NACPB Weekly Payroll News

Federal Payroll Tax Update
Senator Looking to Extend HIRE Act an Additional Six Months
IRS Issues More HIRE Act FAQs
New Payroll Tax Exemption FAQs
New Hire Retention Credit
Businesses Concerned About New Corporate Information Reporting Requirements
IRS Updates Specs for Filing Information Returns Electronically
President Signs Legislation Retroactively Extending Unemployment Benefits
Recruiter May Be Eligible for Overtime Despite Earning Over $100,000
Company Ordered to Stop Pyramiding Scheme that Involved Employment Taxes
Many States Have Modernized Their Unemployment Benefit Programs to Receive Federal Funding
Q&A Corner
IRS Releases Several Information Letters on Employment Tax Issues
DOL Issues Fact Sheet on Requirement to Provide Break Time for Nursing Mothers

State Payroll Tax Update
New State Payroll Related Laws and Developments

Senator Looking to Extend HIRE Act an Additional Six Months

The Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147) encourages companies to hire unemployed workers from Feb. 4, 2010 to Dec. 31, 2010, by exempting certain wages received by the workers from the employer portion of Social Security taxes (payroll tax exemption), and by providing employers with a business tax credit if new hires are retained for at least 52 consecutive weeks (also known as the new hire retention credit). According to the latest U.S. Department of the Treasury (DOT) report, businesses hired an estimated 5.6 million new workers from February 2010 to June 2010, who had been unemployed for eight weeks or longer, making those businesses eligible to receive billions in HIRE Act tax exemptions and credits. Senator Charles Schumer (D-NY) believes that the HIRE Act has proven to be a "timely, targeted and effective job creator, helping middle class Americans find work." Schumer indicated that he will introduce legislation that would extend the HIRE Act an additional six months beyond its current Dec. 31, 2010 expiration date [DOT News Release, 8/2/10].

IRS Issues More HIRE Act FAQs

The IRS has updated its website to include more frequently-asked questions (FAQs) on the provisions in the Hiring Incentives to Restore Employment Act (HIRE Act, PL 111-147) that allow qualified employers to claim a payroll tax exemption and/or new hire retention credit.

The HIRE Act encourages companies to hire unemployed workers in 2010 by exempting certain wages from Social Security taxes (payroll tax exemption), and by providing employers with a business tax credit if new hires are retained for at least 52 consecutive weeks (new hire retention credit). For an employer to receive these tax benefits, the unemployed worker must be a "qualified employee." A qualified employee" is anyone who:

(1) begins work for a qualified employer after Feb. 3, 2010 and before Jan. 1, 2011;

(2) certifies by signed affidavit (under penalties of perjury) that he or she was employed for a total of 40 hours or less during the 60-day period ending on the date the employment begins;

(3) is not employed to replace another employee of the employer unless that former employee separated from employment voluntarily, or for cause; and

(4) is not related to the employer (under rules similar to those for related individuals in IRC §51(i)) [IRC §3111(d)(1)].

New Payroll Tax Exemption FAQs

The payroll tax exemption FAQs are divided into the following three categories: (1) FAQs about the payroll tax exemption and qualified employers (QR); (2) FAQs about qualified employees (QE); and (3) FAQs about claiming the payroll exemption (PE).

When does employee begin work? The IRS notes that the HIRE Act does not address when an individual begins employment; therefore, general principles on employment apply. Under general principles, employment includes the establishment, maintenance, and termination of the employer-employee relationship, all of which depend on the facts and circumstances. Accordingly, an individual begins employment on the date when, based on the facts and circumstances of the particular situation, the employer-employee relationship is first established.

Rehired employee. If an individual was previously employed by a qualified employer, then terminated, and subsequently rehired, the individual will be considered to have started employment on the date when, based on the facts and circumstances of the particular situation, the employer-employee relationship is reestablished [IRS FAQ QE 17, 7/23/10].

Qualified employee status. An individual who has been on furlough, standby status, or temporary layoff will be considered a qualified employee when he or she resumes active status only if the furlough, standby status, or temporary layoff, constitutes a termination of employment and, upon reestablishment of the employment relationship, the requirements to be a qualified employee are satisfied. Whether an employment relationship has been terminated is based on the facts and circumstances [IRS FAQ QE 18, 7/23/10].

The payroll tax exemption may be claimed on: (1) wages paid to an employee hired to replace a worker who terminated employment voluntarily, as long as the employee is otherwise a qualified employee; (2) wages paid to an employee hired to replace an individual who was terminated for gross misconduct, as long as the employee is otherwise a qualified employee; (3) wages paid to an employee hired to replace an individual who was terminated due to poor performance, as long as the employee is a qualified employee; and (4) wages paid to an employee hired to replace a worker whose employment was previously terminated as part of a reduction in force due to lack of work, if the employee is otherwise a qualified employee. The payroll tax exemption may also be claimed on an employee who was terminated as part of a reduction in force and then is subsequently rehired, as long as the rehired employee is otherwise a qualified employee [IRS FAQs QE 20-23, 7/23/10].

