basis to pay for the qualified benefits. Salary reduction contributions are not actually or constructively received by the employee. Therefore, those contributions are not considered wages for federal income tax purposes. In addition, those sums generally are not subject to FICA and FUTA. Employers may report the employee's nontaxable cafeteria plan benefits on the Form W-2, in box 14.

If you maintain a cafeteria plan, you must report on Form 5500 information about the plan each year by the last day of the 7th month after the plan year ends.

References

 

Chapter 9. Scholarships & Educational Assistance

Educational Assistance Programs

Section 127 of the Internal Revenue Code addresses educational assistance programs and whether this assistance should be included in income. An educational assistance program must be a written plan that benefits employees. The plan may not discriminate in favor of highly compensated employees.

Gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance to the employee. The income exclusion from employee gross income is limited to $5,250 per employee in educational assistance during a calendar year. The excludable amount is not subject to income tax withholding or other employment taxes. The education need not be job-related.

For purposes of Code Section 127, the term "educational assistance" means:

 

If you don't have an educational assistance plan or you provide more than $5,250 to an employee in annual education assistance, the payment is taxable unless it qualifies as a "working condition" fringe benefit. A working condition fringe benefit is a tax-free benefit of property or service provided by an employer to an employee that, if the employee had paid for it, the employee could have deducted as an unreimbursed employee business expense on Form 1040. The exclusion is generally available for any form of educational instruction or training that improves or develops the job-related capabilities of an employee.

Scholarships

A scholarship or fellowship grant is any amount paid or allowed to, or for the benefit of, an individual to aid the individual in the pursuit of study or research. A scholarship may, for example, be in the form of a reduction owed by the recipient to an educational organization for tuition, room and board, or any other fee.

Code Section 117 provides an exclusion from income for certain scholarships made to an individual who is candidate for a degree. Code Section 170 defines an educational institution as an educational organization, which maintains a regular faculty, a curriculum and has a regularly enrolled body of students on site.

Nontaxable Benefits

Only "qualified scholarships" may be excluded from income. Where participants are degree candidates, these payments will ordinarily be excludable from the recipient's gross income to the extent of their qualified tuition and related expenses. The student may be either an undergraduate or graduate.

A qualified scholarship is defined as any amount expended for "qualified tuition and related expenses." Qualified tuition and related expenses include:

 

Qualified education expenses do not include the cost of:

 

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Thus, scholarship receipts that exceed expenses for "qualified tuition and expenses" are not excludable from a recipient's gross income (scholarship amounts used to pay these costs are taxable).

The scholarship may be tax free only if the student is a candidate for a degree at an educational institution. Thus, in the case of non-degree candidates, the entire amount of the scholarship is includable in gross income of the recipient regardless of its use.

Reporting Taxable Scholarship Benefits

Do not issue Form 1099-MISC to report scholarship or fellowship grants. A scholarship or fellowship grant represents payment for services when the grantor requires the recipient to perform services in return for granting of the scholarship or fellowship. A requirement that the recipient pursue studies, research or other activities primarily for the benefit of the grantor is treated as a requirement to perform services.

A scholarship or fellowship grant conditioned upon either past, present or future services by the recipient, or upon services that are subject to the direction or supervision of the grantor represents payment for services and is considered wages.

The grantor of this amount is subject to certain withholding and reporting requirements respecting wages, including withholding for income taxes and filing of Forms W-2. The application of Social Security and Medicare taxes depends on the nature of the employment and the status of the grantor.

Exceptions

You do not have to include in income the part of any scholarship or fellowship that represents payment for teaching, research or other services if you receive the amount under the:

 

You must also be a candidate for degree at an eligible educational institution, and use part of the scholarship or fellowship to pay qualified education expenses.

You are not required to report other taxable scholarship or fellowship payments (to a degree or non-degree candidate) to the IRS on any form.

The recipient of these payments is responsible for determining whether the payment is, in whole or in part, includable in gross income for federal income tax purposes.

You may wish to advise scholarship recipients that the amount of their scholarship or fellowship stipends that exceeds their qualified tuition and related expenses, if any, is generally includible in gross income for federal income tax purposes.

References:

 

Chapter 10. Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a refundable tax credit for certain workers whose earned income is below a certain level. Because it is a "credit," the EITC is subtracted from the amount of tax owed, if any, on the worker's individual income tax return. As a refundable credit, any excess over the total tax is refunded to the individual. Even workers who have not filed a tax return in the previous year because their wages were below the minimum income level requirements to file may be able to get the credit -- but only if they file a tax return. Therefore, you must notify each employee who worked for you at any time during the year, and from whom you did not withhold any income tax about EITC.

You will meet the notification requirements by giving the employee either Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC), your own written statement as long as it has the exact wording of Notice 797 or the official IRS Form W-2, Wage and Tax Statement, which contains a statement on the back of Copy B. You do not need to notify employees who claimed exemption from withholding on Form W-4, Employee's Withholding Allowance Certificate.

The amount of the credit depends on a worker's wages and family size.

To claim the EITC, a worker must file a tax return. But many of the workers who are eligible for the EITC do not ordinarily file tax returns because their incomes are too low to trigger any federal tax liability. These workers may have had little or no exposure to the federal tax forms that explain what the EITC is and how to claim it.

The IRS website provides extensive resources on the EITC for individuals, employers and tax professionals.

Advance Payments of EITC Eliminated

Legislation signed by the President on August 10, 2010, repealed the Advanced Earned Income Tax Credit. Recipients will not be able to claim Advance EITC after December 31, 2010.

References

 

Chapter 11. Employment Taxes

Employers must deposit and report employment taxes with the Internal Revenue Service. Employment taxes are:

 

Employer Identification Number

An Employer Identification Number (EIN) is a nine-digit number that IRS assigns in the format XX-XXXXXXX. It is used to identify the tax accounts of employers and certain other entities that have no employees. The IRS uses the number to identify taxpayers that are required to file various tax returns. EINs are used by employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates of decedents, government agencies, certain individuals and other business entities. Use your EIN on all of the items that you send to the IRS and the Social Security Administration (SSA).

If the employer does not already have an EIN, it will need to get one if the employer:

If an EIN has not already been applied for and an EIN is required, an EIN can be obtained by applying:

 

Apply Online

The online EIN application is the preferred method for taxpayers to apply for and obtain an EIN. Once the application is completed, the information is validated during the online session and an EIN is issued immediately. The online application process is available for all entities whose principal business, office or agency, or legal residence (in the case of an individual), is located in the United States or U.S. Territories. The principal officer, general partner, grantor, owner, trustor, etc. must have a valid Taxpayer Identification Number (Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number) to use the online application.

Note: Taxpayers who apply for an EIN online have the option to view, print and save their EIN assignment notice at the end of the session.

Apply by Fax

Taxpayers can fax the completed Form SS-4, Application for Employer Identification Number, to the appropriate fax number (see Instructions for Form SS-4, Where to File or Fax) after ensuring that the Form SS-4 contains all the required information. If it is determined that the entity needs a new EIN, one will be assigned using the appropriate procedures for the entity type. If the taxpayer's fax number is provided, a fax will be sent back with the EIN within four business days.

Apply by Mail

The processing time frame for an EIN application received by mail is four weeks. Ensure that the Form SS-4 contains all the required information. If it is determined that the entity needs a new EIN, one will be assigned using the appropriate procedures for the entity type and mailed to the taxpayer. Find where to mail Form SS-4 in the Instructions for Form SS-4.

Other Important Information

Daily Limitation of an EIN

Effective May 21, 2012, to ensure fair and equitable treatment for all taxpayers, the IRS will limit EIN issuance to one per responsible party per day. This limitation applies to all requests for EINs whether online or by fax or mail.

Form SS-4

When completing Form SS-4 Indian tribal governments should select the "Indian tribal governments/enterprises" box on Line 9a, Type of entity. Designating this box will let IRS know the entity's status as a federally recognized Indian tribal government. This will reduce errors and facilitate processing of tax returns by routing them to specially trained employees. It allows IRS to code the returns so any questions will be directed to the IRS Indian Tribal Governments division. Because it takes several weeks to receive an EIN after the Form SS-4 has been filed, apply for the EIN well before tax returns are due. An EIN may be obtained sooner by using the online EIN application process or by fax.

Note: Use your EIN on all items you send to the IRS or SSA.

Federal Employment Taxes

This section introduces federal employment taxes. It briefly explains your responsibilities as an employer to withhold and pay these taxes. Employment taxes represent the income tax and Social Security and Medicare (FICA) taxes withheld from the wages of an employee plus the employer's share of Social Security taxes and federal unemployment (FUTA) taxes. The withheld (employee's) portion of employment taxes is referred to as "trust fund" taxes. FUTA will be addressed later in this guide.

If the tribe is required to withhold income or Social Security and Medicare taxes, a return reporting the amounts withheld must be filed. Form 941, Employer's Quarterly Federal Tax Return, is used for this purpose. However, other forms are used under certain circumstances.

 

Alternative Signature Method ( Revenue Procedure 2005-39).

Effective with returns filed after June 2005, corporate officers or duly authorized agents may sign any of the following forms by facsimile (such as, by rubber stamp, mechanical device or computer software program):

 

Officers or agents using a facsimile means of signature are personally responsible for ensuring that their facsimile signature is affixed to returns. The person filing the form must retain a letter, signed by the officer or agent authorized to sign the return, declaring under penalties of perjury that the facsimile signature appearing on the form is the signature adopted by the officer or agent and that the facsimile signature was affixed to the form by the officer or agent or at the officer's or agent's direction. The letter must list each return by name and identifying number. The letter should not be sent to the IRS unless specifically requested. The letter must be maintained for at least four years after the later of the due date of the tax as the return relates, or the date the tax is paid.

For additional information, see:

 

Form I-9, Employment Eligibility Verification

Form I-9, Employment Eligibility Verification, is used for verifying the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment in the United States. This includes citizens and noncitizens. Both employees and employers (or authorized representatives of the employer) must complete the form. On the form, an employee must attest to his or her employment authorization. The employee must also present the employer with acceptable documents evidencing identity and employment authorization. The employer must examine the employment eligibility and identity documents an employee presents to determine whether the documents reasonably appear to be genuine and to relate to the employee and record the document information on the Form I-9. The list of acceptable documents is on the last page of the form. Employers must retain Form I-9 for a designated period and make it available for inspection by authorized government officers.

Do not file Form I-9 with the U.S. Citizenship and Immigration Services (USCIS) or U.S. Immigrations and Customs Enforcement (ICE). Employers must have a completed Form I-9 on file for each person on their payroll who is required to complete the form. Form I-9 must be retained and stored by the employer either for three years after the date of hire or for one year after employment is terminated, whichever is later. The form must be available for inspection by authorized U.S. Government officials from the Department of Homeland Security, Department of Labor or Department of Justice.

For questions or more information on employer responsibilities, contact USCIS at 800-375-5283 or visit the Department of Homeland Security website (you may also download the Form I-9 from this link).

Form W-4, Employee's Withholding Allowance Certificate

When employees are hired, the employer must have the employee complete a Form W-4, Employee's Withholding Allowance Certificate; the employer must have a Form W-4 on file for each employee. The federal income taxes to be withheld is determined by the employee's gross wages and the information submitted by the employee on Form W-4.

This information includes:

 

Ask each new employee to submit a signed Form W-4 by his or her first day of work. This Form W-4 is effective with the first wage payment and will last until the employee files a new Form W-4.

If an employee fails to provide a properly completed Form W-4, you must withhold federal income taxes from the employee's wages as if the employee were single and claiming no withholding allowances. If not enough tax is withheld and the employee has not provided a valid Form W-4 or has claimed an exemption from withholding, the employee may be subject to penalties.

An employee may want to change the number of withholding allowances or withholding rate (marital status) on Form W-4 for any number of reasons, such as a marriage, a change in the number of dependents or a change in the amount of itemized deductions or tax credits anticipated for the tax year. If you receive a revised Form W-4 from an employee, you must put it into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received the revised Form W-4. You must honor the request unless the situations described in the sections "Invalid Form W-4" and "Lock-in Letters" below apply.

Exemption from Withholding

If an employee qualifies, Form W-4 is also used by the employee to tell you not to deduct any federal income tax from the employee's wages. To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. However, if the employee can be claimed as a dependent on a parent's or another person's tax return, additional limitations may apply (see the instructions for Form W-4). A Form W-4 claiming exemption from withholding is valid for only the calendar year in which it is filed with the employer. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 claiming exempt status by February 15 of that year. If the employee does not give you a new Form W-4, withhold tax as if the employee is single, with no withholding allowances. However, if you have an earlier Form W-4 (not claiming exempt status) for this employee that is valid, then withhold with the information provided on this valid Form W-4 until you receive a new one.

Note: Student status does not automatically exempt the employee from income tax withholding

Invalid Form W-4

Any unauthorized change or addition to Form W-4 makes it invalid. This includes taking out any language by which the employee certifies that the form is correct, material defacing of the form, or any writing on the form other than the entries requested. A Form W-4 is also invalid if, by the date an employee gives it to the employer, the employee indicates in any way that it is false. When you receive an invalid Form W-4, do not use it to determine federal income tax withholding. Tell the employee that it is invalid and ask for another one. If the employee does not provide a valid Form W-4, withhold taxes as if the employee is single and claiming no withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid, then withhold with the information provided on the valid Form W-4 until you receive a new one.

Lock-in Letters

The IRS uses information reported on Forms W-2 to identify employees with withholding compliance problems. In some cases, where a serious under-withholding problem is found to exist for a particular employee, the IRS may issue a notice (commonly referred to as a "lock-in-letter") to the employer specifying the withholding rate and maximum number of withholding allowances permitted for a specific employee for purposes of calculating the required withholding. The IRS will provide the employee with an opportunity to dispute the determination before the employer will adjust the withholding based on the lock-in letter.

