IRS Launches New Tool for Estimating Taxes

The Internal Revenue Service has launched the new Tax Withholding Estimator, an expanded, mobile-friendly online tool designed to make it easier for everyone to have the right amount of tax withheld during the year. The Tax Withholding Estimator replaces the Withholding Calculator, which offered workers a convenient online method for checking their withholding. The new Tax Withholding Estimator offers workers, as well as retirees, self-employed individuals and other taxpayers, a more user-friendly step-by-step tool for effectively tailoring the amount of income tax they have withheld from wages and pension payments.

“The new estimator takes a new approach and makes it easier for taxpayers to review their withholding,” said IRS Commissioner Chuck Rettig. “This is part of an ongoing effort by the IRS to improve quality services as we continue to pursue modernization and enhancements of our taxpayer relationships.” The IRS took the feedback and concerns of taxpayers and tax professionals to develop the Tax Withholding Estimator, which offers a variety of new user-friendly features including:

  • Plain language throughout the tool to improve comprehension.
  • The ability to more effectively target at the time of filing either a tax due amount close to zero or a refund amount.
  • A new progress tracker to help users see how much more information they need to input.
  • The ability to move back and forth through the steps, correct previous entries and skip questions that don’t apply.
  • Enhanced tips and links to help the user quickly determine if they qualify for various tax credits and deductions.
  • Self-employment tax for a user who has self-employment income in addition to wages or pensions.
  • Automatic calculation of the taxable portion of any Social Security benefits.
  • A mobile-friendly design.

In addition, the new Tax Withholding Estimator makes it easier to enter wages and withholding for each job held by the taxpayer and their spouse, as well as separately entering pensions and other sources of income. At the end of the process, the tool makes specific withholding recommendations for each job and each spouse and clearly explains what the taxpayer should do next.

The new Tax Withholding Estimator will help anyone doing tax planning for the last few months of 2019. Like last year, the IRS urges everyone to do a Paycheck Checkup and review their withholding for 2019. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed this year. It’s also an important step for those who made withholding adjustments in 2018 or had a major life change.

Those most at risk of having too little tax withheld include those who itemized in the past but now take the increased standard deduction, as well as two-wage-earner households, employees with nonwage sources of income and those with complex tax situations.

 

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IRS Revises EIN Application Process…hoping to enhance security

The Internal Revenue Service (IRS) announced today that starting May 13th only individuals with tax identification numbers may request an Employer Identification Number, or EIN, as the “responsible party” on the application.  This change will prevent entities, such as employer, from using their own EINs to obtain additional EINs. The requirement will apply to both the paper Form SS-4, Application for Employer Identification Number, and the online EIN application.

Individuals named as responsible party must have either a Social Security Number (SSN) or an individual taxpayer identification number (ITIN). The IRS is making the announcement now to give entities and their representatives time to identify proper responsible officials and to comply with the new policy.

This change is part of the IRS’s ongoing security review. It provides greater security to the EIN process by requiring an actual individual to be the responsible party and improves transparency. If the employer needs to change the responsible party, it can complete the Form 8822-B, Change of Address or Responsible Party within 60 days of the change.

Entities such as federal, state, local or tribal governments are exempt from the responsible party requirement, as is the military including state national guard units.

 

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Taxpayer Advocate Annual Report: Payroll is Upfront and Center in this Year’s Recommendations

The Taxpayer Advocate Service is an independent organization within the IRS.  Its purpose is to ensure that every taxpayer is treated fairly and to help taxpayers know and understand their rights.  The current Taxpayer Advocate is Nina Olson.  Each year the National Taxpayer Advocate (NTA) releases their Annual Report to Congress.  This report describes the challenges the IRS is facing. Federal law requires that the NTA’s annual report identify at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems. The following are the highlights of this year’s recommendations that affect payroll:

