Employment Tax for
Indian Tribal Governments
Publication 4268 (Rev. 8-2022) Catalog Number 37833J Department of the Treasury Internal Revenue Service www.irs.gov
Tax Exempt & Government Entities
INDIAN TRIBAL GOVERNMENTS
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Table of Contents
Chapter 1
Introduction to Employment Tax for Indian Tribal Governments .............................................. 1
Chapter 2
Employee or Independent Contractor ......................................................................................... 4
Chapter 3
Treatment of Certain Payments ................................................................................................... 9
Chapter 4
Tipped Employees ..................................................................................................................... 18
Chapter 5
Employee Business Expense Reimbursements .......................................................................24
Chapter 6
Fringe Benefits ............................................................................................................................ 27
Chapter 7
Retirement Plans ........................................................................................................................31
Chapter 8
Cafeteria Plans ............................................................................................................................ 40
Chapter 9
Scholarships & Educational Assistance ...................................................................................41
Chapter 10
Earned Income Tax Credit ........................................................................................................44
Chapter 11
Employment Taxes .....................................................................................................................45
Chapter 12
Preparation of Payroll Checks ................................................................................................... 57
Chapter 13
Form 941, Employer’s Quarterly Federal Tax Return ...............................................................62
Chapter 14
Form 943, Agricultural Employees ............................................................................................76
Chapter 15
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return ............................ 81
Chapter 16
Form 945, Annual Return of Withheld Federal Income Tax.....................................................84
Chapter 18
Electronic Filing Requirements for Form W-2, Wage and Tax Statement .............................. 92
Chapter 19
Reporting Compensation & Non-Compensation Payments on Form 1099-MISC &
Form 1099-NEC ..........................................................................................................................95
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Chapter 20
Records Retention ................................................................................................................... 100
Chapter 21
Penalties ................................................................................................................................... 103
Chapter 22
IRS Notices and Letters ...........................................................................................................107
Chapter 23
The Collection Process ............................................................................................................110
Glossary of Terms ...................................................................................................................... 113
1
Chapter 1
Introduction to Employment Tax for Indian Tribal Governments
The office of Indian Tribal Governments (ITG) at the Internal Revenue Service was established
to help Indian tribes address their federal tax matters. ITG uses partnership opportunities with
Indian tribal governments, tribal associations and other federal agencies to respectfully and
cooperatively meet the needs of the Indian tribal governments and the federal government, and
to simplify the tax administration process.
This publication provides information and tips for maintaining good records, preparing payroll,
and filing and depositing employment taxes. It is provided for general information only and
should not be cited as legal authority.
Visit www.irs.gov/tribes for further information on any of the topics covered in this publication.
Are Federally Recognized Tribal Governments Subject to Employment Taxes?
Generally, Indian tribes in their role as employers are subject to federal employment tax laws and
procedures. It is a well-established principle of tax law that in the ordinary affairs of life, Indians
are U.S. citizens and are subject to the payment of federal income taxes.
Where a business enterprise or political subdivision of an Indian tribe is organized and operated
by the tribe itself, the enterprise is considered a private tribal activity. When workers perform
services in the employ of a private tribal activity, these services also constitute employment.
The federal statutes, regulations, case law, revenue rulings and other sources of tax authority
establish the role of Indian tribal governments as employers. As such, tribal governments are
required to follow substantially the same procedures as other employers. There are some special
provisions that apply to tribal governments addressed in later chapters of this publication. If you have
questions about anything contained in or omitted from this publication, go to www.irs.gov/tribes
.
Employment Tax Requirements
Employers are required to withhold and pay employment taxes. Employment taxes include
income tax, Social Security and Medicare taxes (also known as Federal Insurance Contributions
Act (FICA) taxes) withheld from an employee’s wages, plus the employer’s share of FICA taxes
and federal unemployment (FUTA) taxes, when applicable. The withheld (employee’s) portion of
employment taxes is referred to as “trust fund” taxes. FUTA is addressed in Chapter 15.
In addition to your responsibilities for withholding, depositing and reporting federal taxes,
your state taxing authority or tribal governmental taxing agency may also have tax reporting
requirements. This publication is designed to assist you in complying with federal tax
requirements. You should contact your state and, in some cases, tribal taxing agencies for
information concerning state and tribal tax requirements.
Who is an Employee?
Employees are defined in the Treasury Regulations as every individual who performs services
subject to the will and control of an employer, both as to what is to be done and how it is to be
done. The right to discharge or to fire an employee is an important indicator that the person
having the right to discharge is an employer. The employee may have considerable discretion
and freedom of action as long as the employer has the legal right to control both the method
and the result of the employee’s work.
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An employee may be called a partner, an agent or an independent contractor and still meet the
criteria of an employee. The description is immaterial if the legal relationship of employer and
employee exists. Managers and other supervisory personnel are employees. A corporate officer
is an employee.
Tribal council members are employees, but receive special treatment for purposes of
employment taxes. Tribal council members and other situations unique to Indian tribes are
discussed in Chapter 3.
Who is an Employer?
The Treasury Regulations define an employer as any person for whom an employee performs
or performed any service. An employer may be an individual, a corporation, a partnership,
a trust, an estate, an Indian tribe, educational institutions, organizations, federal/state/local
governmental entities and other entities.
In addition to this publication, we offer a number of products and services to assist you.
