October 31 - November 4 Compliance Updates: 2023 Draft Instructions Released for 1042-S

Nov 7, 2022 3:18:19 PM
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2023 Draft Instructions Released for 1042-S

The IRS has released a draft version of the 2023 instructions for Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding).

Background. Withholding agents file Form 1042-S to report amounts paid to foreign persons (e.g., salaries, interest, dividends, premiums, pensions, scholarships, and grants) from sources within the U.S. during the preceding calendar year that are subject to withholding. Copy A of Form 1042-S must be filed with the IRS even if: (1) no tax was withheld because the income was exempt from tax under a treaty or under the Internal Revenue Code, including the exemption for income effectively connected with conducting a trade or business in the United States; or (2) the amount withheld was repaid to the recipient. Form 1042-S should not be filed if the amount is required to be reported on Form W-2 or 1099. 

What's New? The instructions have been updated to reflect requirements under Code Sec. 1446(a) and Code Sec. 1446(f) that apply beginning January 1, 2023. These requirements apply to brokers affecting transfers of interests in publicly traded partnerships (PTPs). Two new income codes (57 and 58) and a new chapter 3 status code (39) have been added for new requirements, beginning in 2023.

Due date. Regardless if Form 1042-S is filed on paper or electronically, the form is due by March 15 of the following year. Additionally, Form 1042-S must be furnished to recipients of the income by March 15. Paper Forms 1042 -T must be accompanied with Form 1042 -T (Annual Summary and Transmittal of Forms 1042-S).

Note:  Filers of 250 or more Forms 1042-S must file the forms electronically. However, the Taxpayer First Act of 2019 (P.L. 116-25) authorizes the Treasury and IRS to issue regulations that reduce the 250-return electronic filing requirement. The IRS has stated that until final regulations are issued, the threshold will remain at 250 returns.

Webinar available. The IRS announced that recordings of a live webinar about Form 1042-S is now available for viewing on the IRS Video Portal

The webinar provides: 

  • An overview of each section of Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding,
  • A discussion of common errors practitioners make when completing the form, and
  • Answers to frequently asked questions.

Tax practitioners and withholding agents can find the recordings on the IRS Video Portal under the Business tab and "Filing and Paying Taxes."


IRS Clarifies that SSA Determines Worker Classification for State and Local Workers

The IRS has issued a memorandum to its employees that provides guidance clarifying that only the Social Security Administration can determine if a Section 218 Agreement applies and determine the worker classification of a state or local worker.


Section 218 Agreement. A Section 218 Agreement is a voluntary agreement between a state or local government employer and the Social Security Administration under which the government employer voluntarily agrees to extend FICA coverage to its employees. Section 218 Agreements cover positions and not individual employees. All 50 states and Puerto Rico and the Virgin Islands have Section 218 Agreements. Provisions of a Section 218 Agreement are covered under §218 of the Social Security Act.

Common Law Standard for Worker Classification. Internal Revenue Manual (02-01-2003) provides that the employment status is determined under Reg. § 31.3121(d)–1(c). Under common law, a worker is an employee when the person for whom the services are performed has the right to control, though that right need not be exercised, and direct the individual who performs the services. This control reaches not only the result to be accomplished, but also the details and means by which that result is to be accomplished.

Form SS-8. In general, the SS-8 program helps employers and workers determine the correct employment status of the workers. Examination technicians assess information provided on Form SS -8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) to make a determination on whether workers are employees subject to FICA taxes or independent contractors subject to self-employment tax. 

Updates to Form SS-8 Handbook

IRM This section has been revised to explain that only the Social Security Administration can determine if a Section 218 Agreement applies and make a worker classification determination on a state or local worker. It clarifies that the common law analysis does not apply to any elected or appointed officer or government entity employee and these workers are considered employees under Code Sec. 3401(c). Further, the common law analysis does not apply to any "public officials." These individuals are considered employees under Reg. § 1.1402(c)-2(b) and are not subject to self-employment tax.

Because the SSA must make a Section 218 coverage determination, the IRS will notify requesters that submit an SS-8 for state or local government workers to contact the SSA regarding the proper employment status. 


DOL Investigation Nets $102K in Back Tips and Wages for Restaurant Workers

An investigation by the U.S. Department of Labor's (DOL) Wage and Hour Division (WHD) found that a restaurant owner failed to combine the hours of employees working in more than one location when calculating overtime. Additionally, the investigators determined that tip pool money was wrongfully diverted from employees, and failed to pay overtime to a non-exempt salaried employee. As a result, the WHD recovered $51,217 in restored tips and back wages and an equal amount in liquidated damages from the restaurants' owners. 

WHD District Director Steven McKinney commented that: "The overtime and tip-related violations found in these investigations are all-too-common in the food service industry. Workers who rely on tips depend on them to supplement their hourly wages to make ends meet. Employers who deprive workers money they earn may face costly consequences when they violate the law."

Federal law prohibits employers, managers and supervisors from keeping employees' tips, including tips in tip pools. The law applies even if tipped workers are paid hourly at rates equal to or above the full minimum wage.

The release further notes that In fiscal year 2021, the WHD recovered more than $34.7 million in back wages for 29,209 food service industry workers. The Bureau of Labor Statistics projects there were 1.2 million job openings in the accommodations and food service industry in August 2022, while 1,022,000 accommodations and food service industry workers separated from their jobs


IRS Releases Final Version of 2022 Form 8027

The IRS has released the final version of the 2022 Form 8027 (Employer's Annual Information Return of Tip Income and Allocated Tips)

Background. Any employer who operates a large food or beverage establishment must file Form 8027. A "large" food or beverage establishment is one that: (1) is located in the 50 states or the District of Columbia; (2) where tipping of food or beverage employees by customers is customary; and (3) whose employer normally employed more than 10 employees on a typical business day during the preceding calendar year. 