  1. Alternative to Form W-4: The report recommends scraping the Form W-4 altogether and analyzing the feasibility of adopting an IRS-determined withholding code. This approach is currently being utilized in the U.S. tax administration.  It also recommends that withholding be expanded at the source to encompass not only wages, but taxable interest, pensions, dividends, capital gains, IRS income, unemployment and even, potentially, certain earnings as an independent contractor.
  2. Furnishing Information Returns Electronically: Information return data to taxpayers should be furnished electronically for direct importation into tax return preparation software or to authorized tax return preparers.
  3. Lower Electronic Filing Thresholds: The report recommends requiring employers with more than five employees to file Forms W-2 electronically.
  4. Form 941 Filing: Recommends requiring Form 941 contain information about each employee’s name, address and social security number. To promote electronic filing, direct the IRS to use the fillable form currently on the IRS website and reformat so the form can be electronically filed, at no cost, directly from the website.
  5. Effects of the new tax law and the shutdown on overall IRS workloads: With all of the new tax forms needed to incorporate the changes to the tax code the IRS was overwhelmed. Add to this the shutdown and the antiquated systems (IRS has two of the oldest IT systems in the federal government) and you have a recipe for potential disaster. Because of these issues the IRS is now having to process more than five million pieces of mail and over 87,000 amended returns. All manually. IT modernization was the number one recommendation in this report.

Whether or not the recommendations are implemented is anybody’s guess.  But as the situation is becoming more intense at the IRS for meeting deadlines and handling the workload with antiquated systems it will be well remembered to monitor this report for any upcoming legislative changes.  Especially in the area of electronic filing, lowering thresholds and replacing the Form W-4.

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Paycheck Checkup May be Needed

The Tax Cuts and Jobs Act made significant changes to the tax law, including increasing the standard deduction, eliminating personal exemptions, increasing the child care tax credit, limiting or discontinuing certain deductions and changing the tax rates and brackets.  While these changes did not affect the 2017 tax returns they will affect the 2018 tax returns filed next year.  For this reason the IRS is continuing to push a “paycheck checkup” for all employees but especially seasonal or part-time employees. To assist employees the IRS unveiled several new features to help people navigate the issues affecting withholding in their paychecks. The effort includes a new series of plain language Tax Tips, a YouTube video series and other special efforts to help people understand the importance of checking their withholding as soon as possible including a withholding calculator.

Employees can use the Withholding Calculator to estimate their 2018 income tax. The Withholding Calculator compares that estimate to the employee’s current tax withholding and can help them decide if they need to change their withholding with their employer.  When using the calculator, it’s helpful to have a completed 2017 tax return available. Employees who need to adjust their withholding will need to submit a new Form W-4, Employee’s Withholding Allowance Certificate, to their employer. If an employee needs to adjust their withholding, doing so as quickly as possible means there’s more time for tax withholding to take place evenly during the rest of the year. But waiting until later in the year means there are fewer pay periods to make the tax changes – which could have a bigger impact on each paycheck.

Among the groups who should check their withholding are:

  • Two-income families.
  • People working two or more jobs or who only work for part of the year.
  • People with children who claim credits such as the Child Tax Credit.
  • People with older dependents, including children age 17 or older.
  • People who itemized deductions in 2017.
  • People with high incomes and more complex tax returns.
  • People with large tax refunds or large tax bills for 2017.

The Bad Guys Are Phishing Again!

It appears the bad guys are after our payroll information again.  The IRS, and state tax agencies in Michigan, Colorado, Maryland and Rhode Island are urging all payroll personnel to be wary and to educate themselves about a Form W-2 phishing scam that made victims of hundreds of organizations and thousands of employees in 2017.  I blogged about this last year but it bears repeating with the new W-2 submission deadline looming. Here’s how the scam works: cyber criminals do their homework, identifying chief operating officers, school executives or others in positions of authority. Using a technique known as business email compromise (BEC) or business email spoofing (BES), fraudsters posing as executives send emails to payroll personnel requesting copies of Forms W-2 for all employees. The bad guys are using the information to file fraudulent tax returns, or they are posted for sale on the Dark Net.

The initial email may be a friendly, “hi, are you working today” exchange before the fraudster asked for all W-2 information. In several reported cases, after the fraudsters acquired the workforce information, they immediately follow up that request with a wire transfer. The IRS is hoping that by alerting employers and payroll professionals now it can limit the success of this scam in 2018. They have also created a new process by which employers should report the scams. There are steps the IRS can take to protect employees, but only if the agency is notified immediately by the employers about the theft.

The IRS is also suggesting that employers consider creating a policy to limit the number of employees who have the authority to handle Form W-2 requests and that they require additional verification procedures to validate the actual request before emailing sensitive data such as an employee’s Form W-2.

