November 7 - 11 Compliance Updates: Labor Department Announces Final List of 2022 FUTA Credit Reduction States

Nov 14, 2022 8:49:57 AM
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Labor Department Announces Final List of 2022 FUTA Credit Reduction States

On November 10, 2022, the U.S. Department of Labor (DOL) issued the final list of FUTA tax credit reduction states for the 2022 tax year, which includes four states and the U.S. Virgin Islands.

Reductions begin with high unemployment. During the height of the Great Recession, a number of U.S. states began making the DOL's annual list of FUTA credit reductions. It started with Michigan in 2009 and grew to 20 states and the U.S. Virgin Islands in 2011. Since that point, the numbers started to decrease as more states were able to repay their federal unemployment loans. California finally repaid its loan in 2017. The U.S Virgin Islands has yet to repay its loan and has remained on the DOL's list for this tax year.

Reductions mean employers pay more in taxes. When a state becomes a FUTA credit reduction state, employers in that state pay more in FUTA taxes. If the state's loan remains outstanding for subsequent years, employers continue to pay more in taxes. A FUTA credit reduction typically begins when there are periods of high unemployment. The Great Recession had periods of high unemployment from 2007 to 2009 averaging around 10%. At the height of the COVID-19 pandemic, unemployment severely and rapidly spiked to 14.7% in April 2020, according to the U.S. Bureau of Labor and Statistics.

Federal unemployment loans. U.S. states and other tax jurisdictions have what is called an unemployment trust fund, which is mainly funded by employers paying unemployment taxes to be used by those who qualify for unemployment benefits. When a state's unemployment trust fund is insolvent, a state may borrow from the U.S. federal government to replenish the ailing fund. There are conditions to these loans. One such condition is tied to the Federal Unemployment Tax Act (FUTA) tax rate credit.

FUTA rate and credit. The FUTA tax rate is 6.0% on the first $7,000 in qualified wages of each employee. However, most employers are able to take advantage of a 5.4% FUTA tax credit, making the effective FUTA tax rate 0.6%. 

When reductions begin. FUTA provides that employers in states that have outstanding federal unemployment loans under Title XII of the Social Security Act at the beginning of January 1 of two or more consecutive years are subject to a reduction in credits otherwise available against the FUTA tax, if all advances are not repaid before November 10 of the taxable year.

The first reduction is 0.3% of the credit, making the effective FUTA tax rate 0.9%. If the state continues to have an outstanding loan balance, the FUTA credit is further reduced each year by another 0.3%. 

Other FUTA tax penalties. There are other penalties that may apply to employers when a loan is not repaid for several years. Following their third consecutive January 1 with an outstanding advance, states are subject to an additional FUTA credit reduction called the 2.7 add-on. After a state passes five consecutive years with an outstanding loan, it may be subject to a benefit cost ratio add-on tax. The BCR add-on replaces the 2.7 add-on. A state may apply for a waiver from the BCR add-on, but must do so by July 1.

During the Great Recession, California was a FUTA credit reduction state for several years, with a total FUTA credit reduction of 2.1% in 2017. The U.S. Virgin Islands was the only other credit reduction state that year where the credit was reduced by 2.4%.

2022 FUTA tax credit reductions. The DOL's final list for tax year 2022 FUTA credit reductions includes the following states and the U.S. Virgin Islands: California, Connecticut, Illinois, and New York. Employers in these four states will pay 0.3% more in FUTA taxes for 2022 or an effective FUTA tax rate of 0.9%. The U.S. Virgin Islands, having never repaid its loans from the Great Recession, will have its FUTA tax credit reduced by 3.6% or an effective FUTA tax rate of 4.2%. The U.S. Virgin Islands applied and was approved for a waiver from the BCR add-on penalty tax for 2022. 

At the beginning of 2022, the DOL's list of potential FUTA credit reduction states also included: Colorado, Massachusetts, Minnesota, New Jersey, and Pennsylvania. However, these five states repaid their outstanding federal unemployment loan before November 10, 2022. As such, these states were not on the DOL's final tax year 2022 list.

Look for IRS 2022 Form 940 and Schedule A. Employers in these four credit reduction states and the U.S. Virgin Islands will want to keep an eye out for the IRS's final release of the 2022 Form 940 (Employer's Annual Federal Unemployment (FUTA) Tax Return) and Schedule A (Form 940) (Multi-State Employer and Credit Reduction Information). The additional FUTA credit reduction taxes are due with Form 940 and Schedule A. The due date is by January 31, 2023.

DOL Investigations Continue to Uncover Wage and Hour Violations, With Stiff Penalties

The Department of Labor (DOL) continues to find no shortage of employees that violate federal wage and hour laws when paying employees and fail to maintain proper records. Recently, the DOL's Wage and Hour Division (WHD) reported three investigations, each with significant penalties on the targeted employer.

The Oregon restaurant owner kept tips and failed to pay appropriate overtime to employees. A WHD investigation found that a restaurant owner kept servers tips, threatened to fire employees if they kept cash tips, and failed to pay kitchen workers overtime. The restaurant collected and withheld cash and credit card tips earned by seven servers, then threatened them they'd be fired if they failed to surrender cash tips. The employer also illegally denied four cooks and sushi chefs their overtime wages due by misapplying overtime rules for salaried, exempt workers. The WHD recovered $375,233 in back wages for 11 workers.

New Hampshire employers denied home health care workers overtime. The WHD determined that a New Hampshire home health care company violated the Fair Labor Standards Act by wrongfully paying employees straight-time wages for overtime hours worked. The employer also did not pay employees for time spent traveling between worksites or track that time as hours worked. The WHD recovered $374,640 in back wages and liquidated damages for 46 healthcare workers. Furthermore, the employer did not pay employees for time spent traveling between worksites or track that time as hours worked. 