No changes to Form 8027. The final version of Form 8027 contains no substantive changes. The instructions for Form 8027 were released in October.


Court Rules Boot Up Time Compensable Under the FLSA

The U.S. Court of Appeals for the Ninth Circuit has ruled that time spent by employees booting up their computers was compensable under the Fair Labor Standards Act (FLSA) as integral and indispensable to their principal job duties.

The facts. Cariene Cadena and other call center workers provide customer service and scheduled customers using computers provided by their employer, Customer Connexx LLC (Connexx). The workers were non-exempt employees and paid on an hourly basis. Workers are required to clock in and out using a computer-based timekeeping program prior to accessing other computer programs. The workers estimate that it can take up to twenty minutes before the computer would boot-up so they could clock in due to the age of the computer or whether the computer was off versus in sleep mode. Workers may correct inaccurate timekeeping using a "punch claim form." When a shift ends, workers close out of programs, clock out, then log off or shut down computers. The average time to log off and boot down computers was estimated between 4.75 to 7.75 minutes. The workers assert that the FLSA and Nevada law require Connexx to pay the employees for the time to boot up and boot down computers. The district court granted summary judgment to Connexx and found that the time spent booting up and down were not "principal activities" related to the answering calls and scheduling tasks. The district court claimed that the timekeeping process could be dispensed with and the workers could still perform their work and compared the time spent as similar to lining up at a physical time clock to punch in. 

The law. The FLSA, as amended by the Portal-to-Portal Act of 1947, generally excludes from compensation activities that are preliminary or postliminary to the principal activity or activities that the employee is employed to perform; however, preliminary and postliminary activities are still compensable under the Portal -to-Portal Act if they are integral and indispensable to an employee's principal activities. To be integral and indispensable, an activity must be: (1) "necessary to the principal work performed," and (2) done for the benefit of the employer.

The ruling. The court noted there was no dispute regarding what the employee's duties are, therefore, the court first examined how those duties are performed. The court noted that the workers did not have assigned computers and used whatever station was available. Whether a machine had to boot up cold or was in sleep mode depended upon the prior user. While the court agreed that booting up was not a task they were hired for, it was a necessary task to "engage" the computer that contained the programs required to do the job. Therefore, instead of examining whether using a timekeeping system was integral, the court determined that booting up the computer was necessary in order for the employees to perform their primary duties. The court was careful to note that not all activities that an employer requires is compensable, however, the required activity (booting up) "bears such a close relationship to the employees' principal duties that employees cannot eliminate the required activity and still perform their principal duties." Connexx also argued that the time spent booting up, is not compensable because it is de minimis and that they did not have "actual or constructive knowledge of the alleged overtime." The court declined to address either argument and instead directed the district court to decide on the merits of the arguments upon remand. 

The takeaway. The Ninth Circuit ruling applies to Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington as well as the U.S. territories of Guam and the Northern Mariana Islands. Employers may wish to consider separating their timekeeping systems from other computer applications that are necessary for an employee to perform work to avoid running afoul of FLSA requirements. 


DOL Granted Court Order Barring Abuse of H-2A Visa Workers by Employer

The Department of Labor's (DOL's) Wage and Hour Division (WHD) pursued and was granted a federal court order barring an Arizona-based agricultural employer from continuing to abuse workers in the United States under the H-2A visa program.

H-2A visa program. The H-2A visa program allows agricultural employers to bring in temporary workers from outside the United States on a seasonal or temporary basis, with certain stipulations on types of work, pay, housing, and food. Employers found in violation of these requirements face civil penalties.

Visa program violations. The Arizona-based agricultural company was investigated by the WHD and found to have seriously violated several safety requirements and abused temporary workers. The company required workers to perform numerous unsafe tasks with faulty machinery, neglected to properly house workers, and threatened visa holders with immigration enforcement ramifications should they complain. The WHD's obtained court order requires an immediate cessation of all such violations and abuse, and although no civil penalties have yet been assessed, litigation against the employer is ongoing [DOL News Release, 22-2079-SAN, 10/28/2022].


2023 Draft Versions of W-2 Series Released

On October 31, 2022, the IRS released draft versions of wage statement forms W-2, W-2AS (for use in American Samoa), W-2GU (for use in Guam), and W-2VI (for use in the Virgin Island) for tax year 2023. 

Form W-2. Wage statement Forms W-2 are required to be filed by January 31 of the year following the tax year they apply to. Employers must furnish copies to employees, the Social Security Administration, and any states that require copies filed.

Changes to draft for 2023. The draft versions of the forms have been updated to reflect higher withholding thresholds for Social Security taxes and Railroad Retirement Taxes. For 2023, the Social Security wage base limit is $160,200. Updates have also been made to deferral limits and the due date for the returns.

Observation: The IRS noted during the October 6 payroll industry call that the 2023 draft Form W-2 compresses the employee copies B, C, and 2 to fit onto one page, with the instructions for employees to be provided on the other side of that page. However, the latest draft no longer compresses copies B, C, and 2 onto a single page. This current draft now separates the copies as in prior years. 

Note: In a November 3 payroll industry call, the IRS stated that stakeholders did not have enough time to get envelopes to accommodate the new design so the IRS has reverted to the prior copy. However, expect the redesign to be implemented in 2024. 


Child Labor and Overtime Violations Spell Trouble in Paradise

A Polynesian restaurant on the island of Kauai found itself on the receiving end of nearly $40,000 in back pay and civil penalties following a U.S. Department of Labor investigation into its use of minors as kitchen workers and overtime pay practices. 