The IRS has established a special email notification address specifically for employers to report Form W-2 data thefts. Here’s how the Form W-2 scam victims can notify the IRS:

  • Email dataloss@irs.gov to notify the IRS of a Form W-2 data loss and provide contact information as listed below
  • In the subject line, type “W-2 Data Loss” so that the email can be routed properly. Do not attach any employee personal identifiable information data.
  • Include the following:
    • business name
    • business employer identification number (EIN) that is associated with the data loss
    • contact name
    • contact phone number
    • summary of how the data loss occurred
    • volume of employees impacted by the data loss

Businesses and payroll professionals that only receive a suspect email but do not fall victim to the scam should send the full email headers to phishing@irs.gov and use “W-2 Scam” in the subject line. But payroll professionals as well as finance departments should be alert to any unusual request for employee data. Cyber criminals and their scams are constantly evolving.

W-2 Verification Code Program is Expanding in 2017

I attended the October 5th payroll industry telephone conference call.  On the call Scott Mezistrano, with the IRS Industry Stakeholder Engagement and Strategy, provided the listeners with updated information on the W-2 Verification Code Pilot Program for the 2018 filing season (2017 Forms W-2).

Where the code appears

First just a quick review of the program itself.  It was implemented during the 2016 filing season. Its purpose is to combat tax-related identity theft and tax refund fraud.  It requires a 16-character code be input into box 9 so that the tax filer can be verified when filing taxes electronically.  It only appears on the Form W-2 copies B (filed with the employee’s federal tax return) and C (the employee’s copy).   If the Verification Code (VC) is deemed valid, then the IRS treats the W-2 data submitted with the Form 1040 to be valid, thereby reducing false fraudulently filed tax returns.

For the 2016 Forms W-2 only ADP, Ceridian, Intuit, Paychex, Payroll People, Prime Pay and Ultimate Software participated in the test pilot program. If the taxpayer had a VC it was entered 34% of the time. However, when it was entered, it was validated 97% of the time.

For the 2017 Forms W-2 there will be 10-12 service bureaus or payroll software companies participating in the program. This includes the same companies as in 2016 along with the National Finance Center and a few more payroll service providers.  This should result in approximately 66 million Forms W-2 containing the code.  That results to about 1 in 4 forms that will be filed.

 

Not All IRS Guidance is as Good as Gold

Nina Olson is with the Taxpayer Advocate Service (TAS).  This is an independent organization within the IRS that assists taxpayers who are experiencing “troubles” with the IRS in getting issued resolve through the “normal channels”. During recent congressional hearing she was asked what seemed like simple questions concerning the types of IRS guidance taxpayers can rely on.  But the answer was not simple.  She has written a blog; IRS Frequently Asked Questions Can be a Trap for the Unwary on July 26, 2017, that contains excellent information for those of us who need to research tax questions and rely on tax guidance from the IRS.  I recommend reading it to ensure you know what you can and cannot rely on when researching the IRS website for tax guidance.

Don’t Get Rejected by the IRS…Make Sure Your 941 Balances

A recent article from RIA told of the following problem:              

Mike McGuire from IRS Modernized e-File (MeF) told listeners to the May 4 payroll industry telephone conference call that the IRS has been rejecting “tens of thousands” of 2017 first quarter electronically-filed Forms 941, Schedule B (Report of Tax Liability for Semiweekly Schedule Depositors) because the total tax liability on Schedule B does not agree with the total tax liability on Form 941, line 12 (Total taxes after adjustments and credits). Prior to the 2017 tax year, the total tax liability on Schedule B had to agree with Form 941, line 10 (Total taxes after adjustments), or the IRS would reject it. However, the IRS revised some of the line numbers on Form 941, beginning with the 2017 tax year, to take into account that “qualified small businesses” may now elect to claim a portion of their research credit as a payroll tax credit against their employer FICA tax liability, rather than against their income tax liability.  Beginning with the 2017 tax year, the total tax liability on Schedule B must agree with Form 941, line 12 (Total taxes after adjustments and credits) rather than line 10. Some electronic filers have not adjusted their programs to take this change into account. Rejected returns have to be resubmitted to the IRS.

Make sure your system has made this change.

