The vitals on employment taxes and medical resident FICA

22nd Annual Health Sciences
Tax Conference
The vitals on employment taxes and medical
resident FICA

December 3, 2012

Disclaimer

► Any US tax advice contained herein was not intended or
written to be used, and cannot be used, for the purpose of
avoiding penalties that may be imposed under the Internal
Revenue Code or applicable state or local tax law
provisions.

Page 2 The vitals on employment taxes and medical resident FICA

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Presenters

► Robert P. Christopher ► Jennie DeVincenzo
Executive Director Ernst & Young LLP
McGaw Medical Center of Iselin, NJ
Northwestern University +1 732 516 4572
Chicago, IL jennie.devincenzo@ey.com
► Ken Hausser
► Larry Abowitz Ernst & Young LLP
Ernst & Young LLP Iselin, NJ
Iselin, NJ +1 732 516 4558
+1 732 516 4223 kenneth.hausser@ey.com
larry.abowitz@ey.com
► Tom Meyerer
Ernst & Young LLP
Washington, DC
+1 202 327 8380
thomas.meyerer@ey.com


Agenda – employment tax update

► Medical resident Federal Insurance Contributions
Act (FICA)
► Background
► Recent timeline
► What’s next?
► McGaw case study
► Employment tax update
► Unemployment insurance (UI)
► Short-term business travelers
► Home office workers
► Federal/State information sharing
► New York MTA payroll tax
► 2013 federal employment tax changes
► Rates/limits


Agenda – employment tax update

► Employment tax update (cont’d.)
► Tax extenders
► Wage recharacterizations
► Medicare tax
► W-2 reporting of health benefits
► FICA on severance pay – Quality Stores case
► Voluntary classification settlement program
► HIRE Act reminder


Medical resident FICA background

► Student FICA exception – Section 3121(b)(10) –
applies to:
► Service in employ of
► “School, college or university” (or supporting organization thereof)
► By a “student” regularly enrolled and attending classes
► Pre-April 1, 2005
► Facts and circumstances determinations
► Many cases went both ways
► Post-March 31, 2005
► Regulations took effect April 1, 2005
► Excluded those working 40+ hours a week from “student” status
► Services are not “incident to and for the purpose of pursuing a course
of study.”



► Mayo case
► District court ruled Internal Revenue Service (IRS) regulation invalid
► 8th Circuit held regulation valid
► Supreme Court upheld 8th Circuit decision
► Regulation is within Treasury Department authority to issue if it is not arbitrary,
capricious or contrary to the statute.

► Regulation is within Treasury Department’s authority to distinguish between
students who are working and workers who are studying.
► Distinguishing based on hours worked is reasonable and is easily administrable,
thereby avoiding uncertainty.

► Therefore, under the regulations, effective April 1, 2005, medical residents
are generally not considered “students” and do not qualify for student
FICA exception.



► March 2010 – IRS News Release 2010-25
► “Administrative determination” that medical residents excepted
from FICA tax under student exception for periods prior to date the
new regulations took effect (April 1, 2005)
► Correspondence packages from IRS regarding perfection
of claims
► Securing consents of residents
► Revising amounts of claims


Medical resident FICA timeline

► March 2010 – IRS administrative decision to allow medical resident FICA
refunds for periods prior to April 1, 2005.
► Mayo case – effective April 1, 2005, medical residents are generally not considered
“students” and do not qualify for student FICA exception.

► November 2010 – March 2011 – employers filed refund claims
► August 2011 – IRS begins review of claims.
► January 2012 – IRS begins to approve claims by issuing Settlement Letters.
► February 2012 – IRS begins to issue FICA refunds.
► June 2012 – IRS halts refunds due to questions surrounding interest rates for
employer refunds.
► August 2012 – IRS begins issuing refunds again and assigns two agents to
work the backlog of “skipped” periods .