Workshops
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available for presentation at your location
Employment Tax
Gaming Tax
Tip Reporting & Tip Agreements
Title 31 (Bank Secrecy Act Overview & Compliance)
The “ITG Tax Kit” is a webpage available at www.irs.gov/government-entities/indian-tribal-
governments/itg-tax-kit, which contains the following forms, publications and web links for
additional services that are the most useful to tribal entities (The freely available Adobe Acrobat
Reader software is required to view, print and search the forms and publications):
Forms
Form W-2 - Wage and Tax Statement
Form W-2G - Certain Gambling Winnings
Form W-3 - Transmittal of Wage and Tax Statements
Form W-4 - Employee’s Withholding Certicate
Form W-9 - Request for Taxpayer Identication Number and Certication
Form 11-C - Occupational Tax and Registration Return for Wagering
Form 720 - Quarterly Federal Excise Tax Return
Form 730 - Monthly Tax Return for Wagers
Form 940 - Employer’s Annual Federal Unemployment (FUTA) Tax Return
Form 941 - Employer’s Quarterly Federal Tax Return
1 Additional topics not listed can be provided as requested/needed
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Form 941-X - Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund
Form 941-X-Instructions
Form 944- Employer’s Annual Federal Tax Return
Form 944- Instructions
Form 945 - Annual Return of Withheld Federal Income Tax
Form 1042 - Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
Form 1042-S - Foreign Person’s U.S. Source Income Subject to Withholding
Form 1096 - Annual Summary and Transmittal of U.S. Information Returns
Form 1099-INT - Interest Income
Form 1099-MISC - Miscellaneous Income
Form 1099-NEC - Nonemployee Compensation
Form 5754- Statement by Person(s) Receiving Gambling Winnings
Form 8027- Employer’s Annual Information Return of Tip Income and Allocated Tips
Form 13551- Application to Participate in the IRS Acceptance Agent Program
Publications
Publication 15 - (Circular E), Employer’s Tax Guide
Publication 15-A- Employer’s Supplemental Tax Guide
Publication 15-B- Employer’s Tax Guideto Fringe Benets
Publication 15-T- Federal Income Tax Withholding Methods
Publication 515- Withholding of Tax on Nonresident Aliens and Foreign Entities
Publication 509 - Tax Calendars
Publication 526 - Charitable Contributions
Publication 531 - Reporting Tip Income
Publication 1281- Backup Withholding for Missing and IncorrectName/TIN(s)
Publication 3908- Gaming Tax Law and Bank Secrecy Act Issues for Indian Tribal Governments
Publication 4268 - Employment Tax for Indian Tribal Governments4
Publication 5343 - Helpful Hints for Indian Tribes and Tribal Entities to Avoid Penalties on Federal
Tax Deposits and Information Returns
Publication 5424 - Income Tax Guide for Native American Individuals and Sole Proprietors
Services
SSA/IRS Reporter- Information for employers who le business returns
EFTPS: The Electronic Federal Tax Payment System - The easiest way to pay your federal taxes
Electronic Filing Options for Business and Self-Employed Taxpayers - Information for
businesses and self-employed taxpayers who le and pay electronically
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Chapter 2
Employee or Independent Contractor
It is critical that the tribe and its wholly-owned entities correctly determine whether the
individuals providing services for them are employees or independent contractors.
Generally, you must withhold income taxes, withhold and pay Social Security and Medicare
taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to
withhold or pay any taxes on payments to independent contractors.
Employees
A person who works for you may be classified as a common law employee, a statutory
employee or an independent contractor. The classification of the worker determines which forms
you must file and which taxes you must pay. Note: Wholly-owned tribal government entities
may be exempt from federal unemployment taxes. Please refer to Chapter 15 for further
information.
Internal Revenue Code (IRC) Section 3121(d)(2) defines “employee” as “any individual who, under
the usual common law rules applicable in determining the employer/employee relationship,
has the status of an employee.” The “usual common law rules” referred to in the statute and the
regulations, are those factors to which the courts have looked over the years to decide whether
a person is an employee.
Generally, an employer/employee relationship exists when the person for whom services are
performed has the right to control and direct the individual who performs the services. This
control includes the result to be accomplished by the work, the details and means by which that
result is accomplished. That is, an employee is subject to the will and control of the employer
not only as to what will be done but how it will be done. It is not necessary the employer actually
direct or control the manner in which the services are performed; it is sufficient the employer has
the right to do so. The right to discharge is also an important factor indicating that an employer/
employee relationship exists.
In determining whether a worker is an employee or an independent contractor under the
common law rules, three main categories must be considered:
1) Behavioral control,
2) Financial control, and
3) Relationship of the parties.
1) Behavioral control—Facts that show whether there is a right to direct or control how the
worker does the work include:
Instruction the business gives to the worker, such as:
How, when or where to do the work
What tools or equipment to use
What assistants to hire to help with the work
Where to purchase supplies and services
What work must be performed by a specified individual
What order or sequence to follow
Type of training the business gives the worker
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2) Financial control—Facts that show whether there is a right to direct or control the business
part of the work include:
Signicant investment—the extent of the worker’s investment
Expenses—the extent to which the worker has unreimbursed business expenses
Opportunity for prot or loss—the extent to which the worker can realize a prot or loss
The extent to which the worker makes services available to others
How the business pays the worker
3) Relationship of the parties—Facts that illustrate how the business and worker perceive their
relationship include:
Employee benets—whether the business provides the worker with employee-type benets
Written contracts describing the relationship
The permanency of the relationship
The extent to which services performed by the worker are a key aspect of the business
Even after evaluating the above factors, there will be times when it is difficult to determine
whether an individual is a common law employee or self-employed and should be treated as
an independent contractor. Many individuals who have personal service contracts with tribal
governments may be employees rather than independent contractors. The mere existence of a
contract does not mean the individual is not an employee.
It’s important to the worker that the employment status be determined as quickly as possible so
the earnings can be properly reported. To request a determination from the IRS as to whether a
worker is an employee, file a Form SS-8, Determination of Worker Status for Purposes of Federal
Employment Taxes and Income Tax Withholding. Further information is provided in Chapter 3.
Some workers may be considered statutory employees (even though they are considered
independent contractors under the common law rules) if they fall into any one of four categories
and they meet three additional conditions. The law defines certain workers as employees by
statute. These categories include:
Drivers who distribute certain food products or deliver laundry or dry cleaning,
Full-time life insurance sales agents,
Individuals who work at home on materials and goods you supply and must be returned to you,
and
Full-time traveling or city salespersons who turn in orders to you from wholesalers, retailers,
contractors, or operators of hotels, restaurants or other similar establishments.