Child labor and overtime requirements. Under the Fair Labor Standards Act (FLSA), children under the age of 16 are not permitted to work later than 9:00 p.m. during non-school weeks, or 7:00 p.m. on school days. Several occupations and job duties, such as the operation of hazardous equipment are also barred from minors. Additionally, the FLSA requires all non-exempt employees to be paid overtime premiums of one and one-half times their regular rates of pay for any hours worked over 40 in a seven day period.

Note: It is important to note that states also have laws regarding the use of minors as well as when overtime is due. State requirements may differ from federal requirements. For example, in New Jersey, state law specifies that minors aged 14 and 15 may only work three hours after school between the hours of 7 a.m to 7 p.m. Further, state laws may prohibit the use of minors in certain tasks. In California, overtime must be paid for work in excess of 8 hours a day, or 40 hours a week. 

Restaurant labor violations. The Wage and Hour Division notes that the restaurant industry in particular falls into labor violation territory when it comes to employing minors, as many jobs require potentially hazardous tasks to be performed on a daily basis. The restaurant has been fined $26,355 in child labor violation penalties and is required to pay $11,181 in back wages and damages for workers denied proper overtime compensation [WHD News Release, 22-1996-SAN, 10/19/2022].


Payroll on the Ballot: November 8 Elections

When voters head into the election booths, many will be casting their ballot on state and local payroll-related ballot measures. Here is a rundown of all the state and local ballot initiatives that voters will be deciding on November 8. 


Proposition 30 would raise funds to provide 45% rebates and incentives for the purchase of zero-emission vehicles and 35% for charging stations by increasing the tax by 1.75% on the personal income over $2 million of individuals and married couples, beginning January 1, 2023 and would sunset at the earlier of: January 1, 2043 or if for three consecutive years on or after January 1, 2030, the statewide greenhouse emissions are at least 80% below the statewide 1990 levels. The initiative would also call for funds to be used for wildfire prevention and suppression programs. 

There are also several ballot measures on a local level:

  • Duarte. Measure J proposes a minimum wage for healthcare workers of $25 per hour employed by a covered healthcare facility (as defined by the ordinance), and related fines for noncompliance. If passed, beginning January 1, 2024, the minimum wage would be adjusted based on the Consumer Price Index annually. The ordinance defines healthcare workers to include clinicians, nurses, certified nursing assistants, aides, maintenance workers, janitorial or housekeeping staff, guards, food service workers, laundry workers, pharmacists, nonmanagerial administrative workers among others, but does not include a manager or supervisor. 
  • Inglewood City. On November 8, voters in Inglewood City will decide on Measure HC that seeks to establish a $25 per hour minimum wage for workers employed by a privately owned covered health facility located in the city. 
  • Laguna Beach. Voters in Laguna Beach will decide on Measure S that asks voters whether to establish a minimum wage of $18 per hour and workplace standards and protections for hotel workers. The minimum wage would be then adjusted annually.


Proposition 121 was placed on the November 8 ballot through a citizen initiative and asks voters whether the state income tax rate should be reduced from 4.55% to 4.40%. The measure would pass with a majority vote. 

District of Columbia
Voters in D.C. will decide whether on Initiative 82 that seeks to eliminate the tip credit for tipped workers gradually with a phased-out approach until tipped workers are paid the required district minimum wage by July 1, 2027. The District of Columbia Tip Credit Elimination Act of 2021, as provided to the Board of Elections, would reduce the tip credit by increasing the cash minimum wage to: (1) $6.00 per hour, beginning January 1, 2023; (2) $8.00 per hour, beginning July 1, 2023; (3) $10.00 per hour, beginning July 1, 2024; (4) $12.00 per hour, beginning July 1, 2025; (5) $14.00 per hour, beginning July 1, 2026. Beginning July 1, 2027, the cash minimum wage for tipped workers is equal to the district minimum wage rate for all workers.

An Idaho Advisory Question will ask voters to approve or disapprove an income tax rate cut by using a budget surplus to refund $500 million to taxpayers as well as increasing education and student funding. The advisory question allows voters to express their approval or disapproval of House Bill 1 passed during a Special Session in September. The new legislation establishes a flat income tax rate of 5.8% for income over $2,500, beginning January 1, 2023 (previously graduated rates of 1% to 6%). The advisory question was placed on the ballot as provided by Section 14 of the House Bill 1, the results of which will assist the state legislature to determine whether the "the ongoing elements of this act shall continue."

On November 8, voters in Massachusetts will consider a constitution amendment (Question 1) that would establish, effective January 1, 2023, an additional 4% state income tax on that portion of annual taxable income in excess of $1 million (Millionaires' Tax). The income level would be increased annually with a cost of living adjustment. The revenues generated by the tax would be used for public education, public colleges and universities; and for the repair and maintenance of roads, bridges, and public transportation. 

Initiative Measure 433 ask voters whether the state minimum wage should be increased from the current $9.00 per hour to: (1) $10.50 per hour, beginning January 1, 2023; (2) $12.00, beginning January 1, 2024; (3) $13.50 per hour, beginning January 1, 2025; (4) $15.00 per hour, beginning January 1, 2026, and thereafter, beginning January 1, 2027, the state minimum wage would be increased annually with a cost of living adjustment. The measure would not increase the cash minimum wage rate for tipped employers, currently $2.13 per hour.

