The IRS gets a bad rap for being behind the times. Between its reliance on paper forms and complicated acronyms (1040-EZ, anyone?), you would be forgiven for not associating the agency with the state-of-the-art.
With a new law, the agency is looking to change that perception. The Taxpayer First Act, signed by President Trump earlier this month, goes a long way in modernizing the IRS’s approach to cybersecurity and some longstanding payroll forms. Below, we’ve summed up the changes most applicable to HR and payroll professionals.
Form W-2 Digital Threshold Shrinks
Today, there’s a good chance you receive your Form W-2 digitally—and an even better chance that your company files it with the IRS that way, too. For the businesses that prefer to use paper, the new law could soon force them to go digital.
Under existing rules, companies filing 250 or more W-2s or 1099s are required to do so digitally. Starting on January 1, 2021, that threshold drops to 100. In 2022, it will drop even lower: 10 or more forms. That means all but the smallest companies will be required to file W-2s and 1099s digitally.
Form 1099 Goes Digital
We’ve all heard about the gig economy’s growth in recent years. Per one study, the majority of U.S. workers will be freelancing by 2027. Ahead of that seismic shift, the IRS is set to make filing the Form 1099 easier than ever.
The Taxpayer First Act instructs the IRS to create a digital portal for businesses to prepare, maintain, and file independent contractors’ 1099 forms. Wondering what that might look like? The legislation specifically calls for the IRS to use the Social Security Agency’s website as a model. The agency will have until January 1, 2023 to launch the portal.
Power of Attorney Changes
If you’ve ever worked with a payroll provider, you’ve likely heard your contact use the phrase “power of attorney.” This term refers to a third-party tax preparer’s authority to file and make inquiries on your company’s behalf.
The new law requires the IRS to publish guidance and uniform standards on how these relationships are established and verified. These rules will be used to standardize the acceptance of taxpayers’ signatures appearing on any accompanying power of attorney or "POA" forms. The IRS has six months from the signing of the bill to publish this guidance.
Many of the changes included in the new law deal with identity theft. The IRS will now be required to have a single point of contact for identity theft victims. As someone who regularly contacts the IRS, I sure wish I had a single point of contact for payroll and tax matters.
Separately, the IRS will also be responsible for taxpayer notification if they suspect identity theft. While having your identity stolen is never a pleasant experience, the agency is posed to make it significantly easier for affected individuals to bounce back.
When you think of IRS headquarters, chances are that you picture dingy drop ceilings, florescent lights, and no shortage of filing cabinets and loose paperwork. Basically, a scene straight out of 1987.
But even so, the agency is set to make serious strides in how it works with both taxpayers and businesses. Between the anticipated release of the new Form W-4, the launch of a new withholding calculator, and the updates mentioned above, it looks to be a banner year for agency officials in Washington.
When it comes to payday, employees aren’t typically used to being asked “paper or plastic?” With a law set to take effect on September 1, 2019, Texas is set to join the growing list of states that allow employers to pay their workers via “paycards” by default.
Below, we’ll detail the sometimes controversial payment method and what the new law specifically entails for Lone Star businesses and their employees.
While we’ve discussed how to calculate wages in the past, there's one final step before payday that arguably matters most: actually getting the money to employees.
For the last few decades, employees have had two main options for receiving their wages. They could either get a crisp paper check or they could have their funds deposited into their bank account. It should go without saying, but cash has always been acceptable as well.
On a federal level, employers can mandate that employees receive funds through direct deposit. But keep in mind that states have their own laws and varying requirements that often trump the federal regulations. For example, certain states prohibit direct deposit fees.
Out of these payment options, paper checks have always been seen as the “default” option for individuals who either haven’t entered their direct deposit information yet or are unbanked.
The new Texas law will allow employers to remove paper checks from the equation entirely. In their place, the employees’ default option would be an electronic payroll card, or “paycard” for short.
Paycards function exactly like debit cards and have all the same conveniences as cash. They can be used for purchases or at an ATM. Paycards have a routing and account number that is used for depositing an employee’s net pay. The employer uses those numbers to fund the paycard, just as it would any other direct deposit payment.
The new law comes with some restrictions. Texas employers who opt to use paycards must notify employees in writing about the implementation of the program. Notification must happen 60 days prior to the first paycard payment. Employers also must also give employees a listing of any associated fees. They're also required to offer a form to opt out of using a paycard if a different form of payment is desired.