See Publication 15-A, Section 1, Who are Employees? for further information.
Independent Contractors
The general rule is that an individual is an independent contractor if the payer has the right
to control or direct only the result of the work, but not what will be done and how it will be
done. The earnings of a person who is working as an independent contractor are subject to
self-employment tax. A Form 1099-NEC, Nonemployee Compensation, should be furnished to
independent contractors and filed with the IRS.
An individual is not an independent contractor if they perform services that can be controlled
by a payer (what will be done and how it will be done). This applies even if individuals are given
freedom of action. What matters is that the employer has the legal right to control the details of
how the services are performed. If an employer/employee relationship exists (regardless of what
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the relationship is called), the individual is not an independent contractor and their earnings are
generally not subject to self-employment tax.
Misclassification of Employees
If you classify an employee as an independent contractor and you have no reasonable basis
for doing so, you will be held liable for employment taxes for that worker (IRC Section 3509). In
some instances, you may have reasonable basis for not treating a worker as an employee and
may be entitled to relief under Section 530 of the Revenue Act of 1978.
If you have a reasonable basis for not treating a worker as an employee, you may be relieved
from having to pay employment taxes for that worker. To get this relief, you must file all required
federal information returns on a basis consistent with your treatment of the worker. You (or your
predecessor) must not have treated any worker holding a substantially similar position as an
employee for any period beginning after 1977.
Workers who believe they have been improperly classified as independent contractors by an
employer can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to
figure and report (on their Form 1040) the employee’s share of uncollected Social Security and
Medicare taxes due on their compensation.
The Voluntary Classification Settlement Program (VCSP) is an optional program that provides
taxpayers with an opportunity to reclassify their workers as employees for future tax periods for
employment tax purposes with partial relief from federal employment taxes for eligible taxpayers
who agree to prospectively treat their workers (or a class or group of workers) as employees.
To participate in this voluntary program, the taxpayer must meet certain eligibility requirements,
apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification
Settlement Program, and enter into a closing agreement with the IRS. For more information go
to: Voluntary Classification Settlement Program | Internal Revenue Service.
Misclassified Workers to File Social Security Tax Form
Form 8919 is used to figure and report an employee’s share of the uncollected Social Security
and Medicare taxes due on their compensation if they were an employee but their employer
treated them as an independent contractor. By filing this form, their Social Security earnings will
be credited to the employee’s Social Security record.
Generally, a worker who receives a Form 1099 for services provided as an independent
contractor must report the income on Schedule C, Profit or Loss from Business, and pay
self-employment tax on the net profit, using Schedule SE, Self-Employment Tax. However,
sometimes the worker is incorrectly treated as an independent contractor when they are actually
an employee. When this happens, Form 8919 will be used by workers who performed services
for an employer but the employer did not withhold the worker’s share of Social Security and
Medicare taxes.
In addition, the worker must meet one of several criteria indicating they were an employee while
performing the services. The criteria include:
The worker has led Form SS-8 and received a determination letter from the IRS stating they are
an employee of the rm.
The worker has been designated as a Section 530 employee by their employer or by the IRS
prior to January 1, 1977.
The worker has received other correspondence from the IRS that states they are an employee.
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The worker was previously treated as an employee by the rm and they are performing services
in a similar capacity and under similar direction and control.
The worker’s co-workers are performing similar services under similar direction and control and
are treated as employees.
The worker’s co-workers are performing similar services under similar direction and control and
led Form SS-8 for the rm and received a determination that they were employees.
The worker has led Form SS-8 with the IRS and has not yet received a reply.
NOTE: In the past, misclassified workers often used Form 4137, Social Security and Medicare
Tax on Unreported Tip Income, to report their share of Social Security and Medicare taxes.
Misclassified workers should no longer use this form. Instead, Form 4137 should now only be
used by tipped employees to report Social Security and Medicare taxes on allocated tips and
tips not reported to their employers.
Examples of Employees
Example 1: The tribal business pays Tom $500 per week to clean the tribal office complex.
Tom only works for the tribe. He doesn’t have the right to hire or fire any assistants, and he is
required to personally do the work. The tribe provides Tom’s supplies and tools. Based on these
facts, Tom is considered an employee and the tribe should withhold income and employment
taxes. Tom will be issued a Form W-2.
Example 2: Bill works as a deputy for the tribal police department. When Bill is off-duty, he has
been repairing the roof of the tribal hospital. Bill doesn’t do roofing for other customers. The
tribe determined when the work was to be done, provided the supplies needed and determined
how Bill will be paid. Based on these facts, Bill is considered an employee of the tribe for both
jobs and should be issued a Form W-2 showing the withheld income and employment taxes.
Example of an Independent Contractor
The tribe pays Paul $1,000 per week to clean the bingo halls. Paul operates his own janitorial
service providing cleaning services to numerous entities. He has the right to hire and fire his
own employees and provides his own supplies. The tribe doesn’t have the right to control
Paul. Therefore, Paul is not an employee of the tribe and would be issued a Form 1099-NEC,
Nonemployee Compensation, to report his compensation.
If you have a question about the treatment of any of your workers, see Topic No. 762,
Independent Contractor vs. Employee, at www.irs.gov/taxtopics/tc762, Publication 15A,
Employer’s Supplemental Tax Guide, or go to www.irs.gov/tribes and click on the “Employment
Tax for Tribes” link.
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Agricultural Labor (Farm Work)
There are special rules for Social Security and Medicare withholding on agricultural workers.
Employment taxes for farmworkers must be filed on Form 943, Employer’s Annual Federal Tax
Return for Agricultural Employees, and must be separate from other workers’ employment taxes
filed on Form 941. See Publication 51, Section 4, Social Security and Medicare Taxes, for more
information.
Crew Leaders
A crew leader is an employer of farmworkers. A crew leader is a person who furnishes and pays
(either on their own behalf or on behalf of the farm operator) workers to do farm work for the
farm operator. If there is no written agreement between you and the farm operator stating that
you are their employee and if you pay the workers (either for yourself or for the farm operator),
then you are a crew leader. Crew leaders are independent contractors and should be issued
Form 1099-NEC, Nonemployee Compensation, to report the nonemployee compensation.