Voters will decide on Question 2, a measure that asks to amend the current state minimum wage provisions that set a different minimum wage rate based on whether employers provide certain health benefits. Currently, the minimum wage rate is $9.50 per hour with qualified health benefits and $10.25 per hour without. There is already a scheduled increase beginning July 1, 2023 of $11.00 per hour with qualified health benefits; $12.00 per hour without. The initiative would set the state minimum wage rate to $12.00 per hour, beginning July 1, 2024, regardless of benefits and the minimum wage would not be increased annually with a cost of living adjustment. However, should the federal minimum wage rate be more than $12 per hour, the state minimum wage rate would increase to match the federal minimum wage.

On November 8, 2022, voters in various localities and school districts across Ohio will decide on income tax issues. There are a total of 35 such measures that seek to establish new rates, continue rates, as well as increase rates. 

Voters will be asked to vote for or against Constitutional Amendment #1, as proposed by SJR 648 (111th) and SJR 2 (112th). If approved, the Tennessee Constitution would have a new section that would make it illegal for a private or public employer to deny or attempt to deny employment based on a person's membership, resignation from, or refusal to join, or affiliate with a labor union or employee organization. 


Client Update: Service Providers, Gig Workers Get 1099-Ks for $600 or More

This Client Update reminds practitioners of the new lower threshold for reporting transactions on Form 1099-K, Payment Card and Third-Party Network Transactions. Beginning in 2022, the reporting threshold for sales of goods or services was reduced to $600. (IR 2022-189, 10/24/2022)

Lower reporting threshold. The American Rescue Plan Act of 2021 lowered the reporting threshold for third-party networks that process payments for those doing business. Before 2022, Form 1099-K was issued for third-party payment network transactions only if the total number of transactions exceeded 200 for the year and the transactions' aggregate amount exceeded $20,000. Beginning in 2022, a single transaction over $600 can trigger reporting on a Form 1099-K.

Note. Money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable income.

Estimated tax payments. Individuals who receive business payments through third-party payment networks should make estimated tax payments for that income. Generally, income taxes must be paid as taxpayers earn or receive income throughout the year. These payments can be made through withholding or by making estimated tax payments.

Individuals who are sole proprietors or partners in a business usually need to make estimated tax payments because they don't have access to withholding.

In addition, individuals who are employees or pensioners may need to make estimated tax payments if the amount withheld from their income isn't enough to cover their tax liability, or if they receive other types of income, such as interest, dividends, alimony, self-employment or gig income, capital gains, prizes, and awards.


CPAs Laud Reporting of Employee Retention Credit Fraud

By Tim Shaw

The IRS’ decision to allow anonymous reporting of potential employee retention credit (ERC) fraud schemes by third-party vendors is popular among certified public accountants who have advocated for improvements to the credit's administration.

Often described as "ERC mills," some service providers deliberately overstate businesses' ERC claims and collect costly upfront contingency fees. The taxpayer may be entitled to a significantly smaller ERC or may not qualify at all, though the vendor omits this information.

On October 19, the IRS warned taxpayers of this practice in a release to raise awareness and provide a vehicle for safely alerting the agency. Taxpayers can now report inappropriate ERC mill activity using Form 3949-A, Information Referral, a move welcomed by the American Institute of Certified Public Accountants.

"For more than a year, the AICPA has communicated its concerns to the IRS and the Department of the Treasury regarding the unscrupulous business practices of ERC mills, and we are encouraged by this acknowledgement by the IRS of these questionable business practices around the ERC," said Barry Melancon, president and CEO of the AICPA in an October 24 statement.

The ERC was first established as part of the Coronavirus Aid, Relief, and Economic Security Act in 2020 (CARES; PL 116-136), and was later modified in subsequent pandemic-related legislative packages, including the Consolidated Appropriations Act of 2021 (CAA; PL 116-260) and the American Rescue Plan Act of 2021 (ARPA; PL 117-2). It was intended to incentivize and compensate companies that did not lay off their workforce as a result of economic disruptions experienced at the height of the pandemic.

Initially, qualified employers, including Paycheck Protection Program loan borrowers, could claim a refundable credit against 50% of qualified wages paid between March 13 and December 31, 2020, up to $10,000 per employee. The credit amount was bumped up to 70% for 2021 and the limit reset on a quarterly basis during that year and was scheduled to sunset in December.

However, the Infrastructure Investment and Jobs Act (IIJA, PL 117-58) retroactively moved up the program's expiration to the end of September 2021. Concerned that the sudden end to the credit would be disruptive to business planning and compliance, the AICPA Tax Executive Committee Chair Jan Lewis wrote to lawmakers on the Senate Finance Committee and the House of Representatives Ways and Means Committee urging transitional relief in the form of penalty waivers.

Although the program has now been expired for over a year, the ERC has a three-year lookback period for employers to claim the credit in an amended tax return. Given the multiple adjustments to the program and common confusion over eligibility, ERC mills have been able to capitalize on businesses seeking outside help.

"If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction," the IRS advised.

For the AICPA, the ERC has been an area of import since its inception. Christopher Hesse, who previously chaired the Tax Executive Committee, sent a letter January 15, 2021, to IRS Commissioner Chuck Rettig and David Kautter and Michael Faulkender, two former Treasury assistant secretaries. Hesse sought guidance for PPP loan recipients claiming the ERC.

Such guidance should state that "the filing of a PPP loan forgiveness application does not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness," according to Hesse.

In a follow-up letter February 25, 2021, addressed to Rettig and Mark Mazur—then-acting assistant secretary for tax policy—Hesse provided additional recommendations relating to Section 206 of the Taxpayer Certainty and Disaster Relief Act of 2020. These pertained to the ERC's evolution from 2020 to 2021 by way of the CAA. He had also sent similar correspondence on multiple occasions in 2020 following the enactment of the CARES Act.