 

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Tips vs Service Charges: An IRS Reminder

The IRS wants to make sure that employers understand tax ramifications of the various payments that they make to employees or that their employees might receive.  So the IRS has posted a reminder for employers when it comes to tips verses service charges.  The key difference between the two categories affect the taxation for employees as well as the reporting. So-called “automatic gratuities” and any amount imposed on the customer by the employer are service charges, not tips.  Service charges are generally wages, and they are reported to the employee and the IRS in a manner similar to other wages. On the other hand, special rules apply to both employers and employees for reporting tips. Employers should make sure they know the difference and how they report each to the IRS.

What are tips? Tips are discretionary (optional or extra) payments determined by a customer that employees receive from customers. They include:

  • Cash tips received directly from customers.
  • Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.
  • The value of any noncash tips, such as tickets, or other items of value.
  • Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangements.

Four factors are used to determine whether a payment qualifies as a tip. Normally, all four must apply. To be a tip:

  • The payment must be made free from compulsion;
  • The customer must have the unrestricted right to determine the amount;
  • The payment should not be the subject of negotiations or dictated by employer policy; and
  • Generally, the customer has the right to determine who receives the payment.

If any one of these doesn’t apply, the payment is likely a service charge.

What are service charges? Amounts an employer requires a customer to pay are service charges. This is true even if the employer or employee calls the payment a tip or gratuity. Examples of service charges commonly added to a customer’s check include:

  • Large dining party automatic gratuity
  • Banquet event fee
  • Cruise trip package fee
  • Hotel room service charge
  • Bottle service charge (nightclubs, restaurants)

Generally, service charges are reported as non-tip wages paid to the employee. Some employers keep a portion of the service charges. Only the amounts distributed to employees are non-tip wages to those employees.

All cash tips and noncash tips should be included in an employee’s gross income and subject to federal income taxes.ployers are required to retain employee tip reports, withhold income taxes and the employee share of Social Security and Medicare taxes from the wages paid, and withhold income taxes and the employee share of Social Security and Medicare taxes on reported tips from wages (other than tips) or from other funds provided by the employee. In addition, employers are required to pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income.  Employers must report income tax and Social Security and Medicare taxes withheld from their employees’ wages, along with the employer share of Social Security and Medicare taxes, on Form 941, Employer’s Quarterly Federal Tax Return, and deposit these taxes in accordance with federal tax deposit requirements.Tips reported to the employer by the employee must be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social Security tips) of the employee’s Form W-2, Wage and Tax Statement. Enter the amount of any uncollected social security tax and Medicare tax in Box 12 of Form W-2. See the General Instructions for Forms W-2 and W-3.

Reporting Service Charges: Employers who distribute service charges to employees should treat them the same as regular wages for tax withholding and filing requirements, as provided in Publication 15, Employer’s Tax Guide. Distributed service charges must be included in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips) of the employee’s Form W-2.

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IRS Looking for Comments on Form 941 Series…Got Any?

Every so often the IRS solicits comments on its various forms. This is an excellent opportunity for payroll professionals to get their two cents in on the forms they must deal with on a regular or sometimes irregular basis.  This time, the IRS is soliciting comments concerning Forms 941 (Employer’s Quarterly Federal Tax Return), 941-PR (Planilla Para La Declaracion Trimestral Del Patrono-LaContribucion Federal Al Seguro Social Y Al Seguro Medicare), 941-SS (Employer’s Quarterly Federal Tax Return-American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands), 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, 941-X(PR), Ajuste a la Declaracion Federal Trimestral del Patrono o Reclamacion de Reembolso, Schedule R, Allocation Schedule for Aggregated Form 941 Filers, Schedule B (Form 941) (Employer’s Record of Federal Tax Liability), Schedule B (Form 941-PR) (Registro Suplementario De La Obligacion Contributiva Federal Del Patrono), and Form 8974 Qualified Small Business Payroll Tax Credit for Increasing Research Activities.

What about the Form 941 or any of the series do you find difficult, needs better explanations, could be revamped or should just be left as is?  Now is the time to speak up.

Written comments should be received on or before July 7, 2017 to be assured of consideration, and should be directed to Laurie Brimmer, Internal Revenue Service, room 6526, 1111 Constitution Avenue NW., Washington, DC 20224. Requests for additional information or copies of the form and instructions should be directed to Ralph Terry, at Internal Revenue Service, room 6526, 1111 Constitution Avenue NW., Washington, DC 20224, or through the internet at Ralph.M.Terry@irs.gov.

 

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