January 23 - 27 Compliance Updates: Top Ten Payroll Issues of State Legislatures

Jan 31, 2023 4:02:16 PM

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Trendspotting: Top Ten Payroll Issues of State Legislatures

The majority of state legislatures began their legislative sessions this January. A flurry of bills are being proposed in the payroll space — many having to do labor and employment. This came as no surprise to Tim Storey, CEO of the National Conference of State Legislators (NCSL), during an early-December 2022 NCSL Forecast 2023 meeting where he explained the challenge to employ workers has been echoed by legislators nationwide.

Storey noted that during informal focus groups with 20 legislative leaders, a common concern expressed was workforce. From difficulties filling state jobs to worker retention issues with private employers in the state. Storey noted that as public policy leaders, employers turn to state legislators for assistance. Storey described the "silver tsunami" of baby boomers reaching retirement age and leaving the workforce. Add the competition of gig work with its flexibility, traditional employers are struggling to fill their jobs.

State legislators are responding to the call. Whether it's introducing apprenticeships or other training programs, or tackling adjacent issues such as paid time off or offering worker protections, these measures are meant to bring workers back. 

Payroll on Checkpoint examined 133 pieces of payroll-related state legislation across the nation to spot the top ten hot topics that are being tackled in the current legislative session. 

  1. Minimum Wage

With over 32 bills so far introduced on the topic, the minimum wage is a perennial favorite for state legislators.

Minimum wage increases. 13 states are looking to increase their current minimum wage rates. 

  • Arizona. House Bill 2240 seeks an increase to $15 per hour in 2024 and also calls for future increases indexed for inflation.
  • Indiana.The minimum wage is a hot topic in Indiana with three proposed bills. House Bill 1394 would increase the minimum wage from $7.25 to $15 per hour, effective July 1, 2023. While House Bill 1192 proposes a more modest and gradual approach until the minimum wage reaches $12.10 per hour by 2027. Yet another bill (Senate Bill 366) looks to increase the minimum wage to $13 per hour. 
  • Kansas. The state has two minimum wage bills. Senate Bill 70 proposes gradual increases until the minimum wage reaches $16 per hour in 2027. Senate Bill 32 would incrementally increase the minimum wage until it reaches $15 per hour on July 1, 2027. The bill would also increase the average annual gross volume of sales of retail stores, service industries, hotels, motels, and 16 restaurant operations from $95,000 to $500,000 to qualify for an exception.
  • Maryland. The state currently has scheduled minimum wage increases. The proposed bill (Senate Bill 81) would further increase the state's minimum wage.
  • Missouri. Currently, the state indexes its minimum wage annually for inflation. Senate Bill 515 proposes gradual increases until the minimum wage reaches $15 per hour by 2026.   
  • Montana. House Bill 201 would increase the floor of the state minimum wage rate from $6.15 per hour to $11.39. Current law requires the state minimum wage to be the greater of the federal minimum wage or $6.15 per hour, adjusted annually. The current minimum wage is $9.95 per hour. 
  • New Hampshire. Senate Bill 144 seeks to increase the minimum wage from $7.25 per hour to $13 per hour, beginning September 1, 2023 and to $15 per hour, effective July 1, 2024. 
  • New Mexico. The state's last scheduled increase is $12.00 per hour, beginning January 1, 2023. House Bill 25 proposes an increase to $16.00 per hour in 2024 and would require annual cost of living adjustments. 
  • New York. With two minimum wage bills, New York is looking for overall scheduled increases through 2027 with adjustments indexed for inflation thereafter (Senate Bill 1978). The proposal would also eliminate the differentiation between small and large employers, but keep the geographical rate differentiation. Assembly Bill 1710 is looking to increase the minimum wage for miscellaneous workers to $15 per hour by 2027.  
  • Oklahoma.The state has two proposals. The current state minimum wage is $7.25 per hour. One bill (House Bill 1986) proposes placing a minimum wage rate increase on the ballot that calls for incremental increases until the minimum wage reaches $11 per hour by 2026. Senate Bill 163 proposes to increase the minimum wage to $13 per hour, effective November 1, 2023 and calls for 50¢ increases over a five-year period.  
  • Rhode Island. Senate Bill 37 proposes to increase the minimum wage to $15 per hour in 2024 and $20 per hour in 2025.
  • Texas. House Bill 1125 would increase the minimum wage from $7.25 per hour to $15 per hour by 2025.
  • West Virginia. House Bill 2481 seeks to increase the minimum wage to $15 per hour by 2029 through incremental increases.

Some states are looking to change only certain elements of their minimum wage laws:

  • Connecticut. House Bill 6364 is looking to eliminate the subminimum wage rate for persons with disabilities. This bill also seeks to eliminate FLSA exemptions for state purposes. In House Bill 6276, a reduction in the youth minimum wage is proposed as well as eliminating the 90-day limit of its use.
  • Hawaii. Senate Bill 230 would authorize counties to establish a minimum wage rate higher than the state's rate.
  • Nebraska. LB15 would establish a youth minimum wage as well as a training wage rate.
  • New Hampshire.  House Bill 583 would eliminate the use of subminimum wage rates for people with disabilities.
  • New Mexico. House 28 proposes to index its state minimum wage for inflation. Currently, the minimum wage increases only through legislative action. 
  • Oregon. The state is exploring options on how to handle future increases. House Bill 2699 would tie future minimum wage increases based on fair market rent estimates. House Bill 2443 is looking to index its minimum wage for a five-year period following its scheduled increases rather than on a continual basis.
  • Virginia. House Bill 1669 would establish a youth wage of $9.00 per hour.
  • West Virginia. The state currently has a minimum wage of $8.75 per hour since 2016. House Bill 2982 proposes to index the state minimum wage to inflation beginning September 1, 2023.

Two states that do not currently have minimum wage and overtime provisions are looking to change that. There are proposed bills in both the House and the Senate of Mississippi (Senate Bill 2439/ House Bill 583) that seek to establish a minimum wage and overtime law for the state. Currently, Mississippi does not have any minimum wage or overtime provisions. S2439 would set the minimum wage at $12 per hour, beginning January 1, 2024 and increase it to $16 per hour, beginning January 1, 2026. The Senate bill includes a training wage of 85% of the state minimum wage and a cash minimum wage for tipped workers of 50% of the state minimum wage. H583 would set the minimum wage at $8.50 per hour with a cash minimum wage for tipped workers at $3.62 per hour. Both bills feature overtime provisions.

South Carolina (Senate Bill 216) would set the state minimum wage at $2.00 above the federal minimum wage (currently, $7.25 per hour). The provision would apply only to individuals who are entitled to the federal minimum wage under the FLSA. 

  1. Paid Leave

Paid Family and Medical Leave remains a hot topic in the 2023 legislative session. While Congress continues to debate Paid Family and Medical Leave, states are examining their options. 13 states have proposed Paid Family and Medical Leave Insurance programs where employees and/or employers contribute premiums. These states include:

States that already have PFMLI programs on the books are eyeing some changes.

  • Colorado began collecting premiums for its PFMLI program, beginning January 1, 2023 with benefits being paid out beginning in 2024. House Bill 1104 looks to postpone implementation of the program for one year. Premiums collected in 2023 would then be credited for premiums owed in 2024.
  • Both New Jersey (Assembly Bill 5084) and Oregon (Senate Bill 481) are looking to add bereavement as a qualifying reason for their PFMLI programs.
  • A proposed bill (House Bill 2138) in Oregon seeks to repeal its PFMLI program, beginning January 1, 2024, and would instead offer a tax credit to employers who provide paid family and medical leave. The bill also calls for any unused PFMLI premiums to be reverted to the General Fund.
  • Washington (Senate Bill 5286) looks to amend the premium rate calculation for its PFMLI program and makes other updates.

Currently, 14 states require employers to provide paid sick leave. Seven states are looking to add paid sick leave requirements or amend current requirements.