References
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 15-T, Federal Income Tax Withholding Methods
Publication 51, (Circular A), Agricultural Employer’s Tax Guide
Publication 1779, Independent Contractor or Employee
Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and
Income Tax Withholding
Form 8919, Uncollected Social Security and Medicare Tax on Wages
Form 8952, Application for Voluntary Classication Settlement Program (VCSP)
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Chapter 3
Treatment of Certain Payments
In this chapter, we’ll discuss how certain payments are treated. Some of these payments are
specific to Indian tribes, while others are not. For example, payments made from fishing rights-
related activities and payments made to tribal council members are tribal specific issues.
Payments made to elected and appointed officials and those payments made as bonuses
apply to all employers. The proper treatment of these payments for withholding and reporting
purposes is sometimes confusing.
The next four sections of this chapter discuss payments for fishing rights-related activities, tribal
council members, bonuses and payments to elected and public officials. If you have questions
about any of these payments, or how they are to be treated, go to www.irs.gov/tribes and click
on the “Employment Tax for Tribes” link. See also Publication 15 and Publication 15A.
Fishing Rights-Related Activities
Any income derived by a member of an Indian tribe, either directly or through a “qualified Indian
entity” (defined later in this chapter), or by a “qualified Indian entity” from a fishing-rights related
activity of that member’s or entity’s tribe is exempt from federal and state taxation (income tax,
income tax withholding, FICA, unemployment tax and self-employment tax).
Wages are not exempt if paid by an employer who is not a member of the same tribe or is not a
qualified Indian entity. Wages are also not exempt if paid to an employee who is not a member
of the tribe whose fishing rights are exercised. Tribal members must fish in their own waters to
be exempt.
Fishing rights-related activity means an activity (including aquaculture) directly related to
harvesting, processing or transporting fish harvested in the exercise of recognized fishing
rights of the tribe or to selling fish, but only if members of the tribe perform substantially all the
harvesting.
A recognized fishing right must have been secured as of March 17, 1988, by a treaty between
the tribe and the United States, by an Executive Order or an Act of Congress.
As an employer exercising fishing rights-related activities you should:
Verify your status as a qualied Indian entity.
Verify your employee’s proof of tribal membership.
Verify time allocated to shing versus non-shing activity. For example, consider a game warden
that is responsible for protecting other wildlife and has other duties, as well as patrolling the
treaty waters of his tribe. His employer should verify the percentage of time he engages in shing
rights-related activities of his tribe.
Maintain records to support each employee’s time allocation.
Maintain records to support the 90% gross receipts rule (dened later in this chapter).
Tax Return Preparation
Do not include exempt wages on Form 941, Form 940 or Form W-2.
Wages paid for non-shing activities are subject to all applicable employment taxes and
employment tax reporting, including Form W-2.
If only shing rights-related income is paid to an individual, no Form W-2 is required.
A letter stating the amount and tax-exempt nature of an employee’s wages may be issued to the
employee to be used for various non-tax purposes, such as bank loans.
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Special Definitions
A “qualified Indian entity” is 100% owned by a federally recognized Indian tribe or tribal
members, and substantially all management functions are performed by tribal members. It may
be jointly owned by more than one tribe or members of more than one tribe.
90% rule for processors and transporters - If the entity engages to any extent in any
substantial processing or transporting of fish, then at least 90% of the annual gross receipts of
the entity must be derived from the exercise of protected fishing rights of tribes whose members
own at least 10% of the equity interests in the entity.
Note: If a processor or transporter fails to meet the 90% rule, all income from that year is
taxable.
Examples of categories of tribal employees whose wages may be exempt or partially exempt:
Fishers, processors (including smoking), transporters
Hatchery workers
Environmental and conservation workers
Enforcement staff and tribal court personnel
Support staff, for example, secretary, accounting, payroll
Program director, executive director
Fishery biologist
Fishery aide
Fishery and habitat policy analyst
Water quality biologist
Habitat inventory and assessment technician
Legislative analyst
Information and education services
Data analyst
Policy analyst
Public information staff
Tribal Council Members
Revenue Ruling 59-354 sets forth a limited employment tax exception for amounts paid to tribal
council members for services performed by them as council members. Revenue Ruling 59-354
holds that while these amounts are includible in the council member’s gross income, they do not
constitute wages for purposes of FICA, FUTA and federal income tax withholding. Note: Tribes
with voluntary agreements under Section 218A of the Social Security Act should see Tribal
Social Security Fairness Act of 2018, below.
Tribal officials are liable for federal income tax on these wages, and some may voluntarily
have this tax withheld to avoid making quarterly estimated tax payments or personal year-end
deficiencies.
Council members’ salaries will be shown in box 1, Wages, tips, other compensation, of the Form
W-2. Additionally, in box 14, Other, you should include “Revenue Ruling 59-354” and the total
amount subject to Revenue Ruling 59-354. This will show why there are no amounts listed in the
boxes for federal income tax withheld (box 2) or FICA (boxes 3, 4 and 7).
Chapter 3: Treatment of Certain Payments
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Note: If the tribal council member requests to have federal income taxes withheld, box 2 will
reflect these voluntarily-withheld amounts. Voluntary withholding of FICA taxes to receive Social
Security and Medicare credit isn’t generally permitted, except as provided under the Tribal
Social Security Fairness Act of 2018 discussed in the next section.
Exhibit 3.1 (at the end of this chapter) is a sample of a Form W-2 for a tribal council member.
Tribal council members may receive two Forms W-2, one for tribal council member wages
and one for services performed in another capacity. See Form W-2 instructions for further
information.
Part of your responsibility as an employer is to provide the council member with either a copy
of Revenue Ruling 59-354 or a statement advising them that their W-2 is treated differently
(such as, salaries do not constitute wages for purposes of FICA or federal withholding taxes per
Revenue Ruling 59-354).