Arizona home health care provider found to have committed wage theft. The WHD determined that another home health care provider, this one in Arizona, committed wage theft. The employer paid straight-time rates for overtime hours worked, and not the appropriate overtime rate. Furthermore, the employer did not record and pay the affected employees for travel time between clients' residences. The investigation resulted in a court order providing for the recovery of $521,905 in back wages and liquidated damages for 253 employees.

Payroll on the Ballot: November 8 Elections

Voters at the polls on Election Day not only had the opportunity to cast their ballot for candidates for various offices, but also to vote on state and local payroll-related ballot measures. The following is a list of the results for several state and local ballot initiatives relating to payroll: 


Additional statewide income tax on the wealthy rejected. The unofficial results from the California Secretary of State's general election information webpage for November 8 show that a ballot item has been defeated by voters that would have added a 1.75% personal income tax on wages over $2 million, beginning in 2023. Proposition 30 states that the proceeds would have gone toward incentives for electric vehicles and charging infrastructure and wildfire prevention. The results will be certified by December 16, 2022.

Duarte voters deny healthcare worker minimum wage. Measure J proposed raising the minimum wage for healthcare workers to $25 per hour beginning on January 1, 2024; requiring annual increases to the minimum wage; and penalizing violations with a fine of up to $120 per worker per day. This proposal failed to pass by a margin of 64.12% (no) to 35.88% (yes).

Inglewood voters approve healthcare worker wage increase. Inglewood City also had a ballot proposal (Measure HC) regarding wages for healthcare workers. The proposal would raise the minimum wage for healthcare workers to $25 dollars an hour, taking effect January 1st, 2024. However, unlike the Duarte proposal, this was approved by a margin of 53.22% to 46.78%.

Laguna Beach voters reject hotel worker proposal. Laguna Beach proposed an ordinance that would amend the Municipal Code to: (1) create a minimum hourly wage for hotel employees of $18, increasing annually; (2) establish workplace standards and protections for hotel employees; (3) authorize the City to adopt administrative regulations to implement the provisions of the ordinance; and (4) authorize the City and others to enforce the provisions of the ordinance. The proposition failed by a margin of 68.8% to 31.2%.


Statewide tax reduction passes. A Colorado ballot measure proposed (Proposition 121) to reduce the state income tax rate from 4.55% to 4.40%. The measure passed by a margin of 65.53% to 34.47%

District of Columbia 

Minimum wage increase for tipped employees approved. Voters in Washington, DC have approved a ballot measure that gradually increases the minimum wage for tipped employees until it equals the wage for non-tipped employees in 2027. This would eliminate the tip credit. The measure passed by a margin of 71.4% to 25.9%. 


Additional tax rate for high wage earners passes. Massachusetts voters voted on a constitutional amendment establishing an additional 4% state income tax on that portion of annual taxable income in excess of $1 million. This income level would be adjusted annually, by the same method used for federal income-tax brackets, to reflect increases in the cost of living. Revenues from this tax would be used, subject to appropriation by the state Legislature, for public education, public colleges and universities; and for the repair and maintenance of roads, bridges, and public transportation. The proposed amendment would apply to tax years beginning on or after January 1, 2023. 

Note: At the time of publication, with 95% of the votes counted, the measure appears to be approved by a margin of 58% to 42%.


Minimum wage increase approved. Nebraska voters had the opportunity to vote on a ballot measure (Initiative 433) that would increase the minimum wage from $9.00 per hour to $10.50 per hour in 2023, with gradual annual increases to $15.00 an hour by 2026 and annual inflationary adjustments in future years.

At the time of publication, with 99% of the votes counted, the proposal appears to be approved by a margin of  58.2% to 41.8%.


Minimum wage changes appear to have been approved. Voters in Nebraska had the opportunity to approve changes to the Nevada Constitution regarding the State's minimum wage provisions. The ballot question included: (1) establishing the State's minimum wage at $12 per hour worked; (2) removing the existing provisions setting different rates for the minimum wage based on whether the employer offers certain health benefits to such employees; and (3) removing the existing provisions for adjusting the minimum wage based on applicable increases in the cost of living. The changes will take effect July 1, 2024 [Nevada Ballot Question No. 2, Amending the Nevada Constitution].

Note: At the time of publication, with 77% of the votes counted, this measure has 54% of voters approving the changes, and 46% voting "no." 


Union contract ballot questions approved. Ballot question #1 proposed a constitutional change prohibiting workplace contracts that require union membership or affiliation as a condition of employment. The measure passed by a margin of 69.7% to 30.3%.

IRS Determines Home Care Payments Subject to Employment Taxes

In a response to an inquiry regarding a 2002 Field Service Advisory (FSA), the IRS asserted that parents who are individual service providers of care for their own disabled children must have employment taxes withheld from wages paid to them for such services. 

Background. IRS Field Service Advisory, 2002 WL 1315695, addressed the issue of the applicability of employment taxes for payments made for the in-home care of disabled minors, even by their own parents. Homecare workers are generally considered to be employees if certain conditions are met.

Continued validity. The IRS responded to the inquiry reaffirming the validity of its response in the original advisory, referencing Code Sec. 3121, Code Sec. 3306, and Code Sec. 6501 to affirm that although home workers who provide services to related parties are generally excluded from income tax withholding, payments made by state or federal government programs such as Medicaid to providers, regardless of the relationship, are liable for FICA and FUTA employment taxes.