The IRS will send a letter to the employee explaining that the IRS will require you to start withholding additional income tax unless the employee contacts the IRS to explain why the employee should not have withholding increased. A toll-free number and address for the unit handling this program will be provided in the letter. As an additional safeguard, you will also receive a notice to provide to the employee.

After the lock-in letter takes effect, you must disregard any Form W-4 that results in less tax withheld, until the IRS notifies you otherwise. However, you must honor any Form W-4 that results in more income tax withheld than at the withholding rate and withholding allowances specified in the lock-in letter. Employers who use electronic Form W-4 systems must make sure the employee cannot override the lock-in letter to decrease withholding via an electronic Form W-4 system. Lock-in letter provisions also apply to employees rehired within 12 months from the date of the notice.

After the lock-in letter takes effect, if the employee wants to claim complete exemption from withholding or claim a withholding rate, withholding allowances or an additional amount that results in less income tax withheld than the lock-in letter, the employee must contact the IRS. A toll-free number and address for the unit handling this program is provided in the lock-in letter.

Recordkeeping Requirements

After the employee completes and signs the Form W-4, you must keep it in your records for at least 4 years (See Publication 15). This form serves as verification that you are withholding federal income tax according to the employee's instructions and needs to be available for inspection should the IRS request it. Form W-4 is still subject to review. You may be directed (in a written notice or in future published guidance) to send certain Forms W-4 to the IRS. You must be able to supply a hardcopy of an electronic Form W-4. Generally, Forms W-4 are for your records. They need not be sent to IRS. For more information on withholding, see Publication 505, Tax Withholding and Estimated Tax.

Federal Income Tax

The wages paid to employees generally are subject to income tax withholding if their wages for any payroll period are more than the dollar amount of their withholding allowances for that period. The amount to be included is figured separately for each payroll period. Wages include all pay the employer gives an employee for services performed. The pay may be in cash or in other forms. It includes salaries, vacation allowances, bonuses, commissions and fringe benefits not excluded by law. It does not matter how payments are measured or paid. Wages paid in any form other than money (such as goods, lodging and meals) are measured by the fair market value. See Publication 15 for more information about income tax withholding.

The income tax to be withheld is figured on gross wages before any deductions are made for Social Security and Medicare taxes. You may figure the withholding by different methods, the most common of which are the percentage method and the wage bracket tables method. Publication 15 contains the income tax withholding tables and instructions for using both of these withholding methods, and it gives more information on reporting and withholding requirements on wages and tip income.

Social Security and Medicare Taxes

Under the Federal Insurance Contributions Act (FICA), employers must withhold Social Security and Medicare taxes from wages that employees receive each payroll period.

Generally, meals, lodging, clothing, services and other payments in-kind are subject to Social Security and Medicare taxes, as are wages paid in cash. However, meals are not taxable wages if furnished for the employer's convenience and on the employer's premises. Lodging is not taxable if furnished for the employer's convenience, on the employer's premises and as a condition of employment.

The employer must withhold and deposit the employee's part of the taxes and pay a matching amount. The Social Security tax is withheld from the employee's gross wages until the employee's cumulative wages for the year reach the wage base limit. Any wages above the wage base limit are not subject to Social Security withholding. However, there is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax.

The United States has Social Security agreements with many countries that eliminate dual taxation and coverage. Compensation subject to Social Security and Medicare taxes may be exempt under one of these agreements. More information and a list of agreement countries can be obtained from the Social Security Administration website.

Social Security and Medicare Tax for 2017

For 2017, the employee tax rate for Social Security is 6.2 percent. The employer tax rate for Social Security remains unchanged at 6.2 percent. The 2017 Social Security wage base limit is $127,200. For 2017, the Medicare tax rate is 1.45 percent each for employers and employees, unchanged from 2016. There is no wage base limit for Medicare tax.

Additional Medicare Tax

In addition to withholding Medicare tax at 1.45 percent, you must withhold a 0.9 percent Additional Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year. You are required to begin withholding the Additional Medicare tax in the pay period in which you paid wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Additional Medicare tax is only imposed on the employee. There is no employer share of Additional Medicare tax. All wages that are subject to Medicare tax are subject to Additional Medicare tax withholding if paid in excess of the $200,000 withholding threshold.

For the most current information on the Social Security, Medicare and Additional Medicare tax rates, see Publication 15, "What's New" section.

How and When to Deposit Taxes

In general, you must deposit income tax withheld and both the employer and employee Social Security and Medicare taxes. First, you must determine which deposit schedule to use. There are two deposit schedules -- monthly or semiweekly -- for determining when you deposit Social Security, Medicare and withheld income taxes. These schedules tell you when a deposit is due after a tax liability arises (for example, when you have a payday).

Important Note:

Remember that Form 941 is a quarterly return, but deposits may be required on a monthly or semiweekly schedule. Publication 509, Tax Calendars, assists employers in monitoring due dates of deposits. Publication 509 has deposit due date schedules for both monthly and semiweekly depositors. The calendars in this publication also include due dates for filing returns, providing information returns to employees, and other important dates you need to know.

Lookback Period

The deposit schedule for a calendar year is determined from the total taxes reported on your Form 941 (line 11) in a four-quarter lookback period. The lookback period for Form 941 filers begins July 1 and ends June 30. See Publication 15, "Depositing Taxes" section for the table that explains the lookback period for the current calendar year. If you reported $50,000 or less in taxes for the lookback period, then you are a monthly schedule depositor; if you reported more than $50,000, then you are a semiweekly schedule depositor.

Monthly Deposit Schedule

Under the monthly deposit schedule, deposit Form 941 taxes on payments made during a month by the 15th day of the following month.

Note: If this is a new tribal entity, during the first calendar year the tax liability for each quarter in the lookback period is considered to be zero. Therefore, this entity is considered a monthly schedule depositor for the first calendar year of the business unless the $100,000 Next-Day Deposit rule (discussed later) applies.

Semiweekly Deposit Schedule

The employer is a semiweekly schedule depositor for a calendar year if the total taxes on Form 941 during the lookback period was more than $50,000. If the payday falls on Wednesday, Thursday or Friday, you must deposit the Form 941 taxes no later than the following Wednesday. If the payday falls on Saturday, Sunday, Monday or Tuesday, deposit by Friday.

Exhibit 11.1. Semiweekly Deposit Schedule

 --------------------------------------------------------------

 

                                    Then deposit taxes by the

 

 If the payday falls on a . . .       following . . .

 

 --------------------------------------------------------------

 

 Wednesday, Thursday or Friday        Wednesday

 

 --------------------------------------------------------------

 

 Saturday, Sunday, Monday or Tuesday  Friday

 

 --------------------------------------------------------------

 

 Note: Semiweekly schedule depositors must complete Schedule B

 

 (Form 941), Report of Tax Liability for Semiweekly Schedule

 

 Depositors, and submit it with Form 941.

 

 

 $100,000 Next-Day Deposit Rule

 

 

If the employer accumulates a tax liability of $100,000 or more on any day during a deposit period, then you must deposit the tax by the next banking day, regardless of whether you are a monthly or semiweekly schedule depositor. The term deposit period refers to the period during which tax liabilities are accumulated for each required deposit due date.

If you are a monthly schedule depositor and accumulate a $100,000 tax liability on any day, you become a semiweekly schedule depositor on the next day and remains so for of the remainder of the calendar year and for the following calendar year.

How to Deposit

You are required to deposit employment taxes by electronic funds transfer (EFT). Generally, an EFT is made using the Electronic Federal Tax Payment System (EFTPS). If you do not want to use EFTPS, then you can arrange for a tax professional, financial institution, payroll service or other trusted third party to make electronic deposits for you. EFTPS is a free service provided by the Department of Treasury. To get more information about EFTPS or to enroll in EFTPS, visit http://www.eftps.gov, or call 800-555-4477. Additional information about EFTPS is also available in Publication 966, Electronic Federal Tax Payment System -- A Guide to Getting Started, and in Publication 15, Chapter 11, "Depositing Taxes."

For deposits made by EFTPS to be on time, you must submit the deposit by 8 p.m. Eastern Time the day before the date the deposit is due. If you use a third party to make a deposit for you, the third party may have different cutoff times.

If you fail to submit a deposit transaction on EFTPS by 8 p.m. Eastern Time the day before the date a deposit is due, you can still make your deposit on time by using the Federal Tax Collection Service (FTCS). To use the same-day wire payment method, you will need to make arrangements with your financial institution ahead of time. Please check with the financial institution regarding availability, deadlines and costs. The financial institution may charge a fee for payments made this way. To learn more about the information needed to provide to the financial institution to make a same-day wire payment, visit http://www.irs.gov/e-pay and click on "Same-day wire."

Deposit Penalties

Penalties may apply if you do not make required deposits on time, if deposits are for less than the required amount or if you do not make your deposits via EFT. The penalties do not apply if any failure to make a proper and timely deposit was due to reasonable cause and not to willful neglect. The IRS may also waive penalties if you inadvertently fail to deposit in the first quarter required to deposit any employment tax, or in the first quarter during which the frequency of deposits changed, if the employment tax return was timely filed. Always ensure that tax deposits are timely. For amounts not properly or timely deposited, the penalty rates are:

 

The following example illustrates how a tribe (a monthly tax depositor) would figure their deposit requirements and due dates:

 ----------------------------------------------------------------------

 

 Period      Gross      *FICA      *Employer's  Income Tax

 

 Ending      Wages      Withheld   FICA         Withheld    Total Taxes

 

 ----------------------------------------------------------------------

 

 1/31        $4,800.00    $367.20    $367.20      $400.00   $1,134.40

 

 ----------------------------------------------------------------------

 

 2/28        $4,750.00    $363.38    $363.38      $406.00   $1,132.76

 

 ----------------------------------------------------------------------

 

 3/31        $4,200.00    $321.30    $321.30      $340.00     $982.60

 

 ----------------------------------------------------------------------

 

 Quarterly

 

 Totals     $13,750.00  $1,051.88  $1,051.88    $1,146.00   $3,249.76

 

 ----------------------------------------------------------------------

 

 * Social Security and Medicare taxes are referred to as FICA

 

 ======================================================================

 

 

As a monthly depositor, the tribe must deposit each month's taxes by the 15th of the following month ($1,134.40 by February 15; $1,132.76 by March 15 and $982.60 by April 15. If the total taxes for all three months of the quarter had been less than $2,500, then the taxes could have been deposited or paid with the Form 941 to be filed by April 30.

If you do not pay the withheld employment taxes (trust fund taxes), the IRS may take additional collection action and may require you to:

 

See Publication 15 for more information.

Basic Federal Employment Tax Responsibilities

The following provides a brief summary of basic federal employment tax responsibilities. Because the individual circumstances for each tribe can vary greatly, its responsibilities for withholding, depositing and reporting employment taxes can differ.

New Employees:

 

Each Payday:

 

Deposit Requirements:

 

Quarterly (by April 30, July 31, October 31 and January 31):

 

Annually:

For Employees:

 

For Independent Contractors:

 

References:

 

Chapter 12. Preparation of Payroll Checks

Payroll Files

In Chapter 11, Form W-4, Employee's Withholding Allowance Certificate, and Form I-9, Employment Eligibility Verification, are discussed. These are forms that employees may have on file with your payroll department. It is important to maintain separate files for each employee with the employee's completed and signed payroll forms.

Payroll Records

Other employment tax records maintained in your payroll records are discussed in Publication 15. Payroll records should be retained for a minimum of four years. Those records include:

 

Payroll Period

The payroll period is a span of time for which wages are paid. When you have a regular payroll period, withhold income tax for that time period even if your employee does not work the full period.

Each tribe or entity determines the dates on which it will pay its employees. Some entities have weekly paydays, some on the first and fifteenth of the month (semimonthly), some pay every other week (biweekly), some on a monthly basis and some at irregular intervals. Some entities have different classes of workers (for instance, factory and office) who are paid at different times. It is important to know the payroll period covered for each individual for each paycheck that will be issued. Knowing the proper payroll period is one element to ensure that Social Security, Medicare and federal income tax is withheld at the proper amounts from employee's wages. Publication 15 has a detailed discussion of this topic.

Wages

Wages subject to federal employment taxes include all pay remitted to an employee for services performed. The pay may be in cash or in other forms. It includes salaries, vacation allowances, bonuses, commissions and fringe benefits. It does not matter how the employer determines or make the payments. Publication 15-A provides additional information on wages and other compensation, including:

 

A common item that must be included as wages is employee business expense reimbursement that is under a nonaccountable plan. Accountable and nonaccountable plans are discussed in Publication 15-A is a good reference for determining what constitutes wages.

Timekeeping

A manual or computerized timekeeping system is generally used to record the hours employees worked during any given pay period. Some type of record will be given to the payroll department as a voucher from which a paycheck will be generated. The timesheet or other voucher should be signed by the appropriate party, or parties, and retained for record keeping purposes.

Once the payroll department is assured of proper reporting of time, it should be determined if any miscellaneous items (as discussed above) should be included in the gross wage computation. Gross wages are the dollar value of the total wages for the pay period. Gross wages are the starting point for computing withholdings and net payroll.

Part-Time Workers

For income tax withholding and Social Security, Medicare and federal unemployment tax (FUTA) purposes, there are no differences between full-time employees, part-time employees and employees hired for short periods. It does not matter whether the worker has another job or has the maximum amount of Social Security tax withheld by another employer. Income tax withholding may be figured the same way as for full-time workers, or it may be figured by the part-year employment method explained in Publication 15-A.

Review Payroll Records

After gross wages are computed for each employee, inspect the employee's file to determine federal and state (if applicable) income tax withholding allowances. You may be required to withhold other items such as child support payments, wage garnishments by court order, federal income tax wage levies, health insurance, charitable payroll deductions and other items. The payroll department should retain copies of all items that support a deduction to an employee's wages for four years.