  • Kentucky (House Bill 69), Hawaii (House Bill 235), Minnesota (Senate Bill 34), and Texas (House Bill 404) are proposing employer-provided paid sick leave requirements. Hawaii is also looking to require supplemental paid sick leave for public health emergencies. Minnesota has several localities that have paid sick leave ordinances. Arkansas has a bill that would require employers to provide paid maternity leave (House Bill 1006).
  • Connecticut already requires certain employers to provide paid sick leave. House Bill 6363 would require employers who are required to provide paid sick leave to also provide two mental health days per year.
  • Virginia has a paid sick leave requirement for certain home health workers. House Bill 1988 seeks to amend current provisions to allow carryover of unused accrued leave as well as require written notice of the paid sick leave policy.
  1. Tax Credits

State legislators are looking to offer businesses tax incentives for certain benefits to employees. There are several bills that propose tax credits for employers for: 

  1. providing paid family and medical leave: Oklahoma Senate Bill 384;
  2. purchasing employee disability insurance: Oklahoma Senate Bill 581;
  3. providing qualified transportation fringe benefits and also creating a requirement: New York Assembly Bill 1944;
  4. employing individuals with disabilities: North Dakota House Bill 1244 and Indiana House Bill 1559;
  5. paying employees a required local minimum wage greater than the state minimum wage: Arizona Senate Bill 1108;
  6. hiring the first permanent employee on the payroll: New York Assembly Bill 1755
  7. participating in a Four-Day Workweek Pilot program: Maryland Senate Bill 197; and
  8. allowing telework for at least 30% of employees: Hawaii House Bill 513.
  1. Unemployment

There are seven bills designed to tackle unemployment issues so far in the 2023 legislative session. California (Senate Bill 227), Connecticut (House Bill 6365), and Washington (Senate Bill 5109) have proposed bills that would permit undocumented individuals to collect unemployment benefits if certain eligibility requirements are met. Missouri (Senate Bill 21) has a proposed bill that would revise the maximum number of weeks that unemployment benefits may be collected by tying the maximum number of weeks to the state's unemployment rate. A proposed bill in Michigan (Senate Bill 40) would look to increase the maximum weeks that benefits may be claimed to 26 weeks. A work sharing program is being proposed in Indiana (Senate Bill 347). Finally, in Oklahoma, a bill (House Bill 2457) is being proposed that would exclude commissions and bonuses from wages as well as one-time bonuses and overtime pay for wage reporting purposes.

  1. Earned Wage Access

Earned wage access (EWA) is a form of on-demand wage payment where employees can access wages after they have performed services rather than wait for the usual pay date. It's a popular perk that workers want. State legislators are grappling with how these programs should be regulated. Six states have introduced legislation that would require registration or licensure  by "earned wage access services" to operate in their state. Some proposed legislation include certain written notice requirements to be provided to employees as well as provisions regarding fees.

Mississippi's proposed legislation (Senate Bill 2648) does not require registration or licensure. However, the bill does lay out certain requirements for earned wage access providers including disclosing terms and conditions and prohibiting mandatory payments or charging late fees, interest or other penalties.

  1. Pay Transparency

Pay transparency is slowly gaining steam among states. In an effort to provide pay transparency, there has been a trend to require employers to provide salary ranges in both external and internal job postings or provide the information upon request. Currently, there are eight states and several localities that have such requirements. So far, four states are eyeing similar requirements: 

  • Connecticut currently requires employers to provide salary ranges upon request. A proposed bill (House Bill 5243) would require the disclosure of salary ranges on job postings while House Bill 6273 would require salary ranges on internal job postings.
  • A proposed bill (Senate Bill 1057) in Hawaii would require job listings to include an hourly rate or salary range. 
  • In Montana, a proposed bill (Senate Bill 146) on wage discrimination includes a provision that requires wage or salary range information including benefits on job postings. 
  • While Jersey City has a pay transparency requirement, New Jersey does not. The state has a proposed bill (Assembly Bill 4285) that would require employers to provide salary and benefit information on job postings.
  1. Tipped Workers

Seven states currently do not permit employers to take a tip credit against the minimum wage. The District of Columbia will be joining them soon. Voters approved a ballot measure that will gradually eliminate the tip credit. The city council has recently voted to delay the effective date of the measure from January 1, 2023 to May 1, 2023.Two states are proposing similar measures. Connecticut has a bill (House Bill 6364) that would repeal the tip credit outright, while Hawaii favors the phased-out approach with its proposed bill (Senate Bill 270). Currently, Hawaii permits tipped workers to be paid $1 less than the state minimum wage. The bill proposes a 25¢ decrease until 2029 where workers would be paid the full state minimum wage.

  1. Worker Classification

Worker classification is an issue that can impact multiple facets of the payroll arena from withholding tax, unemployment, wage and hour, and workers' compensation. Failing to make the correct determination of whether a worker is an employee or independent contractor can lead to not only penalties but unpaid liabilities. It's no wonder that some state legislatures are trying to get a handle on the situation. States generally use a common law test (behavioral control, financial control, and type of relationship) or an ABC test (focuses on control, whether services are performed outside the usual course of the employer's business, and whether individual is customarily engaged in an independent business). The ABC test begins with a presumption that the worker is an employee and therefore is considered stricter than the common law test.

Currently, New Jersey uses the ABC test but a proposed bill (Senate Bill 599) would change the state over to the common law test. While New York, who currently uses the common law test, has a proposed bill (Assembly Bill 2085) that would change over to the ABC test. Oklahoma has a proposed bill (Senate Bill 31) that would adopt the Uniform Worker Classification Act, a model policy brought forth by the American Legislative Exchange Council (ALEC). Under the Act, a worker determination would apply to all laws in the state. 

In Indiana, a proposed bill (Senate Bill 32) seeks to have its state tax, labor, unemployment, and workers' compensation agencies provide information on classification including assessed penalties and the classification criteria of each agency. 

  1. State-Run Retirement Plans.

There is a growing concern that many employees do not have access to an employer-provided retirement plan. As a result, several states began offering a state-run program. Currently, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Massachusetts, Maryland, Maine, New Jersey, New Mexico, New York, Oregon, Virginia, and Vermont offer such plans along with a few localities. Two states have proposed bills that would establish a Secure Choice Retirement program: Minnesota (Senate Bill 413) and Mississippi (House Bill 204). These programs generally include an automatic enrollment where employees may opt out and require employers to perform a wage deduction to be remitted to the state. Employer matching is not required under these types of programs. 

  1. Work Scheduling.

Work scheduling laws can come under many names from predictive scheduling or fair workweek. It's been mostly a trend of cities and focuses on a specific industry such as retail, hospitality, and food. On the state front, only Oregon has a predictive scheduling law. It's become an important issue as some states look to protect workers from sudden schedule changes that impact work-life balance. There are four states with proposed legislation that require predictive scheduling: Hawaii (Senate Bill 42); Michigan (House Bill 4035); and New York (Senate Bill 2560 and Senate Bill 2479).

Payroll on Checkpoint will continue monitoring state legislation and keep you informed of the latest developments.

New 1099 Filing Portal Launched

The long-awaited 1099 filing platform has gone live on the IRS website. The 1099 filing platform named IRIS allows users to download and print 1099s suitable for distribution and allow users to file 1099s with the IRS and state tax agencies that participate in the Combined Federal/State Filing Program (see Payroll Guide ¶5042). This includes Forms 1099-NEC used to report nonemployee compensation. Currently, IRIS accepts Forms 1099 only for tax year 2022 and later [IR 2023-14, 1/25/2023].

Background. Section 2102 of the Taxpayer First Act (TFA) requires the IRS to develop an internet platform by January 1, 2023, that will allow taxpayers to electronically file Forms 1099. The new platform will allow users to prepare, file, provide Forms 1099 suitable for distribution, and create and maintain tax records.

Benefits of IRIS. The IRS notes that switching from paper to electronic filing through IRIS comes with a number of benefits including accurate filings, the ability to submit automatic extensions and corrections, receipt acknowledgement in as little as 48 hours, and year-to-year information storage through IRIS.