Medical resident FICA
What’s next?
► Obtain refund checks from IRS (two checks per quarter)
► Interest verification – several errors identified
► Interest allocation – watch for rounding
► Prepare and mail checks to consenting physicians
► Interest paid to foreign persons
► Prepare and mail Forms W-2c to consenting physicians
► Submit Forms W-2c and W-3c to SSA
► Prepare and mail Forms 1099-INT to consenting
physicians with interest greater than $600
► Interest paid to foreign persons
► Submit Forms 1099-INT and 1096 to IRS

McGaw Medical Center of Northwestern
University

Northwestern
University
Feinberg
School of
Medicine
Ann & Robert
Norwegian H. Lurie
American Children’s
Hospital Hospital of
Chicago

McGaw
Medical
Center
Jesse Brown Northwestern
VA Medical Memorial
Center Hospital

The
Rehabilitation
Institute of
Chicago


Members

► Northwestern University Feinberg School of Medicine
► Ann & Robert H. Lurie Children’s Hospital of Chicago
► Northwestern Memorial Hospital
► The Rehabilitation Institute of Chicago
► *Jesse Brown VA Medical Center
► *Norwegian American Hospital


Consortium history

► “The development of a well-rounded, coordinated
teaching program by the Medical Center should enable us
to attract a much higher caliber of interns and residents
over a period of time. This, in turn, will result in improving
patient care in each of our institutions.” Erwin A. Stuebner,
President, Board of Directors, Passavant Memorial
Hospital.


History

► Established 1966 as NU Medical Center
► NUMS
► Children’s Memorial Hospital
► Evanston Hospital Corporation
► Passavant Memorial Hospital
► Wesley Memorial Hospital
► Chicago Maternity Center
► Rehabilitation Institute of Chicago
► Lakeside VA Medical Center
► Name changed to McGaw in 1972


Mission

► To sponsor, organize, coordinate and supervise the
graduate medical education programs and activities
maintained by the members.
► Original mission also included joint purchasing, shared
facilities, development of group practices and joint
planning efforts toward a unified medical center.


Consortium roles and functions

► ACGME sponsoring institution for all GME programs
offered by its members
► Administrative home of GME Committee and GME Office
► Associate Dean for GME serves as DIO
► Administers payroll and benefits for all residents and
fellows
► All house staff appointed by McGaw


Governance

► Members of the Board of Directors of the Medical Center
shall serve not as representatives of their institutions, but
as members concerned with the overall welfare and
development of the Center. They would act as liaison
between the Board of Directors of the Center and their
respective institutions.” The original McGaw Constitution,
February 1967


Board of Directors

► Governed by Board of Directors
► Board determines compliance with the corporation’s
stated purpose
► Board approves corporate officers
► Board approves annual budget


GME Committee

► Chaired by DIO (GME Dean)
► GMEC membership composed of standing and rotating
members: PD’s, Member executive leadership, house
staff
► Establishes and implements policies and procedures in
compliance with ACGME institutional and program
requirements
► Hear and determine challenges to any reallocation of
residents among programs
► Accountable to the Board
► Two subcommittees: non-standard Programs Committee
and Diversity Council

House staff payroll and benefits

► All house staff sign appointment contracts with McGaw
► House staff payroll and benefits organized by McGaw
► McGaw invoices members (and other funding sources) for
stipends, benefits and admin fees
► McGaw ratio of benefits to stipend: 9.7% (add 5% for
admin fees)
► *National ratio of benefits to stipend: 31%

*AAMC Survey of Resident/Fellow Stipends and Benefits, 2011


Strengths

► Authority for GME centralized across all member
institutions
► Recruiting advantages
► Financial advantages
► Administrative/coordinating advantages


Challenges

► Potential for competing interests among members


Unemployment insurance


Direct reimbursement vs experience rate
Considerations

► Overall financial conditions of the organization and impact
to reductions in work force (current and prospective)
► Length of commitment to changing method
► State unemployment trust fund balance
► Surcharges, interest assessments, etc.
► State taxable wage base (current and prospective)
► State new business rate
► Sometimes industry specific
► Prior experience rate if applicable
► If currently under experience rate method – any elections


Two state components to federal UI loans
that can increase employment tax expense
Federal Unemployment Interest on unpaid balance
Insurance tax (FUTA) credit
reduction
► Title XII allows states to take ► Interest accrues daily on a fiscal year
federal loans for the payment of basis (October 1 – September 30)*
SUI benefits ► Interest payments cannot be made
► Businesses are subject to additional from state UI trust funds.
FUTA if state has not repaid loan ► Interest payments are due on
according to statutory schedule September 30.
(FUTA credit reduction). ► States often impose special interest
assessments on employers for the
payment of interest on Title XII loans.