Self-employed individuals. For purposes of "qualified employee" status, work performed as a self-employed individual does not count in determining whether an individual has been employed for 40 hours or less during the 60-day period ending on the date before the individual begins employment [IRS FAQ QE 19, 7/23/10].

Minors. Minors may sign the HIRE Act employee affidavit (under penalties of perjury). Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, may be used for this purpose [IRS FAQ QE 24, 7/23/10].

Reporting agents. An employer is not required to provide copies of Form W-11 to its reporting agent. There are no specific payroll tax exemption procedures for employers that use reporting agents [IRS FAQ PE 25, 7/23/10].

New Hire Retention Credit

General information on the credit. An employer may claim the new hire retention credit as a general business credit on its 2011 income tax return for each "retained worker." A "retained worker" is a qualified employee (as defined for purposes of the payroll tax exemption) who remains an employee for at least 52 consecutive weeks, and whose wages for the last 26 weeks equal at least 80% of the wages for the first 26 weeks. The amount of the credit is the lesser of $1,000 or 6.2% of wages paid by the employer to the retained worker during the 52-consecutive-week period. Wages are defined the same way that they are defined for withholding tax purposes [IRS FAQs about the Credit, Q1, 7/23/10].

An employer may claim both the payroll tax exemption on an employment tax return, and the new hire retention credit on an income tax return, with respect to the same employee, as long as the requirements for both tax incentives are met [IRS FAQs about Calculating and Claiming the Credit, Q1, 7/23/10].

Consecutive week requirement. The 52-week requirement is used to determine eligibility for the new hire retention credit. It is not a requirement for the payroll tax exemption [IRS FAQs about Retained Workers, Q1, 7/23/10].

As long as the employment relationship is not terminated during the 52 consecutive weeks, and the wages paid to the qualified employee for the last 26 weeks of the 52-week period equal at least 80% of the wages paid to the employee for the first 26 weeks, the employee will be a retained worker even if he or she is not performing services the entire time [IRS FAQs about Retained Workers, Q3, 7/23/10].

Businesses Concerned About New Corporate Information Reporting Requirements

The 2010 Patient Protection and Affordable Care Act (Health Care Act, P.L. 111-148) included a provision (IRC §6041(h)) that, effective for payments made after 2011, requires a person engaged in a trade or business (payors) to file an information return for all payments totalling $600 or more in a calendar year to a single payee (other than a payee that is a tax-exempt corporation). Under current law, payments to corporations, except those made for medical or health care services, are not required to be reported on an information return. On July 1, 2010, the IRS asked for the public's help in drafting guidance on this provision. The public has responded with many letters to the IRS that include the following concerns.

Too much time, money, and paperwork. Tara from Unit Design, Inc., believes that the new reporting requirements would be an "unbearable burden" for the three-person company that she works for which does business with hundreds of vendors. Her company does not have an accounting department to prepare the information returns [Unit Design Letter to IRS, 7/16/10].

McKenzie Bowerman of Willamette Mountain Mercantile LLC told the IRS that he already feels swamped under the burden of paperwork, and feels his mission of serving customers often takes a backseat to various filings [McKenzie Bowerman Letter to IRS, 7/15/10].

Roger Crook of Yardley Management Solutions, Inc., estimates that his company will need to complete 60 to 100 Forms 1099 to comply with the new information reporting requirements, and that to round up all the vendors and compile expenses will take an additional 60 to 100 hours, at a cost somewhere between $9,000 to $15,000. In addition, time will be spent chasing down missing Forms 1099 or answering inquiries by the IRS that his company failed to report something. Crook believes that the unintended consequences of the new reporting requirements will be to: (a) discourage business formation, (b) encourage some business owners to give up or not grow their business, and (c) encourage others to intentionally reduce their number of subcontractors, vendors, and employees [Roger Crook Letter to IRS, 7/12/10].

Form W-9, higher reporting threshold. Martha A. Nest, EA, Westview Tax Services, says that it will be difficult to get all contractors and vendors affected by the new law to provide their taxpayer identification number on Form W-9, Request for Taxpayer Identification Number and Certification. She also believes that the $600 reporting threshold is too low [Martha A. Nest Letter to IRS, 7/6/10].

Later filing deadline. Robert F. Cruise, President of Cruise Associates, feels that the deadline for filing these returns should be at a later time than the deadline for filing Forms W-2. Otherwise, the burden on tax professionals during January will be tremendous [Robert F. Cruise Letter to IRS, 7/13/10].

Electronic reporting. Bernard Blayer, CPA for Blayer & Associates CPA P.C., believes that the new reporting requirements will cause many taxpayers to cross the 250-return threshold for electronic filing, and this will increase their costs. Plus, they will need to maintain more detailed vendor databases than they do now, and if they are not using computerized accounting software, they will have to acquire and build a database [Bernard Blayer Letter to IRS, 7/12/10].