Delivery Services Receive Mixed Results in Court

Federal appellate courts handed down two decisions in cases between former delivery workers and parcel service companies in October, partially supporting and partially punishing the defendant delivery services.

Walker v. United Parcel Service, Inc. A former worker at United Parcel Service (UPS) filed suit against his employer, claiming that UPS had violated the interference and retaliation clauses of the Family Medical Leave Act (FMLA) by not granting him leave and terminating his employment. A federal district court sided with UPS, providing a summary judgment in support of the defendant. On appeal, UPS again received a supportive judgment in federal court. The appellate court judge found that the worker failed to provide proper notification, as required under the FMLA, to his employer, as the documentation he provided to request the leave did not include required information, such as the date of onset, nature of the illness or injury, or a date that the worker could return to work [Walker v. United Postal Service, Inc., CA11, Dkt. No. 21-11267, 10/17/2022].

Plazzi v. FedEx Ground Package System. Former delivery drivers for FedEx filed suit against their former employers, alleging that the independent service provider hired to withhold and remit taxes to the IRS and state taxing authority violated their rights by not remitting the withheld taxes properly. The plaintiffs sued for unpaid wages and damages, as they claimed that by not withholding and paying their taxes as required, the former employer committed wage theft. The district court that originally heard the case dismissed the case, claiming that no wage theft occurred because the employees were never entitled to the tax monies that should have been withheld and paid. The appellate court upheld this reasoning, however, it remanded the case back to the district court to determine if the Massachusetts state court should weigh in on the case [Plazzi, et. al. v. FedEx Ground Package System, CA1, Dkt. No 22-1365, 10/20/2022, 130 AFTR 2d ¶2022,5309].

IRS Updates Publication 5165 for E-Filing ACA Returns

IRS Publication 5165 (Guide for Electronically Filing Affordable Care Act (ACA) Information Returns for Software Developers and Transmitters) has been updated for the 2023 processing year.

The publication contains the specifications for electronically filing 2022 ACA information returns (Forms 1094-B, 1095-B, 1094-C, and 1095-C) with the IRS and includes the communication procedures, transmission formats, business rules, and validation procedures for electronic transmission of ACA information returns through the Affordable Care Act Information Return (AIR) system.

Software developers, transmitters, and issuers should use the guidelines provided in this publication, along with the Extensible Markup Language (XML) schemas published on the IRS website, to develop software for use with the AIR system.

Electronic filing is required for those filing 250 or more of these information returns, though the IRS encourages everyone to file electronically. The filing requirement applies separately for each type of return and separately to each type of corrected return.

ACA Information Returns must be filed through the AIR system using an ACA Transmitter Control Code (TCC). ACA Information Returns may not be filed using any other Transmitter Control Code like a Filing Information Returns Electronically (FIRE) system TCC or Electronic Identification Filing Number (EFIN).

During the November 3 IRS payroll conference call, the IRS noted that the new Form 1099 e-filing system (Information Return Intake System) launching in January 2023 will be expanded to permit the creation and filing of ACA information statements.

The publication notes that Section 4.2 (Transmitting via the Application to Application (A2A) Channel) has been updated with additional information concerning certificates. To invoke the A2A channel, transmitters must have an active IRS e-Services account and an ACA TCC.

The IRS requires the use of client digital (X.509) certificates issued by IRS-designated certificate authorities to provide enhanced authentication of external partner application systems for A2A web service processing.

IRS's 2022 to 2023 Priority Guidance Plan Includes Employment Tax Topics

The IRS has released its 2022 to 2023 Priority Guidance Plan. The plan presents the agency's intended rollout of guidance based on public input during the 12 months from July 2022 through June 2023.

Each year, the IRS compiles a Guidance Priority Plan that identifies and prioritizes tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The IRS uses this document to allocate resources to guidance items deemed most important to taxpayers and tax administration.

The 2022 to 2023 Priority Guidance Plan contains 205 guidance projects that are priorities for allocating Treasury Department and IRS resources during the 12-month period from July 1, 2022 through June 30, 2023. The projects on the plan are the focus of the IRS's efforts during the plan year. However, the plan does not provide any deadline for completing the projects. 

There is a section of the Plan called "Employee Benefits" that includes executive compensation, health care and other Benefits; and employment taxes. The Plan notes final regulations on recapture of excess employment tax credits under the Families First Coronavirus Response Act (FFCRA), the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Plan says that proposed and temporary regulations were published on July 29, 2020 and September 10, 2021.

Another line item under this section notes regulations under Code Sec. 119 and Code Sec. 132 regarding employer-provided meals, in addition to guidance updating Rev Proc 2016-33 and Rev Proc 2017-14 regarding procedures for Certified Professional Employer Organizations (CPEOs).

Under the heading of "General Tax Issues," the Plan talks about guidance on the tax treatment of transactions involving digital assets. In a list of frequently asked questions (FAQs) on the IRS website, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes.

As such, the fair market value of virtual currency paid as wages, measured in U.S. dollars at the date of receipt, is subject to federal income tax withholding, federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2 (Wage and Tax Statement). 

The IRS says it intends to update the 2022 to 2023 plan during the plan year to reflect additional items that become priorities, guidance that is published during the plan year, and projects that may result from legislative developments. 

IRS Releases Draft Versions of Publications 15 and 15-A

The IRS has issued a draft of Publication 15 (Circular E - Employer's Tax Guide) and Publication 15-A (Employer's Supplemental Tax Guide) for 2023. 

Publication 15. Circular E provides guidance on the requirements for withholding, depositing, reporting, paying, and correcting employment taxes. The publication also includes information on the forms that employers must give to employees and that employees must give to employers, as well as the forms that must be sent to the IRS and the Social Security Administration (SSA).