IRIS Transmitter Control Code. Users must obtain an IRIS Transmitter Control Code (TCC). FIRE TCCs will not be accepted on the new system. Issuers, transmitters, and software developers are eligible to apply for an IRIS TCC. Each authorized user must have an account and an e-Services PIN. 

Bulk filers. IRIS allows up to 100 forms to be uploaded via a.csv file. Multiple.csv files can be uploaded. However, the Application to Application (A2A) channel for bulk filing will not be available until May 2023. Bulk filers should continue to use the FIRE system for the 2023 processing year. However, the schema package is available to users who have obtained an IRIS TCC. 

Additional resources. The IRS released IRS Publication 5717 that provides guidance to users of IRIS. A video is available, featuring the entry of Form 1099-NEC.

2023 Fact Finder Updated for Numerous Changes

The annual Fact Finder publication has been updated for calendar year 2023 with valuable payroll information at the federal and state levels for: pension plan limitations, the Social Security taxable wage base, state unemployment, disability and supplemental withholding rates, and a number of state paid family and medical leave rates.

Federal information on page 1. The first page of this two-page PDF focuses on federal tax and includes 2023 pension and transportation limits, federal mileage rates, and FICA (Social Security and Medicare)and FUTA (Federal Unemployment Tax Act) tax rates. Many of the federal figures in the Fact Finder can be found in Payroll Guide ¶3115, which also includes references to other paragraphs that provide more detailed information on the numbers included in the Fact Finder.

  • Pension plan limitations. There were changes to pension plan limitations in 2023, including an increase in the pre tax salary deferral limit for Code Sec. 401(k) contributions to $22,500.
  • Social Security wage base. The Social Security taxable wage base increased $13,200 in 2023 to $160,200 making the annual maximum contribution amount $9,932.40 this year. 
  • Commuting benefits. The monthly dollar amounts for tax free commuting benefits for employee parking and transit passes/van pools increases to $300 in 2023.
  • Federal mileage rates. The business mileage, moving and medical rates all increase in 2023 with the business mileage rate increasing to 65.5¢ this year.
  • Maximum value employer provided vehicles. For purposes of the fleet-average valuation rule and the vehicle cents-per-mile valuation rule, the maximum fair market value (FMV) of automobiles (including trucks and vans) first made available to employees went up from $56,100 to $60,800 in 2023.

State information on page 2. The second page of the Fact Finder PDF includes state information for the unemployment taxable wage base, the supplemental wage withholding rates, disability wage bases and now paid family and medical leave rates. Complete coverage of these topics can be found in the state sections of the Payroll Guide.

  • Unemployment wage base. Washington State still holds the highest unemployment wage base at $67,600 in 2023. Nebraska and Rhode Island have separate, increased wage bases for employers assigned the highest tax rate in 2023 at $24,000 and $29,700, respectively. In Michigan, the wage base is $9,500 in 2023. However, if the state's unemployment trust fund is at least $2.5 billion for two consecutive quarters, the wage base is reduced to $9,000. States like Arkansas, Missouri, and Vermont have decreased their wage bases for 2023.
  • Disability wage bases. Only five states and Puerto Rico have a disability wage base. California's annual wage base hopped up from $145,600 to $153,164 in 2023. Hawaii, New Jersey, and Rhode Island also had wage base increases. New York's wage base is based on the employee's weekly wage and the wage base for Puerto Rico stays put at $9,000.
  • Paid family and medical leave. This section includes the leave rates for five states and the District of Columbia. The employee rate is 0.5% in Connecticut (up to the Social Security wage base of $160,200), 0.06% in New Jersey (up to the wage base of $156,800), 0.455% in New York (up to a maximum of $399.34 per year), and 0.8% in Washington. The employer rate is 0.62% in the District of Columbia.
  • Supplemental tax rates. In addition to the federal supplemental income tax withholding rate (22% on wages up to $1 million; 37% on wages more than $1 million), many state jurisdictions allow for a flat percentage of income tax withholding for wages that are in addition to regular pay. In 2022, legislation and ballot initiatives were adopted that made changes to some state income tax rates. For example, the state income tax rate in Arkansas was reduced to 4.9%, the state income tax rate in Colorado was reduced to 4.4%, and a flat tax was adopted in Idaho (beginning January 1, 2023). In Indiana, legislation decreased the state income tax rate to 3.15%, beginning this year. 

Deadline for Backup Withholding Approaching

The IRS released Tax Tip 2023-08 to remind businesses and other payers that deadlines are approaching for payments related to backup withholding. 

Background. Payers are required to deduct backup withholding on certain non wage payments made to payees for whom an information return was filed and that had either a missing or incorrect taxpayer identification number (TIN). Payments that may be subject to backup withholding include commissions and nonemployee compensation. The backup withholding rate is 24%.

Form 1099-NEC. Certain information returns are used to report backup withholding. A payer must file Form 1099-NEC for each person in the course of the payer's business to whom the payer has paid at least $600 during the year for services performed by someone who is not the payer's employee. Forms 1099-NEC must be furnished to individuals and filed by January 31, 2023 regardless if they are filed by paper or electronically. 

Form 945. Backup withholding must be reported on  Form 945 (Annual Return of Withheld Federal Income Tax). For tax year 2022, the deadline to file Form 945 is Jan. 31, 2023. However, if the payer made all federal deposits on time and in full, the deadline is Feb. 10, 2023.

Employer identification number. The federal employer identification number (FEIN) must be matched on Forms 945 and 1099-NEC. Mismatched FEINs may result in processing delays.

Extension request. A payer may request a 30-day extension to file most information returns by filing Form 8809 (Application for Extension of Time to File Information Returns) (see Payroll Guide ¶4271). The IRS does not automatically grant an extension for someone filing Form 1099-NEC reporting nonemployee compensation payments. Payers who need a 30-day extension to file this form must meet one of the criteria listed on line 7 of Form 8809. 

Payers that request an extension are still required to furnish Forms 1099-NEC to individuals by January 31 unless the payer requests an extension for this deadline as well. If the extension is granted, the payer will have an additional 30 days to furnish Forms 1099-NEC.

Eleventh Circuit Court of Appeals Find ARPA Tax Mandate Unconstitutional

The Eleventh Circuit (the Court), affirming the U.S. District Court for the Northern District of Alabama, has held that the tax mandate provision in the American Rescue Plan Act of 2021 (ARPA) is an unconstitutionally ambiguous condition on states' receipt of federal funds. The Court also found that the district court did not abuse its discretion in granting the plaintiff states' motion for a permanent injunction enjoining enforcement of the tax mandate provision [State of West Virginia, et al. v. U.S. Dept. of Treasury, et al., U.S. Ct. App. (11th Cir.), Dkt. No. 22-10168, 01/20/2023].

Background. ARPA (P.L. 117-2; 42 U.S.C. § 802 et seq.) is a $1.9 trillion economic stimulus bill aimed at mitigating the economic and public health effects caused by the coronavirus pandemic that was passed by Congress and signed into law by President Joe Biden on March 11, 2021. ARPA distributes roughly $195.3 billion directly to the states for specified purposes. Before a state can receive those funds, it must certify to the U.S. Secretary of the Treasury that it will comply with multiple conditions that ARPA imposes.

The plaintiff states contend that one of those conditions, the offset provision (the "Tax Mandate"), exceeds Congress's authority under the Spending Clause of Article I, Section 8 of the U.S. Constitution. The Tax Mandate provision of ARPA provides that, "a State or territory shall not use the funds provided…to either directly or indirectly offset a reduction in the net tax revenue of such state or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase." The phrase "directly or indirectly offset" is not defined in ARPA. The U.S. Treasury Secretary can recoup funds that she interprets were used in violation of the Tax Mandate. The Tax Mandate's "covered period" extends from March 3, 2021, until all funds have been expended or returned to, or recovered by, the U.S. Treasury Secretary.