Payment card transactions. The IRS has indicated that it expects to exempt payment card transactions that would otherwise be reportable under IRC §6050W from the new information reporting requirements. McKenzie Bowerman feels that checking account transactions should be exempted as well. He notes that checks provide a clear paper trail that includes the payer, payee, amount, and other information. Plus checks do not have a 2-4% processing fee that Bowerman avoids burdening his vendors with in order to help minimize costs. He says that if credit and debit cards are the only exceptions to the proposed rules, it would be an unfair windfall for banks and processors.

Jacob Adair, CPP for Wells Fargo Business Payroll Services, asks if a Form 1099 would be required if a taxpayer makes $1,000 in payments to a corporation, $800 of which is not subject to the new information reporting rules because it was made through a payment card [Jacob Adair Letter to IRS, 7/1/10].

Steven Maerz, Accounting Manager for the Wisconsin Chiropractic Association, notes that most small businesses do not use an accounting system that distinguishes between check payments and credit card payment. If he generates a Form 1099-MISC with his accounting system, any payment made to a particular vendor will be included, even if it is exempt under the new rules [Steven Maerz Letter to IRS, 7/7/10].

Taxpayer Advocate Service report. According to a Taxpayer Advocate Service (TAS) analysis of 2009 IRS data, about 40 million businesses and other entities will be subject to the new information reporting requirements. TAS recently issued a report which expressed concern that the burdens of the new information reporting requirements "may turn out to be disproportionate as compared with any resulting improvement in tax compliance." During fiscal year 2011, TAS will study the impact of the new reporting requirements more closely and, depending on what its study finds, may propose administrative or legislative recommendations to modify the provision or suggest that Congress consider less burdensome tax gap proposals [IR 2010-83].

The deadline for submitting comments to the IRS is Sept. 29, 2010.

On July 30, the House of Representatives failed to pass legislation that would have repealed the new information reporting rules.

Observation: The information reporting rules are extremely unpopular among businesses and Congress may make another attempt to repeal them before they become effective.

IRS Updates Specs for Filing Information Returns Electronically

The IRS has updated the specifications for filing Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G electronically. The new specifications must be used in the preparation of tax year 2010 information returns, and for information returns for tax years prior to 2010 that are filed beginning Jan. 1, 2011 [Rev Proc 2010-26, 2010-30 IRB 91].

Changes to the Specifications

The updated specifications include the following changes:

Combined Federal/State Filing Program. Form 6847, Consent for IRS to Release Tax Information, has been obsoleted. The IRS had required this form to be filed as part of the Combined Federal/State Filing program. Under this program, the IRS will forward certain information returns filed electronically to participating states. Test filing is still required to participate in the program.

Contact information. IRS/ECC-MTB (Enterprise Computing Center-Martinsburg) is now IRS/IRB (Information Reporting Branch). The Information Reporting Program is now the Information Returns Branch (IRB). Mail Stop 4360 has been added to the mailing address.

All information returns filed electronically are processed at IRS/IRB. Beginning in 2011, general inquiries concerning the filing of information returns should be sent to the following address: Internal Revenue Service, Information Returns Branch, 230 Murall Drive, Mail Stop 4360, Kearneysville, WV 25430.

Beginning in 2011, all requests for an extension of time to file information returns on Form 8809, requests for an extension to provide recipient copies, and requests for undue hardship waivers filed on Form 8508, should be sent to the following address: Internal Revenue Service, Information Returns Branch, Attn: Extension of Time Coordinator, 240 Murall Drive, Mail Stop 4360, Kearneysville, WV 25430.

Rev Proc 2009-30, 2009-27 IRB 27, has been superseded.

President Signs Legislation Retroactively Extending Unemployment Benefits

President Obama has signed legislation that will retroactively provide unemployment benefits to people who have been out of work for six months or more [H.R. 4213, The Unemployment Compensation Extension Act of 2010].

The Emergency Unemployment Compensation (EUC) program, and the Extended Benefits (EB) program, are 100% federally-funded programs that, in total, provide up to an additional 73 weeks of unemployment benefits to individuals who have exhausted the 26 weeks of benefits that are provided under state unemployment compensation programs. Legislation in the Continuing Extension Act of 2010 extended the expiration date of the above federal programs through June 2, 2010. The Unemployment Compensation Extension Act of 2010 will retroactively restore and extend the EB program through Dec. 5, 2010, allowing over 2.5 million Americans to continue to receive unemployment benefits, according to statistics published by the U.S. Department of Labor. The new legislation will also eliminate a rule that allowed unemployment benefits received by claimants in the EUC program to be significantly reduced if they worked part-time, or worked during a temporary break in collecting unemployment benefits.

Recruiter May Be Eligible for Overtime Despite Earning Over $100,000

A federal district court has denied summary judgment to a staffing company that didn't pay overtime to a recruiter because the court was unclear whether the recruiter qualified for the highly compensated employee exemption in the Fair Labor Standards Act (FLSA) [Ogden v. CDI Corp., DC AZ, Dkt. No. CV08-2180 PHX DGC, 6/30/10].