What's New? The publication clarifies several items that are new for 2023:

  • Social Security and Medicare. For 2023, the rate of social security tax on taxable wages, including qualified sick leave wages and qualified family leave wages paid in 2023 for leave taken after March 31, 2021, and before October 1, 2021, is 6.2% each for the employer and employee or 12.4% for both. Qualified sick leave wages and qualified family leave wages paid in 2023 for leave taken after March 31, 2020, and before April 1, 2021, aren't subject to the employer share of social security tax; therefore the tax rate on these wages is 6.2%. The social security wage base is $160,200 for 2023.
  • Forms 941-SS and 941-PR discontinued for 2023. Form 941-SS, Employer's QUARTERLY Federal Tax Return-American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands, and Form 941-PR, Planilla para la Declaración Federal TRIMESTRAL del Patrono, will no longer be available after the fourth quarter of 2023. Rather, employers in the U.S. territories will file Form 941, Employer's Quarterly Federal Tax Return, which is available in Spanish.
  • Pubs. 51, 80, and 179 discontinued after 2023. Like the forms mentioned above, Publications 51, 80 and 179 are discontinued. Publication 51, Agricultural Employer's Tax Guide; Publication 80, Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands; and Publication 179, Guía Contributiva Federal para Patronos Puertorriqueños, will no longer be available after 2023. Instead, information specific to agricultural employers and employers in the U.S. territories will be included in Publication 15 beginning with the Publication 15 for use in 2024 (published December 2023). Beginning in 2024, there will be a new Publication 15SP that is a Spanish-language version of Publication 15.

Publication 15-A, Employer's Supplemental Tax Guide. This publication supplements Publication15, and contains specialized and detailed employment tax information supplementing the basic information provided in Publication15. Publication 15-B contains information about the employment tax treatment of various types of non-cash compensation. 

What's new? In addition to providing the same updated information on Medicare and social security taxes for 2023, the publication highlights important changes in Form W-4R and W-4P

  • Form W-4P and Form W-4R. Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments (previously titled Withholding Certificate for Pension or Annuity Payments) was redesigned for 2022. The new Form W-4P is now used only to request withholding on periodic pension or annuity payments. Previously, Form W-4P was also used to request additional withholding on nonperiodic payments and eligible rollover distributions. Additional withholding on nonperiodic payments and eligible rollover distributions is now requested on Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions. Although the redesigned Form W-4P and new Form W-4R were available for use in 2022, the IRS postponed the requirement to begin using the new forms until January 1, 2023. The 2023 Forms W-4P and W-4R must be in use on January 1, 2023, or 30 days after the final forms are published on, whichever is later. Payers should have updated their system programming for these forms in 2022.

Class Action Filed Against Twitter Claims Layoffs Violate WARN Act

A class action lawsuit has been filed in a district court that claims Twitter violated both the federal and state WARN Act laws regarding the company's mass layoffs.

In early November 2022, business magnate and investor, Elon Musk, officially purchased American communications company, Twitter Inc. According to the complaint, it has been widely reported that Twitter plans to layoff around 3,700 employees, approximately 50% of its total workforce. The lawsuit further claims that Twitter terminated one employee on November 1, 2022 without providing advanced notice. 

The federal Worker Adjustment and Retraining Notification Act of 1988 (WARN Act) generally requires covered employers to give 60 days' written notice before implementing plant closings or mass layoffs. The notice must be given to the union representing the affected employees or, if there is no union, to each affected employee.

The California Worker Adjustment and Retraining Notification (WARN) Act requires employers with 75 or more employees to provide 60 days' notice of a mass layoff, relocation, or termination affecting 50 or more employees. Employees must have been employed for at least six months of the 12 months preceding the date of required notice in order to be counted.

The complaint notes that Tesla, Inc., another company owned by Musk, engaged in mass layoffs without notice where a federal court subsequently ordered the company to provide employees notice of the claims that had been filed on their behalf (Lynch v. Tesla, Inc., 2022 WL 42952953, 09/16/22).

The class action seeks to ensure that Twitter comply with the law and provide the requisite notice or severance payment in connection with the anticipated layoffs and that it not solicit releases of claims of any employees without informing them of the pendency of this action and their right to pursue their claims under the federal or California WARN Act. 

The plaintiffs seek immediate injunctive relief, as well as a declaratory judgment under the Declaratory Judgment Act, 28 U.S.C. § 2201-02, on behalf of themselves and all similarly situated employees, precluding Twitter from circumventing the requirements of the WARN Act and the California WARN Act. 

According to a Reuters news article, Musk tweeted "everyone exited was offered three months of severance, which is 50% more than legally required" on November 4, 2022.

IRS's Annual Criminal Investigation Report Shows More Employment Tax Fraud Cases Than in 2021

The IRS's annual Criminal Investigation (CI) report for the 2022 fiscal year (FY) shows that the Service initiated more investigations into employment tax fraud this year than in 2021 [IR 2022-194, 11/3/2022]. 

IRS-CI is the criminal investigative arm of the IRS, responsible for conducting financial crime investigations, including tax fraud, narcotics trafficking, money-laundering, public corruption, healthcare fraud, identity theft and more.

The IRS-CI annual report details significant criminal enforcement actions from the past fiscal year. For FY 2022, the report is from October 1, 2021 through September 30, 2022.

Employment tax fraud includes "pyramiding". Employment taxes include federal income tax withholding (FITW), Social Security taxes, and federal unemployment taxes (FUTA). The IRS-CI report notes that employment tax fraud can have serious ramifications for both employers and employees. 

