Omnibus Tax, Spending Bill Impacts Payroll Administration
Author: Alice Gilman
December 22, 2015
President Obama has signed an omnibus appropriations bill (H.R. 2029) that will significantly impact payroll operations. The Protecting Americans From Tax Hikes Act of 2015 (PATH Act), which represents half of the bill, permanently extends parity between qualified (tax-free) employer-provided parking and commuter benefits and substantially revises the rules for filing Forms W-2, Wage and Tax Statement, and 1099-MISC, Miscellaneous Income. The Consolidated Appropriations Act of 2016, which is the other half of the omnibus bill, amends the Affordable Care Act.
Parity for Qualified Transportation Fringe Benefits
Qualified transportation fringe benefits - parking, transit passes, vanpool benefits and qualified bicycle commuting reimbursements - provided by an employer to an employee are not subject to federal income tax withholding or FICA (Social Security and Medicare) tax withholding. Prior to 2015, an employer could provide the same amount to an employee in qualified parking and commuter benefits. For 2015, however, an employer could provide up to $250 a month in qualified parking benefits and up to $130 a month in qualified commuter benefits.
The PATH Act restores parity between parking and commuter benefits, retroactive to the January 1, 2015, and permanently extends parity between these benefits, effective January 1, 2016. For 2016, therefore, an employer may provide up to $255 a month in tax-free parking and commuter benefits to an employee.
Forms W-2 and 1099-MISC
Currently, an employer must file paper Forms W-2, along with the transmittal, Form W-3, with the Social Security Administration by the last business day in February for the prior year. An employer that files at least 250 Forms W-2 must file electronically, by March 31. Likewise, an employer must file paper Forms 1099-MISC, along with the transmittal, Form 1096, Annual Summary and Transmittal of US Information Returns, with the IRS by the last business day in February. An employer filing at least 250 Forms 1099-MISC must file electronically by March 31.
The PATH Act accelerates and consolidates the filing deadline beginning with Forms W-2 and 1099-MISC that an employer will file in 2017. Under the new deadline, both paper and electronic Forms W-2 and 1099-MISC must be filed by January 31. Employees and independent contractors must also receive their copies of these forms by January 31.
The PATH Act also creates a safe harbor to protect an employer that fails to file correct Forms W-2 or 1099-MISC, or fails to provide an employee or independent contractor with a correct form. Under the safe harbor, unless an employee or independent contractor specifically requests a corrected form, an employer will not be penalized if an otherwise correctly completed form contains a de minimis error. For this purpose, a de minimis error is an error that does not exceed $100 or, for errors in tax withholding, $25. This new safe harbor is effective for Forms W-2 and 1099-MISC required to be filed in 2017.
The PATH Act further requires an employer to include an employee's "identifying number," instead of a Social Security number (SSN), on Form W-2. This change will permit the IRS to publish regulations that will require or permit an employer to truncate the employee's SSN on his or her Form W-2. This provision took effect December 18, 2015.
The PATH Act contains the following miscellaneous provisions:
- Individual taxpayer identification numbers (ITINs). Upon receiving a completed Form W-7, Application for IRS Individual Taxpayer Identification Number, and supporting documentation from a nonresident alien, the IRS may issue an ITIN in person or by mail. An individual who received an ITIN prior to 2013 must renew it on a staggered schedule between 2017 and 2020. In addition, an ITIN will expire if the nonresident alien fails to file a tax return for three consecutive years. These provisions took effect December 18, 2015.
- Wage credit for military differential pay. The 20% employer wage credit for employees called to active military duty, which is targeted to employers with 50 or fewer employees, is reinstated retroactive to the beginning of 2015 and permanently extended. Beginning January 1, 2016, the credit applies to employers of any size.
- Work Opportunity Tax Credit (WOTC). The effective date of the WOTC, which is generally a 40% tax credit against the first $6,000 in wages paid to new hires from certain targeted groups, is extended retroactively to January 1, 2015 and will expire on December 31, 2019. For wages paid on or after January 1, 2016, targeted groups include individuals who are qualified long-term unemployment recipients. Qualified long-term unemployment recipients are those who have been certified by a state unemployment agency as having been unemployed for at least 27 weeks during which they received unemployment benefits under a state or federal law.
- Rollovers of individual retirement accounts (IRAs). A distribution from an employer-sponsored retirement plan or a traditional IRA may be rolled over into a SIMPLE IRA, provided the SIMPLE IRA plan has existed for at least two years. The provision applies to rollovers to SIMPLE IRAs made after December 18, 2015.
- Motion picture employees. Motion picture payroll services companies may be treated as the employer of their film and television production workers for payroll tax purposes. The provision is effective for wages paid on or after January 1, 2016.
Consolidated Appropriations Act
Health insurance issuers and sponsors of self-funded group health plans are required to pay a nondeductible 40% excise tax for certain high cost employer-sponsored health care plans, also known as Cadillac Plans. This provision was scheduled to go into effect in 2018. The Act postpones the effective date until 2020.