The facts. Martin Ogden worked as a recruiter for CDI Corp. (CDI), a professional services corporation. Ogden worked more than 40 hours per week, but was not paid overtime. Ogden recruited qualified candidates for information technology (IT) jobs. He would contact candidates to determine their salary requirements and then provide their resumes to his account manager. The account manager would decide whether to present the candidates to the company's clients. Ogden would then schedule interviews for approved candidates. If the client was interested in hiring a candidate, Ogden would call the candidate to make an offer on behalf of the client. Ogden made clear in his deposition testimony that the candidates were subject to vetting by his account manager before they were presented to the client, and that he had limited authority to make decisions because important decisions were ultimately made by the account manager.

The law. 29 CFR 541.601 in the FLSA provides an exemption from overtime for an employee with total annual compensation of at least $100,000 (which includes at least $455 per week paid on a salary basis) if the employee performs one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee. Under 29 CFR 541.203(e), human resources managers who formulate, interpret, or implement employment policies generally meet the duties requirements for the administrative exemption. However, personnel clerks who "screen" applicants to obtain data regarding their minimum qualifications and fitness for employment generally do not meet the duties requirements for the administrative exemption.

There was no argument that Ogden's salary exceeded the $100,000 threshold in the highly compensated employee exemption. However, the parties disagreed as to whether the services performed by Ogden met the duties requirement in the administrative exemption.

The ruling. The court denied summary judgment to CDI. The court cited 29 CFR 541.203(e), and said, based on Ogden's deposition, that he sounded more like the personnel clerk who screened applicants, rather than the manager who formulated, interpreted, or implemented employment policies.

The court also cited Andrade v. Aerotek, Inc., DC MD, 2010 WL 1244308, 3/30/10. In that ruling, the District Court of Maryland held that a recruiter was exempt from overtime because she helped place candidates in contract positions with her company's clients, communicated daily with her company's clients, and had the authority to discipline, manage, coach, and counsel the candidates after placement. In the current litigation, CDI presented no evidence that Ogden managed employees while they were on assignment, administered any performance reviews or disciplinary measures, or discussed the ongoing performance of the candidates with clients in order to ensure that the client's human resource needs were met.

Company Ordered to Stop Pyramiding Scheme that Involved Employment Taxes

A federal district court has issued an injunction against a taxpayer, his corporation, and their representatives, to prevent them from using unpaid employment taxes to pay other debts [U.S. v. Lowery, DC MS, 106 AFTR 2d ¶2010-5087, 4/27/10].

The facts. Barry's Granite & Marble, LLC, owes federal employment taxes for the 2002 to 2008 tax years, totaling over $762,000 as of Oct. 1, 2009, not including interest and other statutory additions. Barry A. Lowery, individually, and as the owner and operator of Barry's Granite & Marble, LLC, has continued to fail to file returns and pay required employment taxes. Lowery and the company use the tax money to pay some of the company's other debts. (This is often referred to as a "pyramiding scheme.")

The law. IRC §7402(a) provides federal district courts with the authority to issue writs and orders of injunction as may be necessary or appropriate for the enforcement of Internal Revenue laws.

The ruling. The district court ordered Lowery and his company to sign and deliver affidavits to the IRS for the next five years which state that all currently required income tax withholding, FICA withholding, and FUTA tax deposits have been timely remitted to the IRS. Lowery and his company were also required by the court to timely file all delinquent corporate employment tax returns and remit all unpaid employment tax liabilities. In addition, Lowery and the company were prohibited from paying other creditors before paying the delinquent employment taxes.

The district court believed that the injunction was necessary to prevent Lowery and his company from continuing to violate the tax laws. The court noted that the government lacked an adequate legal remedy to prevent additional pyramiding of employment taxes. The court said that the harm suffered by the government by allowing this pyramiding scheme to continue outweighed any harm that would be suffered by Lowery and his company in having to comply with the tax laws. In addition, the court believed that an injunction was necessary to serve the public good. The court said that this pyramiding scheme undermined the tax collection system, since the government relies on employers to collect and remit employment taxes paid by its employees.

Many States Have Modernized Their Unemployment Benefit Programs to Receive Federal Funding

The U.S. Department of Labor (DOL) has certified a number of states to receive unemployment insurance (UI) modernization incentive funding [DOL Employment & Training Administration website, UI Agreement, UI Modernization Incentive Payments, Information about Approved Applications (last updated on July 8)].

Alternative base period. Section 2003 in H.R. 1, the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5, Title II, Sec. 2003), provides federal funding to states for three years to help them pay unemployment benefits if a state is willing to modernize its unemployment compensation program. For states to receive one-third of their allotted funding, they must generally allow claimants to qualify for unemployment benefits using a base period that consists of the last four completed calendar quarters immediately preceding the first day of the claimant's benefit year. This base period is known as the alternative base period (ABP). Claimants may use an ABP to qualify for UI benefits if they do not qualify for benefits using the standard base period (i.e., the first four of the last five completed calendar quarters immediately preceding the first day of the claimant's benefit year).

