Other Federal Changes
The tax and compliance professionals at ADP keep a close eye on the Washington scene. So whether the federal government has enacted, adjusted, amended, revised, or appended employee-related regulations, you can count on us to give you the details.
Federal Changes You Can't Afford To Overlook.
The tax and compliance professionals at ADP keep a close eye on the Washington scene. So whether the federal government has enacted, adjusted, amended, revised, or appended employee-related regulations, you can count on us to give you the details. Federal Changes You Can't Afford To Overlook.
I.R.S. Increases Mileage Rates Tthrough Dec. 31, 2008The Internal Revenue Service has announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight (8) cents from the 50.5 cent rate in effect for the first six months of 2008. In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs. |
DOL issues 2007 annual UC certifications of states under FUTAThe Secretary of Labor has signed the annual 12-month certifications under the Federal Unemployment Tax Act that enable employers who make contributions to state unemployment funds to obtain certain credits against their liability for federal unemployment tax. All 50 states, as well as the District of Columbia, Puerto Rico and the Virgin Islands, have received certifications for the maximum additional credit allowable based on the 12-month period ending on October 31, 2007 |
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IRS Announces Various Federal Annual Amounts And Limits Effective 1/1/08
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Non-Qualified Deferred Compensation PlansSection 409A, added by the American Jobs Creation Act of 2004, provides that all amounts deferred under a non-qualified deferred compensation plan for all tax years are currently includible in gross income unless certain requirements are met. If section 409A requires an amount to be included in gross income, the section imposes a substantial tax. The Act requires reporting of the yearly deferrals (plus earnings) under a section 409A non-qualified deferred compensation plan, using code Y in box 12 of Form W-2. Income included under section 409A from a non-qualified deferred compensation plan will be reported in Form W-2 box 1, and in box 12 using code Z. This income is also subject to an additional tax reported on Form 1040. |
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Discrimination Testing LimitsTwo important benchmarks for discrimination testing performed on "cafeteria" and "P.O.P." plans, are the plan treatment of "Highly-Compensated" employees and "Key" employees. For 2006, the compensation threshold for "Highly-Compensated" employees as determined by the I.R.S. under Code section 414(q)(1)(B) is $100,000, increased from $95,000 in 2005 Likewise, the 2006 compensation threshold for a "Key" employee in a top-heavy plan, under Code section 416(i)(1)(A)(i), is $140,000, increased from $135,000 in 2005. |
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Tax Levy Exemption TablesEffective January 1, 2008, a revised I.R.S. table is used for figuring the amount of wages, salary and other income exempt from Federal tax levy. Generally, the 2008 exemption amounts are somewhat higher than for year 2006. For example, for a person with a marital status of "single" and claiming 3 withholding exemptions, the 2008 weekly tax levy exemption is $306.73, compared to $289.42 in 2006. For more information see I.R.S Publication 1494 |
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Format Changes For Magnetic/Electronic Reporting of Forms W-2The last year for filing Forms W-2 on magnetic tapes and cartridges was tax year 2004 (forms timely filed with the SSA in 2005). The last year for filing Forms W-2 on diskette was tax year 2005 (forms timely filed with the SSA in 2006). When filing 250 or more Forms W-2, it is required that they be filed electronically unless the IRS has granted a waiver. |
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Taxability of Frequent Flyer MilesIn Announcement 2002-18, published February 20, 2002, the I.R.S. stated that it would not attempt to tax frequent flier miles received for business travel but used for personal purposes. The I.R.S. indicated that any future guidance issued on this subject would only be applied prospectively. The I.R.S. said it did not attempt to tax frequent flyer miles because of the difficulty of determining the timing and valuation of the imputed income. Also, establishing the source of the benefit, as between business or personal expenditures, was unreliable, noted the I.R.S. |
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The Application of Employment Taxes to Stock OptionsA. STATUTORY (QUALIFIED) STOCK OPTIONS In general, upon the exercise of a statutory stock option, the amount by which the fair market value of the stock on the date of exercise exceeds the exercise price, is "income" to the employee and later is subject to Federal income tax on Form 1040 (after the stock has been sold). Because the opportunity for this "income" arises out of an employment relationship, some commentators have argued that such "income" should also be subject to employment taxes (FIT W/H, FICA and FUTA). However, the IRS originally did not take this position, stating that FICA and FUTA taxes did not apply to the exercise of a statutory stock option because the transaction had not been made subject to income tax withholding. In Notice 2001-14, issued in January, 2001, the IRS changed its position and took the opposite view, contending that the "income" should be subject to employment taxes (FICA and FUTA). However, the IRS also provided both employers and employees a transition period for implementing the new taxability rules, proposing a delay on the imposition of employment taxes until January 1, 2003. This date was later changed. On November 13, 2001, the IRS issued proposed regulations providing for FICA and FUTA taxes to apply when an individual exercises a STATUTORY stock option, and that Federal income tax withholding would NOT apply to the exercise of a statutory stock option. The IRS requested comments as to the proposed regulations. Comments from the public were received on a wide variety of issues. Recognizing the complexity of the issues raised, the IRS concluded it would need more time, and extended the moratorium on applying employment taxes to statutory stock options. Consequently, in July, 2002, the IRS issued Notice 2002-47 which states that until Treasury and the IRS issue further guidance, the IRS will not assess Federal employment taxes (FIT W/H, FICA and FUTA) upon either the exercise of statutory stock options or the disposition of the stock acquired by an employee pursuant to the exercise of the option. Notice 2002-47 further stated that the future application of employment taxes to statutory stock options will not affect any exercise of a statutory stock option that occurs before January 1 of the year that follows the second anniversary of the publication of the final IRS guidelines thus, at least two years after the regulations are issued in final form. NOTE: The IRS uses the term "statutory stock option" to cover the incentive stock option (ISO) described in Code section 422(b), and/or an option granted under an employee stock purchase plan (ESPP) described in Code section 423(b). B. NON-STATUTORY (NON-QUALIFIED) STOCK OPTIONS Importantly, the imposition of employment taxes and income tax withholding on the exercise of NON-STATUTORY (non-qualified) stock options (as opposed to statutory stock options) has been in place for some time. If the option is for stock with a readily ascertainable market value at grant, the option itself is taxable to the employee upon receipt. The taxable amount is the difference between the market value of the stock and the amount payable by the employee for the stock. The amount is treated as wages for purposes of FIT W/H, FICA and FUTA taxes. The amount treated as wages should be reported on Form W-2. However, if a readily ascertainable fair market value cannot be determined at grant, the option is taxable to the employee when the individual exercises the option. NOTE: Beginning in 2003, employers were required to use code "V" in Box 12 of Form W-2, to report income from the employee's exercise of NON-statutory stock options. The I.R.S. defines such "income" as the price spread (fair market value of stock over the exercise price of the option). The amount reported with code "V" in Box 12, must also be included in Boxes 1, 3 (up to the Social Security wage base), and Box 5. |
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I.R.S. Penalties for Form W-2 ErrorsIn August, 2004, notwithstanding the earlier intentions reported below, the I.R.S. indicated that it intends to re-direct its efforts to penalize employers for name and Social Security number mismatches on Forms W-2, to focus only on the employers with “the most egregious mismatch rates.”
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