On March 31, 2021, 13 states sued the Treasury Department, Treasury Secretary, and Inspector General of the Treasury Department in the U.S. District Court for the Northern District of Alabama, challenging the offset provision. The 13 states were Alabama, Alaska, Arkansas, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, Utah, and West Virginia. The states argued that this tax mandate exceeds Congress's authority under the Constitution. The complaint averred three claims: first, that the offset provision is an unconstitutionally ambiguous and coercive condition under the Spending Clause; second, that the offset provision violates the Tenth Amendment's anti-commandeering doctrine; and third, that the harms alleged in the first two counts entitle the states to declaratory relief.

On May 17, 2021, the Treasury Department issued an interim final rule to clarify ARPA's contours and scope. Recognizing that money is fungible, the interim final rule creates a framework for deciding whether a state has improperly offset a reduction in net tax revenue with ARPA funds. The rule makes clear that failure to comply with the offset provision's restrictions on use may result in recoupment of funds and provides a detailed recoupment procedure. The rule also sets a net tax revenue baseline for judging compliance with the offset provision at "fiscal year 2019 tax revenue adjusted for inflation." It provides a 4-part process to determine whether, and the extent to which, ARPA funds have been used to offset a reduction in net tax revenue as compared to the 2019 baseline. The rule prohibits recipient states from offsetting reductions in net tax revenue by cutting spending in an area where they had spent ARPA funds. The final rule, implemented on January 27, 2022, did not materially differ from the interim rule.

On November 15, 2021, the U.S. District Court for the Northern District of Alabama held that the tax mandate provision of ARPA was an unconstitutionally ambiguous condition on the states' receipt of federal funds and granted the plaintiff states' motion for a permanent injunction enjoining enforcement of the tax mandate provision. The district court did not reach the states' coercion and anti-commandeering concerns. Nor did it enter a declaratory judgment for the states because it deemed the permanent injunction would fully rectify the harm.

Standing. The Court concluded that the states had standing, noting that the constitutional minimum of standing requires three elements: (1) an injury in fact that is concrete and particularized and actual or imminent; (2) a causal connection between the injury and the conduct complained of; and (3) redressability.

As to the first element, the Court noted that the states had two theories for why they suffered actual and concrete harm. First, the states argued that their inability to ascertain the condition imposed by the offset provision had already infringed, and continued to infringe, on the states' sovereign prerogatives as parties to a contract with the federal government. Second, the states argued that they were subject to the threat of a recoupment action if they spent funds contrary to the offset provision. The Court agreed that these theories established that the states had suffered an injury-in-fact. As to the second and third elements, the Court noted that the states injury is fairly traceable to the challenged conduct, namely, the promulgation and enforcement of the allegedly unconstitutional offset provision. This injury is plainly redressable by declaring that provision null and void.

The Treasury Department argued that, even if the states had standing to file this suit initially, it had become moot. The Treasury Department said that it had disclaimed the broad reading of the offset provision that would stop the states from cutting taxes and did not intend to enforce the provision to recoup money based on tax cuts as long as the states can pay for the tax cuts using their own funds. The Treasury Department explained that it had formalized this reading of the offset provision in the Treasury regulation issued. The Court, however, concluded that the regulation did not moot the states' challenge. The Court reasoned that even if the Department gave the offset provision a narrow reading, the offset provision would continue to limit how the states may use federal funds. To the extent the limitation was unascertainable, it remained an unconstitutional condition on those funds.

ARPA offset provision violates Spending Clause. The Court agreed with the states' argument that the offset provision violates the Spending Clause of the U.S. Constitution because the states cannot ascertain the condition it imposes on ARPA funds. The Court found the condition imposed by ARPA's offset provision was not ascertainable and did not provide clear notice about how to comply with it, rendering it unconstitutional.

The Spending Clause authorizes Congress to "lay and collect taxes... to pay the debts and provide for the common defense and general welfare of the United States." This clause gives Congress a wide berth not only to tax and spend but also to exert influence on the states by attaching strings to federal funding. Congress may, within limits, compel states to take certain actions that it could not otherwise require them to take, and a state's acceptance of the federal funds will generally constitute consent to the conditions imposed by Congress. In a prior case (Pennhurst State School and Hospital v. Halderman), the Supreme Court held that, by virtue of the Spending Clause, Congress can amplify its enumerated Article I powers and influence state regulatory policy by "fixing the terms on which it shall disburse federal money to the States." But the Supreme Court recognized this broad authority is not limitless, and Congress must speak unambiguously and with a clear voice when it imposes conditions on federal funds. Specifically, Congress must speak clearly enough for "the states to exercise their choice knowingly, cognizant of the consequences of their participation." The Supreme Court explained that a state cannot knowingly accept a condition if it is unable to ascertain what is expected of it.

The Court noted that there were three aspects of ARPA that, when combined, were inconsistent with the constitutional imperative that Congress's funding conditions be ascertainable. First and most importantly, the offset provision did not provide a standard against which a state could assess whether it will reduce or has reduced net tax revenue. The prohibition on any "reduction in the net tax revenue" presupposes a baseline against which to measure a potential reduction. Although the Secretary's rule supplies a benchmark, the ARPA itself does not provide any way to determine whether net tax revenues have been reduced. This lack of a baseline affects whether a state policymaker can understand and comply with the statute. Without a baseline, there is no way to assess whether a tax cut has caused a "reduction in the net tax revenue."

Second, ARPA's prohibition against either directly or indirectly offsetting net tax reductions with recovery funds exacerbates this ascertainability problem. The Court noted that ARPA does not define "directly or indirectly" and that it agreed with the states that the phrase "directly or indirectly offset" seemed extraordinarily expensive. Because money is fungible, the Secretary could always assert a plausible argument that a state, after a tax cut, committed an unlawful indirect offset of the attendant revenue shortfall. Because ARPA funds could conceivably indirectly offset any reduction in net tax revenue caused by a change in law, the Rescue Plan leaves them guessing whether and how they can spend ARPA funds after the tax cut.

Third, the Court noted that it could not ignore that Congress had aimed this novel restriction at each state's entire budget and every single one of its taxes. The states face billions of dollars in potential recoupment actions and must ensure that every tax and tax rate comply with this condition. The Court reasoned that ARPA's novelty and scope made it even more important that Congress speak with a clear voice.

Other constitutional claims. Because of its finding that the condition imposed by ARPA's offset provision violated the Spending Clause for its lack of ascertainability, the Court reasoned that it need not address the states' coercion and Tenth Amendment claims.

Permanent injunction. To obtain a permanent injunction, the moving party must show that: (1) it has suffered irreparable harm; (2) remedies at law will not provide adequate compensation for the injury; (3) on balance, an equitable remedy is warranted; and (4) a permanent injunction will not disserve the public interest. Applying this standard, the Court found that the district court did not abuse its discretion in concluding that a permanent injunction was warranted.

The Court reasoned as follows: First, the states have suffered irreparable harm. ARPA's offset provision affects the states' sovereign authority to tax by binding them to a deal with ambiguous terms and placing them on the hook for billions of dollars in potential recoupment actions. Second, monetary damages cannot adequately compensate the states because the federal government generally enjoys immunity from suit. Third, the states' inability to promulgate their own tax policies, and the attendant financial consequences, outweigh any inconvenience to the Treasury Secretary from the district court's injunction. Fourth, the injunction serves the public interest. Enforcing the Spending Clause's limitations helps preserve state sovereignty and the two-government system established by the Framers. All four elements weigh in favor of granting a permanent injunction.

Declaratory relief unnecessary. The Court agreed with the district court that since the permanent injunction fully redresses the states' harm in this case, declaratory relief was unnecessary. The Court stressed that the permanent injunction applies only to the offset provision of ARPA, which is severable from the remaining provisions of the Act.

United States and Mexico Sign Agreement Offering Protections for Temporary Workers

On January 17, 2023, the United States and Mexico entered into a  Memorandum of Understanding (MOU) regarding protections for workers who are part of a temporary foreign worker program. The MOU emphasizes an increased transparency and coordination between the two countries.