The following states have been certified by the DOL to receive one-third of the federal funding because they have in place, or will adopt, an ABP: Alaska, Arkansas, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Massachusetts, Maine, Maryland, Michigan, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, Washington, West Virginia, and Wisconsin. In addition, the District of Columbia has qualified for one-third of the federal funding, because it allows claimants to use an ABP to qualify for unemployment benefits.

Eligibility for unemployment benefits. After adopting an ABP, states may qualify for the remaining two-thirds of the federal funding if their UI laws include at least two of the following four provisions:

(1) Their UI law must not deny unemployment benefits to any claimant seeking only part-time work (with certain exceptions).

(2) Their UI law must not disqualify a claimant from receiving unemployment benefits if the claimant separated from employment because of a "compelling family reason." A "compelling family reason" could be because of family illness, domestic violence, or the relocation of a spouse's job.

(3) Their UI law must provide 26 weeks of extended unemployment benefits to certain claimants in government-approved training programs.

(4) Their UI law must allow claimants who qualify to receive regular unemployment compensation benefits to also receive benefits equal to at least $15 per dependent per week, subject to certain aggregate limitations [42 USC 1103(f)(1)].

The following states have been certified by the DOL to receive the remaining two-thirds of the federal funding:

• Alaska ("compelling family reason" and dependent allowance);
• Arkansas (part-time workers and "compelling family reason");
• Colorado (part-time workers and "compelling family reason");
• Connecticut ("compelling family reason" and dependent allowance);
• Delaware (part-time workers and "compelling family reason");
• Georgia (part-time workers and training benefits);
• Hawaii (part-time workers and "compelling family reason");
• Idaho (part-time workers and training benefits);
• Illinois ("compelling family reason" and dependent allowance);
• Iowa (part-time workers and training benefits);
• Kansas (part-time workers and training benefits);
• Maine (part-time workers and training benefits);
• Maryland (part-time workers and training benefits);
• Massachusetts (dependent allowance and training benefits);
• Minnesota (part-time workers and "compelling family reason");
• Montana (part-time workers and training benefits);
• Nebraska (part-time workers and training benefits);
• Nevada (part-time workers and "compelling family reason");
• New Hampshire (part-time workers and "compelling family reason");
• New Jersey (part-time workers and training benefits);
• New Mexico (part-time workers and dependent allowance);
• New York (part-time workers and "compelling family reason");
• Oklahoma (part-time workers and "compelling family reason");
• Oregon ("compelling family reason" and training benefits);
• South Dakota (part-time workers and training benefits);
• Tennessee (part-time workers and dependent allowance); and
• Wisconsin ("compelling family reason" and training benefits).

Q&A Corner

The following question was included as part of the Q&As in the Forum on Federal Payroll Issues at the American Payroll Association's (APA) 28th Annual Congress:

Q. Some states allow an employer to deduct an administrative fee for handling creditor garnishments. In a number of those states, instructions tell the employer to deduct the fee from the garnishment collected. Some states, however, instruct the employer to deduct the fee from "exempt" earnings. If the maximum amount under federal law is being withheld for a garnishment (i.e., 25% of disposable income), can the employer fee be deducted in addition to the amount deducted for the garnishment?

A. No, according to Carl Smith, Deputy Regional Administrator for the Department of Labor's Wage and Hour Division. The employer fee is related to the garnishment. The maximum amount that can be withheld for a garnishment is 25% of disposable income. The 25% is a "hard and fast" percentage.

IRS Releases Several Information Letters on Employment Tax Issues

The IRS has recently issued a number of information letters, including several information letters on employment tax topics. The IRS notes that such letters are advisory in nature and have no binding effect on the IRS. Here are some of the highlights from the letters.

HIRE Act payroll tax exemption. The IRS was asked whether an employer that receives services from a staffing company is eligible to claim the payroll tax exemption in the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147) on wages paid to employees hired to replace the workers that the staffing company provided. The IRS did not address this specific situation, but did provide general information on the exemption. The IRS did note that an employer who terminates the employment of an employee to qualify for the exemption, and rehires the same or another employee, is not eligible for the exemption. Whether an employer terminated the employment of an employee to qualify for the exemption depends on the particular facts and circumstances.

Observation: On its website, the IRS notes that a client of a staffing company may claim the payroll tax exemption if the worker is a "qualified employee" when he or she begins employment with the client as its employee. That is, the worker must not have worked as an employee for any business (including the temporary agency) for more than 40 hours in the 60 days prior to beginning employment with the client business.

Family employment. The IRS responded to an inquiry by a taxpayer about whether Social Security and Medicare (FICA) taxes must be withheld on payments made to his wife for domestic services. IRC 3121(b)(3)(B) specifically excludes services performed for an individual's spouse from the term "employment" for FICA tax purposes. There is further information on this topic in IRS Publication 926, Household Employer's Tax Guide [Information Letter 2010-0056].

