What Is Nexus?

A Tax FAQ with Mary E. Vandenack.

Nexus is simply the connection, usually considered in the business context, to another state. So what that is looked at for is that a business might be formed and do its primary operations in the state of Delaware, but it also engages in business in Colorado or sends employees into Colorado. We begin to look at what is called nexus to say how much connection that business has with the state of Colorado for purposes of being subject to Colorado laws and Colorado taxes.

Another nexus issue in the employment tax arena is when you send employees into another state, you look at their connection to that state to determine whether they are subject to that state’s payroll tax laws.

© 2014 Parsonage Vandenack Williams LLC

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IRS Requires Power of Attorney for Business Employees to Communicate

By Mary E. Vandenack.

Circular 230 provides details as to dealing with the Internal Revenue Service (IRS) on all matters. One of the issues addressed is who may communicate and correspond with the IRS. If a corporate employee is simply providing and receiving information, then a Form 4764 is sufficient to authorize the employee to communicate with the IRS. If a corporation wants to allow a specific employee to negotiate, advocate, or dispute issues with the IRS, a Form  2848 designating that employee must be filed.

© 2014 Parsonage Vandenack Williams LLC

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Supreme Court Decides Severance Payments Are Subject to FICA Tax

The U.S. Supreme Court has reversed a Sixth Circuit Court of Appeals decision by finding that severance payments unrelated to state unemployment insurance that are made to terminated employees are subject to tax under the Federal Insurance Contributions Act (FICA).

 The underlying case involved an employer, Quality Stores, Inc., that entered bankruptcy proceedings in 2001. Prior to and following the bankruptcy petition being filed, the employer made payments to terminated employees pursuant to two employee severance plans. When payments were made, the employer withheld federal income tax and the employee portion of the FICA tax and also paid the employer portion of the FICA tax on the payments. In 2002, the employer filed a claim for refund for the employer and employee FICA taxes paid on the severance payments. The IRS failed to either approve or deny the refund request, so the employer filed an adversary action in the bankruptcy proceeding. The bankruptcy court, district court and Sixth Circuit Court of Appeals all found that the severance payments were not subject to FICA.

The Supreme Court reversed the rulings of the lower courts based on FICA’s broad definition of “wages” which was found to include the severance payments. Following the Supreme Court decision, unemployment benefits other than those provided through state unemployment insurance are now “wages” subject to FICA tax. The Court noted that the IRS has taken the position that state unemployment benefits are not subject to FICA, but the Court reserved its opinion on whether that position is supported by FICA’s broad definition of “wages”.

© 2014 Parsonage Vandenack Williams LLC

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2013 Tax Review

There have been a number of important tax developments in 2013 that could impact you and your business in this and future tax years. Among the more notable changes include:

  • Additional Medicare Tax. Beginning with 2013 tax returns, there will be an additional Medicare tax of 0.9% on certain high income earners. This tax generally applies to earned income in excess of $200,000 for single and head of household filers, $250,000 for married filing jointly filers and $125,000 for married filing separately filers. When applicable, employers are required to withhold the additional 0.9%.
  • Tax on Net Investment Income. Beginning with 2013 tax returns, single and head of household taxpayers with modified adjusted gross income (MAGI) in excess of $200,000, married taxpayers filing jointly with MAGI over $250,000 and married taxpayers filing separately with MAGI over $125,000, are subject to an additional 3.8% Medicare tax on certain net investment, such as interest, dividends, rents, royalties and net gains from the sale of property. The tax is generally calculated by multiplying 3.8% by the lesser of net investment income for the year or the amount by which MAGI exceeds the $200,000/$250,000/$125,000 income threshold. The threshold amounts are not indexed for inflation.
  • Phase-Out of Itemized Deductions. Beginning in 2013, the total amount of itemized deductions allowed is reduced by three percent (3%) of adjusted gross income in excess of $250,000 for single taxpayers, $275,000 for head of household taxpayers, $300,000 for married taxpayers filing jointly and $150,000 for married taxpayers filing separately. A taxpayer may not lose more than 80% of itemized deductions due to the phase-out.
  • Phase-Out of Personal Exemptions. For 2013, a taxpayer’s personal exemption are phased-out by 2% for each $2,500 or fraction thereof by which the taxpayer’s adjusted gross income exceeds $250,000 for single filers, $275,000 for head of household filers, $300,000 for married filing jointly filers and $150,000 for married filing separately filers. In 2013, a married taxpayer filing jointly will have all personal exemptions phased out at income of $422,501.
  • Increase in Top Tax Brackets. For the 2013 tax year, there is a new top tax bracket of 39.6%. This rate applies to income in excess of $400,000 for single filers, $425,000 for head of household filers, $450,000 for married filing jointly filers and $225,000 for married filing separate filers. The previous top tax bracket was 35%.
  • Same Sex Couples Must File as Married Filing Jointly or Married Filing Separately. Effective September 16, 2013, same-sex couples who were legally married in jurisdictions that recognize same-sex marriages will be treated as married for federal tax purposes. This rule applies regardless of where the same-sex couple currently resides.
  • Small Employer Tax Credit. Effective January 1, 2014, employers with no more than 25 full-time employees who offer health insurance coverage to their employees may be eligible to receive a tax credit. The employees must have annual equivalent wages that average no more than $50,000. The maximum credit available is 50% of the premium payments made on behalf of employees.
  • Employer Shared Responsibility Payment Delayed until 2015. Effective January 1, 2015, employers with more than 50 full-time equivalent employees may be subject to penalties if they do not offer insurance that meets certain minimum affordability standards to their employees. This penalty was originally set to be enforced beginning January 1, 2014.