The agreement looks for both countries to provide better enforcement of working conditions and discrimination requirements, support fair recruiting, and facilitate the availability of temporary agricultural and non-agricultural employment (H-2 workers). The parties also agree to acknowledge the certain requirements specific to the H-2 Temporary Worker Programs and include an intention to raise awareness of these requirements.  This includes H-2 wage requirements. 

The U.S. and Mexico will improve current methods of preventing, reporting, and investigating worker rights violations and will provide assistance to workers whose rights have been violated. Employers will be held accountable for such violations. The countries agree to meet quarterly to discuss progress.

U.S. Secretary of Labor Marty Walsh commented that: "Mexico is the country of origin for the majority of temporary foreign workers in the U.S. The memorandum of understanding ensures workers' rights are an absolute priority for both countries. We are committed to protecting the rights of every worker in the U.S., regardless of their immigration status. Today's pact will help inform migrant workers of their rights and of the availability of mechanisms in both countries to seek assistance if they feel their rights were violated" [Bureau of International Labor Affairs, Release No. 23-83-NAT, Jan. 18, 2023]. 

OCSE Releases Revised National Medical Support Notice and Instructions...Again

The Office of Child Support Enforcement (OCSE) has released a second version of the National Medical Support Notice (NMSN) forms and instructions. The OCSE had released a prior version earlier this January along with an Action Transmittal explaining that proposed changes were not reflected in this version and set an expiration of October 31, 2023 to grant states time to implement changes. The OCSE has released another version incorporating those proposed changes that have an effective date of November 1, 2022, however, states will not have to generate the revised form until November 1, 2023 [OCSE, AT-23-01, 1/17/2023].

Background. The National Medical Support Notice (NMSN) is a federal form that all state child support enforcement agencies must use to enforce the health care coverage provisions in a child support order. The form serves as legal notice to the employer that the employee identified in the NMSN is obligated by a court or administrative child support order to provide medical coverage for the child(ren) identified in the notice. The NMSN has two parts: Part A (Notice to Withhold for Health Care Coverage), and Part B (Medical Support Notice to Plan Administrator). Part A notifies the employer to withhold employee contributions required by the group health plan(s) in which the child(ren) is/are enrolled. Part B must either be forwarded by the employer to the administrator of each group health plan identified by the employer to enroll the eligible child(ren) in medical coverage, or completed by the employer if the employer serves as the health plan administrator. See Payroll Guide ¶17,334.

November 1, 2023 version. The NMSN has two parts:

  • Part A - Notice to Withhold for Health Care Coverage (OMB 0970-0222) for the employer to withhold any employee contributions required by the group health plan(s) in which the child(ren) is/are enrolled; and
  • Part B - Medical Support Notice to the Plan Administrator (OMB 1210-0113), which must be forwarded to the Administrator of each group health plan identified by the employer to enroll the eligible child(ren), or completed by the employer if the employer serves as the health Plan Administrator.

There are number of significant changes:

  • Part A:  Under the "Additional Information Termination Order/Notice" section, it notes that unless an employee indicates they want to continue coverage voluntarily, employers are required to terminate health care coverage if the Termination Order/Notice checkbox has been checked on page 1.
  • Part A:  The "Employer Response" section is now divided into three sections: (1) No enrollment possible; (2) Dependent Enrollment Not Yet Available; and (3) Dependent Coverage Available. It also requires an employer to indicate if an employee is on leave and the date of expected return.  
  • Part A: Under the "Employer Responsibilities" section, it notes that if the employee is also under a child support order, release of a health care insurance order may result in an increase in the amount of earnings available to remit to the state disbursement unit as child support. However, an employer must comply with the child support wage order regardless of a release from a health care insurance order.
  • Part A: Under the "Duration of Withholding" section, it notes, in addition to established requirements, employers are required to provide any available continuation coverage that is not elected, or the period of when such coverage expires.
  • Part B: Now contains an addendum that requires completion by a plan administrator. The addendum requires the following information: (1) medical, prescription drug, mental health, dental, vision and other insurance details and (2) a list of children no longer eligible for coverage.  

Supplemental instructions are in a stand-alone attachment. The instructions state that employers who receive an NMSN are required to complete and return Part A no later than 20 days from the date of receipt regardless if the employee was never employer or is no longer employed. Part B must be completed by the plan administrator if the employer offers dependent health benefits to the employee. Part B must be completed no later than 20 business days after the date of the notice. 

Additional resources. The OCSE has also provided the following additional resources:

Q&A Corner: W-2 De Minimis Corrections

Question: When we began W-2 processing, we discovered an error with one of our employees. In 2022, during the first week when health benefit deductions were taken for an employee, there was a calculation error where we deducted an additional $50. Luckily, we corrected it for all other weeks, but somehow we never refunded the employee in 2022. We will be refunding the $50 in January 2023 and withholding appropriate taxes for the amount. How do we fix this for 2022?

Answer: The error you are describing results in additional wages in 2022 of $50. A provision under the PATH Act of 2015 provides a safe harbor from penalties for errors on a Form W-2 if the error is $100 or less ($25 or less for tax withheld). An employer will not be required to issue a corrected return unless the employee requests a corrected statement. If it is requested, then the W-2c must be furnished and also filed with the IRS. The safe harbor provision under the PATH Act only applies to de minimis errors and does not apply to intentional misreporting or a failure to file or furnish an information statement. 

Also, the safe harbor does not mean the employer is not required to report or remit withholding tax. In other words, based on the above scenario, a Form 941-X would be required to be filed to account for the adjustment for the relevant period in 2022. Notice 2017-9 notes that the IRS still encourages employers to correct even de minimis errors. The Combined Annual Wage Reporting (CAWR) program compares federal withholding, Medicare wages, Social Security wages, and Social Security tips reported to the IRS on Form 941 against amounts reported to the SSA on Forms W-3 and W-2. The IRS cautions that the CAWR program may generate a notice where an underpayment or overpayment of tax occurs even in the case of de minimis amounts. 

Healthcare Provider Ordered to Pay $1.6M in Unpaid Overtime Following DOL Investigation

Following an investigation that determined a home healthcare company violated the overtime and recordkeeping provisions of the Fair Labor Standards Act (FLSA), the U.S. Department of Labor (DOL) obtained a consent judgment in federal court requiring the employer to pay back wages and damages to the affected employees.

The DOL's Wage and Hour Division (WHD) conducted an investigation against Minnesota Living Assistance Inc. (operating as Baywood Home Care) and found that the company attempted to circumvent overtime requirements by paying workers a daily rate that did not vary when overtime was worked. The WHD also discovered recordkeeping violations that included the failure to record hours worked weekly and keep accurate records of each worker's regular hourly rate of pay.

On January 19, 2023, the U.S. District Court for the District of Minnesota in Minneapolis ordered the home health care company to pay $1.6 million $1.6 million in back wages and damages to 136 employees. The Court ordered Baywood to pay $1 million upon signing the agreement and the $600,000 balance in six equal quarterly installments beginning 90 days later.

As part of the judgment, the company has also agreed to hire an independent, third-party agent to audit the company’s payroll records for the period of September 7, 2022 to September 7, 2023 to ensure compliance with the provisions of the FLSA. In addition, Baywood must provide all employees with information on the FLSA and their worker rights and protections under federal law.

WHD Principal Deputy Administrator Jessica Looman noted that: "Home healthcare workers provide essential caregiving work and ensure the dignity of people unable to care for themselves. The long-awaited recovery of these wages will have a tremendous impact on 136 workers and their families" [Wage and Hour Division, Release No. 23-23-CHI, Jan. 19, 2023].

Advocacy Group Requests Proposed Worker Classification Rules Remove Unemployment and Workers' Compensation Applicability

Another business advocacy group has weighed in on the DOL's proposed worker classification rules. In addition to the over 55,000 comments received and the most recently reported comments by the American Payroll Association, UWC–Strategic Services on Unemployment and Workers’ Compensation, a national association that advocates for businesses on unemployment insurance and workers’ compensation (WC) public policy issues, has raised their concerns on the proposed rules.