Taxation of wages paid to green card holder for services performed outside the United States. The IRS responded to an inquiry by a taxpayer asking if wages paid to his wife, a "green card" holder who works at the U.S. Embassy in a foreign country, are subject to FICA taxes. Wages paid to U.S. residents for services performed outside the U.S. for an American employer are subject to FICA taxes under IRC §3121(b). An individual is a resident of the U.S. for tax purposes if the individual is a lawful permanent resident. An individual is a lawful permanent resident at any time he or she has received the privilege, according to the immigration laws, of permanently residing in the U.S. as an immigrant. An individual generally has this status if the U.S. Citizenship and Immigration Services (USCIS) has issued an alien registration card, also known as a "green card," to that individual.

U.S. resident aliens are subject to U.S. income tax on their worldwide income, regardless of where they reside. Individuals subject to U.S. taxes as a resident must furnish their employer with their Social Security Number (SSN) so the employer can withhold FICA taxes from their wages. The wages subject to FICA withholding are only those wages earned after the USCIS has issued a green card to the individual [Information Letter 2010-0089].

H-2A visas. The IRS responded to an inquiry about the tax treatment of payments made to temporary foreign workers who assist in U.S. farming operations. Foreign agricultural workers temporarily admitted into the U.S. under an H-2A visa are exempt from both income tax withholding (see IRC §3401(a)(2)) and FICA tax withholding (see IRC §3121(b)(1)). This rule applies whether the worker is a resident or nonresident alien. However, employers must report payments made to H-2A resident and nonresident alien agricultural workers on Form 1099-MISC if the amount paid during the calendar year equals or exceeds $600 [Information Letter 2010-0101].

Volunteer firefighters. The IRS responded to an inquiry about the employment status and information reporting requirements for volunteer firefighters. The IRS said that the tax laws generally apply to volunteer firefighters in the same way that they do to other workers. In most cases, the information reporting requirements for payments made or benefits provided to a worker depend on the worker's status as either a common law employee or independent contractor (non-employee). The fact that a firefighter may be called a "volunteer" does not determine his or her status as an employee or an independent contractor. Neither does it determine the nature of required federal information reporting [Information Letter 2010-0079].

DOL Issues Fact Sheet on Requirement to Provide Break Time for Nursing Mothers

The U.S. Department of Labor's Wage and Hour Division (WHD) has issued a fact sheet on the provision in the Patient Protection and Affordability Act (Health Care Act, P.L. 111-148) that requires employers covered by the Fair Labor Standards Act (FLSA) to provide an employee with reasonable break time to express breast milk for her nursing child for one year after the child's birth [WHD Fact Sheet #73: Break Time for Nursing Mothers under the FLSA, July 2010].

Break time. The fact sheet states that "employers are required to provide a reasonable amount of break time to express milk as frequently as needed by the nursing mother." The duration and frequency of the breaks will likely vary among employees, since individual needs vary.

Location of breaks. Employers are required to provide "a place, other than a bathroom, that is shielded from view and free from intrusion from coworkers and the public" that the employee can use to express breast milk. Even a private bathroom is not an acceptable location. If the space is not strictly dedicated for use by nursing mothers, it must be available when needed in order to meet the statutory criteria. A space temporarily created, converted into a space for expressing milk, or made available when needed by the nursing mother, is an acceptable location if the space is shielded from view and free from any intrusion by co-workers and the public.

Coverage and compensation. Only non-exempt (i.e., overtime-eligible) employees are entitled to breaks to express milk. Employers with fewer than 50 employees are not subject to the break time requirement if it would impose an "undue hardship," which is determined by "looking at the difficulty or expense of compliance for a specific employer in comparison to the size, financial resources, nature, and structure of the employer's business."

Employers are not required under the FLSA to compensate nursing mothers for breaks taken for the purpose of expressing milk. However, where employers already provide compensated breaks, an employee who uses that break time to express milk must be compensated in the same way that other employees are compensated for break time. In addition, the time expressing breast milk must be compensated for if the employee is not completely relieved from duty while expressing breast milk.

This rule does not preempt state laws that provide greater protections to employees (for example, providing compensated break time, providing break time for exempt employees, or providing break time beyond one year after the child's birth).

New State Payroll Related Laws and Developments

New laws and developments are reported from the following states:

ALABAMA

Withholding. The Alabama Department of Revenue (DOR) has issued a July 2010 version of its Withholding Tax Tables and Instructions booklet. In addition, the DOR has issued July 2010 versions of the following forms and instructions: (1) Form A-4, Employee's Withholding Exemption Certificate; (2) the instructions to Form A-1, Employer's Quarterly Return; (3) Form A-3, Annual Reconciliation; and (4) Form A-6, Employer's Monthly Return [ADOR website].

Wages earned offshore in the oil cleanup effort within a three-mile range of Alabama's coastline are considered Alabama wages. Employers should withhold Alabama income taxes in the same manner as wages earned onshore [Ala. Department of Revenue website, Oil Spill Information, Frequently Asked Questions].

ARIZONA

Employment Taxes. The Arizona Department of Revenue (DOR) and the Arizona Department of Economic Security (DES) have implemented mandatory furlough programs for all of their employees during fiscal year 2011, which began on July 1, 2010. The six designated State furlough days are: July 23, 2010, Aug. 20, 2010, Sept. 17, 2010, Nov. 26, 2010, Dec. 23, 2010, and June 10, 2011. Online services will still be available on furlough days. Return and payment deadlines will not be affected by the furlough days [DOR Announcement, Furloughs-State Agencies Closed, 7/13/10; DES website, What's New, Statewide Furloughs and Office Closures].