AICPA members have raised complaints over ERC mills, many of which are non-CPA vendors. Expanding Form 3949-A to be used for reporting ERC fraud is a step in the right direction for protecting businesses impacted by the pandemic, the AICPA believes.

"This credit has been hugely beneficial to countless businesses that struggled to navigate the challenges brought on by the pandemic, and CPAs have often advised clients and business owners against taking the improper recommendations of these third-party vendors," said Melancon. "We are pleased that employers and others now have a mechanism to anonymously report bad actors and help to protect the public against them."


Federal Agency's Annual Audit Plan Contains Payroll-Related Items

The 2023 audit plan from the Treasury Inspector General for Tax Administration (TIGTA) contains some payroll-related items. 

The Office of Audit Fiscal Year Annual Audit Plan communicates TIGTA's audit priorities to the IRS, Congress and other interested parties. The report notes that many of the activities described in the plan address the fundamental goals related to the IRS’s mission to administer its programs effectively and efficiently. The fiscal year (FY) 2023 plan includes 146 new and in-process audits.

The list of FY 2023 planned audits include the following:

  • Ghost Employer Initiative. Review the IRS’s efforts to bring "ghost employers" into compliance with employment tax reporting and payment requirements through collaboration with the IRS Small Business/Small Employer Division Examination and Collection, Criminal Investigation and Research, Applied Analytics and Statistics. 
  • Affordable Care Act: Selection and Resolution on Non-Compliant Employers Subject to the Employer Shared Responsibility. Evaluate the IRS’s identification and selection of non-filers, and the notification, selection and resolution processes to ensure Applicable Large Employer compliance with the Employer Shared Responsibility Provision.
  • Processing of Employer Identification Number Applications and Maintenance of Business Accounts. Evaluate the effectiveness of the IRS’s controls for processing Employer Identification Number (EIN) applications and ensuring that they accurately consolidate accounts with multiple EINs.
  • Employment Tax Examinations. Assess the IRS’s controls over the selection and examination of employment tax returns and determine the resolutions of employment tax examination efforts, including relief from employment tax obligations that may be provided under Section 530 of the Revenue Act of 1978.
  • Assessment of the IRS’s Efforts to Address Underreporting of Schedule H, Household Employment Taxes. Evaluate the IRS’s processes and procedures to ensure that Schedule H (Household Employment Taxes) filers comply with their payment and reporting requirements.
  • Inflation Reduction Act: Assessment of the Expanded Research Credit for Small Businesses. Determine whether the IRS can ensure that taxpayers who claim the Research Credit against their payroll taxes are eligible to claim the credit and claim the correct amount. 

IRS Increasing Headcount for 2023 Tax Filing Season While Form 941 Mission Critical Backlog Decreases

The IRS has announced taxpayer service improvements with 4,000 new hires to prepare for the 2023 tax filing season while the number of unprocessed Form 941 (Employer's Quarterly Federal Tax Return) returns has decreased [IR 2022-191; IRS Operations During COVID-19: Mission-Critical Functions Continue].

More headcount. The IRS explains that the additional headcount was added over the last several months and is being trained to provide help to taxpayers, including answering phone questions. The Service says that the increase in employees is part of a wider improvement effort tied to the Inflation Reduction Act (P.L. 117-169) funding approved in August.

More improvements and further new hires. The IRS adds that updates on other improvement areas will be provided in the near future and has a goal to add another 1,000 customer service representatives by the end of 2022. Nearly all training for these new hires will be completed by Presidents Day 2023.

"IRS employees make a difference for our nation, and we're excited that we can add more people to serve taxpayers and support the critical work of tax administration," said IRS Commissioner Chuck Rettig.

Form 941 processing backlog. Regarding the critical work, as of October 20, 2022, the IRS notes there are 2.9 million unprocessed Forms 941. In mid-August 2022, there were 4.8 million unprocessed forms. The October 20, 2022 backlog is nearly half of that total. Part of August's higher numbers may have to do with the filing of second quarter 2022 Form 941s, which were due by July 31, 2022. This may mean another spike in unprocessed returns next month since the third quarter 2022 returns are due by October 31, 2022.

The IRS advises that if an employer filed a Form 941 electronically and received an acknowledgement, no further action is required other than promptly responding to any requests for information. The IRS notes that tax returns are processed in the order they are received.

Backlog for corrected Forms 941 too. There also remains a large backlog of Forms 941-X (Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund). As of October 19, 2022, the IRS's total inventory of unprocessed Forms 941-X was approximately 230,000. This number is actually an increase from the IRS's August 17, 2022 total of only 135,000.

The IRS explains that some Forms 941-X cannot be processed until the related Forms 941 are processed, which may account for increased processing delays. The IRS adds that although not all of the backlogged returns involve a COVID-19 tax credit, the inventory is being worked on at two sites (Cincinnati and Ogden) with trained staff to work possible any related credit.


State Payroll Tax News

Arizona—New 2023 Flat Income Tax Rate Prompts Changes to Withholding Tax Forms

According to the Arizona Department of Revenue (ADOR), taxpayers must complete new withholding tax forms for 2023 due to the state's tax rate change next year. These forms include A-4 (Employee’s Arizona Withholding Election), A4-P (Annuitant’s Request for Voluntary Arizona Income Tax Withholding), and A-4V (Voluntary Withholding Request for Arizona Resident Employed Outside of Arizona). Arizona Senate Bill 1828 included a provision that would gradually reduce the state income tax rate to a flat 2.5% if certain state revenue goals were met. A letter signed by Arizona Governor Doug Ducey on September 29 stated that the state met those goals and Ducey was directing the ADOR to implement the 2.5% flat tax rate, beginning January 1, 2023. The updated Form A-4 notes that if an employee fails to complete the form, employers must withhold at the default rate of 2.0% of the employee's wages until a completed Form A-4 has been received. The 2023 withholding request forms allow taxpayers to elect withholding from 0.5% to 3.5% (previously 0.8% to 5.1%). 