Tribal Social Security Fairness Act of 2018
The Tribal Social Security Fairness Act of 2018 allows federally recognized Indian tribes to
extend Social Security coverage to tribal council positions voluntarily through an agreement with
the Commissioner of Social Security under Section 218A of the Social Security Act.
Under this new legislation, if a tribe chooses to enter into an agreement for coverage, then all
tribal council positions are covered. Coverage will apply to any current and future tribal council
members and cannot be terminated once granted.
Interested tribes need to complete the Tribal Council Member Coverage Agreement to
request coverage. Tribes will communicate directly with SSA regional specialists to execute the
agreements. Coverage is effective the month after the month the agreement is signed, unless the
tribe requests a later effective date.
Tribes may request retroactive coverage for periods for which they have already paid FICA taxes
and not received a refund. Retroactivity can go back as far as needed without limit as long
as FICA taxes were paid. If you did not pay FICA during the retroactive period, you will not be
charged. You cannot pay into the retroactive period.
Visit the SSA at www.ssa.gov/people/aian/ for more information on the Tribal Social Security
Fairness Act
Claim for Over Collected Employee Social Security and Medicare Taxes
If the Indian tribal government withheld Social Security taxes and Medicare taxes from a
tribal council member’s salary, those over collected taxes may be refunded to the tribal
council member in one of two ways: 1) by the tribal council member filing Form 843, Claim for
Refund and Request for Abatement, or 2) the tribal government may file Form 941-X, Adjusted
Employer’s Quarterly Federal Tax Return or Claim for Refund, and refund the member’s share of
FICA taxes (to correct prior period Forms 941).
When filing Form 941-X, a written statement must be obtained from each tribal council employee
stating that the employee has not claimed, and will not claim, refund or credit for the amount of
over collection. The Indian tribal government can make a claim for both the employer and the
employee shares of Social Security and Medicare taxes for those employees who provide the
required written statements.
Chapter 3: Treatment of Certain Payments
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For those employees who do not provide statements, you (as the employer) can make a claim for
only the employer’s share of Social Security and Medicare taxes.
Next, complete the Form 941-X for each Form 941 being corrected. When completing the Form
941-X, be sure to complete Part 1 by checking the appropriate boxes and signing at the bottom
of Part 5. The tribe then reimburses the council members for their share of the Social Security
and Medicare taxes.
Finally, complete Form W-2c, Corrected Wage and Tax Statement, for each employee for whom
adjustments were made to Social Security and Medicare taxes. This corrects the previous
Form W-2 filed. Submit the Forms W-2c along with the Form W-3c to the Social Security
Administration.
Benefit Payments for Training or Retraining
Revenue Ruling 63-136 addresses the issue of benefit payments, received by individuals
undergoing training or retraining under the Area Redevelopment Act (75 Stat. 47-63), or the
Manpower Development and Training Act of 1962 (76 Stat. 23-33). Examples of state-funded
retraining programs are the Job Training Partnership Act (JTPA) and the Work Investment Act
(WIA). A tribe may establish its own work employment program.
As stated in Revenue Ruling 63-136, these benefit payments are not taxable. The payments
are intended to aid the recipients in their efforts to acquire new skills to prepare them for
better employment opportunities. As such, the payments fall into the same category as other
unemployment relief payments and are not includible in the recipient’s gross income.
Bonuses
Bonuses that the tribe pays an employee are includable in the employee’s income and are
shown as wages on Form W-2. If the bonuses are paid to the employee in the form of goods or
services, the fair market value of the goods or services will be added to the employee’s income.
Bonuses are considered supplemental wages paid in addition to the employee’s regular wages.
How you withhold on bonuses depends on whether the bonus is identified as a separate
payment from regular wages.
Bonus Combined with Regular Wages
If you pay bonuses with regular wages but do not specify the amount of each, withhold income
tax as if the total were a single payment for a regular payroll period.
Bonus Identified Separately from Regular Wages
If you pay bonuses separately (or combine them in a single payment and specify the amount of
each), the income tax withholding method depends partly on whether you withhold income tax
from your employee’s regular wages.
If you withheld income tax from an employee’s regular wages, you can use one of the following
methods for the bonus:
a) Withhold a flat 22% (no other percentage allowed).
b) Add the bonus and regular wages for the most recent payroll period this year. Figure the
income tax withholding as if the total were a single payment. Subtract the tax already withheld
from the regular wages. Withhold the remaining tax from the bonus.
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If you did not withhold income tax from the employee’s regular wages, use method b, above.
(This would occur, for example, when the value of the employee’s withholding allowances
claimed on Form W-4 is more than the wages.)
Regardless of the method you use to withhold income tax on bonuses, they are subject to Social
Security, Medicare and FUTA (if applicable) taxes.
Example 1: – Form W-4 after 2020 You pay Sharon a base salary on the first of each month.
She is single and didn’t complete Steps 2, 3 or 4 on the Form W-4. Her July 1 pay is $2,000.
Using the current wage bracket tables, you withhold $95 using the standard rate. On July 15 you
pay Sharon a bonus of $1,000. Electing to use supplemental payment method b, you:
1) Add the bonus amount to the amount of wages from the most recent pay date ($1,000 +
$2,000 = $3,000).
2) Determine the amount of withholding on the combined $3,000 ($213 using the wage bracket
tables).
3) Subtract the amount withheld from wages on the most recent pay date from the combined
withholding amount ($213 - $95 = $118).
4) Withhold $118 from the bonus payment.
Example 2: The facts are the same as above, except you elect to use the flat rate method of
withholding on the bonus. You withhold 22% of $1,000, or $220, from Sharon’s bonus payment.
Example 3: – Form W-4 Prior to 2020 You pay John a base salary on the first of each month.
His most recent Form W-4 is from 2018. He is single and claimed one withholding allowance. He
didn’t enter an amount for additional withholding. His July 1 pay is $1,000. You decide to use the
Wage Bracket Method of withholding. Using Worksheet 3 and the withholding tables in section 3
of Pub. 15-T, you withhold $29 from this amount. In August John receives his salary and a bonus
of $500, which you combine with regular wages and don’t identify separately. You withhold
based on the total of $1500. The correct amount of withholding from the tables is $78.