If an employee does ask for a form of payment other than the paycard, the employer has up to 30 days to accommodate that request.
Pros and Cons
Paycards are particularly useful for employees who don’t have bank accounts. There are probably more employees in that situation than you might think—according to the FDIC (Federal Deposit Insurance Corporation), over a quarter of U.S. households are unbanked or underbanked. That's a sizable portion of the population that needs a means of payment outside of direct deposit.
There are also environment benefits to offering paycards. Boston University’s HR department crunched the numbers and found that phasing out traditional paper checks would save it nearly $50,000 per year, not to mention over 3,000 pounds of paper.
While paycards may sound like a win-win, the payment method isn’t controversy-free. Less reputable vendors have been known to charge excessive fees for withdrawing funds or requesting paper statements. Workers have even reported being charged “inactivity fees” for not using the cards enough. Though the paycard industry has become much more regulated since then, businesses should carefully vet providers to ensure employees won’t be subject to excessive fees.
There’s an added benefit to paycards: avoiding the headache of escheatment regulations. Escheatment is the accounting of wages considered "abandoned" that must be turned over to the state.
In the payroll world, this mostly means uncashed checks. For example, if a former employee doesn’t cash their paycheck, Texas employers have one year to turn those funds over to the state in the event that they ever decide to claim the funds. If reading that was a headache, imagine filing and accounting for it. Thankfully, direct deposit and our friend the paycard prevent those issues.
Paycards aren’t new to the scene. That said, the Texas law represents another big break for the increasingly popular payment method. When it comes to payroll, there’s only one sure bet: These cards won’t be getting lost in the shuffle any time soon.
Everyone knows about the ill-fated Fyre Festival. Simply put, it was supposed to be a massive festival in the Bahamas and the experience of a lifetime. Ticket holders would get the opportunity to sip margaritas and hit the pool with celebrities, supermodels, and artists. Long story short, none of that ever happened. People spent (and lost) a lot of money for what turned out to be a living nightmare. Seriously, look up the stories.
But before people arrived on the island to see their dreams dashed upon the Bahamian coast, festival staff had an inkling into the issues that would arise. How, might you ask? Payroll.
Take it from a payroll professional: This disaster could have been predicted. Here are the three payroll warning signs that would have exposed a flop like Fyre Fest before it was too late.
1. Irregular Pay Frequency
When you started your job, you should have been told how often you could expect to be paid. The most common pay schedule is biweekly, but many companies also choose weekly or semimonthly. The frequency an employee must be paid is partly determined by state payday laws. While companies can pay more often than their state's required frequency, most jurisdictions still provide a minimum expectation.
With that in mind, the first red flag for festival employees would have been not receiving a paycheck on payday. Any sudden change in pay frequency points to there likely being some kind of issue behind the scenes. Fyre’s offices started missing payroll months before the actual event was scheduled.
Note that if there's a problem outside of an employer’s control (like a banking issue or natural disaster), a lapse isn't automatically cause for concern if it gets rectified quickly. Also, if you’re paid on a semimonthly schedule, remember that bank holidays and weekends often don't always allow for consistent pay dates.
2. Cash Payments
While most people wouldn't complain if their employer handed them a bag of cash on payday, it should generally be a cause for concern. If you usually receive payments via direct deposit or a paper check, the expectation is that you will continue to be paid in that method. Both types of payment should also include a paystub that breaks down the arithmetic behind your net pay.
While most folks care about the bottom line, it’s important to make sure that the taxes that are taken from your paycheck are remitted on your behalf. This is especially true of both Social Security and Medicare taxes, which your employer is required to match, since that money is intended to be there for you in your twilight years. If an employer is having funding issues and just paying you with cash on hand—which is exactly what Fyre’s organizers did—this should be considered a red flag.
There are only a few circumstances where cash payments aren't problematic. For example, if an employee recently changed their bank account and the direct deposit failed, employers may opt to pay in cash or by check instead of waiting for the funds to be returned. In this instance, your employer is just using a different means of getting you the net pay you were owed. Even so, you should still receive a paystub explaining what was taxed and deducted from your pay.