* Note that interest was waived for 2009
and 2010


FUTA credit reduction
How it works

► If a state with an outstanding federal loan balance on January 1 of two
consecutive years fails to repay the entire loan amount by November
10 of the second year, employers in that state are subject to a FUTA
credit reduction of 0.3%.
► The credit reduction increases by an additional 0.3%
each year (special computation of the credit reduction in
subsequent years).
► In 2012, the FUTA rate for employers entitled to the full FUTA
credit is 0.6%.
► A loss in the FUTA credit of 0.3%, results in a net FUTA rate of 0.9%.
► A loss in the FUTA credit of 0.6%, results in a net FUTA rate of 1.2%,
and so on.


FUTA credit reduction
Actual and projected

Year of Year FUTA credit States
original loan reduction applies applicable
2007 2009 Michigan
2008 2010 Indiana, Michigan and
South Carolina
2009 2011 18 states (plus Indiana,
Michigan and South Carolina
resulted in 21 total FUTA credit
reduction states for 2011)
2010 2012 21 states projected as of
September 13, 2012

* Michigan repaid its loan balance in 2012 by issuing bonds.


Our pick of the five states most likely to have
significant future UI cost increases
► A number of factors were considered in determining the states most
at risk for significant future SUI cost increases.
► Higher than usual claimant benefits
► Employer contributions that are low in relationship to state trust fund debt.
► Wage base below $15,000 (an increase in FUTA wage base is likely.)
► For 2012, the top five, based on the risk factors evaluated are:
► California
► Delaware
► Massachusetts
► Ohio
► Pennsylvania


Short-term business traveler (STBT)
issues

Shaun, please show graphic
of car moving into a new state
or something


Current domestic landscape

► Proposed federal legislation (H.R. 1864/S. 3485)
► Mobile Workforce Simplification Act
► Allows employees to work outside their home states for up to 30 days
without being subject to nonresident state income tax and withholding.
► Similar to earlier proposed bills that have not received support or
traction historically.
► Significant support from Council on State Taxation (COST)
► Legislation has opposition in several states where the revenue
impact would be significant.


Current domestic landscape

► States actively seeking to generate revenue
► Aggressive electronic state audits
► States changing deferred compensation taxation
► States consider wages/salary and equity compensation
► Local tax jurisdictions also now auditing nonresident
workforce
Issues employer currently face:
► Income tax not withheld in nonresident work state for short-term business traveling workforce
► Statute of limitations (employer or employee)
► Limited system capabilities to track STBTs and to calculate the appropriate nonresident wage
allocation and income tax withholding
► Complicated withholding tax calculation for deferred and equity-based compensation


Businesses are acting sooner rather than
later

Companies who address STBT
Why now?
compliance proactively realize benefits

► This can be a multi-jurisdictional, ► Audit readiness
multi-agency and multi-year issue.
► Controlling reputational risk
► Potential risk of domino effect — one audit
► Greater confidence around
can open other related issues.
STBT deployments
► More jurisdictions will focus on it in
► Taking control of relationships
the future
with authorities
► Data is widely available.
► Right people, right place, right time
with greater certainty

No
surprises


Issues, considerations and leading
practices
Issue Considerations Leading practice

How do we get our ► Human Resources Information Systems ► Focus on travel to most aggressive states
arms around the (HRIS) and payroll system capabilities ► Quarterly travel projections/true-up
► Travel documentation (expense reports, ► Repercussions/rewards aligned with corporate culture (reimbursement,
traveling population?
calendars, airline reservations, etc.) performance, etc.)
► Telecommuters
► Foreign jurisdiction travel

► Setting the tone/risk tolerance from the top
How and what ► Communication vehicle ► Communicate employer/employee issues and risks associated with
should be ► Explanation of the issue and risks noncompliance
communicated to associated with noncompliance ► Implement an accountability framework to drive compliance
employees? ► Tax equalization and return preparation (i.e., tracking participation and completion of trainings)
assistance ► Communicate differences between employer and employee requirements
(e.g., NY 14-day rule)

► Ease of implementation
What type of ► System constraints ► Single policy for tax equalization
company policy ► Employee perception ► Reimbursement policy for assistance with tax return preparation
is best? ► Reputational risk