Federal Income Tax Withholding

To know how much federal income tax to withhold from employees' wages, refer to the Form W-4, Employee's Withholding Allowance Certificate, on file for each employee. If a new employee does not give you a completed Form W-4, withhold tax as if the employee is single, with no withholding allowances.

Generally, Form W-4 remains in effect until the employee submits a new one. If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date you received the replacement Form W-4.

Form W-4 claiming exemption for the previous calendar year expires on February 15. A new Form W-4 is required annually if the employee claimed exemption from withholding. Begin withholding for any employee who previously claimed exemption from withholding but hasn't given you a new Form W-4 by February 16 of the current year. Withhold based on the last valid Form W-4 you have for the employee that doesn't claim exemption from withholding or, if one doesn't exist, as if the employee is single with zero withholding allowances.

The amount of income tax withholding must be based on marital status and withholding allowances. Employees may not base their withholding amounts on a fixed dollar amount or percentage. However, the employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4.

Employees may claim fewer withholding allowances than they are entitled to claim. They may wish to claim fewer allowances to ensure that they have enough withholding or to offset other sources of taxable income that are not subject to adequate withholding.

An employee may claim exemption from income tax withholding because the employee had no income tax liability last year and expects none this year. The Form W-4 instructions state that you cannot claim exemption from withholding if your income exceeds a certain dollar threshold and includes more than a certain dollar amount of unearned income (for example, interest and dividends) and another person can claim you as a dependent on their tax return. See the Form W-4 instructions for these dollar amounts and more information. The wages are still subject to Social Security and Medicare taxes.

In general, if wages are paid to nonresident aliens, then income tax (unless exempted by regulations), Social Security and Medicare taxes must be withheld just as is completed for a U.S. citizen. The general rules for nonresident aliens are found in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and Publication 519, U.S. Tax Guide for Aliens.

Social Security and Medicare Taxes

The Federal Insurance Contributions Act (FICA) provides for a federal system of old age, survivors, disability and hospital insurance. The old age, survivors and disability insurance part is financed by the Social Security tax. The hospital insurance part is financed by the Medicare tax. Each of these taxes is reported separately.

Social Security and Medicare taxes are levied on both the employer and employees. The employer must withhold and deposit the employee's part of the taxes and must pay a matching amount. Generally, employee wages are subject to Social Security and Medicare taxes regardless of the employee's age or whether he or she is receiving Social Security benefits.

Other Payroll Deductions

Before arriving at the employee's net paycheck, the individual's payroll folder must be reviewed to determine if other amounts are required to be withheld. Many states require the employer to withhold state income taxes. Income earned by members of an Indian tribe who live and work on their reservation is generally not subject to state income tax. Contact your state tax authority for information and instructions on their requirements.

Miscellaneous payroll deductions may include insurance, charitable items, union dues and others. In each case, you should have an authorization signed by the employee to allow you to make deductions from their wages and remit to the various organizations. Each signed authorization should have instructions on when and where to remit payments. It's important to be able to account for each deduction from an employee's paycheck.

There may be involuntary deductions from an employee's paycheck such as a court ordered judgment, a federal or state tax levy or court enforced child support payments. In these cases, federal or state law requires the employer to make the deductions and remit them to the appropriate agency, even if the employee disagrees with the process. Again, the employer is required to keep all payroll records for at least four years.

Payroll Taxes

After you have computed payroll, you must calculate your payroll tax liability.

Federal income, Social Security and Medicare taxes are withheld from your employees' pay. Taxes withheld from employees' pay make up what is known as "trust fund" taxes. They are called trust fund taxes because you are entrusted to deposit the taxes withheld from your employees' wages with a federal depository. See Chapter 19 for more specific information on trust fund penalties.

NOTE: As the employer, you are entrusted with the responsibility of remitting other payroll deductions withheld from employees' wages to the proper payee.

Net Paycheck

Once you ensure that you have computed the payroll correctly, then you're ready to issue payroll checks. You may want to use a computerized or manual payroll system to monitor the process. Often, someone other than the payroll clerk is required to sign payroll checks as a matter of internal control.

Many computerized payroll systems automatically print a check stub with fields to list the gross wages and each of the items deducted, with columns for the current pay period and year-to-date totals for each category. If your system does not automatically track these items, then you may want to design a spreadsheet to do so. Employees need to be able to reconcile these items from time to time during the year to ensure that the proper amounts are being withheld.

Example 12.1. Sample Payroll Ledger Sheet for an Hourly Employee Paid Weekly For the Quarter Ending March 31

 -----------------------------------------------------------

 

 Name       SSN           Address        W-4            W-5

 

 -----------------------------------------------------------

 

 John Doe   123-45-6789   111 Elm St.    Married,       None

 

                        Anytown, USA   3 exemptions

 

 -----------------------------------------------------------

 

 

 ----------------------------------------------------------------------

 

               Hourly             Social              Federal  State

 

 Date      Hrs.  Rate    Gross Pay  Security  Medicare  WH       WH

 

 ----------------------------------------------------------------------

 

 January

 

 ----------------------------------------------------------------------

 

 Week 1    40    $10.00    $400.00    $24.80     $5.80    $7.00   $4.00

 

 ----------------------------------------------------------------------

 

 Week 2    38    $10.00    $380.00    $23.56     $5.51    $5.00   $4.00

 

 ----------------------------------------------------------------------

 

 Week 3    40    $10.00    $400.00    $24.80     $5.80    $7.00   $4.00

 

 ----------------------------------------------------------------------

 

 Week 4    40    $10.00    $400.00    $24.80     $5.80    $7.00   $4.00

 

 ----------------------------------------------------------------------

 

 February

 

 ----------------------------------------------------------------------

 

 Week 5    38    $10.00    $380.00    $23.56     $5.51    $5.00   $4.00

 

 ----------------------------------------------------------------------

 

 Week 6    38    $10.00    $380.00    $23.56     $5.51    $5.00   $4.00

 

 ----------------------------------------------------------------------

 

 Week 7    40    $10.00    $400.00    $24.80     $5.80    $7.00   $4.00

 

 ----------------------------------------------------------------------

 

 Week 8    40    $10.00    $400.00    $24.80     $5.80    $7.00   $4.00

 

 ----------------------------------------------------------------------

 

 March

 

 ----------------------------------------------------------------------

 

 Week 9    32    $10.00    $320.00    $19.84     $4.64    $0.00   $2.00

 

 ----------------------------------------------------------------------

 

 Week 10   31    $10.00    $310.00    $19.22     $4.50    $0.00   $0.00

 

 ----------------------------------------------------------------------

 

 Week 11   40    $10.00    $400.00    $24.80     $5.80    $7.00   $4.00

 

 ----------------------------------------------------------------------

 

 Vacation  40    $10.00    $400.00    $24.80     $5.80    $7.00   $4.00

 

 ----------------------------------------------------------------------

 

 Week 13   40    $10.00    $400.00    $24.80     $5.80    $7.00   $4.00

 

 ----------------------------------------------------------------------

 

 Total                   $4,970.00   $308.14    $72.07   $71.00  $46.00

 

 ----------------------------------------------------------------------

 

 [Table Continued]

 

 -------------------------------------

 

 Date      Insurance  Other    Net Pay

 

 -------------------------------------

 

 January

 

 -------------------------------------

 

 Week 1       $25.00  $0.00    $333.40

 

 -------------------------------------

 

 Week 2       $25.00  $0.00    $316.93

 

 -------------------------------------

 

 Week 3       $25.00  $0.00    $333.40

 

 -------------------------------------

 

 Week 4       $25.00  $0.00    $333.40

 

 -------------------------------------

 

 February

 

 -------------------------------------

 

 Week 5       $25.00  $0.00    $316.93

 

 -------------------------------------

 

 Week 6       $25.00  $0.00    $316.93

 

 -------------------------------------

 

 Week 7       $25.00  $0.00    $333.40

 

 -------------------------------------

 

 Week 8       $25.00  $0.00    $333.40

 

 -------------------------------------

 

 March

 

 -------------------------------------

 

 Week 9       $25.00  $0.00    $268.52

 

 -------------------------------------

 

 Week 10      $25.00  $0.00    $261.28

 

 -------------------------------------

 

 Week 11      $25.00  $0.00    $333.40

 

 -------------------------------------

 

 Vacation     $25.00  $0.00    $333.40

 

 -------------------------------------

 

 Week 13      $25.00  $0.00    $333.40

 

 -------------------------------------

 

 Total       $325.00  $0.00  $4,147.79

 

 -------------------------------------

 

 

Example 12.2. Sample Payroll Ledger Sheet for a Salaried Employee Paid Semi-Monthly

 -----------------------------------------------------------

 

 Name       SSN           Address        W-4            W-5

 

 -----------------------------------------------------------

 

 John Doe   000-65-4321   111 Elm St.    Married,       None

 

                        Anytown, USA   2 exemptions

 

 -----------------------------------------------------------

 

 

 --------------------------------------------------------------------

 

       Semi-Monthly             Social              Federal   State

 

 Date    Salary        Gross Pay  Security  Medicare  WH        WH

 

 --------------------------------------------------------------------

 

 Jan 15       $900.00    $900.00    $55.80    $13.05   $32.00  $10.00

 

 --------------------------------------------------------------------

 

 Jan 31       $900.00    $900.00    $55.80    $13.05   $32.00  $10.00

 

 --------------------------------------------------------------------

 

 Feb 15       $900.00    $900.00    $55.80    $13.05   $32.00  $10.00

 

 --------------------------------------------------------------------

 

 Feb 28       $900.00    $900.00    $55.80    $13.05   $32.00  $10.00

 

 --------------------------------------------------------------------

 

 Mar 15       $900.00    $900.00    $55.80    $13.05   $32.00  $10.00

 

 --------------------------------------------------------------------

 

 Mar 31       $900.00    $900.00    $55.80    $13.05   $32.00  $10.00

 

 --------------------------------------------------------------------

 

 Total      $5,400.00  $5,400.00   $334.80    $78.30  $192.00  $60.00

 

 --------------------------------------------------------------------

 

 [Table Continued]

 

 -----------------------------------

 

 Date    Insurance  Other    Net Pay

 

 -----------------------------------

 

 Jan 15     $35.00  $0.00    $754.15

 

 -----------------------------------

 

 Jan 31     $35.00  $0.00    $754.15

 

 -----------------------------------

 

 Feb 15     $35.00  $0.00    $754.15

 

 -----------------------------------

 

 Feb 28     $35.00  $0.00    $754.15

 

 -----------------------------------

 

 Mar 15     $35.00  $0.00    $754.15

 

 -----------------------------------

 

 Mar 31     $35.00  $0.00    $754.15

 

 -----------------------------------

 

 Total     $210.00  $0.00  $4,524.90

 

 -----------------------------------

 

 

References:

 

Chapter 13. Form 941, Employer's Quarterly Federal Tax Return

Employers who withhold income taxes from wages or who must pay Social Security or Medicare tax, use Form 941 to report those taxes.

Due Dates for Filing Form 941

Form 941 is due by the last day of the month after each quarter ends. The return filing dates are:

 -------------------------------------------------------------

 

 Quarter                         Ends             Due date

 

 -------------------------------------------------------------

 

 January, February, March        March 31         April 30*

 

 -------------------------------------------------------------

 

 April, May, June                June 30          July 31*

 

 -------------------------------------------------------------

 

 July, August, September         September 30     October 31*

 

 -------------------------------------------------------------

 

 October, November, December     December 31      January 31*

 

 -------------------------------------------------------------

 

 * If the due date for a return falls on a Saturday, Sunday or

 

 legal holiday, the due date is the next business day.

 

 =============================================================

 

 

If you paid the quarterly tax payments in full, you're allowed an additional 10 days to file the return. For example, your return for the quarter that ends June 30 would be due on August 10 instead of July 31.

Semiweekly schedule depositors, and monthly schedule depositors who accumulate $100,000 or more on any day, must complete a Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors, and attach it to Form 941. You do not need to complete a Schedule B if you accumulate less than $2,500 in tax liability during the quarter and you pay in full with a timely filed return.

The IRS uses Schedule B to determine if you have timely deposited your employment and withholding tax liabilities. Unless Schedule B is properly completed and filed with your Form 941, the IRS may not be able to process your return correctly and deposit penalties could be applied.

Do not file more than one Form 941 per quarter and do not report more than one calendar quarter on a return.

Seasonal employers are not required to file for quarters when they regularly have no tax liability because they have paid no wages. To alert the IRS that you will not have to file a return for one or more quarters during the year, check the seasonal employer box above line 16 on Form 941 each time you file. See section 12 of Publication 15 for more information.

If the tribe has an entity that ceases to do business or pay wages, a final return needs to be filed. The instructions on Form 941 give information on how to file the final return.

Annual Employment Tax Filing for Small Employers

Certain employers will need to file Form 944, Employer's Annual Federal Tax Return, instead of Form 941. Form 944 must be filed by employers whose liability for Social Security, Medicare and withheld federal income taxes for the calendar year is $1,000 or less. The IRS will directly notify employers who are required to file Form 944. If you believe you are eligible but are not notified, you can contact the IRS at 800-829-4933 to determine your eligibility. Do not file Form 944 unless directed to do so by the IRS.

How to Complete the Form 941

Your EIN must be shown on the Form 941. If you have not received notification of your EIN, write "Applied For" and the date you applied in the space provided for the EIN. Be sure to include your name and EIN on the top of page 2 on the Form 941; this is commonly missed when completing the Form 941.

Under "Report for this Quarter of 2016" at the top of Form 941, check the appropriate box of the quarter for which you are filing. Make sure the quarter checked is the same as shown on any attached Schedule B (Form 941).

Make entries on Form 941 as follows to enable accurate scanning and processing:

Use 10-point Courier font (if possible) for all entries if you are typing or using a computer to complete your form. Portable Document Format (PDF) forms on IRS.gov have fillable fields with acceptable font specifications.