CALIFORNIA

Employment Taxes. Employers in Kern County that were directly affected by recent fires may request up to a 60-day extension of time from the Employment Development Department (EDD) to file their State payroll reports and/or deposit State payroll taxes without penalty or interest. Written requests for extension must be received within 60 days from the original delinquent date of the payment or return [EDD Tax Branch News #101, 7/28/10].

Unclaimed Wages. There is a July 2010 version of the Unclaimed Property Holder Handbook on the California State Controller's Office (SCO) website [SCO Holder Outreach Newsletter, Summer 2010].

Wage Payment. Cal. Lab. Cd. § 226(a)(2) requires pay statements to include total hours worked by employees. A California appeals court has ruled that an employer who listed the total number of regular hours and the total number of overtime hours on its pay statements complied with this requirement, even though the employer did not list "total hours" (i.e., the sum of the regular and overtime hours) on a separate line [Morgan v. United Retail Inc., Cal. Ct. App., Dkt. No. B216130, 6/23/10].

Worker Classification. A federal appeals court has denied summary judgment to a Texas trucking company that argued it was not subject to California Labor Code rules with respect to classifying workers. The company argued that it was exempt because its preprinted contracts contained a clause in which employees: (1) acknowledged that they were independent contractors, and (2) agreed that the contract would be interpreted in accordance with the laws of another jurisdiction (Texas), where such an agreement is generally enforceable. The company's drivers had filed a complaint in California, where they resided and worked, stating that they were in fact employees who were being deprived of benefits. The court held that despite the contract, California law applied, since the drivers' claims arose under the California Labor Code. California law does not regard declarations by workers that they are independent contractors as controlling, and applies a multi-factor analysis to determine how workers should be classified [Narayan v. EGL, Inc., CA9, Dkt. No. 07-16487, 7/13/10].

DISTRICT OF COLUMBIA

Withholding. A tax amnesty program is in effect from August 2 to September 30 for certain taxpayers with unpaid D.C. tax obligations (including withholding taxes) on returns with a due date prior to Dec. 31, 2009. Eligible taxpayers can receive an abatement of penalties and fees, and avoid criminal penalties, if they pay the full amount of taxes and interest due on amnesty bills and returns by September 30 [D.C. Office of Tax and Revenue website].

ILLINOIS

Child Support. The Illinois Division of Child Support Enforcement (DCSE) is now known as the Illinois Division of Child Support Services (DCSS). Along with the name change comes an updated website. According to the Illinois Department of Healthcare and Family Services (HFS), the new DCSS website has a more simplified structure, streamlined information, and enhanced security. Employers will need a PIN to access their account information. PINs are being mailed to current website users [HFS Press Release, 7/1/10].

IOWA

Unemployment. Iowa Workforce Development (IWD) has posted nine instructional videos on its website to help employers understand how to use the State's new online tax system, called "My Iowa." Topics include: (1) creating a new account; (2) filing quarterly reports; and (3) making payments.

KANSAS

Withholding. The latest version of the Kansas Business Tax Application and Instruction Guide includes information on the new mandatory electronic filing requirement for withholding returns.

KENTUCKY

Withholding. The Kentucky Department of Revenue (DOR) reports that some taxpayers are continuing to send mail to the Fair Oaks and Perimeter Park offices, even though these offices have been closed. Affected taxpayers should now be sending their mail to: 501 High Street, Frankfort, KY 40601 [DOR website].

MINNESOTA

Withholding. A construction employer fact sheet that discusses the 2% Minnesota withholding tax rule on payments to independent contractors has been updated to include information on the reciprocity exemption for individual construction contractors. Minnesota has reciprocity agreements with North Dakota and Michigan. If the individual construction contractor is a resident of one of those states, income from personal services is exempt from Minnesota income tax, and payments for personal services he or she receives as an individual construction contractor are not subject to the 2% Minnesota withholding. Residents of North Dakota or Michigan must return to their state of residence at least once a month to qualify for the exemption. Individual construction contractors who qualify for reciprocity, and who do not want Minnesota income tax withheld from their pay, must complete Form ICCR, Reciprocity Exemption for Individual Construction Contractors. The form should be given to the construction contractor (payer) before the payer makes the payment to the individual [Minnesota Withholding Tax Fact Sheet 18, 07/01/2010].

NEW HAMPSHIRE

Child Support. "Lump-sum" payments are now subject to child support withholding. A "lump-sum payment" includes any income paid or payable to an employee as severance pay, accumulated sick pay, vacation pay, bonuses, commissions, or other similar payments. It doesn't include reimbursements for employment-related expenses [L. 2009, S458, eff. 7/23/10].