California—South San Francisco and Redwood City Announce 2023 Minimum Wage Rates

Two California localities have announced their 2023 minimum wage rates. South San Francisco's 2023 minimum wage rate is $16.70 per hour, up from $15.80 per hour. The minimum wage law applies to all businesses within the geographic boundaries of South San Francisco and any employee working at least two or more hours per week. Redwood City's minimum wage rate increases from $16.20 per hour to $17.00 per hour, beginning January 1, 2023. The minimum wage law applies to all businesses operating within the geographic boundaries of Redwood City and any employee working at least two or more hours per week.

California—State Confirms FUTA Tax Credit Reduction for Employers Ahead of Federal Government

The California Employment Development Department (EDD) has added a page to its website that confirms that the state will have a Federal Unemployment Tax Act (FUTA) tax credit reduction for the 2022 tax year. As a result, employers in the state will pay more in FUTA taxes. California began borrowing from the federal government on June 3, 2020 in order to maintain solvency of its unemployment trust fund. Federal law generally provides employers with a 5.4% FUTA tax credit against the 6.0% FUTA tax rate. This credit will be reduced by 0.3% for the 2022 tax year for California employers.

California—Oakland Minimum Wage Rate Increases to $15.97 in 2023

Effective January 1, 2023, the minimum wage rate in Oakland will increase to $15.97 per hour. Effective January 1, 2023, the minimum wage rate for hotel workers increases to $17.37 per hour (with Health Benefits), and $23.15 per hour (without Health Benefits). On December 1, 2022, the new posters will be made available on the City's website. 

California—State Announces Disability Withholding Tax Rate and Wage Base for 2023

The California Employment Development Department (EDD) has announced that the State Disability Insurance (SDI) withholding rate for 2023 is 0.9%. The taxable wage limit is $153,164 for each employee per calendar year. As such, the maximum to withhold for each employee in 2023 is $1,378.48. 

Delaware—No New State Income Tax Withholding Tables in 2023

The Delaware Department of Revenue has informed Thomson Reuters that there will be no new state income tax withholding tables for the 2023 tax year. The DOR's Employer's Guide contains these tables.

Illinois—Hurricane Ian Tax Relief

The Illinois Department of Revenue announced that it will waive penalties and interest for taxpayers who cannot file or pay on time as a result of Hurricane Ian. The waiver applies to affected taxpayers for payments or returns due between September 23, 2022, and February 15, 2023. To request the relief, taxpayers will need to write “Hurricane Ian - September 2022” in red at the top of the return and on the envelope containing the return or payment. Taxpayers must also send a brief written explanation of why they cannot file or pay on time, and clearly indicate a request for abatement of penalties and interest. They must include their name, account number (if using a Social Security number, including only the last four digits), mailing address, and an estimate of when they believe they can file or pay. Taxpayers may send a request for abatement of penalties and interest electronically.

Illinois—Chicago Announces Paid Leave Policy for City Employees

Chicago Mayor Lightfoot announced the rollout of a new paid leave policy for new parents, including "nonbirth" parents, which would extend the city's current six weeks paid leave for birth parents and two weeks for "nonbirth" parents to 12 weeks for new parents of either sort. City employees are eligible to use the new leave after one year of employment with at least 1,250 hours worked. The new policy follows contract negotiations between the city and the union representing municipal employees [City of Chicago Press Release, Mayor Lightfoot Announces Full Twelve Weeks of Paid Parental Leave for All City Employees, 09/30/2022].

Kentucky—Unemployment Information Released for 2023

A spokesperson for the Kentucky Department of Unemployment Insurance has verified that Schedule A will be in use for tax year 2023. Under this schedule, positively rated employers will pay unemployment tax rates from 0.30% to 2.4%, and negatively rated employers will pay unemployment tax rates from 6.50% to 9.00%. The taxable wage base has increased from $10,800 to $11,100 for tax year 2023. Contribution rate notices for contributory employers will be mailed out in early December.

Louisiana—Voluntary Reclassification Addressed in Proposed Regulation

The Louisiana Department of Revenue (DOR) has proposed regulations that would address the authority of employers to reclassify workers treated as independent contractors as employees voluntarily without liability for withholding tax in prior periods. The proposed rule would enact provisions of L. 2021, H1067, passed earlier this year.

New Jersey—Guidance Updated for 2023 for Health Coverage Providers Under the Health Insurance Market Preservation Act

The New Jersey Division of Taxation has updated its website regarding the Health Insurance Market Preservation Act requirements on third-party reporting to verify health coverage information supplied by individual payers of New Jersey income tax. The updates provide guidance for 2023, including deadlines. The updated guidance states that by March 2, 2023 , employers must provide a Form 1095 form for each primary enrollee who was a New Jersey resident (part-time or full-time) and to whom the filer provided minimum essential coverage in all or part of 2022. By March 31, 2023, employers must transmit 1095 health coverage forms to the New Jersey Division of Taxation. New sections have also been added, including a section explaining that insurers are not required to file for 2023 insurance policies purchased on New Jersey's State Exchange. The section clarifies that insurers who sell policies on New Jersey's GetCoveredNJ exchange don't file 1095-B forms for 2023 coverage. The Exchange will file 1095-A forms with the Division of Taxation that meet the filing requirements. It also notes that if 1095-B forms were not filed in years previous to 2023, you should do so. The 1095-B form can be filed for the 2019 through 2022 tax years. If a correction file is submitted to the IRS, New Jersey also will require a correction file also. 