 

Where to Mail Forms 941 Without a Payment

Department of the Treasury Internal Revenue Service Ogden, UT 84201-0005

Regardless of where the tribal government is located, all Forms 941 that are not accompanied by a payment should be mailed to the Ogden address.

Payment with Return

You may make a payment with Form 941 instead of depositing it if your net tax liability during the quarter (line 10 of Form 941) is less than $2,500 and you pay in full with a timely filed return. Use Form 941-V, Payment Voucher. See Publication 15 for additional information and exceptions.

Where to Mail Forms 941 With a Payment and Form 941-V, Payment Voucher

Internal Revenue Service P. O. Box 105083 Atlanta, GA 30348-5083

Regardless of where the tribal government is located, all Forms 941 that are accompanied by a payment should be mailed to the Atlanta address.

Note: Do not use the Form 941-V to make federal tax deposits.

Correcting Form 941

Corrections to a previously filed Form 941 must be made on Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund. Form 941-X replaces Form 941c, Supporting Statement to Correct Information, and Form 843, Claim for Refund and Request for Abatement. Form 941-X is a stand-alone form corresponding to, and relates line-by-line with, the employment tax return it is correcting. You will be able to file Form 941-X when an error is discovered, rather than having to wait to file it at the end of the quarter with the next employment tax return. You must:

 

Form 941 no longer provides adjustment lines (formally lines 7d through 7g) for correcting prior quarter errors. However, current period adjustments for fraction of cents, third-party sick pay, tips and group-term life insurance will continue to be reported on Form 941 lines 7 through 9.

Report the correction of underreported and overreported amounts for the same tax period on a single Form 941-X unless you are requesting a refund. If you are requesting a refund and are correcting both underreported and overreported amounts file one Form 941-X correcting the underreported amounts only and a second Form 941-X correcting the overreported amounts.

COBRA Health Insurance Continuation Premium Subsidy

The American Recovery and Reinvestment Act of 2009 (The Recovery Act) established an employer-provided health insurance continuation subsidy for workers who involuntarily lost their jobs between Sept. 1, 2008, and March 31, 2010. The COBRA premium assistance credit is not available for individuals who were involuntarily terminated after May 31, 2010. Therefore, only in rare circumstances, such as instances where COBRA eligibility was delayed as a result of employer-provided health insurance coverage following termination, will the credit be available.

NOTE: An employer can no longer claim the COBRA premium assistance payments as a credit on Forms 941, 943 or 944. Instead:

 

View the latest information about developments related to Form 941 and its instructions, such as legislation enacted after it was published.

References

 

Chapter 14. Form 943, Agricultural Employees

Agricultural workers are subject to FICA tax if certain wage tests are met. Amounts paid to seasonal farm workers are excluded from FICA tax if specific provisions are met.

You are an employer of farm workers if your employees:

 

The term "farm" includes stock, dairy, poultry, fruit, fur-bearing animal and truck farms, as well as plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising or harvesting of agricultural or horticultural commodities and orchards.

Farm work does not include reselling activities that do not involve any substantial activity of raising agricultural commodities, such as a retail store or a greenhouse used primarily for display or storage. Refer to the How Do Employment Taxes Apply to Farm work? table within Publication 51, (Circular A), Agricultural Employer's Tax Guide, to distinguish between farm and nonfarm activities.

Crew Leaders

A crew leader is a person who furnishes and pays workers to do farm work for a farm operator. A crew leader must pay the workers on his/her behalf, or for the farm operator and the crew leader must not have a written agreement with the farm operator stating that he or she is an employee. If you are a crew leader, you are an employer of farm workers.

Taxable Wages

Cash wages you pay to employees for farm work are subject to Social Security and Medicare taxes, if the wages meet the wage test (discussed below). They are also subject to income tax withholding. Additionally, they may also be liable for federal unemployment (FUTA) tax.

Cash wages include checks, money orders, etc. Do not count the value of food, lodging and other noncash items. For more information on what payments are considered taxable wages, see Publication 15.

Wage Test

All cash wages you pay to an employee during the year for farm work are subject to Social Security and Medicare taxes and income tax withholding if:

 

Example 1: A tribe is the owner of a local mushroom farm. The tribe paid their employees to plant mushrooms. John was paid $95, Tom was paid $175 and Kirk $900. The tribe had no other employees on the farm. Wages paid to Tom and Kirk were subject to FICA tax because they met the $150 or more requirement. John's wages were not subject to FICA because he did not meet the wage requirement.

Exceptions: The $150 and $2,500 test do not apply to:

Wages you pay to a farm worker who receives less than $150 in annual cash wages are not subject to Social Security and Medicare taxes, or income tax withholding, even if you pay $2,500 or more in that year to all your farm workers, if the farm worker:

Amounts you pay to these seasonal farm workers, however, count toward the $2,500-or-more test to determine whether wages you pay to other farm workers are subject to Social Security and Medicare taxes.

Example 2: A tribe, a local avocado grower, hired Marion, a high school student, to harvest a new crop of avocados. Marion, who had never harvested avocados before, was paid by the pound as is customary in the industry. Marion was transported by a bus provided by the tribe from her home to the farm. She was given instructions by the tribe on where and how to harvest the avocados. The tribe inspected and approved the avocados that Marion harvested. Marion earned $125.

The amount earned by Marion is not subject to FICA tax based on the provision of Code Section 3121(a)(8)(B). This exception to FICA tax applies regardless of the fact that the worker had the status of common law employee.

Employers of Both Farm and Nonfarm Workers

If you employ both farm and nonfarm workers, you must treat employment taxes for the farm workers (Form 943) separately from employment taxes for the nonfarm workers (Form 941 and Form 944). Form 943 taxes and Form 941/944 taxes are not combined for applying any of the deposit schedule rules.

Due Date of Form 943

Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, should be filed with the IRS by January 31. However, if you deposited all Form 943 taxes when due, you may file Form 943 in February; check the Form 943 instructions for the specific date.

Depositing Taxes

You are required to make federal tax deposits by electronic funds transfer (EFT). Generally, an EFT is made using the Electronic Federal Tax Payment System (EFTPS). If you do not want to use EFTPS, you can arrange for your financial institution, payroll service or other trusted third-party to make electronic deposits for you. Also, you may arrange for your financial institution to initiate a same-day wire payment for you. EFTPS is a free service provided by the Department of Treasury. EFT services provided by your financial institution, payroll service or other third-party may have a fee. To get more information about EFTPS or to enroll in EFTPS, visit http://www.eftps.gov or call 800-555-4477.

You must deposit both the employer and employee shares of Social Security and Medicare taxes and federal income tax withheld.

Making Payment with Form 943

Make a payment with your Form 943 only if:

 

Otherwise, you must deposit the amount at an authorized financial institution or by using EFT. Do not use the Form 943V payment voucher to make federal tax deposits.

Caution: If you pay an amount with Form 943 that should have been deposited, you may be subject to a penalty.

For more information about depositing Social Security, Medicare and income taxes withheld, see Publication 51 Section 7, Depositing Taxes. Publication 51 also contains information about penalties that may apply if deposits are not made on time and/or if the Form 943 is not filed timely.

Where to File

Regardless of the location of the tribal government, file Form 943 at:

Return without payment

Department of Treasury Internal Revenue Service Ogden, UT 84201-0008

Return with payment

Internal Revenue Service P.O. Box 37943 Harford, CT 06176-7943

See Publication 51 for more complete information on agricultural workers. There are special rules for Social Security and Medicare withholding on agricultural workers. Refer to Section 4, Social Security and Medicare taxes, and Section 13, Federal Income Tax Withholding Methods, for withholding methods.

Correcting Form 943

Corrections to a previously filed Form 943 must be made on Form 943-X, Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or Claim for Refund. Form 943-X is a stand-alone form corresponding to, and relates line-by-line with, the employment tax return it is correcting. You will be able to file Form 943-X when an error is discovered, rather than having to wait to file it at the end of the year with the next employment tax return. You must:

 

Report the correction of underreported and overreported amounts for the same tax period on a single Form 943-X unless you are requesting a refund or abatement. If you are requesting a refund or abatement and are correcting both underreported and overreported amounts, file one Form 943-X correcting the underreported amounts only and a second Form 943-X correcting the overreported amounts.

Use Form 843, Claim for Refund and Request for Abatement, to request a refund or abatement of assessed interest or penalties. Do not request a refund or abatement of assessed interest or penalties on Form 943 or Form 943-X.

Follow the chart on the back of Form 943-X for help in choosing whether to use the adjustment process or the claim process.

Continue to report current year adjustments for fraction of cents, third-party sick pay, tips and group-term life insurance on Form 943, line 10.

References

 

Chapter 15. Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

Beginning January 1, 2000, Indian tribes are not required to file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, as long as they participate in the State Unemployment Tax Act (SUTA). This is due to the Consolidated Appropriations Act, 2001 (CAA) that was signed in to law on December 21, 2000 (Public Law No. 106-554).

Services rendered by employees of a federally recognized Indian tribal government employer (including any subdivision, subsidiary or business enterprise wholly owned by the tribe) are exempt from FUTA tax and no Form 940 is required. However, the tribe must have participated in the state unemployment system for the full year and be in compliance with state unemployment law.

This applies to all enterprises wholly owned by an Indian tribe whether or not they might compete with similar private businesses. This also includes entities that are jointly owned by two or more tribes providing they are wholly owned. If an enterprise is jointly owned by an Indian tribe and another entity that is not tribally owned, then this entity would not be exempt from paying FUTA. In other words, the enterprise must be owned 100 percent by the tribe or tribes. There are certain services that may be excluded from the required coverage. See Publication 15 or Publication 15-A for a list of these exceptions.

States must give Indian tribes the option to elect the reimbursement method rather than paying the SUTA tax (tax contribution method). Employers electing the reimbursement option are required to reimburse the Unemployment Fund on a dollar-for-dollar basis for benefits paid to their former employees and charged to their accounts. This requirement applies to benefit payments that are calculated based on remuneration paid to employees on or after the date the election becomes effective.

If a tribe wishes to use the reimbursement option, each of its subdivisions, subsidiaries and wholly-owned business enterprises will need to make a separate election as to whether to use the reimbursement method. Some entities may find the tax contribution method more advantageous to its particular enterprise.

Two or more wholly-owned tribal enterprises can elect the benefit reimbursement option as a group for sharing the cost of benefits paid to former employees. The members of the group will be severally and jointly liable for reimbursement.

States may enact safeguards (including requiring the tribe to post a payment bond) to ensure that tribes using the reimbursement method make the required payments to the state. For state specific information on unemployment benefits, employment assistance or employer information, visit the Office of Workforce Security website.

However, whether a tribe uses the reimbursement method or the tax contribution method to pay SUTA, if the tribe fails to make required payments to the state's unemployment fund or payments of penalty or interest, then the state may terminate the tribe from the program. This would result in tribal employees not being covered for unemployment insurance.

States are not required to terminate coverage due to nonpayment. This is generally done only as a last resort because termination of coverage punishes workers who have no control over whether their employers satisfy their unemployment compensation obligations.

The law requires states to notify the IRS and the U.S. Department of Labor when the state terminates the tribe from coverage due to nonpayment.

Once the IRS is notified that the tribe is in noncompliance with the state, the tribe will become liable for FUTA taxes and will be required to file Form 940 with the IRS.

Form 940 is an annual return, due on January 31 of the subsequent year. However, if you deposited all FUTA tax when due, you have ten additional days to file. If the due date falls on a Saturday, Sunday or legal holiday, the due date will be the next business day.

The FUTA tax rate for 2015 and 2016 is 6 percent and to the first $7,000 of wages you pay each employee during the year. Only the employer pays the FUTA tax. Do not collect or deduct it from your employees' wages.

Although Form 940 covers a calendar year, you may have to make deposits of the tax before filing the return. Deposit FUTA tax quarterly if the FUTA tax exceeds $500. For more information on FUTA taxes and for assistance with filing Form 940, see Publication 15-A.

Note: When a tribe is required to file Form 940 due to failure to meet state unemployment program requirements, tribal employees will not be eligible for unemployment compensation benefits, even though the tax per the Form 940 is paid. In essence, the tribe's employees will not receive unemployment compensation benefits when they otherwise would be eligible.

Unemployment Insurance

The Federal-State Unemployment Insurance Program provides unemployment benefits to eligible workers who are unemployed through no fault of their own (as determined by state law) and meet other eligibility requirements of state law.

 

To find out whether you, as the employer, will owe state unemployment tax, contact your state's unemployment tax agency. For a list of state unemployment tax agencies, visit the U.S. Department of Labor's website.

What are Unemployment Compensation Wages?

Wages subject to unemployment compensation (UC) vary from state to state because each state has a different method for computing UC. States may base the UC on a wage base and an experience rate.

A state experience rate is the rate at which the state taxes your payroll for UC. This rate may be adjusted from time to time based on the number and length of claims for unemployment compensation that your former employees make against the fund. If you don't know your rate, contact your state employment security agency. Each state may have a different wage base upon which the UC is computed. This rate can vary from year to year. It may also vary, depending on the duties performed.

Example: A state's current wage base subject to UC is $10,100. The UC program has assigned the tribe an experience rate of 1 percent, based on the employment history of the tribe. The tribe would pay a maximum of $10,100 × .01 or $101 per year for each employee subject to UC.

What if Wages are not Paid in Cash?

If you pay your employees in some form other than cash or a readily negotiable instrument (such as a check), you pay them "in-kind." Payments in-kind may be in the form of goods, lodging, food, clothing or services. Generally, wages paid in-kind are treated the same as wages paid in money. The value of a wage payment in-kind is its fair market price on the day the payment is made.

References

 

Chapter 16. Form 945, Annual Return of Withheld Federal Income Tax

Purpose of Form 945

Use Form 945 to report withheld federal income tax from nonpayroll payments. Nonpayroll payments include:

 

Report all federal income tax withholding from nonpayroll payments or distributions annually on one Form 945. Do not file more than one Form 945 for any calendar year.