3. Missing Paystubs
One of the best things you can do as an employee is understand your paystub. These critical payday documents weren't provided to Fyre staff. Reading your paystub can help you spot legal variations to net pay such as reaching a wage base, working more or less hours, or maxing out a deduction. However, outside of those reasons, a deviation in the amount you're paid could be a red flag that your employer is having funding issues.
If you're paid a standard check of $2,000 and receive $1,600 after taxes and deductions, it should turn your head if you suddenly receive $1,000 on payday. In this specific example, the employer might not have had enough to fund the entire payroll and instead decided to shortchange some paychecks. No surprise here: Shortchanging employees is not an acceptable method to meet payroll.
When it comes to payroll, the minds behind Fyre Fest did just about everything wrong. But even with their issues with funding and money management, there were alternatives to shortchanging employees. Some employers handle these situations respectfully and understand the importance of their employees’ paychecks.
Most companies in these circumstances will use one of two options for funding payrolls. First, they can take a short-term business loan if they expect this to be a one-off event. As an alternative, they can add a small business line of credit if they expect to have slow customer payments trickling in for the foreseeable future. Both options allow companies to pay their employees on payday without issue.
No matter what, not paying employees is never an option. You work hard for your money and you deserve to have the confidence and comfort knowing that it will arrive consistently, by the same method, and in a predictable amount.
As companies grow, there are plenty of reasons to change from semimonthly to biweekly payroll frequencies, or weekly to monthly, or any combination of the above. Regardless of the prevalence of these changes, switching pay frequencies involves a lot more than just the flip of a switch.
What's the Secret to Switching Pay Frequencies? B.R.A.K.E.
Below, you’ll find the five things you need to consider before making the leap to a new pay frequency. As in driving, before you change direction you’ll need to brake and come to a complete stop. To help you remember, we came up with a catchy (and hopefully not too cheesy) acronym: B.R.A.K.E.
One of the biggest considerations in any pay frequency change is the effect on benefits. Exhibit A: plan remittance to carriers. Managing remittance can be especially complicated when changing from semimonthly to biweekly. With biweekly payroll, you have two months a year with 3 paydays. These additional days can change deduction amounts. Some companies block those 3rd pay period(s) from collecting. Bottom line? Regardless of the change in pay frequency, benefits will need to be reviewed and considered because your deduction amounts will change.
Outside of health benefits, you’ll want to consider any other frequency-based deduction that has been configured in your system. Examples to consider include any child support or garnishment deductions, as these are typically processed on a schedule. Make sure to review any garnishing agency paperwork when changing pay frequencies to ensure you are deducting the proper amount from your employees before moving forward.
As mentioned previously, pay frequency regulations are state-specific. For example, New York requires weekly pay frequencies for manual workers. However, semimonthly is acceptable in New York for other kinds of employees. Conversely, for those doing business in Nebraska or Pennsylvania, there are no state mandates on pay frequencies—meaning it’s entirely up to the employer to decide what works best. So, before changing pay frequencies, make sure you are compliant within the states you do business.
Why do so many companies opt for biweekly payroll? Read all about the country’s most popular pay cycle.
Accruals are a two-part consideration. First, the monetary accrual of pay on a new frequency needs to be considered. This is as simple as breaking down an employee’s annual salary by the new pay period frequency. The reason this is reviewed is because salaried employees may be set up with their per-pay-period amounts, and not their annual salary. It’s important to make sure your payroll system has these updated amounts. When changing pay frequencies, a salaried employee would receive more per period in 24 increments than they would in 26 or 52. Ensuring salaried amounts are set up properly before changing frequencies is crucial.
Next, some companies use pay frequency to calculate their time off accruals. Basically, if a company offers 80 hours of PTO, instead of granting that all at once, it might be accrued per pay period. In this example, a semimonthly payroll would accrue 3.33 vacation hours per pay period (80 ÷ 24 = 3.33) and a biweekly payroll would accrue at 3.08 (80 ÷ 26 = 3.08).
You don’t want to under or over accrue hours—and you certainly want to ensure you’re paying the proper amount, so be sure to consider both of these rate examples.
Knowing might be the most important step of all. You absolutely need to make sure your staff is aware of this change. Notifying employees should happen as far in advance of the change as possible. Avoid just posting a note in the lunchroom, as you don’t want to risk your entire communication plan being foiled by an unfortunately placed fern. Instead, multiple emails, memos, and company newsfeed posts leading up to the change can ensure employees are alerted to the new schedule and can prepare accordingly.