New Jersey—More State Unemployment and Disability Information for Fiscal Year 2023

According to the New Jersey Department of Labor and Workforce Development (DLWD), the 2023 fiscal year (July 1, 2022 through June 30, 2023) disability rate for workers is 0%. For the 2022 fiscal year, the rate is 0.14%. The unemployment tax rate for employees for the fiscal year 2023 is unchanged at 0.425%, which includes a base rate of 0.3825% allocated to the state’s unemployment trust fund and an assessment of 0.0425% allocated to the state’s workforce development supplement workforce fund. The new employer unemployment tax rate for fiscal year 2023 continues to be 3.1%. The new employer disability tax rate for fiscal year 2023 also remains at 0.5%. For information on the state's 2023 wage base changes for unemployment and disability,[New Jersey DLWD website, Rate Information, Contributions, and Due Dates].

New Mexico—Albuquerque Announces Corrected 2023 Minimum Wage Rate

On November 3, 2022, the City of Albuquerque announced that a miscalculation occurred when setting the 2023 minimum wage rate.  Effective January 1, 2023, the minimum wage will be $12.00 per hour with the health care reduction. While the City of Albuquerque Minimum Wage Ordinance allows for a reduction up to $1.00 per hour if an employer offers certain benefits to its employees, the minimum wage rate set by the New Mexico Minimum Wage Act cannot fall below $12.00 per hour. Therefore, the minimum wage rate reduction allowed in the City of Albuquerque Minimum Wage Ordinance cannot be used to reduce the minimum wage below $12.00 per hour. The minimum wage for tipped workers is $7.20 per hour. The City noted in an email that the website will be updated by the end of November 3 to reflect this corrected information. 

New York—Court Determines that COVID-19 Leave Payments Were Not "Wages"

The  U.S. Court of Appeals for the Second Circuit has ruled that payments to employees for COVID-19 leave were not "wages." A group of Amazon employees filed a lawsuit claiming, in part, that the company violated N.Y. Lab. Law § 191 by failing to pay, on time and in full, COVID-19 sick leave under New York's COVID-19 sick leave law, and injunctive relief against future violations. The court held that the cited wage payment law does not permit a worker to sue an employer for failing to comply with the state's COVID-19 sick leave law because leave payments are not "wages" and are "benefits or supplemental wages" therefore not subject to wage payment requirements. The law provides that benefits or wage supplements include: (1) reimbursement for expenses; health, welfare, and retirement benefits; and (2) vacation, separation or holiday pay. The court determined that the COVID-19 payments fell into that category, and not wages. 

North Carolina—Hurricane Ian Tax Relief FAQs

The North Carolina Department of Revenue has provided answers to a list of frequently asked questions (FAQs) regarding the tax relief it is offering to victims of Hurricane Ian for all of its counties. As previously outlined in an important notice, the Department will waive any late action penalties assessed against affected taxpayers from September 28, 2022 through February 15, 2023, if the license is obtained, the return is filed, or the tax is paid by February 15, 2023. The FAQs address the impact of the tax relief on specific tax types such as personal income tax, sales and use tax, and withholding tax. In addition, the tax relief applies to the following excise taxes: privilege tax; tobacco products tax; alcoholic beverages tax; motor fuel tax; alternative fuel tax; and inspection tax. Further, since the tax relief is limited to late action penalties, persons operating without a license may still be subject to other civil and criminal penalties for operating without a license.

Oregon—Revenue Online Gets an Upgrade

The Oregon Department of Revenue has announced that its website, Revenue Online, will have a new look and additional functionality beginning November 14. The changes include better authentication options, an easier to understand layout, fewer menus, simpler navigation, easier filing and payment options, and built-in responsiveness to various screen sizes. To facilitate the upgrade, Revenue Online will be down for scheduled maintenance from 6 p.m. PST on Thursday, November 10 until 7:30 a.m. PST on Monday, November 14.

Oregon—2023 Deadlines for State IRA Program for Smaller Employer Participation

OregonSaves, the state retirement program for workers whose employers do not offer an employer-sponsored retirement plan, is reminding small employers of the 2023 deadlines for required participation. The registration deadline for employers with three to four employees is March 1, 2023. The registration deadline for employers with one to two employees is July 31, 2023. Businesses that use a Professional Employer Organization (PEO) or leasing agency must register by July 31, 2023. The registration deadline for employers with five or more employees has already passed. Employers may register here

Puerto Rico—Changes to Withholding Statements and Information Returns for 2022 Tax Year

The Puerto Rico Department of the Treasury (PRDOT) has released Internal Revenue Bulletin No. 22-10 that contains notable changes to withholding statements (Forms 499R-2/W-2PR, 499R-2c/W-2cPR and 499 R-3) and information returns (Forms 480.6A, 480.6B, 480.6B.1, 480.6C, 480.30, 480.6D, 480.6G, 480.6SP, 480.6SP.2, 480.7, 480.7A, 480.7B, 480.7B.1, 480.7C, 480.7C. 1, 480.7D, 480.7E, 480.7F, 480.7G and 480.5) for the 2022 tax year. All statements and returns must be filed electronically through SURI. Withholding statements: A new box has been added for private employers to indicate whether reported compensation includes payments for services rendered by a direct employee under tax incentive laws. If so, the employer must indicate the number of hours worked by the employee directly in the activities covered by a tax exemption under incentive laws. Employees that worked for more than one exempt business for the employer must be broken down by separate EINs and the related number hours worked for that EIN. For employers with teleworkers, a new code (Code 3) has been added for use in the "Others" box to identify reported compensation received by a teleworker. Information returns: The Bulletin notes that many of the information returns have been updated to indicate if the preparation of the form was paid for and so that the information and digital signature of the Specialist can be entered. Due dates: Form 499R-2/W-2PR is due to the Puerto Rico Department of Treasury (PRDOT) by January 31, 2023. Form W-3PR is due to SSA by January 31, 2023. Forms 480.7A, 480.7D and 480.5 are due January 31, 2023. Forms 480.6A, 480.6B, 480.6D, 480.6B.1, 480.6G, February 28. Forms 480.6SP, 480.6SP.2, 480.7E and 480.5 are due February 28, 2023. Forms 480.6C, 480.30, and 480.5 are due April 17, 2023. Forms 480.7, 480.7B, 480.7C, 480.7B.1, 480.7C1 and 480.5 are due February 28, 2023 or November 30, 2023.