► Ten-day threshold except for New York and Connecticut
► Four hours = workday
► Threshold baseline for withholding ► Includes all “wage” types
How are companies ► Definition of workday ► Deal with prior year issues when and if they arise, vs. retroactively dealing
creating and/or ► Definition of compensation with prior years
adapting their ► Prior year exposure ► Implement in most aggressive states first then follow with other states, focus
policies? ► Which states to focus on on states where business travel to the state is highest, apply 80/20
approach to implementation.
► Management audit verification with compliance


Enforcement of nonresident income
requirements

► States are aggressively enforcing their nonresident
income tax requirements. Frequently, audits are triggered
by the mailing of an information request.
► Case in point – Minnesota
This year, the Minnesota Department of Revenue began mailing
letters to large US employers requesting documents and
information relevant in identifying income tax underpayments.
Within three days of receiving the letter, employers must
acknowledge its receipt by email or phone, and provide the
requested information within 20 days. The data requested of
employers spans four years (2008 through 2011).


Nonresident income tax may apply even if
corporate income tax does not

► A state’s requirements for establishing liability to file and
pay corporate income tax may differ from those that apply
to nonresident income tax withholding.
► Case in point – Virginia
In response to a request for ruling, the Virginia Department of
Revenue held on September 21, 2012 that although there were
insufficient facts to establish Nexus for Virginia corporate income
tax purposes, the presence of employees within the state
constituted the requisite nexus to impose nonresident withholding
tax collection responsibilities in accordance with Virginia law.


Understand the implications of home
office workers
► Many states take the position that when employees regularly work
from home, their home is a place of business.
► Having a place of business in a state triggers not only an income tax
withholding obligation, but other business taxes as well.
► Case in point – New Jersey
In a recent decision of the New Jersey Superior Court, Appellate Division,
it was determined that a foreign corporation with a principal place of
business in Maryland was subject to New Jersey’s corporate income tax
requirements because one of its employees was allowed to work on a full-
time basis from her New Jersey home office (Telebright Corporation v.
Director, N.J. Super. Ct. App. Div., Dkt. No. A-5096-09T2, March 2, 2012).
► Case in point – California
The California State Board of Equalization held in 2012 that a recruiter
working from her home in California for a Massachusetts business created
Nexus for California franchise tax purposes (even though she was
classified as an independent contractor).


Federal-state agreements to share audit
information are paying off

► The IRS has entered into agreements with a number of
states to share audit information. Consequently,
employers have a greater incentive to disclose findings in
all jurisdictions.
► Case in point – New York
The New York Department of Taxation and Finance (the
Department) is imposing automatic income tax withholding audit
assessments on employers that made wage reporting adjustments
as the result of an IRS employment tax audit. The Department
asserts that these income tax withholding audit assessments are
not subject to the normal three year statute of limitations.


New York MTA payroll tax held
unconstitutional
► On August 22, 2012, a New York Supreme Court judge upheld
Nassau County’s assertion that New York state’s Metropolitan
Commuter Transportation Mobility Tax (MCTMT or MTA Payroll Tax)
is unconstitutional (Mangano v. Silver, No. 14444/10 (N.Y. Sup. Ct.,
Nassau County)).
► Taxpayers must continue to pay the tax until a final decision
is reached.
► Should the final outcome result in a repeal of the MTA payroll tax,
most taxpayers could be entitled to refunds for periods beginning in
2009, provided they file protective refund claims now.


Potential implications to 2013 net pay

2012 2013 projected Total change

Medicare tax is 1.45% of all Additional Medicare tax of 0.9% of wages in excess of
covered wages 0.9% on wages in excess of $200,000
$200,000
Social Security tax of 4.2% Social Security tax of 6.2% 2.0% of all covered wages up
to the annual limit
Graduated federal income tax Graduated federal income tax Increase of 3%, except those
rates of 25%, 28%, 33% and rates of 28%, 31%, 36% and in highest tax bracket have
35% 39.6%, respectively increase of 4.6%
Social Security wage base of Social Security wage base Increase in wage base of
$110,100 projected to increase to $3,600 or tax of $223.20
$113,700


Limit on flexible spending accounts

► Effective in 2013, to be qualified under a cafeteria plan, an
employee’s health flexible spending account contributions
cannot exceed $2,500 per year (with the annual amount
indexed each year thereafter for inflation).
► The $2,500 limit applies without regard to employees’
marital status, and each may elect the statutory limit.
► The limit does not apply to employer non-elective
contributions (i.e., flex credits).