The proposed rules seek to rescind the current Trump-era rules that would determine worker status based on two core factors: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss based on initiative and/or investment. The proposed rules would opt for a multi-factor approach, favored historically by the courts, that would account for the totality of the circumstances in order to determine worker status. 

In their comments, UWC asserts that the DOL is not authorized under the Fair Labor Standards Act (FLSA) to promulgate regulations on worker classification that impact unemployment and workers' compensation programs. UWC argues that worker classification definitions, as it pertains to unemployment, are determined under the Federal Unemployment Tax Act (FUTA), the Social Security Act (SSA), and state laws, while workers' compensation worker status is governed by state laws. UWC contends that the FLSA does not provide the authority to the DOL to set rules on the issue for unemployment and workers' compensation purposes. 

The UWC also expressed concerns that the applicability of the proposed worker classification rules on unemployment and workers' compensation would add confusion and result in inconsistent determinations. 

IRS to Republish Publication on Specifications for Electronic Filing Certain Information Returns

The IRS has alerted taxpayers that the October 2022 version of Publication 1220 (Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G) contains incorrect information, which will be updated in a revised version of the publication to be available on the Service's website soon. 

Purpose of publication. The purpose of Publication 1220 is to provide the specifications for filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G electronically with the IRS, including the requirements and specifications for electronic filing under the Combined Federal/State Filing (CF/SF) program. It also provides specifications to submit an automatic 30-day extension of time to file certain information returns.

Correction to list of combined federal/state filing participants. Exhibit 2 of the publication contains the tax year 2022 revision updates. This section of the publication will reflect the two corrections being made. The first correction is to remove the District of Columbia and Pennsylvania from the section of the publication discussing the Combined Federal/State Filing (CF/SF) Program (Part A, Sec. 12). These two tax jurisdictions were prematurely added to the chart in Sec. 12 listing the states participating in the program. DC and Pennsylvania will not participate in the program until the 2023 tax year (2024 filing year).

Correction to e-filing waiver form name. The IRS further notes that the title of Form 8508 will be corrected to the following: "Application for a Waiver from Electronic Filing of Information Returns." The IRS notes that the name change will be updated throughout the publication. The form is used to request a waiver of the requirement to file electronically for the current tax year and supports both the Filing Information Returns Electronically (FIRE) and Information Return Intake System (IRIS) systems. Filers with 250 or more information returns must file electronically. The IRIS system launched earlier in January, however, bulk filers must continue using the FIRE system because Application to Application (A2A) will not launch until May 2023. 

Federal Employment Tax Deadlines for February

We have listed the February payroll tax deposit deadlines for semi-weekly and monthly depositors below.

Semi-weekly depositors. Semi-weekly depositors must deposit the income tax they withheld from employee wages, and both the employee and employer share of Social Security and Medicare taxes (FICA taxes), by the end of Wednesday if the payday was on the previous Wednesday, Thursday, or Friday; or by the end of Friday if the payday was on the previous Saturday, Sunday, Monday, or Tuesday.

A due date which falls on Saturday, Sunday, or a legal holiday is postponed until the next business day. Semi-weekly depositors must have at least three business days after the end of a semiweekly period to deposit their taxes.

The February deposit deadlines for semi-weekly depositors are as follows: 

  • February 1 - deposit the taxes for payments made January 25 - 27.
  • February 3 - deposit the taxes for payments made January 28-31.
  • February 8 - deposit the taxes for payments made February 1 -3.
  • February 10 - deposit the taxes for payments made February 4 - 7.
  • February 15 - deposit the taxes for payments made February 8 -10.
  • February 17- deposit the taxes for payments made February 11 -14.
  • February 23 - deposit the taxes for payments made February 15 - 17.
  • February 24 - deposit the taxes for payments made February 18 - 21.

Tips. Employees must report tips of $20 or more earned during January to employers by February 10.

Monthly depositors. Filers who have a monthly deposit frequency must deposit the tax for January by February 15.

Annual information statements to recipients of certain payments. All businesses must provide employees information statements by February 15 for (1) payments reported on Form 1099-B; (2) payments reported on Form 1099-S; and (3) any substitute payments reported in box 8 or gross proceeds paid to an attorney reported in box 10 of Form 1099-MISC.

File information returns. By February 28, employers should file information returns (such as certain Forms 1099) from 2022. However, the Form 1099-NEC reporting nonemployee compensation must be filed by January 31. Filers should use a separate Form 1096 to summarize and transmit the forms for each type of payment. If an employer files Forms 1097, 1098, 1099 (except a Form 1099-NEC reporting nonemployee compensation), 3921, 3922, or W-2G electronically, the due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms generally remains January 31.  

Forms 940, 941, 943, 944 and/or 945. If tax payments have been deposited timely, Forms 940, 941 (4th quarter of 2022), 943, 944 and/or 945 are due February 10.

Withholding for employees who claimed exemption from withholding in 2022. On February 16th, employers should begin withholding income tax from the pay of any employee who claimed exemption from withholding in 2022, but didn't give you Form W-4 (or Form W-4(SP), its Spanish version) to continue the exemption this year.

Health coverage reporting. By February 28, Applicable Large Employers must file paper Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C with the IRS. For all other providers of minimum essential coverage, file paper Forms 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B with the IRS. If you're filing any of these forms with the IRS electronically, the due date for filing them will be extended to March 31. 

Large food and beverage business employers. Employers who operate a large food and beverage business must File Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer's Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit paper Forms 8027 if you have more than one establishment. However, i filing electronically, the due date for filing them with the IRS will be extended to March 31.

Holidays. Monday, February 20th (President's Day). 

State Payroll Tax News

Alaska—2023 Revised Forms/Publications Regarding Quarterly Reporting and First Time Filers for Unemployment Tax

The Alaska Department of Labor and Workforce Development has issued updated 2023 versions of its quarterly contribution report for unemployment tax, the instructions for this form, and a publication for first time filers of unemployment tax in the state. The publication for first time filers provides 2023 unemployment tax rate information such as the total maximum rate for a new employer (1.86% for employers and 0.51% for employees) and the unemployment taxable wage base ($47,100). It also notes that corporate officers are excluded from unemployment coverage and should not be listed on reports unless a "Voluntary Election of Coverage for Excluded Employment" has been filed and approved. 

Arizona—Guidance Updated on Submitting Withholding

The Arizona Department of Revenue (DOR) has revised its Publication 701, which contains information about submitting Arizona Form A1-R or Arizona Form A1-APR, and federal Forms W-2, W-2c, W-2G, and 1099 series. Taxpayers must submit all federal Forms W-2 and federal Forms W-2c that report Arizona wages paid or Arizona income tax withheld. They should also submit all federal Forms W-2G and any federal Form 1099 series that report Arizona income tax withheld. Any federal Form W-2G or federal Form 1099 series not reporting Arizona income tax withheld is not required to be submitted to the DOR. The due date for the required federal attachments is the same as the due date for filing Arizona Form A1-R or Arizona Form A1-APR, January 31, of the following calendar year, or the extended due date for filing those returns. The publication discusses submission requirements, including electronic filing requirements, bulk filings, exemption from electronic filing requirements, and optical media submissions [Arizona DOR Publication No. 701, 12/01/2022].

California—Paid Military Leave Ordinance Passed in San Francisco

The "Military Leave Pay Protection Act," approved by San Francisco Mayor London Breed on January 20, 2023, requires large private employers to provide differential paid leave for military reservists called up for active duty. Large employers are defined as those with 100 or more employees, regardless of work location. The paid leave would cover the difference between the employees' military pay and their regular rates of pay, up to 30 days in a calendar year. Employees covered by a collective bargaining agreement are excluded from the leave requirement.

California—Employment Development Department Issues Updated Wage Adjustment and Benefit Charges for Unemployment Tax Purposes

The Employment Development Department (EDD) has issued revised versions of the Quarterly Contribution and Wage Adjustment Form (DE 9ADJ) and Voluntary Plan for Disability Insurance Quarterly Adjustment Form (DE 938). The has also issued the Statement of Reimbursable Benefit Charges (DE 428R) and School Employees Fund Employer Statement of Benefit Charges (DE 428F) for the fourth quarter of 2022. The issue date is January 25, 2023. The Notice of Amount Due (DE 6601) and Statement of Account (DE 2176) are sent two weeks after the benefit charge statements are issued [EDD Tax Branch News #509 and EDD Tax Branch #510].