With any change to payroll, employees will understandably worry about their benefits, deductions, and accruals. Give them enough time to prepare for their new pay frequency in terms of budgeting and any automatic bill payments that they may have set up.
You’ve reviewed salaries, deductions, state requirements, and notified your employees, what else could be left? The execution of the change.
The implementation of your new pay frequency needs to be handled strategically. Ideally, you will not disrupt your pay schedule at all. You can achieve this by seeing when an old and new pay period dates align closely. Any seasoned payroll professional would also suggest making a clean change—meaning that you make the change happen with the start of a new quarter or calendar year. By leveraging payroll reports and working closely with your vendor, you can pull-off the “old switcheroo” with relative ease.
There’s a lot tied to making a pay frequency change. Just remember to B.R.A.K.E. and study all the factors involved. Once you have a plan in place, you’re ready to move forward and put that old pay frequency in the rearview mirror.
Everyone knows you can find (and buy) just about anything on Amazon, including medical supplies. While the online mega-retailer has always accepted a long list of payment methods, one recent addition might be just what the doctor ordered.
The company recently announced that it would begin accepting health savings account (HSA) and flexible savings account (FSA) cards as payment. This development marks just the latest in Amazon’s foray into the healthcare industry, which Namely first covered last year.
If you’re currently unenrolled in an HSA or FSA, it might be prime time to reconsider. In this article, we’ll go through the two account types and their potential payroll tax implications.
Health Savings Accounts (HSAs)
An HSA is an account you can fund with pre-tax dollars and use to cover certain medical expenses. While everyone is eligible for an FSA (we'll cover that later), you can only elect to withhold for an HSA if you have a high deductible healthcare plan.
HSA funds don't have to be used for traditional medical services. There are plenty of covered, everyday purchases that people use. Common examples of HSA-eligible products are Band-Aids, contact lenses, co-pays, hearing aids, eyeglasses, and even sunscreen. If you know you're going to spend $3,000 in Band-Aids over the next 10 years, why pay tax on it?
Exceptions and Limits
Before you get too excited and sign up for an HSA, the IRS does impose some restrictions. Don’t expect to use your HSA to pay for vacations, vitamins, childcare (for healthy babies), standard toiletries, funeral costs, or most cosmetic procedures.
Also, keep in mind that the amount you can withhold annually for an HSA is subject to federal limits. In 2019, you can contribute up to $3,500 to an HSA if you have single coverage. If you are using the HSA to cover a family, you can contribute double, or $7,000. Similar to 401(k) plans, if you're 55 or older, you can contribute an additional $1,000. Limits aside, there’s good news—HSA plans roll over from year to year, so you can keep your savings!
In terms of how an HSA affects your taxes, look at it like this. If you earn $40,000 and pay the maximum single coverage in 2019 ($3,500), you would show $36,500 in federally taxable wages on your Form W-2, assuming you don't have any other pre-tax deductions.
Flexible Spending Accounts (FSAs)
While FSAs are similar to HSAs, there are important differences. Both plans provide pre-tax advantages, and both are used for out-of-pocket expenses and the same eligible medical supplies mentioned earlier.
The similarities stop there. First, FSAs are set up by an employer for employees to help cover medical expenses or dependent care expenses. While an HSA account will follow you from job to job, an FSA plan is specific to your current employer. One of the reasons is that with an FSA, the maximum annual amount can be taken before a full contribution is made. We'll dig into that in our next section.
Exceptions and Limits
In 2019, an employee can contribute up to $2,700 into an FSA, significantly less than an HSA plan. For an employee who is maxing out their FSA in a biweekly pay frequency ($2,700 ÷ 26 = $103.85) as soon as they make their first contribution of $103.85, they can call upon the entire $2,700 for that year.
Unlike an HSA plan, FSA contributions do not carry over from year to year. It should be noted that, depending on your plan, you may be eligible to carry over up to $500 into the new year. Another difference is that FSA deductions can only be changed during open enrollment (or with a qualifying event), whereas HSA amounts can be changed at any time.