Unemployment. Tax rates for experienced employers in the fiscal year that began on July 1, 2010 range from 0.1% to 7.0%. The new employer rate remains at 2.7%. These rates do not include the 1.0% emergency surcharge that is added to all employer tax rates, and the 1.5% inverse minimum rate surcharge that is added to the tax rates of negative-rated employers in addition to the emergency surcharge [NH Department of Employment Security website, Upcoming Unemployment Tax Legislative Changes].

NEW JERSEY

Unemployment/Disability. The taxable wage base for unemployment insurance (UI), temporary disability insurance (TDI), and family leave insurance will decrease to $29,600 in 2011 (currently, $29,700). Maximum weekly unemployment benefits will decrease from $600 to $598 in 2011, and maximum weekly TDI benefits will decrease from $561 to $559. The alternative earnings test amount for UI and TDI benefits will remain at $7,300 in 2011, and the base week amount for UI benefit eligibility will remain at $145 [NJ Dep't of Labor & Workforce Development website].

Employment Taxes. The owners of a paving company have been sentenced to prison for failing to report and remit New Jersey payroll taxes over an eight-year period. In addition, they must pay the State over $368,000 in back payroll taxes, penalties, and interest [New Jersey Office of the Attorney General website, News Release, 6/24/10].

Worker Classification. A New Jersey federal district court has agreed to hear a proposed class action lawsuit by a union against a home construction company who owned a subsidiary that was accused of violating the New Jersey Construction Industry Independent Contractor Act. The subsidiary allegedly hired undocumented workers to cut costs. While the parent company argued that the court didn't have jurisdiction to hear the case because only the subsidiary did business in New Jersey, the court found that the parent company's contacts with New Jersey were "continuous and systematic," noting some 20 trips by corporate officials within the past five years. In addition, the parent company maintained a website that advertised homes for sale throughout the country, including New Jersey [NJ Council of Regional Carpenters v. D.R. Horton, Inc., DC NJ, Dkt. No. 08-cv-1731, 7/22/10].

NEW YORK

New Hire Reporting. Effective Oct. 18, 2010, new hire reports must indicate if dependent health insurance benefits are available to new hires, and the date the new hire qualifies for the benefits. In addition, employers providing dependent health insurance benefits and reporting new hire information to New York State on federal Form W-4 will be required to file an additional form with the State Directory of New Hires that contains the newly-required information. The form may be filed by first class mail, magnetic media, or electronically [L. 2009, A8952].

OKLAHOMA

Withholding. The Oklahoma Tax Commission (OTC) has issued an informational notice and a Frequently Asked Questions document discussing amendments to the personal income tax partial military pay exclusion that are in effect from July 1, 2010 through tax year 2014. From January through June 2010, active duty military members should have had Oklahoma income tax withheld from their military pay if over the $1,500 annual exclusion that was in effect before the amendments. For military pay received after July 1, 2010, active duty military members are not subject to Oklahoma income tax withholding on military pay [OTC Informational Notice, Military Pay Exclusion, 7/15/10; Okla. Stat. § 2358(E)(5)].

RHODE ISLAND

Child Support. The Rhode Island Office of Child Support Services has launched a new electronic payment processing center. Employers may make payments by ACH debit. The State will also accept electronic payments through the ACH banking network if the employer or payroll company has the capability to send the State an ACH EFT file. Electronic payments may not be made from a foreign bank account. Online registration is required to make payments electronically. After completion of registration, a prenote will be processed to confirm bank account information. Employers will receive an e-mail from the State after they have been approved to use the online payment service [Rhode Island Office of Child Support Services website].

SOUTH DAKOTA

Unemployment. The South Dakota Department of Labor (DOL) has announced that the unemployment tax surcharge will be assessed at the minimum 0.1% rate in the third quarter of 2010. The DOL is currently projecting that the surcharge will not be in effect in the fourth quarter of 2010 [DOL website, Unemployment Insurance Tax - Employer Updates].

VIRGINIA

Withholding. The Virginia Department of Taxation (DOT) is reminding taxpayers that, beginning with the 2010 tax year, employers who furnish 150 or more W-2s must file W-2 statements electronically. The DOT will no longer allow W-2 statements to be filed on tapes beginning Oct. 1, 2010, and on CDs and diskettes beginning Jan. 1, 2011. Employers required to file W-2s electronically, and employers with less than 150 employees who choose to file their W-2s electronically, must use Web Upload to submit W-2 information [Virginia Department of Taxation, New Employer W-2 Electronic Filing Requirements, 7/22/10].

WEST VIRGINIA

Withholding. The West Virginia State Tax Department (WVSTD) is providing tax relief to taxpayers located in the counties of Logan, McDowell, Mingo, Wyoming, and Lewis. These counties were declared federal disaster areas because of flooding that occurred on June 12, and high winds and sustained heavy rainfall on June 24. The WVSTD is allowing taxpayers located in the above counties to apply for an extension of time to file and pay employer withholding that was due on or after June 12, and on or before August 30. Businesses eligible for the tax relief should write "Federal Disaster Extension" on the top of the first page of the applicable return. No extension of time will be granted after August 30 [West Virginia Administrative Notice 2010-23, 07/16/2010].