Stipend Payments
A stipend is a fixed sum of money paid periodically for services or to defray expenses. The
fact that remuneration is termed a “fee” or “stipend” rather than salary or wages is immaterial.
Wages are generally subject to employment taxes and should be reported on Form W-2. Refer
to Publication 15 (Circular E), Employer’s Tax Guide, section 5, Wages and Other Compensation,
for rules on accountable and nonaccountable plans for employee business expenses.
Stipends or fees paid to an employee or an independent contractor are generally reportable.
However, if the stipend is intended to be a reimbursement of expenses and the requirements for
an accountable plan are met, the stipend may not be reportable.
Elected and Public Officials
To determine whether an elected or public official is an employee, tribal governments would
apply the ‘common law’ factors. The tribal government should use the three-prong test to
determine whether a common law employment relationship exists. The three prongs are:
1) Behavioral control;
2) Financial control; and
3) The relationship of the parties.
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Each determination is based upon its unique facts and circumstances. If there is any question
whether a person is a public official, obtain a copy of, or a reference to, the statute or ordinance
relating to the establishment of the position.
For more information on employer-employee relationships, refer to Chapter 2 of Publication
15 and Chapter 2 of Publication 15-A, Employer’s Supplemental Tax Guide. If you would
like the IRS to determine whether services are performed as an employee or independent
contractor, you may submit Form SS-8, Determination of Worker Status for Purposes of Federal
Employment Taxes and Income Tax Withholding.
Election Workers
If an election worker’s compensation is subject to withholding of FICA tax, reporting is required
for all compensation, regardless of the amount. If an election worker’s compensation is not
subject to withholding of FICA tax, information reporting is required for payments that aggregate
$600 or more in a calendar year. See Revenue Ruling 2000-6 to determine when an election
worker’s compensation is subject to withholding of FICA tax.
In the following examples, all the wages paid have been for services as an election worker only.
1) If wages paid during the year are less than $600, no Form W-2 is required. The wages are
not subject to FICA or federal income tax withholding. The election worker must report the
earnings as wages.
2) If wages paid during the year are between $600 and $1,999, file a Form W-2. FICA and federal
income tax withholding are not required. The election worker must report the earnings as
wages.
3) If wages are equal to or greater than $2,000 for 2022 (this amount is indexed for inflation), a
W-2 must be issued. The wages are subject to FICA, but not federal income tax withholding.
The election worker must report the earnings as wages.
For later years, see Special Rules for Various Types of Services and Payments in Publication 15
for the FICA wage requirement for Election Workers.
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Per Capita Payments
When a tribe distributes revenue to all its members or groups of members, it has provided a
per capita payment. Under IGRA, a federally recognized Indian tribe may use net revenues from
Class II or Class III gaming activities to make per capita payments to its tribal members only if
four conditions are met:
1. It must prepare a plan to allocate revenues only for IGRA authorized uses to:
fund tribal government operations or programs,
provide for the general welfare of the Indian tribe and its members,
promote tribal economic development,
donate to charitable organizations, or
fund local government and agency operations.
2. T
he Secretary of the Interior must approve the revenue’s use, particularly when it’s for funding tribal
government operations or programs and for promoting tribal economic development.
3. The tribe must protect and preserve minors’ and other legally incompetent persons’ interests
who are entitled to receive any of the per capita payments. The tribe disperses these
payments to their parents or legal guardian for their health, education or welfare, under a plan
approved by the Secretary and the tribe’s governing body.
4. The per capita payments are subject to federal taxation and tribes notify members of this tax
liability when payments are made.
Gaming Distributions to Minors
The IGRA requires protections of the minors’ interests for gaming revenue distribution. To satisfy
this requirement, many tribes establish trusts for minors and legal incompetents. A tribe may
serve as the grantor and owner of the trust.
Revenue Procedure 2011-56 clarifies that deposits into a trust are taxable at the time the
deposits are made. If the funds are left in the trust account until the beneficiary reaches the
age of majority the principal and interest are not reported as taxable income to the beneficiary.
The revenue procedure states that when an IGRA trust earns money or receives a deposit,
the beneficiaries are not required to include those amounts in their gross income. However,
beneficiaries who receive trust distributions would include the amounts as taxable income when
actually or constructively received.
Example: Jane, a minor, is a member of a federally recognized tribe. The tribe creates a trust for
her. She cannot receive any distributions from the trust before she reaches age 18. Therefore,
Jane does not include the trust’s income as part of her gross income. She is not in constructive
receipt of the funds placed in trust or income earned by the trust, because she doesn’t have
the unqualified right to receive immediate payment. As a result, the accumulated per capita
distributions and the related income are not taxable. However, if the tribe gives the trustee
(Jane’s legal guardian) approval to access the funds, those funds become taxable.
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Withholding Requirements of Distributions from Net Gaming Revenue
Per capita distributions from gaming are subject to federal taxation under IRC Section 3402(r).
Tribes must notify its members of the tax liability when it makes the payments, reporting the
per capita distributions on Form 1099-MISC, Miscellaneous Income. When the tribal members
receive their Forms 1099-MISC, they report the income on the “Other Income” line of their Form
1040, U.S. Individual Income Tax Return, and include a description as “Indian gaming profits.”
These distributions are also subject to withholding. The Social Security number of all payees
should be secured prior to making payments. Otherwise, the tribe is potentially liable for backup
withholding provisions under IRC Section 3406.
In the payments section of Form 1040, the payee should report any withholding reflected on
Form 1099 as “federal income tax withheld from Forms W-2 or 1099.” The tribe determines
the withholding amount based on the total payment to the tribal member for the year.
Publication ublication 15-T, Federal Income Tax Withholding Methods contains the withholding
tables (identified as “Tables for Withholding on Distributions of Indian Gaming Profits to
TribalMembers”). The tribe is potentially liable for the difference between the amount required to
be withheld under the tables and the amount actually withheld.