What have we learned? Basically, both FSA and HSA accounts have perks for managing your common healthcare expenses throughout the year. In simplest terms, HSAs offer higher limits and carryover while FSAs are available to all with immediate full contribution use. So if you think Amazon has a chance of being around for a while, you might want to grow your medical savings in an HSA, but if you have a low deductible medical plan and expect to use your pre-tax amounts quicker, an FSA might be right for you.
It’s likely that Amazon's announcement will rekindle interest in HSA and FSA enrollment. Of course, Amazon will need to make it as simple as possible to toggle between saved card information and distinguish what purchases are FSA and HSA eligible. Either way, the benefits and payroll community will watch whether other online mega-retailers follow in Amazon's footsteps.
The weekend feels short enough as it is. If you can believe it, this upcoming one will seem even shorter for most of us.
This weekend marks the return of daylight saving time. With it, we will enjoy nearly eight months of additional daylight—meaning you'll soon end your workday with some sun to spare. Like every spring, you'll set your clock ahead one hour this Sunday. But what happens if you have an hourly employee working at that time? How does your payroll team account for the time shift?
Covering the Basics
Before diving into the payroll implications, lets get a few things straight about daylight saving time. Simply put, this is just the practice of setting your clock forward one hour from "standard time" on the second Sunday in March until the first Sunday in November.
While most of us will change our clocks before going to bed, this weekend's shift technically starts at 2:00 AM, per rules set by the Energy Policy Act of 2005.
Spring Forward vs. Fall Back
So how do payroll teams deal with the loss of an hour when we "spring forward?" As is the case with most wage and hour questions, the Fair Labor Standards Act (FLSA) has insight to offer. Under the FLSA, overnight workers who lose an hour of work due to change do not need to be compensated for that lost hour. That said, businesses can decide to pay employees for that time, even though it was not technically spent working. If they do so, they do not have to include that extra hour in the employee’s regular rate when calculating overtime.
Now, how does this impact employees when we "fall back" in November? When we return to standard time, hourly and non-exempt employees working at 2:00 AM end up working an additional hour that day or week. The FLSA is clear here: If that hour is spent working, the employee must be paid for it. And if the additional hour forces the employee’s worked hours to exceed forty, overtime must be included.
While most of us will lose and gain an hour throughout the year, there are still some places that are not as keen on resetting their clocks. Our time change is not observed by most of Arizona, Hawaii, Puerto Rico, and the U.S. Virgin Islands. If you are reading this from any of those places, sorry for wasting your time. At least now you have a payroll fun fact for your next party.
It’s game day. The wings are hot, the beer is cold, and mom’s seven layer dip is on point. While your friends are agonizing over the score, the payroll professional in you can’t stop thinking, “How is the away team taxed?” Come on, I know that's going through your mind.
While our sports heroes seem larger than life, you might be surprised to learn that they’re taxed like the rest of us. An employee who travels to another state for a portion of their employment, no matter how short the duration, should technically pay tax there. For example, a New York employee making $1,000 per week who spends two days working in Connecticut should report $400 as taxable income to that state. In turn, New York would then only tax the remaining $600. If that sounds like an logistical nightmare, that’s because it often is—and most employers just choose not to go there.
But professional athletes make significant (and publicly known) amounts of money, and regularly ply their trade in different states and on national television. While Dale in accounting might not be held liable that one time he answered a work email on the road, Tom Brady’s “hours worked” are a little more apparent to state tax agencies.
While most of us simply call this multistate taxation, the sports community has labeled this liability the "jock tax.”
'Michael Jordan’s Revenge'
It wasn’t always this way. For decades, the lax multistate standards applicable to most individuals were also applied to professional athletes. Until, that is, the Chicago Bulls beat the Los Angeles Lakers in the 1991 NBA Finals. As retribution, the State of California sent Michael Jordan and the Chicago Bulls a hefty tax bill for their time playing in the state. Illinois fired back with a law taxing all visiting athletes, cheekily labeled “Michael Jordan’s Revenge”—which should not be confused for the title of the upcoming Space Jam sequel.
This incident kicked off the beginning of the jock tax, and from that point forward, states consistently taxed players and staff for their game day action.
How the Jock Tax Is Calculated
To calculate the portion of tax paid for athletes’ multistate appearances, the method generally used is called the duty-day formula. Let’s break this down.