Employment tax fraud includes cases involving employee leasing, paying employees in cash, filing false payroll returns, failing to file payroll tax returns and "pyramiding," which occurs when a business withholds taxes from employees, but then intentionally fails to remit payment to the IRS. After a liability has accrued, the owner shuts down the business and begins to accrue new liability under a new business name.

More employment tax fraud cases FY 2022. There were 223 employment tax investigations initiated in FY 2022, up from 215 in FY 2021. These investigations netted a 70% incarceration rate compared with an 81% rate in FY 2021. The average months to serve in prison from these employment tax fraud cases was 18 months (22 months for FY 2021). There were nearly 300 employment tax fraud cases initiated for the 2020 FY.

Some notable FY 2022 cases. In June and July 2022, Ernesto and Giuseppe Cannuscio, brothers and owners of Mario’s Pizza in Ocean City, New Jersey, pleaded guilty to conspiracy to evade more than $200,000 in payroll, personal, and corporate income tax.

From 2013 to 2018, the Cannuscio brothers failed to deposit cash receipts into the business bank accounts and paid employees cash wages off the books to avoid payroll taxes. They face up to five years in prison and/or a fine up to $250,000 for their crimes.

In May 2022, 12 individuals were sentenced in South Carolina for employment tax fraud and other crimes related to hiring unauthorized aliens at seven construction-related companies. The construction companies used unlicensed check cashers to facilitate under-the-table payments to employees, many of whom were unauthorized aliens.

On May 27, 2022, Kimberly Zulkowski was sentenced to 15 months in prison followed by three years of supervised release for her willful failure to account for and pay over taxes owed to the IRS. Zulkowski founded and managed Faith Family Services, Inc., a personal care business based in Brookfield, Wisconsin.

Despite running a successful business with annual gross receipts exceeding $5 million, Zulkowski refused to pay over taxes she withheld from her employees’ wages as part of her company’s payroll tax obligations. Court records reveal that although the IRS had warned Zulkowski in 2015 that she was violating the federal tax laws, she nevertheless persisted in her criminal conduct for nearly two more years.

On November 17, 2021, Sara Collins was sentenced to six months in prison, followed by 18 months of supervised release. Collins served as the Corporate Secretary of a plumbing, heating, and air conditioning business for over 20 years. She was responsible for overseeing payroll disbursement and filing tax documents on behalf of the business.

From the first quarter of 2013 through the last quarter of 2019, Collins failed to file quarterly Forms 941 with the IRS, and she paid fewer than $37,000 in payroll taxes for that entire six-year period. In total, Collins failed to pay over $930,000 in taxes owed to the IRS by the business.

On February 17, 2022, Antoinette Charmane Becton of Wilmington, North Carolina, was sentenced to more than 13 and one-half years in prison for conspiracy to distribute and to possess with intent to distribute 50 grams or more of a mixture and substance containing a detectable amount of methamphetamine, and conspiracy to defraud the United States.

In addition to the drug activity, Becton owned and operated Carolina Tax Solutions, a tax return preparation business in New Bern and Kinston, North Carolina. Becton and her employees filed false tax returns with intended losses of more than $1 million. From 2014 to 2018, Becton and others knowingly prepared false tax returns for clients by falsifying Form W-2 income, Form W-2 withholdings, and credits. Becton was paid through fees deducted from the refund checks, and she received cash kickbacks of approximately $1,000 to $1,500 after the client cashed the refund check. 

IRS Explains Second Draft of Forms W-2

During the November 3 IRS payroll industry call, the IRS addressed the recently released draft 2023 W-2 forms. 

The IRS released a second round of drafts for Forms W-2 for the 2023 tax year on October 31. The first round of drafts, released on September 29, 2022, featured a three-up design for Copies B (Employee—Federal Return), C (Employee's Record) and 2 (Employee—State Return) on a single page and eliminated Copy D (Employer's Record). 

After the release of the first draft, the IRS received feedback from stakeholders that the new design would not match the envelopes used in previous years. Due to the short notice of the redesign, the IRS has opted to revert to the design used in prior years. However, the IRS noted that while the second draft, which currently features Copy D, most likely will be eliminated in the final version of the 2023 Form W-2. 

The IRS stated the first draft format with the three-up design will likely be implemented for the 2024 tax year. 

New 1099 Filing Portal Slated to Launch January 9

During the November 3 IRS payroll industry call, the IRS revealed further details on the 1099 filing portal that is due to launch in 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.

Launch date. The launch date for the new 1099 filing platform, the Information Return Intake System (IRIS), will be January 9, 2023.

What filers may do. Users will be able to file Forms 1099 through IRIS by keying information or uploading a.csv file using a downloadable template as provided by the IRS. IRIS will allow 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. While the.csv template is limited to 100 entries, users may upload an unlimited number of.csv templates. Most likely, IRIS filers will be users with many records but not enough records to use schemas to format data. 

IRIS TCC Code required. Users with an existing FIRE Transmitter Control Code (TCC) will not be able to use that TCC for the IRIS. An IRIS TCC is required to use the new portal. Transmitters can begin applying for IRIS TCC by December 5, 2022. While it may take up to 45 days for processing, the IRS noted it will most likely only take a few days. 

Bulk filers. As previously announced, IRIS, unlike the FIRE system, will use xml schemas. However, the Application to Application (A2A) will not launch when the IRIS portal becomes available on January 9. Therefore, bulk filers must continue to use FIRE during the 2023 filing season. For Forms 1099-NEC due January 31, bulk filers must use FIRE, while low volume filers may use the new IRIS portal. 

The future of IRIS. The IRS also noted that, in the future, IRIS will be expanded to permit creation and the filing of Affordable Care Act (ACA) information statements. No timeline was provided for the expansion. 