California—2023 State Disability Tax/Benefit Changes Relevant to San Francisco's Paid Parental Leave Ordinance

The 2023 changes in California's State Disability Insurance (SDI) voluntary plan employee contribution (0.9% tax on first $153,164 in wages) and benefit amount ($1,620 maximum weekly benefit) are relevant to employers in San Francisco that must comply with the City's Paid Parental Leave Ordinance (PPLO). Most San Francisco employers with 20 or more employees worldwide must supplement Paid Family Leave (PFL) benefits received by employees to bond with a new child. During the PFL leave period, the PPLO supplemental compensation provided by an employer, added to the PFL wage replacement benefit received, must equal 100% of the employee’s gross weekly wage,subject to a $2,700 cap in 2023. The SDI Assessment Rate (0.126% in 2023) is relevant to employers that maintain a state-approved voluntary plan (VP), which is a disability insurance plan that an employer can offer to its California employees as a legal alternative to mandatory SDI and PFL. This rate is the amount that an employer pays to the California Employment Development Department (EDD) as an administrative expense for maintaining a voluntary plan.

Colorado—Governor Calls for Lower Income Tax Rate in State of the State Address

Colorado Governor Jared Polis' 2023 State of the State address calls for the "Centennial State'' to "further reduce the income tax rate." Since Polis took office, the state's income tax rate has been reduced from 4.63% to the current 4.4%. "I was proud to have supported two successful income tax cuts at the ballot and since I took office," Polis said. The Governor indicated his dislike for the income tax and called for a further reduction in the rate, after acknowledging that he does not think the state's income tax rate could be fully eliminated by Colordo's 150th anniversary in three years. 

Colorado—Denver Increases Penalties for Wage Theft Violations

Denver Mayor Michael Hancock signed a bill (22-1614) on January 10, 2023 that increases the civil penalties for wage theft violations in the City, specifically including joint liability for general contractors. Before this bill was signed, Denver's minimum wage ordinance (current minimum wage of $17.29 per hour) already imposed certain penalties for employers that did not pay their workers based on the designated minimum wage. Employees could file complaints to the Denver City Auditor within one-year of a violation and provided a private right of action for three years to employees to seek to recover unpaid wages plus 12% interest, $100 for each day the violation continued, and liquidated damages three times the amount of unpaid wages. This new bill continues those rights for workers but extends the period of time from one year to three years for employees to file a complaint. In addition, the ordinance further creates "joint and several liability" for any employer, including general contractors. This "up the chain" policy starts with the direct employer and then moves "up the chain" to seek restitution for the employee from whomever in the chain can pay. The penalties are at the discretion of the auditor and intend to penalize employers that intentionally withhold wages, do not fix issues within 30 days, and do not cooperate with an investigation. When an employer violates both the City's minimum wage ordinance and its wage theft laws, the auditor must choose to enforce one or the other (no double dipping).

Connecticut—2023 Unemployment Tax Rate Information

The Connecticut Department of Labor (CDOL) has announced that the 2023 unemployment tax rates for experienced employers range from 1.7% to 6.6% (1.9% to 6.8% in 2022). The new employer rate is 2.8% (3.0%) this year. In addition, the unemployment taxable wage base continues to be $15,000 in 2023. The change in tax rates for 2023 is a result of Public Act 22-118, which creates a temporary reduction of 0.2% in the state's new employer and fund solvency tax rates for this year only. 

District of Columbia—National Payroll Associations Ask That Employers Not Be Held Responsible for Underwithholding Due to Tax Rate Increases

The American Payroll Association (APA) and National Payroll Reporting Consortium (NPRC) are asking the District of Columbia's (D.C.) Office of Tax and Revenue (OTR) to clarify that employers will not be held responsible for any underwithholding for 2022, as long as the employer complied with the FR-230 (Income Tax Withholding Instructions and Tables) issued in 2018. Legislation changed D.C.'s income tax rates in 2022. The OTR issued notices on the changes and also explained issues with its ability to create new tables due to the federal Tax Cuts and Jobs Act (TCJA). The OTR announced in October 2022 that employers should be using the increased rate of 10.75% to calculate withholding on single earners making $250,000 or more beginning in January 2022. The letter to the OTR notes that the current withholding tables on the OTR's website are from 2018. The letter also asks the OTR to issue and post new withholding tables for employers and update the Form D-4 (Withholding Allowance Certificate). The letter says this form was last revised in 2016. Additionally, the APA and NPRC say it may be necessary to suspend or modify application of any underwithholding penalties that may apply to taxpayers to which the higher rates apply for 2022. 

District of Columbia—Mayor Signs Legislation to Expand the District Government Employee Bereavement Leave Benefit

On January 10, 2023, District of Columbia Mayor Murial Bowser signed legislation to expand the District Government Employee Bereavement Leave Benefit Act. In addition to annual leave, sick leave, disability benefits, and leave donations, employees are eligible for an additional two weeks of paid leave following the death of a minor child, a late-term miscarriage, or stillbirth. On January 20, 2023, Act A24-0723 was published in the D.C. Register, Volume 70, page number 000524.

District of Columbia—Tip Credit Increase Postponed Until May 1, 2023

At a recent legislative meeting, the Council of the District of Columbia (D.C.) shifted the effective date of the Tip Credit Elimination Act from January 1, 2023 to May 1, 2023 with emergency legislation. Voters in D.C. approved Initiative 82 back in November 2022 that gradually eliminates the tip credit. The first increase in the tip credit was to take place on the first day of 2023 with an increase to $6.00 per hour. Due to the time needed to certify election results, the mandatory Congressional review period, and the Council’s recent inability to transmit legislation to Congress due to the protracted vote for Speaker of the House of Representatives, the Act passed by the initiative is projected to become law on March 8, 2023, more than three months after the anticipated January 1, 2023. The emergency legislation sets the effective date for the first tip credit increase to May 1, 2023. The second increase to $8.00 per hour will still take effect on July 1, 2023. Subsequent annual increases occurring on July 1 of each year are also not affected by this initial delay.

District of Columbia—Legislation Requiring Written Agreements When Employing Domestic Workers Enacted Without Mayor's Signature

On January 18, 2023, the Domestic Worker Employment Rights Amendment Act of 2022 was enacted without District of Columbia (D.C.) Mayor Murial Bowser's signature. Act A24-0777 requires written agreements when a hiring entity employs a domestic worker. The bill also requires that certain information be posted online and that administrative procedures for complaints be specified. Certain educational materials and outreach must be provided to domestic workers and the exclusion of domestic workers from the protections of the D.C. Human Rights Act and the Occupational Safety and Health Act are removed. In addition, the legislation specifies the powers of the Attorney General and the D.C. Mayor to enforce the law. 

Hawaii—Governor's State of the State Calls for Shifting Income Tax Brackets, Increasing Standard Deduction/Personal Exemption

On January 23, 2023, Hawaii Governor Josh Green delivered his State of the State address, which included calls for shifting the income tax brackets and increasing both the standard deduction and personal exemption. Green said these calls for reform follow the recommendations of the state's 2020 Tax Commission. Under the plan, every income tax bracket in Hawaii would pay less in state income tax. Also, the plan calls for increasing the state's standard deduction from $2,200 to $5,000 and doubling the personal exemption from $1,144 to $2,288. 