All federal income tax withholding reported on Forms 1099 (for example, Form 1099-MISC, Miscellaneous Income) or Form W-2G, Certain Gambling Winnings, must be reported on Form 945. Don't report federal income tax withholding from wages on Form 945.

All employment taxes and federal income tax withholding reported on Form W-2, must be reported on Form 941, Employer's Quarterly Federal Tax Return, Form 944, Employer's Annual Federal Tax Return, or Form 943, Employer's Annual Federal Tax Return for Agricultural Employees.

Due Date for Filing Form 945

If you withhold federal income tax (including backup withholding) from nonpayroll payments, you must file Form 945. You do not have to file Form 945 for those years in which you do not have a nonpayroll tax liability.

Form 945 is generally due by the last of the first calendar month after the calendar year ends (for 2016, file Form 945 by January 31, 2017). However, if you made deposits on time in full payment of the taxes for the year, you are allowed an additional 10 days to file the return. Your return will be considered timely filed if it is properly addressed and mailed first-class or sent by an IRS-designated private delivery service on or before the due date. See Publication 15 for more information on IRS-designated private delivery services.

Where to File Form 945

Regardless of the location of the tribal government file Form 945 at:

Return without payment

Department of Treasury Internal Revenue Service Ogden, UT 84201-0042

Return with payment

Internal Revenue Service P.O. Box 37945 Harford, CT 06176-7945

Depositing Withheld Taxes

Deposit all nonpayroll (Form 945) withheld federal income tax, including backup withholding, by EFT. Combine all Form 945 taxes for deposit purposes. Do not combine deposits for Forms 941, 943 or 944 with deposits for Form 945.

Generally, the deposit rules that apply to Form 941 also apply to Form 945. However, because Form 945 is an annual return, the rules for determining your deposit schedule (discussed below) are different from those for Form 941. See section 11 of Publication 15 for a detailed discussion of the deposit rules.

Determining Your Deposit Schedule

There are two deposit schedules--monthly or semiweekly--for determining when you must deposit withheld federal income tax. These schedules tell you when a deposit is due after a tax liability arises (that is, you make a payment subject to federal income tax withholding, including backup withholding). Before the beginning of each calendar year, you must determine which of the two deposit schedules you must use.

For 2016, you are a monthly schedule depositor for Form 945 if the total tax reported on your 2014 Form 945 (line 3) was $50,000 or less. If the total tax reported for 2014 was more than $50,000, you are a semiweekly schedule depositor (use Form 945-A to record semiweekly tax liabilities).

Next-Day Deposit Rule

If you are a monthly schedule depositor and accumulate a $100,000 liability or more on any day during a calendar month, your deposit schedule changes on the next day to semiweekly for the remainder of the year and for the following year. For more information, see the $100,000 Next-Day Deposit Rule in section 11 of Publication 15.

Correcting Form 945

Use Form 945-X to correct administrative errors only on a previously filed Form 945. An administrative error occurs if the federal income tax (including backup withholding) you reported on Form 945 is not the amount you actually withheld from payees. For example, if the total federal income tax you withheld was incorrectly reported on Form 945 due to a mathematical or transposition error, this would be an administrative error.

When you discover an error on a previously filed Form 945, you must:

 

Report the correction of underreported and overreported amounts for the same year on a single Form 945-X, unless you are requesting a refund or abatement. If you are requesting a refund or abatement, file one Form 945-X correcting the underreported amounts and a second Form 945-X correcting the overreported amounts.

References

 

Chapter 17. Wage Reports

For the latest information about developments related to Forms W-2 and W-3 and their instructions, such as legislation enacted after they were published, go to http://www.irs.gov/w2.

Form W-2, Wage and Tax Statement

Every employer engaged in a trade or business who pays remuneration, including noncash payments of $600 or more for the year (all amounts if any income, Social Security or Medicare tax was withheld) for services performed by an employee must file a Form W-2 for each employee (even if the employee is related to the employer) from whom:

 

Form W-2 must show total wages and other compensation paid (even if not subject to withholding); total wages subject to Social Security and Medicare taxes; allocated tips (if any) and amounts deducted for income, Social Security and Medicare taxes.

Due Date of Form W-2

The due date for filing Forms W-2 with the SSA is now January 31 regardless of whether you file using paper forms or electronically.

Extensions of time to file Form W-2 with the SSA are no longer automatic. For filings due on or after January 1, 2017, you may request one 30-day extension to file Form W-2 by submitting a complete application on Form 8809, Application for Extension of Time to File Information Returns, including a detailed explanation of why you need additional time and signed under penalties of perjury. The IRS will only grant the extension in extraordinary circumstances or catastrophe. This does not affect extensions of time to furnish Forms W-2 to employees.

If an employee's employment ends before the close of the year, the employee may request the form earlier. You must give the employee a Form W-2 within 30 days of the employee's request or final payment, whichever is later.

You should keep any undeliverable employee copies of Form W-2 (Copies B and C) as part of your records for four years.

If you file 250 or more Forms W-2 for the year, you are required to file them electronically.

Social Security Numbers

Do not truncate Social Security numbers shown on Forms W-2 (for example, xxx-xx-4567); the complete Social Security numbers are required.

Form W-3, Transmittal of Wage and Tax Statements

Each year, you must file Form W-3 to transmit copy A of Forms W-2 to the Social Security Administration (SSA) by the last day of February (paper) or the last day of March (electronic) after the calendar year for which the Forms W-2 are prepared. The SSA will process these forms and provide the IRS with the income tax data that it needs from those forms.

The Form W-3 is required to be filed electronically if you file 250 or more Forms W-2 for the year.

Paper Forms W-2 (copy A) and W-3 (entire page) should be mailed to:

Social Security Administration Data Operations Center Wilkes-Barre, PA 18769-0001

Note: The totals on the Form W-3 you file should equal the totals from all Forms 941 filed for the same year.

Business Services Online (BSO)

The SSA has enhanced its secure BSO website to make it easier to register and navigate. Use BSO's online fill-in forms to create, save and submit Forms W-2 and W-2c to the SSA electronically. BSO lets you print copies of these forms to file with state or local governments, distribute to your employees and keep for your records. BSO generates Form W-3 automatically based on your Forms W-2. You also can use BSO to upload wage files to the SSA, check on the status of previously submitted wage reports and take advantage of other convenient services for employers and businesses.

For additional information about SSA's BSO website, see the discussion in Chapter 18 of this publication.

Correcting Forms W-2 and W-3

If there is an error made on Forms W-2 or W-3, make the correction by filing Form W-2c, Corrected Wage and Tax Statement, and Form W-3c, Transmittal of Corrected Wage and Tax Statements.

See Forms W-2 and W-3 Instructions, Special Situations for Forms W-2c and W-3c section, for further information.

Common Errors on Forms W-2

Forms W-2 provide information to your employees, the SSA, the IRS and state and local governments. Avoid making the following errors, which cause processing delays. Do not:

 

Remember: Amounts reported on Forms W-2, W-3 and 941/943/944 may not match for valid reasons. If they do not match, determine that the reasons are valid. Keep your reconciliation in case you receive a Combined Annual Wage Reporting (CAWR) discrepancy notice.

Reconciling Forms W-2, W-3 and 941 (or Form 943/944)

When there are discrepancies between amounts reported on Form 941 (or annual Forms 943 or 944) filed with the IRS and Forms W-2 and W-3 filed with the SSA, the IRS must contact you to resolve the discrepancies.

Amounts reported on the four quarterly Forms 941 (or annual Forms 943 or 944) that should agree with the Forms W-2 and Form W-3 filed with the SSA are:

 

If the totals do not agree, investigate and correct the discrepancy.

The CAWR is the system that permits an employer to file a single statement to report its employees' earnings. Both the IRS and SSA use the information reported by employers to ensure that the proper amount of taxes has been paid and reported. CAWR cases are identified by the SSA when it appears that the amounts do not agree with the Forms 941, 943, W-2 and W-3, or for not filing any or all of the required Forms W-2.

If you receive a CAWR discrepancy notice, you should review your copies of Forms 941 (or annual Forms 943 or 944), W-2 and W-3 that you filed and perform a complete review to find the error. Send a complete explanation of the error and what you did to make the necessary corrections (including any corrected forms) to the address noted on the CAWR discrepancy notice. If you have questions about a CAWR discrepancy, please contact your assigned ITG specialist or local ITG manager.

To reduce the discrepancies between amounts reported on Forms W-2, W-3 and Forms 941/943:

 

References

 

Chapter 18. Electronic Filing Requirements for Form W-2, Wage and Tax Statements

Form W-2, Wage and Tax Statement

Forms W-2 are filed with the Social Security Administration (SSA). Employers are required to file Forms W-2 to report wages, tips, Social Security, Medicare tax and federal income tax withholdings, and other items with regard to an employee's annual wages. The SSA provides Form W-2 information to the IRS.

Social Security Business Services Online (BSO) is a suite of business services enabling organizations and authorized individuals to conduct business with, and submit confidential information to, the SSA. It allows registered users to submit a wage file, create, save, print and submit Forms W2 and W-2c electronically, view status, error and notice information, acknowledge notices, request a one-time 15-day extension and verify names and Social Security numbers of employees. Other services include Electronic Records Express, which enables users to upload electronic records to support the processing of disability claims. You must be a registered BSO user to use these services. To get a User ID and Password, you must visit SSA's website.

When employers file 250 or more Forms W-2 for a given year, they are required to file them with the SSA electronically. The employer must provide a paper copy of Form W-2 to employees, and retain a copy of the paper document for their own records. They should also retain copies of electronic files transmitted.

Electronic submission of Forms W-2 and W-3 is considered the best practice and is recommended by the Social Security Administration.

Before year-end, you should register with the SSA either online or by telephoning 800-772-6270 Monday through Friday from 5 a.m. to 1 a.m. Eastern time. It is preferable to register in December for new registrations and submitting test files. Register early so you'll be ready when the filing season begins.

The SSA has Employer Services Liaison Officers (ESLO) in regional offices across the country that can help you.

The SSA must confirm your identity before issuing a User ID and password. They also have to know how to contact you if the need arises. You will be asked to provide your name as it appears on your Social Security card, Social Security number, date of birth, mailing address, work telephone number, fax number (optional), email address (optional), company name, employer identification number (EIN) and company telephone number. Your SSN, date of birth and EIN will be verified against SSA records.

Once the information is verified, a User ID will be issued immediately.

The first time you log on to the system, you will be asked to create and enter your personal password. You can change your password at any time, and you are required to change it at least once every 365 days for security purposes.

The SSA will notify the tribe of the electronic registration.

If the tribe wishes to participate in the verification of Social Security numbers online, access to this service involves a more rigorous process and requires pre-authorization from the tribal entity/employer. If access is requested, the employer will be notified via first class mail within two weeks and will include an activation code, which is needed to activate the service.

Commercial Software Packages

Most commercial software packages for payroll programs have detailed instructions for year-end closing and procedures for transmitting data electronically. You will also need to consult with your software developers to determine if they have compatible state W-2 electronic products if you are required to file W-2s with your state. You will also want to verify with your state if they support the EFW2 format used by the SSA.

Requests for Waiver of Requirement

Under the Treasury Regulations Section 301.6011-2(c)(2), the Commissioner of Internal Revenue may waive the electronic requirements on a written showing of hardship by the filer. In determining whether hardship has been shown, the principal factor is the amount, if any, by which the cost of filing returns electronically exceeds the cost of filing returns on paper forms.

A request for waiver must be filed at least 45 days before the filing of the first return for which a waiver is requested. The filer must send the request to the IRS using Form 8508, Request for Waiver from Filing Information Returns Electronically.

Accuracy

Accurate reporting of employees' Form W-2 information directly affects the eligibility for and amount of any Social Security and Medicare benefits payable to employees and their families. That is why we continually emphasize the importance of recording the right name, SSN and wages for each employee. Accurate reporting can also prevent penalty assessments for inaccurate or late filing.

Frequently Asked Questions

 

Call 800-772-6270 Monday through Friday between 7:00 a.m. and 7:00 p.m. Eastern Time.

 

The IRS may penalize you.

 

By accessing http://www.ssa.gov/employer/accuwage/index/html.

 

A paper copy of Form W-2 must be provided to the employee by January 31 of each year.

The due date for filing Forms W-2 with the SSA is now January 31, regardless of whether you file using paper forms or electronically.

 

You can submit corrections to the Form W-2 processed information electronically, or using paper Forms W-3c and W-2c. If there are 250 or more corrections, you must transmit the corrections electronically.

 

Check your records. If your Form W-2 reports need to be corrected, you should file Forms W-3c and W-2c with SSA. If your Form W-2 reports were correct as filed, then you should file Form 941-X with IRS to correct your previous Form 941.

References

 

Chapter 19. Reporting Payments to Independent Contractors

File Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid during the year:

 

You must also file Form 1099-MISC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.

Reportable Payments to Corporations

The following payments made to corporations generally must be reported on Form 1099-MISC:

 

See Instructions for 1099-MISC and General Instructions for Certain Information Returns for additional filing requirements.

Due Date for Form 1099-MISC

For calendar years beginning on or after January 1, 2016, Form 1099-MISC must be filed on or before January 31 of the following calendar year, when you are reporting nonemployee compensation payments in box 7. Otherwise, file by February 28, if you file on paper, or by March 31, if you file electronically.