New publications will be released regarding IRIS and a webpage ( soon.

Court Order Requires Home Healthcare Business to Stop Intimidation and Retaliation Against Employees

Following an investigation by the U.S. Department of Labor's (DOL) Wage and Hour Division (WHD), federal court has approved a consent preliminary injunction to prevent a home healthcare business and its president from coercing employees to "kick back" wages recovered for them by WHD. The injunction further prohibits the defendants from interfering with a current investigation.

The release explains that this is the latest in a long line of labor issues for Your Comfort Zone Inc. and Rosalind Godfrey. Prior investigations disclosed that the company and Godfrey failed to pay 25 workers overtime wages when required, in violation of the Fair Labor Standards Act. As a result of that investigation, the company and its president agreed to pay $100,055 in back wages to the affected workers. On Oct. 14, 2022, the DOL's Office of the Solicitor filed a federal complaint in federal court claiming that the employer coerced some employees into returning the back wages the investigations recovered.

The DOL asserted that Your Comfort Zone and Godfrey interfered with a current investigation. Specifically, the DOL alleges that the company asked employees about their contact with investigators, telling at least one employee they did not need to speak with investigators. They also altered at least one timesheet and submitted that false information to investigators. 

Regional Solicitor of Labor Maia S. Fisher explained that: "Employers who demand that their employees return wages recovered for them by the U.S. Department of Labor or who try to obstruct and interfere with an investigation are violating federal law. When employers demand such 'kickbacks,' discourage employees from asserting their legal protections or falsify records, the department will take swift legal action to defend workers' rights and hold employers accountable."

The preliminary injunction prohibits the defendants from retaliation or interference with the investigation so that it may proceed. Specifically, the court order states that the defendants cannot require current or former employees to pay back any compensation they are owed. They also cannot threaten to take, or take, action that harms current or former employees who took part or will take part in legally protected activity. Prohibited actions include termination, verbal or written threats, physical harm or verbal abuse, threats of deportation or reports to immigration authorities and other actions that would hinder an investigation, such as instructing employees not to speak to investigators. 

State Payroll Tax News

Arizona—Tucson Minimum Wage Increasing in 2023

Effective January 1, 2023, the minimum wage rate in Tucson, Arizona will increase to $13.85 per hour. Tucson's minimum wage rate is scheduled to incrementally increase to $15.00 per hour by January 1, 2025.

Arkansas—2023 Unemployment Tax Rates Unchanged

A spokesperson for the Arkansas Division of Workforce Services has informed Thomson Reuters that unemployment tax rates for experienced employers will range from 0.3% to 14.2%. The new employer tax rate for 2023 is 3.1%. The unemployment stabilization tax rate (all employers, except reimbursing employers, pay this tax) 0.2%. This tax rate is included in the experienced employer and new employer rate. The unemployment taxable wage base will continue to be $10,000 in 2023.

California—2023 Withholding Bracket Tables and Exact Calculation Method Issued

The California Employment Development Department has issued the 2023 versions of the two methods for determining the withholding amount from wages and salaries for state personal income tax. Method A (Wage Bracket Table Method) includes instructions for: low income exemption, estimated deduction, and payroll periods (weekly, biweekly, semimonthly, monthly, and daily/miscellaneous). Method A is limited to wages/salaries less than $1 million. Method B (Exact Calculation Method) includes instructions for: low income exemption, estimated deduction, standard deduction, personal exemption credit, and payroll periods such as annual, daily/miscellaneous, quarterly, semiannual, monthly, weekly, and biweekly.

California—Novato Announces 2023 Minimum Wage Increase

Effective January 1, 2023, the minimum wage rate for Novato, California will increase as follows: (1) $16.32 per hour for employers with 100 or more employees, (2) $16.07 per hour for employers with between 26 to 99 employees, and (3) $15.53 per hour for small business with up to 25 employees. The Novato minimum wage applies to each employee who performs more than two hours of work in a particular week within city limits.

California—2023 Meals and Lodging Values Announced

The California Employment Development Department (EDD) has announced the meals and lodging values for the 2023 tax year. For non-maritime employees, breakfast will be valued at $2.85 ($2.65 in 2022), lunch will be valued at $4.25 ($4.00 in 2022), and dinner will be valued at $6.75 ($6.30 in 2022). The total daily meal reimbursement will be valued at $13.85 ($12.95 in 2022). A meal not identified as either breakfast, lunch, or dinner will be valued at $4.95 ($4.65 in 2022). Lodging will be valued at 66⅔% of the ordinary rental value to the public, but not in excess of $1,759 ($1,715 per month in 2022), nor less than $57.05 per week ($55.60 per week in 2022) [EDD website, Rates, Withholding Schedules, and Meals and Lodging Values].

California—Menlo Park and Mountain View Increasing Minimum Wage Rates in 2023

The California cities of Menlo Park and Mountain View have announced minimum wage rate increases in 2023. For Menlo Park, the minimum wage rate will increase from $15.75 to $16.20 per hour, effective January 1, 2023. The city's minimum wage ordinance requires that all employers in Menlo Park pay a minimum per hour wage to employees working more than two hours per week, which applies to all employers in Menlo Park, excluding federal, state, county and public school district employers. For Mountain View, the minimum wage rate will increase from $17.10 to $18.15 per hour. The minimum wage requirement for Mountain View applies to adult and minor employees who work two or more hours per week (tips not included). Employers must post the city's official rate notice in the workplace, informing employees of the rate and their rights. Employers must document all hours worked by employees and keep records for four years.