Illinois—Bulletin Highlights Withholding Changes

The Illinois Department of Revenue has issued a bulletin summarizing changes for 2023 withholding tax forms and schedules, and changes for tax preparers and software developers. The bulletin also provides detailed information on the original and extended filing and payment due dates for various returns [Illinois Dept. of Rev. Info. Bulletin No. FY 2023-10, 01/01/2023]. Important for employers is the increase of the personal exemption allowance for individuals to $2,625 per person. This impacts the 2023 withholding income tax rates for employers (see IL-700-T, Illinois Withholding Tax Tables Booklet). Also, per Public Act 102-0700, effective for tax years beginning on or after January 1, 2023, the Earned Income Tax Credit increases to 20% of the federal EIC amount and will be extended to qualifying taxpayers, ages 18 through 25, and 65 and older, and ITIN filers; and the Instructional Materials and Supplies Credit increases to $500. Other items mentioned include, notably, that Public Act 102-0700 created a new credit, the Organ Donation credit, which is effective for reporting periods beginning on or after January 1, 2023. See the 2023 Schedule WC-I (Withholding Income Tax Credits Information) for calculation of this credit. Withholding income tax forms, W-2 (Wage and Tax Statement), W-2G (Certain Gambling Winnings) and 1099-K (Payment Card and Third Party Network Payments), issued to payees with Illinois addresses if required by the IRS to electronically file, or payee has 4 or more transactions and the cumulative total of payee's transactions exceeds $1,000) must be submitted electronically. See Publication 110 (Forms W-2, W-2c, W-2G, and 1099 Filing and Storage Requirements for Employers and Payers, including New 1099-K Electronic Filing Requirements) for more information. Finally, Public Act 102-0700 extended the EDGE tax credit to tax years ending on or prior to June 30, 2027. It includes a new provision that allows "startup" taxpayers to claim EDGE credits against their withholding income tax.

Kentucky—Union City Occupational Tax Implementation Delayed

The City of Union, Kentucky has announced that its planned occupational tax of 2% will not go into effect until July 1, 2023. Originally, the City had planned on an effective date of January 1, 2023. The delay will allow for updates to the website, quarterly returns, and annual reconciliation forms for the final two quarters of 2023 [City of Union Payroll Tax UPDATE Tax Holiday Until July 1, 2023, 01/01/2023].

Louisiana—Rule Adopted to Implement Fresh Start Initiative

The Louisiana Department of Revenue has adopted LAC 61:III.2301, effective January 20, 2023, to implement the Fresh Start Worker Classification Initiative enacted by L. 2022, H1067 (Act 406). The Fresh Start Program is optional and provides a taxpayer with an opportunity to voluntarily reclassify a worker as an employee for a future tax period. An eligible taxpayer that participates in the initiative is not liable for any withholding tax or related interest and penalties with respect to any amounts paid to any workers before the date on which the taxpayer is accepted for participation in the initiative. The rule provides guidance regarding the necessary qualifications to participate in the program and the conditions associated with an accepted application.

Maryland—Unemployment Information for 2023 Released

The Maryland Department of Labor (DOL) released its updated unemployment tax rates for tax year 2023, which will continue to be based on Table C. Experienced employer rates range from 1.0% to 10.50% in 2023. The new employer tax rate in 2023 is 2.3%. The rate for new construction employers headquartered in another state is 5.10% in 2023. The state's taxable wage base is set at $8,500.

Missouri—Governor Proposes Credits to Support Employers Who Support Workers with Child Car Assistance

On January 18, 2023, Governor Mike Parson delivered his annual State of the State address. With the theme of "We Are Not Done Yet," Parson vowed to continue work his administration had started. He proposed three new child tax care programs, including: (1) the Childcare Contribution Credit to encourage contributions to child care providers with the goal of improving and expanding facilities and services; (2) the Employer Provided Child Care Assistance Tax Credit, which would provided a credit to employers who offer child care assistance to employees; and (3) the Child Care Providers Tax Credit, which would provide a credit to child care providers with payroll costs and incentives for capital improvements. 

New Mexico—State of State Address Outlines Tax Reform Proposals

New Mexico Governor Michelle Lujan Grisham proposed several tax reform agenda items in her State of the State address on January 17, 2023. The proposals include a gradual expansion of the lower income tax brackets. This would include more taxpayers in those brackets, and lower taxes for low- and middle-income New Mexicans. She also proposed changes to the New Mexico Film Tax Credit "to further incentivize the hiring of more New Mexico residents, promote New Mexico's diverse locations and cultures, expand productions to additional rural communities, and sustain robust investments in workforce development and job training." The full text of the Governor's address can be found here

New York—Overtime Salary Threshold Increases for 2023

The New York Department of The overtime salary threshold for outside of New York City, Nassau, Suffolk, and Westchester counties has increased to $1,064.25 per week for 2023 (previously, $990.00 week). The final rule confirming the threshold was published in the New York Register on December 22, 2022.

New York—Employee Withholding Allowance Certificate and Instructions Released

The New York Department of Finance has updated Form IT-2104 (Employee's Withholding Allowance Certificate). The instructions for completing the form have also been revised. Employees should fill out the new form if they: (1) have experienced life changes (such as marriage, divorce, or the birth of a child); (2) have specified changes in income; (3) experience a change in employment; or (4) experience a change in tax situation (such as itemizing deductions or eligibility for the earned income tax credit or other credits). The form also provides guidance for claiming the correct number of withholding allowances. 

Pennsylvania—Employer Withholding Guide Updated for 2023

The Pennsylvania Department of Revenue has released an updated version of the Rev-415 (Employer Withholding Information Guide, Rev. 01-23). The Guide contains information require employer withholding requirements, when taxable compensation is not subject to withholding, fringe benefits and expense reimbursements, calculating withholding, returns and payments, as well as W-2s and 1099 reporting. There is a quick reference guide available in the Guide for payroll providers. 

Rhode Island—2023 Rhode Island Tax Changes

The Rhode Island Division of Taxation has issued a reminder of tax changes. Beginning on January 1, 2023, large business registrant taxpayers are required to use electronic means to file returns and remit taxes. Interest on overpayments for calendar year 2023 will increase from 3% to 6.25%, while the interest rate on underpayments will decrease to 12% for all other taxes [Rhode Island Advisory No. 2023-02, 01/20/2023].

Rhode Island—2023 Withholding Tax Payment Calendar Available

The Rhode Island Division of Taxation has released the 2023 Withholding Tax Payment Calendar which features the withholding tax deadlines for weekly, monthly, and quarterly depositors. The calendar notes that dates in red or blue fall on either a weekend, federal, or state holiday, in which the due date is the next business day. 

Utah—State of the State and Budget Proposal Includes Income Tax Rate Decrease

On January 19, 2023, Utah Governor Spencer J. Cox gave the State of the State speech and proposed $1 billion in tax relief for Utah families. In the Fiscal Year 2024 Budget Recommendations, almost $300 million in new ongoing income tax cuts are proposed, including a reduction of the income tax rate from 4.85% to 4.75%, which would offer $190 million in tax relief. 

Virginia—Reminder: W-2/1099 Deadline is January 31

Virginia Tax has issued a reminder to employers and payers that the January 31 deadline is fast approaching for Forms W-2 and 1099. Current specifications for filing W-2s and 1099s electronically can be found in the W-2/1099 Guide for Web Upload. Forms may be submitted by eForms or Web Upload. Corrected W-2s (W-2Cs) for Tax Year 2021 and beyond can be submitted electronically. For Tax Year 2020 and prior years, payroll providers and employers will need to submit written copies of updated W-2s. 

West Virginia—House Passes 50% Income Tax Rate Cut

West Virginia Gov. Jim Justice announced that the House of Delegates voted to pass his proposal (H2526) to gradually reduce the state's personal income tax by 50% over a three-year period (see Payroll Update, 1/17/2023). The bill is currently being reviewed by the Senate Finance committee [Press Release: Gov. Justice cheers House passage of 50% personal income tax cut, Office of the Governor, 01/18/2023].

Wisconsin—State of the State Addresses Discusses Tax Relief

On January 24, 2023, Wisconsin Governor Tony Evers gave his State of the State Address in which he announced that tax relief was part of his agenda, but without giving big breaks to the wealthiest 20% of earners, cutting priorities like public schools and public safety, or instituting a flat tax. He also promised to expand the Child and Dependent Care Credit, which will provide nearly $30 million in tax relief.