South Dakota—2023 Unemployment Tax Rates

A spokesperson for the South Dakota Department of Labor and Regulation has told Thomson Reuters that there will be no changes to the unemployment tax rate schedules for 2023. Experienced employer unemployment tax rates will continue to be determined under Schedule B. Rates range from 0% to 9.3%, including an investment fee that ranges from 0% to 0.55% depending on an employer's reserve ratio. Experienced employers with a reserve ratio of less than 2.25% must also pay a 0.02% administrative fee on wages. New non-construction employer rate for the first year of business is 1.2%, and 1% for the second and third years of business. New construction employers in their first year of business will pay 6.0%. New construction employers in their second and third year of business will pay 3.0%. If a new employer has a negative account balance after their first year they may remain at the 1.2% and 6.0% rates respectively. The new employer rates include a 0.55% investment fee. The 2023 taxable wage base will remain at $15,000.

Utah—Publication and Form Updates for Voluntary Disclosure Program

The Utah State Tax Commission (STC) has updated its publication on the Voluntary Disclosure Program, which provides information to businesses and individuals (taxpayers) who wish to voluntarily resolve prior business tax liabilities. Taxpayers wishing to apply to Utah's Voluntary Disclosure Program may contact program staff on an anonymous basis. To enter an agreement to resolve prior tax liabilities, taxpayers must complete the Form TC-43 (Voluntary Disclosure Program Application) and email it tonexus@utah.govn the application to participate in the Voluntary Disclosure Program is accepted, an official Voluntary Disclosure Agreement (VDA) will be prepared, which must be signed by the taxpayer within 90 days. Once signed, the taxpayer has 30 days to provide all requested information, registration, returns and schedules. The length of the disclosure period (the period the taxpayer will pay back taxes) depends on the nature of the taxpayer's activities in Utah. Generally, the disclosure period is three years if the company has a substantial presence in Utah. An assessment is issued when all the required documentation is received; the company has 30 days to pay the assessment. If payment is not received within 30 days, a penalty for failure to pay the tax and interest will be imposed, and interest will continue to accrue. Form TC-43 has also been updated. Publication 4 and Form TC-43 feature a new contact phone number for further information: (801) 297-6299. There is also a new fax number: (801) 297-6358 [Utah Informational Publication No. 4, 10/01/2022].

Washington—Seattle Suspends Covid-19 Gig Worker Protections Effective November 1

The Seattle Office of Labor Standards has announced that the COVID-19 Gig Worker Paid Sick and Safe Time and Gig Worker Premium Pay ordinances have been suspended, effective November 1, 2022. Mayor Bruce Harrell ended the Civil Emergency Proclamation after October 31, 2022 and Governor Inslee ended the statewide state of emergency. Certain requirements of these ordinances will still apply moving forward. The Gig Worker Paid Sick and Safe Time (PSST) Ordinance: Gig workers of Food Delivery Network Companies and Transportation Network Companies of 250 or more gig workers worldwide will continue to be entitled to accrue and use PSST until April 30, 2023. Covered hiring entities must provide a Notice of Rights for a period of three years through October 31, 2025. Gig Worker Premium Pay Ordinance: Gig workers of Food Delivery Network Companies of 250 or more gig workers worldwide, as of November 1, 2022, will no longer be required to pay additional premium pay for orders. However, covered entities must provide a Notice of Rights for a period of three years through October 31, 2025. Both Ordinances: Gig workers with complaints that a hiring entity did not meet the requirements of these ordinance can still contact OLS with their complaints for three years (through October 31, 2025).

West Virginia—No New Withholding Tables for 2023

A spokesperson for the West Virginia Tax Division has confirmed with Thomson Reuters that the state will not be issuing new withholding tables for the 2023 tax year. Current tables, last revised in 2007, remain good for 2023.

Wisconsin—State's October 2022 Tax Bulletin Discusses Withholding, Per Diem and Unclaimed Property

The Wisconsin Department of Revenue's (DOR) October 2022 Tax Bulletin contains information on withholding tax, per diem rates, and unclaimed property. The DOR is holding withholding tax webinars on Wednesday, December 14, 2022, 9:00 a.m. and Wednesday, January 11, 2023, 10:00 a.m. on topics that include: employer responsibilities and filing frequency information, how to file withholding and information returns, tips for avoiding penalties and interest, employer requirements for closing accounts, and a My Tax Account overview for withholding tax. There is also a list of withholding tax updates for 2022 that include an employer's responsibility for unclaimed property. Employers may apply for relief through Wisconsin's unclaimed property voluntary disclosure program. Applications must be received by February 28, 2023. Per diem rates change annually and are updated on a fiscal year basis starting on October 1. The two methods used to calculate per diem pay are the regular federal per diem method or the high-low method. Paying an employee a per diem does not avoid Wisconsin withholding requirements. An employer must report a per diem as employee wages and withhold taxes if certain criteria apply.