California—Court Rules Target's Overtime Compensation Payment Methodology Complies with State Law

The U.S. Court of Appeals for the Ninth Circuit has ruled that the payment methodology that Target uses to compute overtime pay for their employees who received a shift differential and/or holiday premium pay complies with California's overtime requirement, reversing a district court's prior ruling. The plaintiffs, in this class action lawsuit against Target, claimed that the corporation violated California law by conflicting with the California Supreme Court's holding in Alvarado v. Dart Container Corp., 411 P.3d 528 (Cal. 2018) regarding the calculation of the regular rate of pay and the state's requirement that overtime be calculated "at the rate of no less than one and one-half times the regular rate of pay for an employee" under Cal. Lab. Cd. §510. The Ninth Circuit said that the district court erred in ruling that Target’s method of calculating regular rate of pay using both overtime and non-overtime hours conflicts with the California Supreme Court’s Alvarado decision. The court explained that in Alvarado, the court held that when non hourly compensation is factored into the regular rate of pay calculation, only non overtime hours are considered. As a result, in Alvarado, an attendance bonus is "is payable even if the employee works no overtime at all," and should be "treated as if it were fully earned by only the non overtime hours in the pay period." The plaintiffs argued that the shift differentials and holiday premium pay should be treated like the attendance bonuses. The court did not agree. Instead, the shift differentials/holiday premium pay are not fixed flat sums. As hourly payments, they are proportional based on the hours worked, increasing as overtime is worked. Also, the Ninth Circuit said that the district court erred in ruling that Target violates California’s requirement that employees’ overtime hours be paid at a rate of "no less than one and one-half times the regular rate of pay." The Court said that although both parties offer dueling ways to calculate overtime pay, it concludes that Target’s methodology meets California’s requirement because the employees receive total base compensation plus any accumulated shift-premium pay, plus an overtime premium of one-half of the regular rate of pay times overtime hours. Regardless of how it may be calculated, employees are receiving the one-half overtime premium thereby satisfying the state law. While the workers assert Target should have a pay scheme that maximizes their overtime pay, California law does not require this [Bowen v. Target Corp., CA9, Dkt. No. 21-56136, 11/1/2022].

Colorado—Family and Medical Leave Insurance Toolkit Notes Employers Must Notify Employees by Start of 2023

The Colorado Department of Labor and Employment's (CDLE) Family and Medical Leave Insurance(FAMLI) Toolkit for Employers notes that employers must notify employees of the program by January 1, 2023. The CDLE explains that most Colorado workers will see deductions come out of their first paycheck in January 2023. However, benefits will not be available until January 2024. Tools to help employers prepare employees include the Required 2023 FAMLI Program Notice poster, a paycheck stuffer to include with the paystubs for employees, the 2023 FAMLI Employee Handbook. Several of these materials are also available in Spanish.

Florida—2023 Unemployment Tax Rate Information

A spokesperson for the Florida Department of Revenue has informed Thomson Reuters that the unemployment tax rate range for experienced employers will continue to be from 0.1% to 5.4%. However, the spokesperson noted that it is possible for employers in the state's Short Term Compensation program to have a rate as high as 6.4% and employers that engage in SUTA dumping can have their rates increase to 7.4%. The 2023 unemployment tax rate for new employers continues to be 2.7%. The 2023 unemployment taxable wage base will also remain at $7,000.

Georgia—Revised Employer's Guide Contains 2023 Withholding Tax Tables

The Georgia Department of Revenue (GDOR) has issued an October 2022 version of its annual Employer's Withholding Tax Guide that contains the 2023 withholding tax tables, electronic filing information, general withholding tax information, and answers to frequently asked questions. 

Louisiana—No New Withholding Tables for 2023

A spokesperson for the Louisiana Department of Revenue (DOR) has confirmed that there will be no adjustments to the existing withholding tables, released in August 2022, for tax year 2023. The current withholding tables reflect adjustments to the income tax withholding rate pursuant to LA L. 2021, H278.

Maine—Minimum Wage to Increase in 2023

The Maine Department of Labor has confirmed in an email that the state's minimum wage will increase to $13.80 per hour, effective January 1, 2023 (currently, $12.75 per hour).  The tip credit will be $6.90 per hour (50% of the minimum wage). The minimum wage exemption threshold for executive, administrative, and professional employees will rise in 2023 to $796.17 per week (currently $735.58), or $41,401 annually.

Michigan—Unemployment Information Released for 2023

A spokesperson for the Michigan Department of Labor and Economic Opportunity (LEO) has notified Thomson Reuters that unemployment information for 2023 would remain unchanged from 2022. The range of rates for experienced employers will continue to run from 0.06% to 10.3%. The new employer rate for non construction employers will remain 2.7%, while the rate for construction employers will not be known until the end of the year but is expected to remain at 6.0%. The maximum rate for experienced employers will continue to include a 6.3% maximum chargeable benefit, a 3.0% maximum account building component, and a 1.0% maximum nonchargeable benefits component. The range for nonchargeable benefits components will continue to run from 0.06% to 1.0%. Finally, the wage base will be $9,500 for all employers (currently, $9,000 for nondelinquent employers and $9,500 for delinquent and reimbursing employers).

New Jersey—Legislation Amends Unemployment Insurance Benefits Payment Process

New legislation, effective August 1, 2023, amends the payment process for unemployment insurance benefits. Specifically, the law requires improved information sharing. Employers who provide benefit information and instructions to workers will be required to share that information with the state unemployment and temporary disability insurance division. The information provided will be used to make determinations on benefit qualifications. It further provides that an employer will be notified electronically after seven calendar days if it fails to provide all the information needed to make a benefit determination. A failure to respond to the notice can result in the division making a determination based on information from other sources. Furthermore, the employer will not be able to contest benefits charged to its account until it provides the information needed. Additionally, employers that fail to provide the information to the division may be subject to a penalty of $500. The bill also addresses overpayments, providing that if an employer makes a successful benefits appeal, it will still be charged for any overpayments if the initial benefit determination was caused by an employer error or failure to provide information as required [L. 2022, S2357].

