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Avoid the havoc from the burden of employee payroll administration on your small business clients. This course is designed to provide you with practical pointers for managing the payroll tax and reporting function. This course also shows how to handle reporting and withholding requirements for employee benefits. Learn the requirements in the new hire reporting. Understand how to avoid the frequent penalties in payroll tax reporting while decreasing the load of payroll tax administration.
Objectives:
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Determining Employers
As defined in IRC Sec. 3401(d), an employer is an individual or organization engaged in a trade or business in which one or more individuals either have or are performing a service(s). Generally, if the potential employer has an employee/employer relationship focused around control and the employer controls the payments being made to an individual, that individual is an employee.
Obtain an Employee Identification Number1
When an employer hires the first employee, a Federal Employer Identification Number (EIN) is required. EINS are not only used by employers, but also sole proprietors, corporation, partnerships, nonprofit organizations, trusts, estates of decedents, government agencies, certain individuals, and other business entities. A sole proprietor who only employs family members must obtain an EIN. The sole proprietor is not required to withhold FICA for their children under the age of 18 or pay FUTA for any of their children under the age of 21. However, they are required to withhold on income, so an EIN is needed to report the information to the IRS.
The EIN may be requested on a Form SS-4 by mailing, faxing, phoning, or completing online at www.irs.gov/businesses/small. Applying online is the easiest and fastest method. However, not all entity types may apply online. Those that cannot are
• Foreign Addresses (including Puerto Rico).
• Limited Liability Companies (LLC) without entity types.
• REMICs.
• State and Local Governments.
• Federal Government/Military.
• Indian Tribal Government/Enterprise.
Assistance for applying for an EIN is available at the Business and Specialty Tax Line, 800-829- 4933. Employers with foreign addresses call 215-516-6999 for assistance.
Treasury Regulation Section 301.7702-2 changes were issued on August 16, 2007, and required for wages paid on or after January 1, 2009, that single member/single owner limited liability company (LLCs) which have not elected to be treated as corporations may be required to change the way they report and pay federal employment taxes and wage payments. The new regulations state the LLC, not its single owner, is responsible for filing and paying all employment taxes on wages paid on or after January 1, 2009. For wages paid before January 1, 2009, disregarded entities followed Notice 99-6 and choose how they wanted to file and pay the employment taxes, by either using the owner's name and taxpayer identification number or the company's name and taxpayer identification number. The new regulations do not change income tax treatment for a disregarded entity or other LLCs, or for employment and/or excise tax treatment for the LLCs classified as partnerships or corporations.
S Corporations' shareholders who are paid by the S Corporation for services rendered are treated as employee wages and are subject to FITW, FICA, and FUTA. Corporations must classify these services correctly or the IRS may determine their own calculation of wages.
A Qualified Subchapter S Subsidiary (QSUB), a corporation owned 100% by an S corporation or other entity disregarded as an entity separate from its owner is not required to have its own EIN. Their employment taxes may be paid under one of the following methods:
• By its owner (as if the employees of the disregarded entity are employed directly by the owner) using the owner's name and taxpayer identification number or
• By each entity recognized as a separate entity under state law using the entity's own name and taxpayer identification number.
If the second method is chosen, the owner retains responsibility for the federal employment tax obligations of the disregarded entity on wages paid before January 1, 2009. Final regulations, T.D. 9356, require QSubs and eligible single-owner disregarded entities be treated as separate entities for employment tax purposes. Disregarded entities and their owners may continue to use the first method permitted for wages paid before January 1, 2009. Employers may switch to the second method for wages paid after August 15, 2007, and before January 1, 2009, without seeking permission of the Commissioner. Taxpayers who switch from the first method to the second method for wages paid before January 1, 2009, may consider wages paid by the owner to employees of the disregarded entity during the calendar year of the switch as having been paid by the disregarded entity for purposes of determining whether wages paid to the disregarded entity's employees have reached the compensation bases for social security and FUTA taxes. All taxpayers must switch to the second method for wages paid after December 31, 2008, and the disregarded entity will be responsible for its own employment tax obligations on wages paid after that date.2
Non-profit organizations with employees, must obtain an EIN. They may not be required to collect or pay all taxes, but their employee wages and taxes are reported to the IRS at the end of each calendar year.
Mergers continue and bring with them employer questions. Mergers, acquisitions, and other reorganizations are considered one of the following for reporting employment taxes:
• Statutory mergers and consolidation.
• Acquisitions that qualify under the predecessor-successor rules.
• Other acquisitions that are not statutory mergers or consolidations and do not qualify under the predecessor-successor rules.
Statutory Mergers and Consolidation
According to Rev. Rul. 62-60, 1962-1 C.B. 186 for employment tax purposes, the resultant corporation (surviving corporation) of a statutory merger or consolidation takes on the same status as the absorbed corporation (acquired corporation). The predecessor-successor rules described in Rev. Proc. 2004-53 do not apply to these transactions. However, Rev. Proc. 2004- 53 allows the use of Schedule D of Form 941 by a surviving corporation or an acquired corporation to report information after a statutory merger or consolidation when there is a discrepancy. Using this form also provides notice of a statutory merger or consolidation under Rev. Rul. 62-60.
Acquisitions That Qualify under Predecessor-Successor Rules
These transactions satisfy the conditions for predecessor-successor status set forth in section 3121(a)(1) of the Internal Revenue Code and section 31.3121(a)(1)-1(b) of the Employment Tax Regulations:
• Acquires substantially all the property used in a trade or business of another employer (predecessor) or in a separate unit of a trade or business of a predecessor.
• Directly after the acquisition but during the same calendar year, employs individuals who immediately before the acquisition were employed in the trade or business of the predecessor.
Chapter 8 explains how to report these transactions on Schedule D of Form 941. EINs with no activity for eight years will have their account, along with the EIN, dropped from the IRS system.
What If an Entity Changes Locations?3
According to Tax Tip 2005-16 issued January 24, 2005, the IRS recommends employers notify the IRS immediately of any location change. The IRS uses the Postal Service's change of address files to update taxpayer addresses, but notifying the IRS directly, employers insure forms and correspondence are delivered timely. Change of address is accomplished several ways:
• Change a preprinted mailing label before submitting to the IRS.
• Write the new address in the appropriate boxes on a return.
• Use Form 8822, Change of Address any time during the year.
• If an IRS employee contacts an employer for any reason, verbally request a change of address.
• Write the IRS center where annual returns are filed.
Hiring New Employees
After employers start their companies and begin hiring employees, there are issues other than Internal Revenue Services (IRS) requirements that are discussed in this chapter. We will discuss those in this chapter, but the other IRS issues are talked about in the remaining chapters.
1 For complete information, see IRS Publication 1635, Understanding Your EIN.
2 See Notice 99-6, 1999-3 C.B. 321.
3 For complete information, see Tax Topic 157, Change of Address.
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