Where to File if Paper Filing:

 If your principal business,        Use the following address

 

 office or agency, or legal

 

 residence in the case of an

 

 individual, is located in

 

 --------------------------------------------------------------

 

 Alabama, Arizona, Arkansas,        Department of the Treasury

 

 Connecticut, Delware, Florida,     Internal Revenue Service

 

 Georgia, Kentucky, Louisiana,      Center

 

 Maine, Massachusetts,              Austin, TX 73301

 

 Mississippi, New Hampshire,

 

 New Jersey, New Mexico, New

 

 York, North Carolina, Ohio,

 

 Pennsylvania, Rhode Island,

 

 Texas, Vermont, Virginia,

 

 West Virginia

 

 --------------------------------------------------------------

 

 Alaska, California, Colorado,      Department of the Treasury

 

 District of Columbia, Hawaii,      Internal Revenue Service

 

 Idho, Illinois, Indiana, Iowa,     Center

 

 Kansas, Maryland, Michigan,        Kansas City, Mo 64999

 

 Minnesota, Missouri, Montana,

 

 Nebraska, Nevada, North

 

 Dakota, Oklahoma, Oregon,

 

 South Carolina, South Dakota,

 

 Tennessee, Utah, Washington,

 

 Wisconsin, Wyoming

 

 --------------------------------------------------------------

 

 

 Electronic Filing Option

 

 

You can file electronically through the Filing Information Returns Electronically System (FIRE System); however, you must have software that can produce a file in the proper format; refer to Publication 1220 Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, W-2G, for more information on how to prepare and upload files when using the FIRE System. The FIRE System does not provide a fill-in form option for information return reporting. The FIRE System operates 24 hours a day, 7 days a week.

Backup Withholding "B" Processes

Under the provisions of Internal Revenue Code Section 3406(b), persons (payers) making certain payments to payees must withhold and pay to the IRS a specified percentage of 28 percent under certain conditions (described below).

Backup withholding will apply if:

 

Failure to follow the backup withholding rules can result in penalties to the payer for filing incorrect information returns. The payer may also become liable for any uncollected amounts.

Which Payments May be Subject to Backup Withholding?

Backup withholding can apply to most kinds of payments that are reported on Form 1099, some of these payments include:

 

The current backup withholding rate is 28 percent on the total gross payments.

First and Second Annual Solicitation Requirements

A solicitation is a request for a payee's correct TIN. You must make the request to satisfy the backup withholding requirements and to avoid a penalty for filing another information return with a missing or an incorrect TIN. The payee must furnish a certified TIN (initial solicitation) on Form W-9, Request for Taxpayer Identification Number, with respect to payments of interest, dividends and amounts subject to broker reporting. For other payments, the payee may provide the TIN in any manner.

Missing TINs

For all payees you must make the initial solicitation when the payee opens the account or when the transaction occurs. If the payee does not provide a TIN when you initially ask for it, you must begin backup withholding. In addition, to avoid a penalty for filing an incorrect information return, you must make a first annual solicitation by December 31 of the year in which the account is opened (for accounts opened before December) or January 31 of the following year (for accounts opened during the preceding December). If the payee does not provide a TIN after the first annual solicitation, you must make the second annual solicitation by December 31 of the year following the calendar year in which the account was opened.

For Incorrect TINs

You must make up to two annual solicitations in response to a CP2100 or CP2100A Notice. You must send a B Notice within 15 business days after you receive one of these notices. If you receive a Proposed Penalty Notice (972CG) but not a CP2100 or CP2100A Notice, you must make your annual solicitation by December 31 of the year you received the Proposed Penalty Notice.

However, if you already sent a B Notice in the calendar year in response to a CP2100 or CP2100A Notice, you do not have to send another solicitation in response to the Proposed Penalty Notice. If the IRS notifies you in the next calendar year that a TIN is still incorrect, you must make a second annual solicitation within 15 business days after you receive the second CP2100 or CP2100A Notice.

What is a CP2100 or CP2100A Notice?

A CP2100 or CP2100A Notice informs payers that they may be responsible for backup withholding. It is accompanied by a listing of missing, incorrect or not currently issued payee TINs. Filers with 250 or more error documents receive a CP2100; filers with less than 250 error documents will receive a CP2100A.

What to Do if You Receive a CP2100 or CP2100A Notice

 

Reminder: You do not have to call or write the IRS to say that you made the correction or update.

If you have any questions about backup withholding, information reporting, Forms 1099, or the CP2100 or CP2100A Notices and listings, you may call:

The Information Reporting Program Customer Service Section

Toll-Free Telephone: 866-455-7438

Hours: 8:30 a.m. - 4:30 p.m. Monday - Friday EST

See Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s) for additional information and copies of the first and second annual solicitation notices for your use.

References

 

Chapter 20. Records Retention

Fires, natural disasters, equipment failure and human error may cause records to be lost or destroyed. The extent to which payroll records can be reconstructed depends primarily on backups, storage and cataloging of archived records.

Reconstructed records are no substitute for maintenance of original records, as they are never as accurate or complete as the originals. An extensive effort to reconstruct records is sometimes required. However, a reconstruction may lack the authenticity and credibility of original records to regulators, state agencies, federal agencies or the courts. Reconstructed records, simply put, are better than nothing.

Backup of Records

Instructions on how to back up your accounting and payroll records can be found in accounting and bookkeeping textbooks, from the manufacturer of your payroll system and many other sources. The form of backup will depend on the system you use to maintain your records. For instance, a manual payroll system creates physical copies of payroll entries. A computerized system will use your computer's hard-drive or another electronic medium for storage.

However you decide to back up your payroll records, it is important to follow instructions, and to test a backup copy from time to time to ensure that you are copying the intended files. Backups of either manual or computerized systems should be made routinely, checked for accuracy and stored in a safe place.

Storage

The site you select for storage of records should be carefully chosen. You will want your backup copies to be reasonably secure from physical damage including fire, flood, theft, insects, rodents, temperature and humidity. While paper documents may seem more sensitive to these hazards, you will want to provide the same safeguards for your computerized records.

You also want to ensure privacy of your records by restricting access to those persons with a "need to know." Payroll records contain a great deal of personal information and employees depend on their employers to keep this information confidential. Employee names, addresses and Social Security numbers, in addition to items like notices of employee levies, garnishments and child support payments should always be kept secure.

Record Retention

Keep all records of employment taxes for at least four years. These should be available for IRS review. Your records should include:

 

Original records should be well labeled and organized. Because payroll records "close out" at year-end, a new file should be started for each employee for each year. Some payroll records such as Form W-4, garnishments, court ordered deductions for child support and others, may span more than one calendar year. A copy of the original document should be made for the prior year file. Keep the original in the new file folder for the employee.

All payroll reconciliation work papers generated in your payroll office should be retained. Often payroll reconciliations coincide with the payroll deposits you make with the bank, over the telephone or online using EFTPS. You will want to keep all the work papers, receipts, recordation of telephone or online deposits, photocopies of checks written for payroll deposits, copies of the front and back of canceled checks written for payroll deposits and any IRS correspondence. These records will be useful when you prepare your quarterly payroll reports.

Copies for Easy Access

Sometimes, the IRS will send correspondence about payroll tax deposits or payroll tax reports. This correspondence may have a short response time. It is recommended you keep accessible copies of payroll deposits and payroll reports for the past two years. (This should be an extra copy in addition to the ones you are going to take to storage).

Preparing Hard Copy Files for Storage

After you file year-end payroll reports Forms W-2 and W-3, you will prepare files for storage. It is well worth the time to organize, label and place the files (whether electronic or hard copy) in some sort of storage container. If you store large quantities of records, it is helpful to label the box with a list of contents and the calendar year. For instance, you may have a storage box labeled "Payroll Records -- 2016." You should also attach a packing list to inventory the contents of each box.

Preparing Computerized Copies for Storage

After you follow established procedures for backing up your computerized payroll records, test the media on which they are stored. You want to ensure that you copied the correct information and there are no glitches or errors to prevent you from reloading it if the need arises.

A secure, off-site location is generally recommended for storage of backups to your computerized records. They should be well labeled and write-protected so no one can accidentally write over your valuable back up.

For additional information regarding storing and safeguarding taxpayer data, refer to Publication 4557, Safeguarding Taxpayer Data.

Reconstruction

After taking steps to prepare complete and accurate records and storing them according to established procedures, something unexpected may happen to cause your records to be lost or destroyed.

Every effort should be made to find lost records, or partial records that may have "survived" a disaster. If partial records are recovered, they are the best place to begin a reconstruction.

A reconstruction of records is best approached in reverse order. In other words, begin with the end of the year and work backward. The following steps may help in the reconstruction process:

 

You will want to evaluate the need for the records in relation to the cost of reconstruction. For assistance with IRS records, you should contact your Indian Tribal Governments specialist.

References

 

Chapter 21. Penalties

The best way to avoid penalties is to understand what can be done to reduce or eliminate them before they are ever assessed. In an effort to assist, we have created a "Helpful Hints to Avoid Penalties" guide. Hopefully, the suggestions outlined in this guide will reduce penalty assessments, but if a penalty is asserted, the guide also outlines the steps to address it.

The goal of each payroll or accounting department is compliance with the different filing, paying and depositing requirements. There may be times when this doesn't happen.

The following penalties may be assessed for failure to comply with filing and payment requirements:

Failure to File -- a penalty of 5 percent (of the tax required to be shown on a return) may be imposed for each month or part of a month that a return is not filed (not to exceed 25 percent).

Failure to Pay -- a penalty of .05 percent may be imposed per month of the amount of tax shown on the return not timely paid (not to exceed 25 percent).

Dishonored Payments -- Any form of payment that is dishonored and returned from a financial institution is subject to a penalty of $25 or 2 percent of the payment, whichever is more. However, the penalty on dishonored payments of $24.99 or less is an amount equal to the payment. For example, a dishonored payment of $18 is charged a penalty of $18.

Failure to File Correct Information Returns (by the Due Date) -- You may be required to file information returns to report certain types of payments made during the year (for example, Forms W-2, etc.). If you fail to file a correct information return by the due date and cannot show reasonable cause, you may be subject to a penalty as provided under Code Section 6721, Failure to File Correct Information Returns. Section 6721 imposes a penalty per return for each of the following infractions related to information returns:

 

The amount of the penalty is based on when you file the correct information return. Penalties are indexed for inflation. The Code Section 6721 penalty rates are:

Code Section 6721-Large Business with Gross Receipts of More than $5 Million

 ----------------------------------------------------------------------

 

                                 Returns due on or  Returns due on or

 

               Returns due       after Jan. 1,      after Jan. 1,

 

 Time of         before Jan. 1,    2011 and before    2016 (w/inflation

 

 filing          2011              Jan. 1, 2016       adjustments)

 

 ----------------------------------------------------------------------

 

 Not more than   $15 per return/   $30 per return/    $50 per return/

 

 30 days late    $75,000 maximum   $250,000 maximum   $529,500 maximum

 

 ----------------------------------------------------------------------

 

 31 days late    $30 per return/   $60 per return/    $100 per return/

 

 - August 1      $150,000 maximum  $500,000 maximum   $1,589,000

 

                                                    maximum

 

 ----------------------------------------------------------------------

 

 After August 1  $50 per return/   $100 per return/   $260 per return/

 

               $250,000 maximum  $1,500,000         $3,178,500

 

                                 maximum            maximum

 

 ----------------------------------------------------------------------

 

 Intentional     $100 per return/  $250 per return/   $520 per return/

 

 Disregard       no limitation     no limitation      no limitation

 

 ----------------------------------------------------------------------

 

 

Code Section 6721-Small Business with Gross Receipts of $5 million or Less

 ----------------------------------------------------------------------

 

                                 Returns due on or  Returns due on or

 

               Returns due       after Jan. 1,      after Jan. 1,

 

 Time of         before Jan. 1,    2011 and before    2016 (w/inflation

 

 filing          2011              Jan. 1, 2016       adjustments)

 

 ----------------------------------------------------------------------

 

 Not more than   $15 per return/   $30 per return/    $50 per return/

 

 30 days late    $25,000 maximum   $75,000 maximum    $185,000 maximum

 

 ----------------------------------------------------------------------

 

 31 days late    $30 per return/   $60 per return/    $100 per return/

 

 - August 1      $50,000 maximum   $200,000 maximum   $529,500 maximum

 

 ----------------------------------------------------------------------

 

 After August 1  $50 per return/   $100 per return/   $260 per return/

 

               $100,000 maximum  $500,000 maximum   $1,059,500

 

                                                    maximum

 

 ----------------------------------------------------------------------

 

 Intentional     $100 per return/  $250 per return/   $520 per return/

 

 Disregard       no limitation     no limitation      no limitation

 

 ----------------------------------------------------------------------

 

 

Note: Increased penalty amounts may apply in the case of certain failures due to intentional disregard.

Failure to Furnish Correct Payee Statements (Information Returns)

If you fail to furnish a correct information return by the due date and cannot show reasonable cause, you may be subject to a penalty as provided under Code Section 6722, Failure to Furnish Correct Information Returns. Section 6722 imposes a penalty per return for each of the following infractions related to information returns:

 

The amount of the penalty is based on when you file the correct information return. Penalties are indexed for inflation. The Code Section 6722 penalty rates are:

Code Section 6722-Large Business with Gross Receipts of More than $5 Million

 ----------------------------------------------------------------------

 

                                 Returns due on or  Returns due on or

 

               Returns due       after Jan. 1,      after Jan. 1,

 

 Time of         before Jan. 1,    2011 and before    2016 (w/inflation

 

 filing          2011              Jan. 1, 2016       adjustments)

 

 ----------------------------------------------------------------------

 

 Not more than   $50 per return/   $30 per return/    $50 per return/

 

 30 days late    $100,000 maximum  $250,000 maximum   $529,500 maximum

 

 ----------------------------------------------------------------------

 

 31 days late    $50 per return/   $60 per return/    $100 per return/

 

 - August 1      $100,000 maximum  $500,000 maximum   $1,589,000

 

                                                    maximum

 

 ----------------------------------------------------------------------

 

 After August 1  $50 per return/   $100 per return/   $260 per return/

 

               $100,000 maximum  $1,500,000         $3,178,500

 

                                 maximum            maximum

 

 ----------------------------------------------------------------------

 

 Intentional     $100 per return/  $250 per return/   $520 per return/

 

 Disregard       no limitation     no limitation      no limitation

 

 ----------------------------------------------------------------------

 

 

Code Section 6722-Small Business with Gross Receipts of $5 million or Less

 ----------------------------------------------------------------------

 

                                 Returns due on or  Returns due on or

 

               Returns due       after Jan. 1,      after Jan. 1,

 

 Time of         before Jan. 1,    2011 and before    2016 (w/inflation

 

 filing          2011              Jan. 1, 2016       adjustments)

 

 ----------------------------------------------------------------------

 

 Not more than   $50 per return/   $30 per return/    $50 per return/

 

 30 days late    $100,000 maximum  $75,000 maximum    $185,000 maximum

 

 ----------------------------------------------------------------------

 

 31 days late    $50 per return/   $60 per return/    $100 per return/

 

 - August 1      $100,000 maximum  $200,000 maximum   $529,500 maximum

 

 ----------------------------------------------------------------------

 

 After August 1  $50 per return/   $100 per return/   $260 per return/

 

               $100,000 maximum  $500,000 maximum   $1,059,500

 

                                                    maximum

 

 ----------------------------------------------------------------------

 

 Intentional     $100 per return/  $250 per return/   $520 per return/

 

 Disregard       no limitation     no limitation      no maximum

 

 ----------------------------------------------------------------------

 

 

Note: Increased penalty amounts may apply in the case of certain failures due to intentional disregard.