The duty-day formula divides the total number of days that an athlete works (game, practice, autographs and team meetings included) in a state by the total working days in the year. The week prior to the Super Bowl, which is full of press time, practice, and video review, is all taxable income to the host state. That percentage will then get multiplied by the employee’s salary to determine how much is taxable to that state.
There are a few notable exceptions to the jock tax, which also apply to people just like us. Individuals visiting Florida, Texas, Washington State, or Washington D.C. are not subject to income tax there. With the exception of Washington D.C., these states also don’t charge income tax for residents—meaning that while the Dallas Cowboys don’t pay income taxes at home, they do when they visit their rival New York Giants. Keep in mind that those taxes are paid to the state of New Jersey, where the Giants actually play and practice.
Whether your place of work is a football field or maze of cubicles, multistate compliance is no small task. From varying overtime rules to contradictory paid leave requirements, making sense of it all requires the equivalent of an HR Hail Mary pass. Read the Ultimate Guide To Multistate Employment and be the playmaker your company needs.
The absolute worst feeling that a payroll professional can have is finding out someone didn’t get paid.
While that stings for us, it’s even worse for the ones who wake up to an empty bank account on payday. Last week, roughly 800,000 federal employees experienced that due to a partial government shutdown.
Eventually, most of these employees will be paid for their time. And given that the shutdown started back in December, it's a sure bet that payroll professionals like me will be asked to process plenty of retroactive payments. Here’s how those should be handled.
Essential vs. Non-Essential
Let's start with the basics. Federal workers are on a biweekly pay frequency. This means that they get their paychecks every other Friday, or 26 times per year. Because the recent shutdown started in late December, January 11 marked the first missed payday for federal workers.
But wait—if the government is shut down, why are people still working?
Keep in mind that there are two types of workers impacted by the partial government shutdown. Some employees are considered “non-essential.” These individuals receive furloughs during a shutdown. This means they do not report to work and do not receive a paycheck. Furloughed workers can file for unemployment benefits if they need to.
Conversely, “essential” workers are still on the job without pay. These individuals cannot apply for unemployment benefits because they technically remain employed. There's a good chance that both these workers and their furloughed colleagues will be provided back pay after the shutdown ends. At the end of every previous shutdown, Congress has passed measures to ensuring employee back pay.
And federal contractors? Sorry—unlike essential and non-essential workers, they almost certainly won’t receive back pay for the time lost during the shutdown.
Processing Retro Pay
So how does retroactive (or retro) pay work in payroll? Simply put, retro pay is compensation owed to an employee for work performed in a previous pay period.
In the case of these government employees, it would be a simple calculation of the time worked multiplied by hourly rate. Here’s a quick example: If an employee worked 160 hours during the shutdown (or roughly two biweekly periods) and they are typically paid $10 per hour, they would receive a check for $1,600 ($10 x 160). Of course, taxes will come out of that amount as usual. There are no special tax breaks on retro pay.
That example is a little cut and dry, so let’s look at a more common reason for retro pay. In this scenario, let’s pretend that the government up and running. Our same government employee from before worked 86 hours one pay period and was paid $860 (86 hours x $10.00). But that employee (who is nonexempt) is due overtime for six hours. Remember, any work over 40 hours per week is overtime. At time and a half ($10 x 1.5), the employee should receive a rate of $15 per hour for overtime. The overtime total here is $90 ($15.00 x 6). If we take the original payment of $860 and subtract it from the properly calculated $890, we get a remainder of $30. That $30 would be paid to the employee as retroactive pay.
It’s critical to understand that these payments are not considered “additional wages.” Retroactive pay simply represents a true-up of wages already earned. That’s an important distinction to make when making these kinds of payments to employees.
It’s never a good feeling to see employees going unpaid or underpaid. In the case of the partial government shutdown, it’s all too real. One thing is for sure—when this most recent government shutdown ends, it’s certain there will be a lot of retro pay being calculated by payroll professionals just like me.
Everyone’s heard the saying, “you scratch my back, I’ll scratch yours.” In payroll, when these agreements happen between states, we call them reciprocal agreements. In other words, “you take my tax, I’ll take yours.”
Before we tackle the subject head on, it’s important to understand one basic rule of state taxation. While it can get complicated when an employee is moving, working in multiple states, or a professional athlete, in most cases they only pay taxes to the state they work in.