 © 2014 Parsonage Vandenack Williams LLC

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COO Ordered to Pay Delinquent Employment Taxes as a Responsible Party

The IRS imposes stiff penalties on employers who fail to collect and turn over employment taxes. These penalties are particularly noteworthy because the taxes can be personal liability of the party who fails to account for the taxes, even if the company is a limited liability entity. The penalty for failing to pay employment taxes is typically the entire amount of tax that the employer failed to collect. When payroll taxes are unpaid, the IRS will attempt to collect from multiple responsible parties connected to the business.

In a recent case, the United States Tax Court held that a corporate officer failed to fulfill her tax accounting duties and as a result, was liable for the company’s unpaid payroll taxes.  In this case, the COO was determined to be responsible because she had oversight and responsibility over the company’s finances and allowed the company to use withheld employment taxes to pay off other creditors.

© 2012 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com

Court Holds Severance Payments Are Not Subject to FICA Taxes

A federal appellate court decision may give employers and laid-off employees a new opportunity to be refunded FICA taxes paid on severance payments. The Sixth Circuit upheld the decision in U.S. v. Quality Stores, Inc. that the employer’s severance payments made to laid-off employees should not have been subject to FICA tax.

The Facts:  Quality Stores, Inc. filed for bankruptcy and laid-off numerous employees from locations that were forced to close. In compliance with plans created both before and after the bankruptcy, Quality Stores made severance payments to laid-off employees. The plan created after the bankruptcy filing was designed to retain current employees and provide a payment that acts as a safety net for laid-off employees. On severance payments, both the employer and employee were subject to FICA tax.  After paying the tax deemed to be owed, Quality Stores filed for a refund of the FICA taxes paid arguing that the severance payments were supplemental unemployment compensation benefit (SUB) payments and should not be subject to FICA taxes. In response the IRS denied the request for a refund and the case went to court to determine if a refund should be issued. The Sixth Circuit Affirmed the determination that Quality Stores’ severance payments should be considered SUB payments for the sake of FICA taxation and the refund was allowed.

For years the issue of whether or not severance payments made to laid-off employees should be subject to FICA taxes has been in dispute. Quality Stores may be the biggest breakthrough since the CSX Corp. case which determined involuntary lay-off payments are exempt from FICA taxes.

What does this mean for current employers and employees? Any employer or laid-off employee who has previously paid FICA taxes on severance payments may now have an opportunity to seek a FICA tax refund. In addition, future severance payments, if compliant with the requirements set forth in U.S. v. Quality Stores, may not be subject to FICA tax.

How can you request a refund? It may be easy to request a refund but doing so successfully is another story. You should contact a tax attorney who is familiar with requests for FICA tax refunds if you believe one may be due. Your time to request a refund is limited, so time is of the essence. Generally, the deadline to file a request for a FICA tax refund is the later of 3 years from the due date of the affected return or 2 years following payment of the tax.

Who can request a refund? Employers and employees who have paid FICA taxes on severance payments within the time period discussed above can request a refund. Employers and employees should consider filing a refund request as soon as possible for the best chance at a refund.

© 2012 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com

Payroll Cut Extended Through 2012

The 2 percent payroll tax cut has been extended through 2012 under the Middle Class Tax Relief and Job Creation Act of 2012 (the “Act”).  The IRS has now released a revised Form 941.

The Social Security tax rate for employee withholding will stay at 4.2 percent, two percentage points less than the 6.2 percent rate in effect prior to 2011.

No action is required by workers to continue receiving the payroll tax cut, and the lower rate will still have no effect on workers’ future Social Security benefits.

Self-employed individuals will also benefit from a rate reduction in the Social Security part of the self-employment tax from 12.4 percent to 10.4 percent. For 2012, the Social Security tax applies to the first $110,100.00 of wages and net self-employment income received by an individual.

The Act also repeals the 2 percent recapture tax included in the December 2011 legislation that capped the amount of wages eligible for the payroll tax cut at $18,350.00. Thus, the now-repealed recapture tax does not apply.

The IRS will issue additional guidance as needed to implement the newly-extended payroll tax cut.

© 2012 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com