The withholding tables are revised each year and generally published in January. There is a
threshold for requiring withholding which often changes annually. Once the threshold distribution
amount is reached, withholding is required between 10-24%.
Example: A tribe distributes $28,000 of per capita payments to tribal members during 2022.
A regular monthly per capita payment of $1,500 is issued during the months January through
December. During December, an additional per capita payment is made of $10,000, for a
cumulative distribution of $9,000.
The computation for withholding on monthly per capita payments would be based on the $1,500
monthly payment for January to November and for December, the aggregate payment amount
of $11,500. Using the tables for 2022 for monthly distributions, payments of $1,500 are subject
to 10% withholding on the amount over $1,079, or $42.10 (.10 x $421). The December payment
would be $1,267.79 plus 24% of the amount over 8,502, or $1,987.31 ($1,267.79 + $719.52 (.24 x
($11,500 - $8502))).
To avoid incorrect withholding, payments during a chosen distribution period should be
aggregated as in the example above.
Form SS-8
Occasionally, an Indian tribal government will be unable to determine whether a worker is
an employee or is self-employed and should be treated as an independent contractor. Many
individuals who have personal service contracts with Indian tribal governments may be
employees rather than independent contractors. The existence of a contract does not mean
that the individual performing the service is not an employee. It is important to the worker that
the employment status be determined as soon as possible so the earnings can be properly
reported.
If no clear resolution is possible, consider filing a Form SS-8 with the IRS for a determination.
A Form SS-8 is used to gather information to determine whether a worker is an employee for
federal employment taxes.
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All pertinent facts about the individual’s work arrangement should be obtained and submitted
to the IRS on a Form SS-8. A Form SS-8 may be submitted by the tribal government or by
the worker. If a contract has been executed between the worker and the entity, a copy of the
contract should be furnished with the Form SS-8. When a Form SS-8 is submitted to the IRS, all
the facts are analyzed and the determination of a worker’s status is presented to the employer in
the form of a determination or letter ruling.
Several problems arise for a worker when incorrectly treated as an independent contractor. To
begin with, the worker would probably pay more taxes (that is, Self-Employment Contributions Act
(SECA) taxes) than if the worker were being treated correctly as an employee. As an employee, only
the employee’s portion of the Social Security and Medicare taxes are withheld and paid from the
employee’s wages. As an independent contractor, the worker is not eligible for any unemployment
benefits or other benefit plans that the worker would have as an employee. Also, as an independent
contractor, the worker may have to pay estimated tax payments each quarter.
References
Internal Revenue Code Section 7873
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 15-T, Federal Income Tax Withholding Methods
Revenue Ruling 59-354
Revenue Ruling 63-136
Revenue Ruling 2000-6
Form 843, Claim for Refund and Request for Abatement
Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund
Exhibit 3.1
Sample Form W-2 for Tribal Council Member
Note: The below sample Form W-2 only applies to tribes that do not have an agreement
under Section 218A of the Social Security Act with the Commissioner of Social Security.
18
Chapter 4
Tipped Employees
Tips are Wages
Tips are defined as wages under IRC Sections 3121(a) and 3401(a). Tips received by an
employee in the course of employment should be reported to the employer whether received
directly from customers or indirectly in the form of shared tips or tip-outs from fellow employees.
For purposes of FICA, the term “wages” means all remuneration for employment, including the
cash value of all remuneration (including benefits) paid in any medium other than cash (unless
specifically excepted). For purposes of federal income tax withholding, the term “wages” is
similar to the one for FICA.
All tips your employees receive are taxable income subject to federal income tax. Cash tips
include tips received directly from customers, tips from other employees under any tip-sharing
arrangement and charged tips (for example, credit and debit card charges) that are distributed to
the employee. Both directly and indirectly tipped employees must report tips received to you.
Cash tips of $20 or more an employee receives in a calendar month while working for any one
employer are wages subject to FICA and income tax withholding. Cash tips include charged tips,
and tips paid by check or other cash equivalents. Even though these tips are taxable income,
tips of less than $20 received by an employee during a calendar month while working for a
particular employer are not wages for FICA or federal income tax withholding purposes. Once
the amount of tips received in a calendar month reaches $20 from any one employer, the entire
amount of tips received must be reported to the employer and included in wages (not just the
amount over $20).
An employee who receives $20 or more in cash tips must report those tips in writing to you by
the tenth day following the month in which the tips are received (or more often if required by the
employer). Employees who receive tips of less than $20 in a calendar month are not required to
report their tips to you but must report these amounts as income on their tax returns and pay
taxes, if any.
Service Charges
Service charges added to a bill or fixed by the employer that the customer must pay will not
constitute a tip when paid to an employee, but rather constitute non-tip wages. These non-tip
wages are subject to Social Security, Medicare and federal income tax withholding. Common
examples of service charges (sometimes called auto-gratuities) in service industries are:
Large party charge (restaurant),
Bottle service charge (restaurant and night-club),
Room service charge (hotel and resort),
Contracted luggage assistance charge (hotel and resort), and
Mandated delivery charge (pizza or other retail deliveries).
These service charges are treated as wages and are includible on Form W-2.
Large Food and Beverage Establishments
If you operate a large food or beverage establishment, you must file Form 8027, Employer’s
Annual Information Return of Tip Income and Allocated Tips, for each calendar year, and may be
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required to allocate tips to your employees. A large food or beverage establishment is a food or
beverage operation where:
Food and beverages are provided for consumption on the premises,
Tipping is a customary practice, and
There are more than 10 employees who work more than 80 hours on a typical business day.
For the Form 8027 filing requirement:
Casino buffets are included if tipping is customary.
Ten or more employees include all employees at the establishment, not just the tipped
employees.
If you own more than one establishment, you must le a separate Form 8027 for each
establishment.
If there is more than one business operating within a single building, and if the receipts for the
businesses are recorded separately, then each business should le a separate Form 8027.