Extender legislation hopefuls in 2012

Provision Description Expiration date
Undergraduate and graduate- Exclusion of up to $5,250 per 31 December 2012
level education assistance year
Adoption assistance Effective in 2012, exclude up 31 December 2012
to $12,170 per year, indexed
for inflation
Work Opportunity Tax Credit Other than certain veteran 31 December 2011
(WOTC) groups
Mass transit benefits Renew or reinstate the parity 31 December 2011
between parking and transit
benefits
Expense tax credit for A credit of up to $150,000 for 31 December 2012
employer child care acquiring, constructing,
assistance refurbishing or expanding
child care facility
Bush-era tax rate reductions The tax rates are set to 31 December 2012
automatically increase in 2013
to 28%, 31%, 36% and 39.6%
(currently 25%, 28%, 33% and
35%, respectively)


In the face of uncertainty

► Be certain to make educational reimbursements in 2012
► Payments that fall into 2013 could be fully taxable (because the
$5,250 would no longer apply)
► Continue to certify WOTC eligible employees with the
state employment agency
► A retroactive reinstatement to January 1, 2012 is still likely and will
apply only to employees properly certified
► Continue to monitor developments and expect last-minute
Congressional action
► Consider the state/local decoupling issues
► Consider all of the ramifications of accelerating to 2012
bonus payments scheduled for 2013


Wage recharacterization
Rev. Rul. 2012-25
► Section 62(a)(2)(A) provides that an employee may deduct
certain business expenses paid by the employee in connection
with the performance of services as an employee under a
reimbursement or other expense allowance arrangement.
► Section 62(c) provides that for purposes of Section 62(a)(2)(A),
an arrangement will not be treated as a reimbursement or other
expense allowance arrangement if: (1) the arrangement does
not require the employee to substantiate the expenses covered
by the arrangement to the person providing the reimbursement;
or (2) the arrangement provides the employee the right to
retain any amount in excess of the substantiated expenses
covered under the arrangement.


Rev. Rul. 2012-25

► Under Section 1.62-2(c), if a reimbursement or other
expense allowance arrangement meets the requirements
of business connection, substantiation and returning
amounts in excess of substantiated expenses, all
amounts paid under the arrangement are treated as paid
under an accountable plan.
► Amounts treated as paid under an accountable plan are
excluded from an employee’s gross income, are exempt
from withholding and payment of employment taxes and
are not reported as wages on the employee’s Form W-2.


Rev. Rul. 2012-25

► Section 1.62-2(d)(1) provides that an arrangement
satisfies the business connection requirement if it
provides advances, allowances or reimbursements only
for deductible business expenses that are paid or incurred
by the employee in connection with the performance of
services as an employee for that employer.
► Thus, not only must an employee actually pay or incur a
deductible business expense, but the expense must arise
in connection with the employment for that employer.


Rev. Rul. 2012-25
► Section 1.62-2(d)(3)(i) provides that the business connection
requirement will not be satisfied if a payor pays an amount to
an employee regardless of whether the employee incurs or is
reasonably expected to incur deductible business expenses.
► Failure to meet this reimbursement requirement of business
connection is referred to as wage recharacterization, because
the amount being paid is not an expense reimbursement but
rather a substitute for an amount that would otherwise be paid
as wages.
► Generally, wage recharacterization is present when the
employer structures compensation so that the employee
receives the same or a substantially similar amount whether or
not the employee has incurred deductible business expenses
related to the employer’s business.

Medicare tax to increase in 2013

► Effective in 2013, employers are required to withhold an additional
Medicare tax of 0.9% on wages in excess of US$200,000 for all
employees regardless of marital status.
► There is no matching employer contribution, and employees are
required to pay the additional tax based on a threshold of income and
their filing status.
► Taxpayers with combined income in excess of US$250,000 pay the
remaining Medicare tax on their Federal Form 1040.
► The additional Medicare tax is not separately reported on Form W-2.
► Form 941 will include a separate line for additional Medicare tax.
► Also effective in 2013, investment income is subject to Medicare tax.
► A number of employees may need to revise their Form W-4 in 2013 to
take into account this additional tax.