Failure to Make Federal Tax Deposits on Time in an Authorized Government Depository -- Penalties may apply if you do not make required deposits on time, make deposits for less than the required amount or if you do not use EFTPS or EFT when required. For amounts not properly or timely deposited, the penalty rates are:

  2 percent -- Deposits made 1 to 5 days late

 

  5 percent -- Deposits made 6 to 15 days late

 

 10 percent -- Deposits made 16 or more days late (Also applies to

 

             amounts paid within 10 days of the date of the first

 

             notice the IRS sent asking for the tax due)

 

 10 percent -- Deposits made at an unauthorized financial institution,

 

             paid directly to the IRS or paid with your tax return

 

             (unless otherwise excepted)

 

 10 percent -- Amounts subject to electronic deposit

 

  5 percent -- Amounts still unpaid more than 10 days after the date of

 

             the first notice the IRS sent asking for the tax due or

 

             the day on which you receive notice and demand for

 

             immediate payment, whichever is earlier

 

 

Failure to Collect and Pay Over Trust Fund Taxes -- If federal income, Social Security and Medicare taxes to be withheld are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. This penalty is the full amount of the unpaid trust fund tax. It may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for and paying over theses taxes. Refer to Chapter 22 for further information on the trust fund recovery penalty.

Penalty Relief

If a penalty is assessed and you do not think the assessment is correct or you still have questions, the law allows the IRS to remove or reduce the penalties if you can show you acted reasonably and in good faith, or relied on the incorrect advice of an IRS employee.

Upon receipt of your assessment notice, you may send IRS a signed statement explaining why you believe the penalty should be removed or reduced. Please be sure to explain in detail what caused the problem. Your statement will be reviewed and you will be notified if your explanation is accepted.

Please refer to Notice 746, Information About Your Notice, Penalty and Interest, for detailed information on why penalties are assessed and in what amounts, and the removal of penalties. Contact your Indian Tribal Governments specialist for further assistance.

How are Penalties Paid?

If you receive a notice of penalty, it will include instructions to send payment with the voucher at the bottom of the notice. Electronic payment options are available on IRS.gov/Payments. If you have questions regarding the payment of penalties, please call your Indian Tribal Governments specialist.

References

 

Chapter 22. IRS Notices and Letters

Understanding Your Notice or Letter

The IRS will mail you a notice or letter that will explain the reason for the contact and give you instructions on how to handle the issue.

Why was I Notified by the IRS?

The IRS sends notices and letters if:

 

Do Not Ignore the Notice or Letter

You can respond to most IRS notices and letters quickly and easily. If you ignore the notice or letter, the IRS may take enforcement action (see Chapter 23, The Collection Process, for more information).

Read the Notice or Letter and Follow Instructions

Each notice or letter contains a lot of valuable information, so it is very important that you read it carefully. The notice or letter will tell you if you need to take any corrective action or provide additional information. Be sure to follow the instructions provided if corrective action or additional information is requested.

If, after reviewing the letter or notice, you believe there is an error, write to the IRS office that sent it to you within the time frame given. You should also provide photocopies of any records that may help correct the error. You may also call the number listed on your notice or bill for assistance. If you are correct, IRS will make the necessary adjustment to your account and send you a corrected notice.

Respond

If your notice or letter requires a response by a specific date, there are two main reasons you will want to comply:

 

Correction Notice

If the IRS changed or corrected your tax return, compare the information provided in the notice or letter with the information in your original return.

 

Pay

If you agree with the information provided in the notice or letter, pay as much as you can, even if you cannot pay the full amount you owe. The EFTPS is the best way for you to pay your federal taxes. However, if you decide to pay by mail, in order to make sure your payment credits properly to your account, be sure to return the tear-off stub on your bill and use the return envelope, if provided. Please ensure that you:

 

Keep a Copy of Your Notice or Letter

It's important to keep a copy of all notices or letters with your tax records. You may need these documents at a later date.

Contact Us

Most correspondence can be handled without calling or visiting an IRS office if you follow the instructions in your letter or notice. The IRS provides a contact phone number on the top right-hand corner of the notice or letter. Typically, you only need to contact us if you do not agree with the information, if we requested additional information, if you have a balance due or if you have additional questions not addressed in the original notice or letter. You can also write to us at the address in the notice or letter. If you write, allow at least 30 days for our response.

If you need assistance with your notice or letter, call your ITG specialist, who can help you address issues and provide guidance on how to resolve issues identified in the notice or letter you received

Location of the Notice or Letter Number

You can find the notice (CP) or letter (LTR) number on either the top or the bottom right-hand corner of your correspondence. You can find more information about your notice or letter received by visiting IRS Notice or Letter: Business Filers and entering the notice or letter number in the search box.

When the Notice or Letter Looks Suspicious

The IRS does not initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information. This includes requests for PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts.

Phishing is a scam typically carried out through unsolicited email or websites that pose as legitimate sites and lure unsuspecting victims to provide personal and financial information.

Report all unsolicited email claiming to be from the IRS or an IRS-related function to phishing@irs.gov. If you've experienced any monetary losses due to an IRS-related incident, please report it to the Treasury Inspector General Administration and file a complaint with the Federal Trade Commission through their Complaint Assistant to make the information available to investigators.

Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is your voice at the IRS. TAS is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels or who believe that an IRS system or procedure is not working as it should. They ensure that you are treated fairly, and know and understand your rights. If you are having tax problems and have not been able to resolve them with the IRS, you may be eligible for free TAS assistance if you:

 

The service is free, confidential, tailored to meet your needs and is available for businesses as well as individuals. There is at least one local Taxpayer Advocate in each state, as well as in Puerto Rico and the District of Columbia. Because they are part of the IRS, Advocates know the tax system and how to navigate it. If you qualify, you will receive personalized service from a knowledgeable Advocate who will:

 

You can reach the Taxpayer Advocate Service by:

 

References

 

Chapter 23. The Collection Process

The Collection Process: What to Do When You Owe Taxes

It is highly recommended that you have one designated office for each entity to receive and review all IRS notices. It's important to pay attention to the time frame stated in the notice and to respond to the notice promptly. This internal control will alleviate notices being lost or misdirected.

When employment tax returns are filed, IRS checks to see if the math is accurate and if the correct amount of tax has been paid or timely deposited. If you have not paid all you owe, IRS will send a bill called a Notice of Tax Due and Demand for Payment. The bill includes the taxes, plus penalties and interest. We encourage you to pay your bill by check or money order as quickly as possible. If you received a bill for unpaid taxes, you should pay the entire amount, or tell IRS right away why you cannot. If you received a tax notice or if you would like to know if there are any outstanding tax debts, contact your Indian Tribal Governments specialist for further assistance.

If you do not pay the taxes you owe and if you make no effort to pay them, IRS can ask you to take action to pay your taxes, such as selling or mortgaging assets or getting a loan. If you still make no effort to pay your bill or to work out a payment plan, IRS may also take more serious action, such as seizing bank accounts or other assets.

If You Cannot Pay in Full, There is Still Something You Can Do . . .

Publication 594, The IRS Collection Process, tells you the steps the IRS may take to collect your balance due account.

If you cannot pay all your taxes now, pay as much as you can. Paying now reduces the amount of interest and penalty owed on the account. Then, immediately call or write the IRS Indian Tribal Governments office, or visit the nearest IRS office to explain your situation. They will assist you with resolving the account.

If you are unable to pay what you owe, you should contact the IRS as soon as possible. The IRS may be able to offer you a number of payment solutions including:

 

What if You Believe Your Bill is Wrong?

If you believe your bill is wrong, let IRS know as soon as possible. Call the number on your bill or contact the IRS Indian Tribal Governments office in your area for assistance.

To help us correct the problem, gather a copy of the bill along with copies of any records, tax returns and canceled checks, etc., that will help us understand why you believe your bill is wrong. If we find you are correct, we will adjust your account.

Before any action that is explained in this section is taken, you have the opportunity to voluntarily pay what is owed. But if you do not pay your taxes in full and do not contact IRS to let them know why you cannot pay or why you disagree with our decision to take enforcement action, the law requires IRS to take action. IRS may:

 

These enforced collection actions are the means by which the Notice and Demand for Tax Payment is enforced. Publication 1660, Collection Appeal Rights, and Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don't Agree, give detailed information about the appeals process.

Liens

Liens give a legal claim to property as security or payment for a tax debt. A Notice of Federal Tax Lien may be filed only after:

 

Once these requirements are met, a lien is created for the amount of the tax debt. Filing this notice publicly notifies other possible creditors that the federal government has a claim against the debtor's property, including property acquired after the lien is filed.

Liens can be attached to all property or rights to property, including an employer's accounts receivable.

Levies

A levy is a legal seizure of property to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

If the taxes are not paid, or arrangements are not made to settle the debt, the IRS may seize and sell any type of real or personal property.

Generally, these three requirements must be met before a levy action is taken:

 

Trust Fund Recovery Penalty

To encourage prompt payment of withheld income and employment taxes, including Social Security taxes, railroad retirement taxes or collected excise taxes, Congress passed a law that provides for the trust fund recovery penalty. (These taxes are called trust fund taxes because you actually hold the employee's money in trust until you make a federal tax deposit in that amount.)

If IRS plans to assess the trust fund recovery penalty, it will send you a letter stating that you have been determined to be a responsible person. You have 60 days after you receive the letter to appeal the proposal. If you do not respond to the letter, IRS will assess the penalty against you as a responsible person and send you a Notice and Demand for Payment. Also, IRS can apply this penalty whether or not you are out of business.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting and paying of trust fund taxes.

This person may be:

 

Assessing the Trust Fund Recovery Penalty

IRS may assess the penalty against anyone:

 

For willfulness to exist, the responsible person must:

 

The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:

 

For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.

Once IRS asserts this penalty, it can take collection action against your personal assets. For instance, IRS can file a federal tax lien or take levy or seizure action.

You can avoid the trust fund recovery penalty by making sure that all employment taxes are collected, accounted for and paid to the IRS when required.

References

 

Glossary of Terms

 Consolidated Appropriations Act                   CAA

 

 Combined Annual Wage Reporting                    CAWR

 

 Cash or Deferred Arrangement                      CODA

 

 Electronic Data Transfer                          EDT

 

 Electronic Filing                                 E-FILE

 

 Electronic Federal Tax Payment System             EFTPS

 

 Electronic Funds Transfer                         EFT

 

 Employer Identification Number                    EIN

 

 Earned Income Tax Credit                          EITC

 

 Employee Retirement Income Security Act           ERISA

 

 Federal Insurance Contributions Act               FICA

 

 Federal Tax Deposit                               FTD

 

 Federal Unemployment Tax Act                      FUTA

 

 U.S. Immigration and Customs Enforcement Service  ICE

 

 Individual Retirement Account                     IRA

 

 Old-Age, Survivors, and Disability Insurance      OASDI

 

 Salary Reduction Simplified Employee Pension      SARSEP

 

 Self-Employment Contributions Act                 SECA

 

 Simplified Employee Pension                       SEP

 

 Savings Incentive Match Plan for Employees        SIMPLE

 

 State Unemployment Tax Act                        SUTA

 

 Social Security Administration                    SSA

 

 Social Security Number                            SSN

 

 Taxpayer Advocate Service                         TAS

 

 Unemployment Compensation                         UC

 

 

Attachment A. Revenue Ruling 59-354

Revenue Ruling 59-354

SECTION 61 - Gross Income Defined

1959-2 Cumulative Bulletin 24; July 1959

26 CFR 1.61-2: Compensation for services, including fees, commissions, and similar items (Also Sections 3121, 3306, 3401; 31.3121(a)-1, 31.3306(b)-1, 31.3401(a)-1.)

Although includible in gross income under section 61 of the Internal Revenue Code of 1954, amounts paid to members of Indian tribal councils for services performed by them as council members do not constitute "wages" for the purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act and the collection of income tax at source on wages.

Amounts paid to other salaried employees of such Indian councils and to employees of private tribal business enterprises constitute "wages" subject to the Federal employment taxes, including the withholding of income tax under section 3402 of the Internal Revenue Code of 1954.

Advice has been requested whether the salaries of members of Indian tribal councils are subject to Federal income tax and Federal employment taxes and whether the tribal councils are liable for the withholding and payment of such taxes.

The constitution and bylaws of the various Indian tribes provide that the members of the council are elected from among the full tribal membership; that their duties include representing the tribe in business 25 dealings with the United States Government and the public generally; that the council is a policy determining group; and that the members also have some duties to perform in legislative and executive capacities for the tribe. Their duties appear to be similar to the duties of a city council.