New York—NYC Housing Authority Must Face Worker Suit Over COVID-19 Leave

Joel Sosa, who was employed as a contract specification writer at the New York City Housing Authority (NYCHA), filed a lawsuit against the NYCHA alleging it denied him leave during the COVID-19 pandemic after his sons’ schools closed. While Sosa asserted that NYCHA was his primary employer, the NYCHA claimed that Sosa’s primary employer was IIT Inc. (a staffing company that hired Sosa, and issued his paychecks and W-2 form). The court rejected NYCHA’s claim that it was not Sosa's primary employer under Department of Labor rules. Sosa’s requests to work from home were denied, as was Sosa's subsequent request for FLMA leave. He was ultimately fired on April 1, 2020. The suit also adequately alleges that NYCHA was Sosa’s primary employer under the Family Medical Leave Act (FMLA) because the NYCHA had the authority to fire him, and controlled whether he was granted leave. The NYCHA's motion to dismiss was therefore denied [Sosa v. New York City Housing Authority, D.C.N.Y., Dkt. No. 22 Civ. 2460, 11/4/2022].

Ohio—2023 Unemployment Tax Rate Information

The Ohio Department of Jobs and Family Services (DJFS) has informed Thomson Reuters that unemployment tax rates for experienced employers will range from 0.3% to 9.8% (0.3% to 9.7% in 2022) in 2023. The 2023 tax rate schedule does include a minimum safe level increase. For new employers, the unemployment tax rate is to be 5.6% for those in the construction industry and 2.7% for all others next year. The unemployment tax rate for delinquent employers will be 12.9% in 2023 and the taxable wage base will continue to be $9,000. The DJFS began sending unemployment tax rate notices to employers on November 9.

Ohio—RITA Now Administers Lincoln Heights, South Amherst, and Piqua

The Ohio Regional Income Tax Agency (RITA) now administers the 2% local income tax of Lincoln Heights, the 1% local income tax of South Amherst, and the 2% local income tax of Piqua.

Pennsylvania—New Legislation Amends Several Unemployment Provisions

On November 3, 2022, Pennsylvania Governor Tom Wolf signed Senate Bill 1083, effective immediately, that allows certain businesses that were closed during the COVID-19 pandemic (after March 6, 2020 and before July 1, 2021) to retain their experience rating for UC tax purposes, thereby avoiding a tax increase for these employers. Specifically, these shuttered businesses will continue to receive an experienced-based tax rate by deeming these employers to have paid contributions, even if no contributions were made. To qualify, the employer must have made contributions for at least one quarter in fiscal year 2020 or 2021. Also, the legislation provides that a claimant will not be disqualified from benefits if they left employment to accompany a military spouse who is required to relocate due to permanent change of station orders, activation orders or unit deployment orders. Finally, the legislation repeals two sections of the Shared Work program that have been suspended by the Department of Labor and Industry (DLI) since 2014. Under amended provisions, an approved shared-work plan will take effect following later of: (1) the date on which the employer submits the plan to the DLI or (2) on the first calendar week following the date the employer provided in the plan [L. 2022, S1083].

Puerto Rico—2022 Developer Guide for Electronic Filing Requirements for Form 499R-2C/W-2cPR Released

The Puerto Rico Department of the Treasury (PRDOT) has also released Publication 22-01 (Developer Guide Form 499R-2c/W-2cPR). Forms 499R-2c/W-2cPR must be submitted to El Sistema Unificado de Rentas Internas (SURI) in the EFW2CPR format. Forms 499R-2c/W-2cPR printed without a confirmation number will be rejected. Wage records for tax year 2022 are due January 31, 2023. Box F, previously designated as "Others” is now used for the reporting of remuneration related to direct employment to participate directly in the activities covered by a tax exemption decree. The box is used to report hours worked and the related EIN of an employee leasing company if employees are leased. Box G is now designated "Others." Under Box G, new for the 2022 tax year, compensation received by a teleworker must be reported. Also the RS – State Record has new codes related to direct employment and teleworker information.

South Carolina—2023 Unemployment Tax Rate Information

A spokesperson for the South Carolina Department of Employment and Workforce (DEW) has informed Thomson Reuters that the unemployment tax rates for experienced employers will continue to range from 0.06% to 5.46% (including a 0.06% as a contingency assessment) in 2023. The new employer rate will be 0.450% (that includes 0.390% as a base rate and 0.06% as a contingency assessment) next year. The taxable wage base will remain at $14,000 in 2023.

Washington—Tukwila Voters Approve Local Minimum Wage

Voters in Tukwila, Wash., have approved a ballot initiative (Initiative Measure No. 1). The measure establishes a local minimum wage requiring employers to pay employees an hourly minimum wage comparable to equivalent employees in the city of SeaTac. Currently, SeaTac’s minimum wage is $17.54 per hour, but it is increasing to $19.06 per hour effective Jan. 1, 2023. Employers will be subject to the new ordinance effective July 1, 2023 if they have at least 15 employees, or more than $2 million in annual gross revenue,.The rate will be adjusted annually for inflation. Tips and other charges must be retained by employees and will not count toward the hourly minimum wage. Additionally, covered employers must offer additional hours of work to existing employees before hiring new employees or subcontractors.