A reciprocal agreement is a special tax arrangement between two states. When two states enter the arrangement, they allow residents of one state to request exemption from tax withholding in another state. For example, if an employee lives in Ohio and works in Indiana, that employee can ask their company to not withhold Indiana state taxes. They can make that specific request with the form WH-47.
Keep in mind that the reverse is also true. If an employee lived in Indiana and worked in Ohio, they could also ask the employer to not withhold by completing the Form IT-4NR. The employee in either scenario then files one Form W-2 at tax time in their resident state.
It’s important to note that employers are not required to comply with either of the above requests. It all comes down to whether the employer has a tax ID set up in that state. For example, if the Ohio employer doesn't already do business in Indiana, they likely wouldn’t have a tax ID in that state. Without a tax ID, the employer can't remit taxes to the state. The decision of whether to set up an Indiana tax ID is at the employer’s discretion. That’s why the remittance of resident tax is sometimes called a “courtesy withholding.”
When States Don’t Play Nice
Now, just because the Buckeyes and Hoosiers play along doesn’t mean every state is that way. State reciprocal agreements are more uncommon than you might expect. As of this writing, there are only 17 states with reciprocal agreements. That's a lot of unscratched backs.
There is one important exception to the rule: the District of Columbia. If you work in D.C. and are a resident of any other state, you do not have to file a tax return in D.C. In that case, you can submit Form D-4A. Conversely, D.C. gets the same courtesy from two states: Maryland and Virginia.
There are a lot of employees who work in states that don’t have reciprocal agreements with their home state. In that case, the employee will have to file a resident tax return as well as a return in their work state. The home state should allow the employee to claim a tax credit on their resident tax return for the taxes paid to the work state. This relieves the tax burden of owing in two states.
Note that this wasn’t always the case. In the landmark case Comptroller of the Treasury of Maryland v. Wynne et ux., the U.S. Supreme Court eliminated the ability to be taxed twice on the same income. Since employees don’t have to owe taxes for both a resident and work state, reciprocity means they only need to file one return. You might call it a big Wynne for taxpayers.
Of course, there’s a lot to digest when it comes to reciprocal agreements. Employees are ultimately responsible for their own withholding requests and should seek the information to be aware of what options they have. Employers should always consult with a tax advisor if they have any questions—and we all know most tax advisors love a good back scratching.
The holiday season is known for a lot of pleasant things—eggnog, scented candles, and family time all come to mind. But if you’ve been in the payroll profession long enough, there’s a good chance you associate it with something else: federal and state tax notices. And when those come in, it’s time to pick up the phone. Gulp.
As we covered last year, tax notices can be as varying as snowflakes, though most are completely harmless. But when you do need to give the IRS or a local agency those “five golden rings,” here are few tips to make those intimidating conversations stress-free.
1. Do Your Homework
You’ll want your ducks in a row before picking up the phone. Your tax notice will typically reference a specific period or quarter, so it’s best practice to first gather data relevant to that timeframe.
Next, you’ll want your tax ID at the ready. This might be as simple as looking at the notice itself. If it’s not on there, go ahead and pull up a copy of your latest return to that respective agency, which you’ll also want to have handy.
Once you have your ID and returns, it’s good to also have your federal ID just in case (if you're calling a state or local agency). Some will ask for one or the other, or both.
2. Keep Your Cool
So you’ve made the call—and undoubtedly waited on hold for a little while. Keep your cool and most importantly, be kind. It’s the holiday season, after all. In my experience, no matter what issue I was dealing with, courtesy almost always got me the answer I needed. The agent you’re speaking with is a human, and they’re apt to respond to your attitude. Maintaining a happy, positive tone is the best way to get a happy, positive result.
3. Write Down Contact Information
Once you get through to an agent, they’re likely to rattle off their name and ID number. Write this down! This will be helpful information to have in the event you need to call back.
In addition to the above, it’s also wise to take down any direct lines or extensions you're provided. It’s not uncommon to be transferred from department to department. Try to keep track of those contacts and their numbers.
4. Confirm That You’re Authorized
While some tax agencies will speak to just about anyone, others require that the person calling is authorized to speak on the company’s behalf. These authorizations are typically established when your company is first set up with the agency.
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