Section 61(a) of the Internal Revenue of 1954 defines the term "gross income" to include "income derived from any source whatever."

Exemption from the payment of Federal income tax may not be implied and, if exemption of Indians from the payment of such tax exists, it must derive plainly from the Federal tax statutes or from treaties or agreements with the Indian tribes concerned or some Act of Congress dealing with their affairs. See Revenue Ruling 54-456, C.B. 1954-2, 49. Accordingly, Indians are required to include in gross income all income they receive which has not been specifically exempted in some manner from Federal income tax.

There is no provision in the Federal income tax laws, which would exempt Indians, as such, from income taxation. Accordingly, unless income of an Indian derived from a particular source is otherwise exempt; such income will be subject to tax in his hands the same as it would be in the hands of any other taxpayer. Similarly, all remuneration received by an Indian for services performed as an employee for his employer which constitutes "wages," as that term is defined in the Federal employment tax statutes, is subject to the taxes imposed by such statutes.

Where a business enterprise of an Indian tribe is organized and operated by the tribe itself, such enterprise is considered a private tribal activity and services performed in its employ constitute employment. In this connection, see Revenue Ruling 56-110, Cumulative Bulletin 1956-1, 488.

A review of many court decisions and legislative enactments pertaining to Indian tribes indicates that the powers vested in any tribe or tribal council by existing law, within the meaning of section 16 of the Wheeler-Howard Act, 25 U.S.C. 476, precludes a conclusion that services performed by members of such councils in their capacities as council members constitute employment for Federal employment tax purposes. Accordingly, it is held that the amounts paid to members of tribal councils for services performed by them as council members do not constitute "wages" for purposes of the Federal Insurance Contributions Act, Federal Unemployment Tax Act and the collection of income tax at source on wages (chapters 21, 23 and 24, respectively, Subtitle C, Internal Revenue Code of 1954).

It is held further that services performed by other salaried employees of tribal councils and by employees of tribal business enterprises constitute employment and their wages are subject to the Federal employment taxes, including the withholding of income tax under section 3402 of the Code. The tribal councils are responsible for the withholding of taxes where applicable and for the payment of any taxes owing with respect to the wages paid to such employees

Attachment B. Revenue Ruling 63-136

Note: The following ruling was issued prior to the enactment of the Tribal General Welfare Exclusion Act of 2014. This document should be interpreted in light of that Act and caution should be applied when applying this ruling to your situation. If uncertain, consult with your ITG specialist.

Revenue Ruling 63-136

SECTION 61 - Gross Income Defined

1963-2 Cumulative Bulletin 19; January 1, 1963

26 CFR 1.61-1: Gross income.

Benefit payments made to individuals undergoing training or retraining under either the Area Redevelopment Act or the Manpower Development and Training Act of 1962 are not includible in the gross incomes of the recipients.

Advice has been requested whether benefit payments received by individuals undergoing training or retraining under the Area Redevelopment Act, 75 Stat. 47-63, or the Manpower Development and Training Act of 1962, 76 Stat. 23-33, are includible in the gross incomes of the recipients.

The Area Redevelopment Act provides for certain types of Federal assistance to areas of substantial and persistent unemployment and underemployment, which have been designated redevelopment areas, for the purpose of aiding such areas in financing their redevelopment.

The purpose of the Manpower Development and Training Act of 1962 is to deal with the problems of unemployment resulting from technological developments and structural changes in the economy.

Both of these Acts authorize the Secretary of Labor to enter into agreements under which payments are made to the several states for the purpose of enabling them, as agents of the United States, to make weekly payments to individuals selected for training or retraining under one of the Acts. Payments made under either of the Acts are equal to the amount of the average weekly unemployment compensation payment payable for a week of total unemployment by the state making such payment. Both Acts also provide that no retraining payment may be made to any person for any week for which he has received, or is seeking, unemployment compensation under any Federal or state unemployment compensation law; however, these provisions do not prevent a person from receiving training or retraining benefits for any week for which it is later determined that he was not eligible to receive unemployment compensation.

The Manpower Development and Training Act of 1962 authorizes the payment of benefits to persons undergoing on-the-job training. However, the amount of any payment which would otherwise be made to such a person is reduced by an amount which bears the same ratio to the payment as the number of compensated hours per week bears to forty hours. That Act also authorizes additional payments for transportation and subsistence in the case of persons whose training is provided in facilities which are not within commuting distance of their regular place of residence.

Revenue Ruling 55-652, C.B. 1955-2, 21, and I.T. 3230, C.B. 1938-2, 136, hold that unemployment compensation payments made by a state or Federal agency are not subject to Federal income tax in the hands of the recipients. A similar position has been taken with respect to other payments which were made in the interest of the general welfare. See Revenue Ruling 57-102, C.B. 1957-1, 26, which holds that benefit payments received by a blind person from the State of Pennsylvania constitute disbursements from a general welfare fund in the interest of the general public and are not includible in the gross income of the recipients. See also Attachment C. Revenue Ruling 2000-6

Revenue Ruling 2000-6

SECTION 6041 -- Information at Source

2001-1 Cumulative Bulletin 512; February 7, 2000

26 CFR 1.6041-2: Return of information as to payments to employees. (Also Sections 3121, 3401, 6051); (Also Section 1.6041-1.)

Issue

How do the information reporting requirements of §§ 6041(a) and 6051(a) of the Internal Revenue Code apply to election workers?

Facts

Election workers are individuals who are generally employed to perform services for state and local governments (governments) at election booths in connection with national, state, or local elections. Governments typically pay election workers a set fee for each day of work. Election workers' wages are includible in gross income as compensation for services. Section 61(a)(1). An individual employed as an election worker may also perform services for the government in another capacity.

A state and the Social Security Administration may agree to extend social security coverage to services of employees of the state or its political subdivisions under § 218 of the Social Security Act (§ 218 agreement). A § 218 agreement may cover the services of election workers. If so, the § 218 agreement may specify the level of fees the election workers must receive to be entitled to coverage. Information about a state's § 218 agreement can be obtained from the State Social Security Administrator.

Situation 1: Government A pays V $200 in a calendar year for services as an election worker. A does not employ V in any other capacity. The services of A's election workers are not covered by a § 218 agreement. V is not covered by a retirement plan maintained by A.

Situation 2: Government B pays W $200 in a calendar year for services as an election worker. B does not employ W in any other capacity. The services of B's election workers are covered by a § 218 agreement if their remuneration is $100 or more in a calendar year. W is not covered by a retirement plan maintained by B.

Situation 3: Government C pays X $1,100 in calendar year 2000 for services as an election worker. C does not employ X in any other capacity. The services of C's election workers are not covered by a § 218 agreement. X is not covered by a retirement plan maintained by C.

Situation 4: Government D pays Y $200 in a calendar year for services as an election worker. D also employed Y in another capacity, in which Y earned wages of $300 that are subject to income tax withholding. The services of D's election workers are not covered by a § 218 agreement. Y is not covered by a retirement plan maintained by D.

Situation 5: Government E pays Z $200 in a calendar year for services as an election worker. E also employed Z in another capacity, in which Z earned wages of $500 that are subject to income tax withholding. The services of E's election workers are not covered by a § 218 agreement. Z is not covered by a retirement plan maintained by E.

Law

Taxes under the Federal Insurance Contribution Act (FICA) apply to "wages" as defined in § 3121(a). That section provides that the term wages includes only remuneration for "employment." Section 3121(b)(7)(F)(iv) provides that the services of an election worker are not employment for FICA purposes if the worker's remuneration is less than $1,000. For calendar years beginning on or after January 1, 2000, the amount is indexed for inflation. The applicable amount for the year 2000 is $1,100. Because service performed by an election worker for calendar year 2000 for an amount less than $1,100 is excluded from employment for FICA purposes, that amount is not wages for FICA purposes unless covered under a § 218 agreement.

Similarly, section 3121(u)(2)(B)(ii)(V) provides that the services of an election worker are not employment for purposes of the Medicare tax portion of the FICA if the worker's remuneration is less than $1,000 in a calendar year. For calendar years beginning on or after January 1, 2000, the amount is indexed for inflation. The applicable amount for the year 2000 is $1,100. For services performed before January 1, 1995, the § 3121(u)(2)(B)(ii)(V) exclusion was for remuneration of less than $100. Rev. Rul. 88-36, 1988-1 C.B. 343, A2, provides that an election worker is subject to Medicare tax unless the remuneration paid to the worker in a calendar year is less than $100.

Section 3401(a) provides that, for purposes of income tax withholding, the term "wages" means all remuneration (other than fees paid to a public official) for services performed by an employee for an employer. Section 31.3401(a)-2(b)(2) of the Employment Tax Regulations states that amounts paid to precinct workers for services performed at election booths are "in the nature of fees paid to public officials" and not subject to income tax withholding.

6041(a) and 6051(a) both impose a duty to file information reports of compensation paid to workers.

Section 6041(a) provides:

All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income . . . of $600 or more in any taxable year . . . shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.

Under § 1.6041-1(b)(1) of the Income Tax Regulations, the term "all persons engaged in a trade or business," as used in § 6041(a), includes organizations the activities of which are not for the purpose of gain or profit.

The general rule stated in § 1.6041-1(a)(2) is that the required return is made on Forms 1096 and 1099, except that § 1.6041-1(a)(2)(ii) provides that compensation paid to an employee by an employer shall be reported on Forms W-3 and W-2 under the provisions of § 1.6041-2 (relating to return of information as to payments to employees).

Under § 1.6041-2(a)(1), payments of wages not subject to income tax withholding must be reported on Form W-2 if the total of those payments and the amount of the employee's wages subject to income tax withholding, if any, is $600 or more in a calendar year. For example, if a payment of $700 was made to an employee and $400 thereof represents wages subject to withholding under section 3402 and the remaining $300 represents compensation not subject to withholding, such wages and compensation must both be reported on Form W-2. If the employee has no wages subject to income tax withholding, the employer is required to file Form W-2 for that employee if payments to that employee equal $600 or more in a calendar year.

Section 1.6041-2(a)(1) provides that, at the election of the employer, components of amounts required to be reported on Form W-2 pursuant to this subparagraph may be reported on more than one Form W-2. Thus the amounts paid to an individual for services as an election worker may be reported on a separate W-2 from amounts paid to the individual for service in another capacity, even though the amounts are aggregated to determine whether reporting applies.

Section 6051(a) imposes a reporting requirement on the following two categories of payors of remuneration:

Every person required to deduct and withhold from an employee a tax under section 3101 [employee FICA tax] or 3402 [income tax withholding] . . . or every employer engaged in a trade or business who pays remuneration for services performed by an employee. . . .

Section 6051(a) does not require reporting of compensation that is not subject to withholding of FICA tax or income tax.

Section 6051(c) provides that the Secretary may prescribe by regulations the reporting of additional items. No regulations requiring employers to furnish additional information have been published.

Analysis

Compensation of an election worker is not subject to income tax withholding. Sections 3401(a) and 31.3401(a)-2(b)(2). If an election worker's compensation is less than $1,100 for calendar year 2000, it is generally not subject to FICA tax. Sections 3121(b)(7)(F)(iv) and 3121(u)(2)(B)(ii)(V). However, under a state's § 218 agreement, an election worker's compensation may be subject to both the old-age, survivors and disability insurance (OASDI) and the Medicare portions of the FICA tax at a level below $1,100 for calendar year 2000.

Section 6041(a) applies to payments of compensation that are not subject to withholding of FICA or income tax. If an election worker's compensation is not subject to withholding of FICA tax, the § 6041(a) reporting requirement applies to payments that aggregate $600 or more in any taxable year. Under § 1.6041-2(a)(1), compensation subject to income tax withholding is taken into account in determining whether the $600 reporting requirement applies.

Section 6051(a) requires reporting of compensation subject to either FICA tax or income tax withholding. No reporting is required by §§ 6051(a) and 31.6051-1(a) and (b) for items of income that are not subject to withholding of FICA tax or income tax. If an election worker's compensation is subject to withholding of FICA tax, reporting is required by § 6051(a), regardless of the amount of compensation.

Holdings

The reporting requirements applicable to governments that employ election workers are as follows:

Situation 1: Neither FICA tax nor income tax withholding applies to the $200 paid to V. The reporting requirements of § 6041(a) apply. Because V earns fees that are less than $600, Government A is not required to issue Form W-2 to V.

Situation 2: FICA tax, but not income tax withholding, applies to the $200 paid to W because the fees exceed the $100 threshold in the § 218 agreement. Government B must follow the reporting requirements of § 6051(a), reporting on Form W-2 the fees of $200 and the FICA tax withheld.

Situation 3: FICA tax, but not income tax withholding, applies to the $1,100 paid to X for calendar year 2000. Government C must follow the reporting requirements of § 6051(a), reporting on Form W-2 the fees of $1,100 and the FICA tax withheld.

Situation 4: Neither FICA tax nor income tax withholding applies to the $200 paid to Y for services as an election worker, but the $300 payment is subject to income tax withholding. Government D must follow the reporting requirements of § 6051(a), reporting on Form W-2 the $300 payment and the income tax withheld. Section 6041(a) does not require reporting of the $200 payment because the total of the two payments is less than $600 for the calendar year.

Situation 5: Neither FICA tax nor income tax withholding applies to the $200 paid to Z for services as an election worker, but the $500 payment is subject to income tax withholding. Government E must follow the reporting requirements of §§ 6041(a) and 6051(a), reporting on Form W-2 both the $200 and the $500 payments and the amount of income tax withheld.

Effect on Other Revenue Ruling(s)

This ruling modifies Rev. Rul. 88-36, A2, to reflect the increase in the amount of remuneration applicable for purposes of the Medicare tax exclusion under § 3121(u)(2)(B)(ii)(V), currently $1,100 for calendar year 2000.