Form W-2 – reporting of health benefits

► Effective in tax year 2012, employers are required to
report the aggregate cost of employer-sponsored health
coverage on Form W-2.
► Box 12, code DD is used for this purpose.
► The requirement to report employer-sponsored health
coverage costs is informational only.
► Amounts reported in Box 12, Form W-2 are also not included in
employees’ taxable income (for now).
► Until the issuance of further guidance, an employer is not
subject to the reporting requirement for a calendar year if
the employer was required to file fewer than 250 Forms
W-2 for the preceding calendar year.


(cont’d)
► Terminated employees
► An employer may apply any reasonable method of reporting the
cost of coverage for an employee who terminated employment
during the calendar year, as long as the method is used
consistently for all employees covered under the plan.
► An employer is not required to issue a Form W-2 reporting the
aggregate reportable cost of insurance to a terminated employee
who requests the Form W-2 within 30 days of severance.
► Successor employer
► If an individual transfers to a new successor employer, generally
both the predecessor and successor employers must report the
employer-sponsored group health plan coverage that each
provided, unless the successor reports using the alternate
procedure (Revenue Procedure 2004-53).


(cont’d)
► Multiple employers/common paymaster
► Generally, each employer of an employee must report the cost of
coverage that it provides. However, if the employers are related
employers and one such employer is a common paymaster under
IRC Section 3121(s), the common paymaster must include the
aggregate reportable cost of the coverage provided to that
employee by all the employers for whom it serves as the common
paymaster.


(cont’d)
► The following are required to be included in aggregate
cost:
► Major medical
► Health FSA value for the plan year in excess of employees’
cafeteria plan salary reductions for all qualified benefits
► Hospital indemnity or specified illness (insured or self insured) paid
through salary reduction (pre-tax) or by employer
► Employee Assistance Plan (EAP) providing employer-sponsored
health care coverage (if employer charges COBRA premium)
► Wellness programs providing employer-sponsored health care
coverage (if employer charges COBRA premium)
► On-site medical clinics providing employer-sponsored health care
coverage (if employer charges COBRA premium)
► Domestic partner coverage included in taxable wages


(cont’d)
► The following are optionally included in aggregate cost:
► Dental or vision plan not integrated into another medical or
health plan
► Health Reimbursement Arrangement (HRA) contributions
► Employee Assistance Plan (EAP) providing employer-sponsored
health care coverage (if employer does not charge COBRA premium)
► On-site medical clinics providing employer-sponsored health care
coverage (if employer does not charge COBRA premium)
► Wellness programs providing employer-sponsored health care
coverage (if employer does not charge COBRA premium)
► Multi-employer plans
► Self-funded plans not subject to COBRA
► Forms W-2 provided by third-party sick pay provider to employees
of other employers


(cont’d)
► The following are not included in aggregate cost:
► Health FSA funded solely by salary reductions for all qualified
benefits
► Health Savings Arrangement (HSA) contributions (employer or
employee)
► Archer Medical Savings Account (Archer MSA) contributions
(employer or employee)
► Hospital indemnity or specified illness (insured or self insured) and
paid on after-tax basis
► Governmental plans providing coverage primarily for members of
the military and their families


(cont’d)
► The following are not included in aggregate cost:
► Federally recognized Indian tribal government plans and plans of
tribally charted corporations wholly owned by a federally recognized
Indian tribal government
► Accident or disability income
► Long-term care
► Liability insurance
► Supplemental liability insurance
► Workers’ compensation
► Automobile medical payment insurance
► Credit-only insurance
► Excess reimbursement to highly compensated individual included
in gross income
► Payment/reimbursement of health insurance premiums for 2%
shareholder-employee included in gross income


FICA on severance pay

► On September 7, 2012, the Sixth Circuit Court of Appeals affirmed the
2010 decision of the Michigan District Court that Quality Stores is
entitled to a refund of the Social Security/Medicare tax that it collected
and paid on severance payments (United States of America v. Quality
Stores Inc., et al., No. 10-1563).
► In 2008, the Federal Circuit ruled in favor of the IRS in CSX,
concluding that similar severance type payments were subject to
FICA (CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir.2008)) .
CSX did not request a rehearing, and on August 11 ,2008, the opinion
was considered final.
► The recent Quality Stores decision creates a split in the circuits.
► The Government is likely to petition for certiorari to the Supreme Court on
the basis of the split, and on the fact of administrative importance citing
the dollar amount of FICA claims at issue.


FICA on severance pay (cont’d)

► Employers are potentially eligible for a refund of FICA on
severance pay pending the outcome of the Quality Stores.
► A protective claim must be filed within the statute of limitations.
► The tax must be paid according to the current tax rules, using the
protective claim process to request a refund after the fact.
► There must be at least a reasonable basis (a position with
disclosure) for filing the protective claim (e.g., a court decision,
such as Quality Stores).

► The deadline for filing protective refund claims for
severance payments made in 2009 is April 15, 2013.
Protective refund claims may also be filed for any
payments made in 2010, 2011 and 2012.


FICA on severance pay (cont’d)

► The IRS began disallowing CSX-type claims in 2010.
► This means that for certain taxpayers, the two-year period is
expiring.
► If taxpayers want to maintain their protective claims for refund
without bringing suit, they can file Form 907, Agreement to Extend
the Time to Bring Suit. Under IRC Section 6532(a)(2), the two-year
period to bring suit can be extended to a specified date if the IRS
and the taxpayer agree in writing to the extension and Form 907 is
used for this purpose.
► The IRS has been signing these agreements for CSX-types of
refund disallowances while the Sixth Circuit’s Quality Stores
opinion was pending.


Voluntary Classification Settlement
Program (VCSP)
► Entity must have consistently treated workers as nonemployees
and must have filed all required Forms 1099-MISC for the past three
years
► Properly apply for VCSP using Form 8952
► Pay 10% of the employment tax liability under IRC Section 3509 due
on the compensation paid to the workers for the most recent year
► Agree to extend the period of assessment on employment by three
calendar years beginning after the year during which the entity starts
treating the workers as employers
► Execute a closing agreement that finalizes the terms of VCSP and
make full payment of the employment tax liability


Voluntary Classification Settlement
Program (VCSP) (cont.)
► As of October 15, 2012, XXX Forms 8952 have been filed
with the IRS under the VCSP.
► These filed Forms 8952 pertain to more than XXX workers
subject to reclassification.


HIRE Act reminder

► FICA holiday for employer’s share of FICA for part of 2010
► Applies to:
► Qualified employees
► Are able to certify that they have not been employed for more than 40 hours
for 60 days ending on their start date
► Began their employment after February 3, 2010 and before January 1, 2011
► Are not replacing current employees, unless the employees leave voluntarily
or are terminated for cause
► Are not individuals as described in IRC Section 51(i)(1) (such as the
employer’s relative)
► Qualified employers
► Public companies or private sector Section 501(a) employers
► Educational institutions
► Does not include the US government, state government or any political
subdivision thereof


HIRE Act reminder – retention credit

► Qualified employers can claim the credit on their Form
990-T for qualified employees who:
► Were employed by the employer for no less than 52 consecutive
weeks
► Received during the second 26 weeks of their employment at least
80% of the wages paid to them in the first 26 weeks
► The credit may be claimed for a retained worker for the
first taxable year ending after March 18, 2010 (the date of
enactment of the HIRE Act), for which the retained worker
satisfies the 52 consecutive week requirement.
► Taxpayer with a 2010 fiscal year end after February 3,
2010 may use its 2010 Form 990-T to claim the credit.


HIRE Act reminder – UBI retention credit

► As long as an exempt organization (EO) is a qualified
employer, it can claim the retention credit on any retained
HIRE Act-qualified employees to offset its unrelated
business income (UBI) tax liability.
► Retention credit
► The retention credit is calculated on Form 5884-B, New Hire
Retention Credit.
► The value of the retention credit as reported on Form 5884-B,
Line 13 is reported on Form 3800, Line 1aa, “New hire retention
credit (Form 5884-B)” as a general business credit.
► Form 3800, Line 1aa then flows up to Form 990-T, Part IV,
Line 40-c, “General Business Credit. Attach Form 3800,” where
the credit can be claimed against any UBI generated by the EO.


HIRE Act reminder

► Why mention now?
► Applied to 2010 (hires) and 2011 (retainees)
► Statute of limitations still open to amend returns and claim credits


Thank you!

Questions?


The vitals on employment taxes and medical resident FICA

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