File Form 8027 by the last day of February for the preceding calendar year. However, if you file
electronically, the due date is March 31, for the preceding calendar year. You may request an
extension on Form 8809, Application for Extension of Time to File Information Returns, if you
file the request before the due date of the return. Refer to Publication 1239, Specifications for
Electronic Filing of Form 8027, to file electronically.
Allocated Tips
IRC Sections 6053(c)(2) and (3) require large food and beverage establishments to allocate tips
to those employees who report tips of less than 8% of gross receipts to them (or a lower rate
approved by the IRS). You may base the allocation on each employee’s share of gross receipts
or share of total hours worked, or on a written agreement between you and your employees.
You are required to report the amount allocated on Form W-2 in the box labeled “Allocated Tips”
for each employee to whom you allocated tips. Penalties may be imposed for both failing to file
and failing to furnish a correct Form W-2 for each form on which you fail to include this required
information. Do not withhold income, Social Security or Medicare taxes on allocated tips, since
your employee did not report these amounts to you. See Exhibit 4.1 for an example.
Whether or not you are required to allocate tips, your employees must continue to report all tips
to you, and you must use the amounts they report to figure payroll taxes.
Tip Rate Reduction Requests
You may request a reduced allocation rate by submitting a petition that clearly demonstrates that
a rate less than 8% should apply. Refer to Instructions for Form 8027 on how to apply.
IRC Section 3121(q)
IRC Section 3121(q) provides that tips are deemed to have been paid by the employer for
purposes of FICA tax and requires that employers withhold both the employer and employee
shares of FICA. It also provides that unreported tips are subject to employer FICA tax. IRC
Section 3121(q) allows the IRS to assess the employer’s share of FICA taxes on reported tips
(for example, where the employee did not furnish a statement reporting the tips or to the extent
the statement is inaccurate or incomplete). When determining the employer’s additional FICA tax
liability, the tips are deemed paid on the date the Notice and Demand is made to the employer
by the IRS.
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Employer’s General Responsibilities
The employer is responsible for deducting and depositing the employee’s FICA tax on tips
included in the written report furnished by the employee to the extent that collections can be
made from the employee’s wages (under the employer’s control, excluding tips) on or after the
time the written statement is furnished.
Additional FICA Tax Payable
An employee’s regular pay may not be enough for the employer to withhold all the taxes an
employee owes on the regular pay and reported tips. If this happens an employee may give the
employer more money to cover the taxes.
If the employee’s pay under the employer’s control, including any additional money given by
the employee, is not enough to cover all the taxes, Treasury Regulations Section 31.3102-3(a)(1)
clarifies the sequence the employer must follow when paying over the withheld taxes:
1) All taxes (FICA, federal withholding, and state and local) on regular pay, exclusive of tips
2) Social Security and Medicare taxes on reported tips
3) Federal, state and local taxes on reported tips
The employer must furnish to the employee a written statement showing the amount of
employee FICA on tips that exceeds the tax the employer can collect from the wages under the
control of the employer. The statement is provided on the employee’s Form W-2. The employee
is required to report and pay over to the IRS the portion of employee tax that the employer was
unable to withhold due to the lack of employee wages available to cover the liability.
Example: Employee taxes on wages and tips exceed regular wages:
Grady is a blackjack dealer for a tribal casino. He routinely receives tips as a part of his
compensation as a dealer. The casino pays him a salary of $200 per week. He receives tips in
cash each day that he works.
Grady keeps a daily tip record and reports tips to his employer every other Friday. He has a Form
W-4, Employee’s Withholding Allowance Certificate, on file with his employer (the casino) from 2018.
It reflects that he is single with one exemption. For the two-week period ending April 12, Grady
reported $1,200 in cash tips to his employer. His regular wages for the same two-week period are
$400. The casino tip policy allows Grady to keep his cash tips at the time he receives them.
The following computation illustrates that Grady’s total withholding for wages and tips exceeds
his regular wages, causing him to owe taxes to his employer.
Gross Regular Pay .........................................................................................$400.00
Tips Reported .............................................................................................. $1,200.00
Deductions Deductions from
Gross Regular Pay
Deductions from
Tip Income
Total
FICA $30.60 $91.80 $122.40
Federal Withholding $100.00* $200.00* $300.00*
State Withholding $26.00 $78.00 $104.00
Total $156.60 $369.80 $526.40
Net Paycheck Zero**
* The withholding amounts are for this example only. The withholding tables were not consulted
for federal or state withholding taxes.
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**The employee owes the amount of tax that exceeds his regular paycheck ($526.40 – $400.00 =
$126.40).
Because all tips are taxable wages to the employee, this situation creates a withholding shortfall
for Grady. The withholding on his wages plus his tips exceeds his biweekly paycheck from his
regular salary.
If Grady does not make arrangements with his employer to pay all his FICA and withholding, his
taxes will be applied in the following order:
1) Withholding on regular wages (FICA, federal income, state income) ($156.60)
2) FICA withholding tax on tips ($91.80)
3) Federal income tax withholding ($151.60 of the $200 due)
Net paycheck = $0 ($400 less $156.60, $91.80 and $151.60)
Grady owes $48.40 in federal income tax withholding and $78 in state withholding.
Because Grady’s regular pay is not enough for his employer to withhold all the taxes he owes
on his regular pay plus his reported tips, he may give his employer money until the close of the
calendar year to pay the rest of the taxes.
His employer may also collect any taxes that remain unpaid from his next paycheck. If
withholding taxes remain uncollected at the end of the year, Grady may be subject to a penalty
for underpayment of estimated tax.
In the example, Grady’s regular paycheck paid all his FICA (Social Security and Medicare taxes).
This is not always the case; sometimes an employee may owe Social Security and Medicare
taxes uncollected at the end of the year. These uncollected taxes will be shown in box 12 of
Form W-2 and must be reported on the employee’s Form 1040, U.S. Individual Income Tax
Return.
Employer Tip Employment Tax Responsibilities
Include tips as wages, withholding FICA and federal income tax, and include on Form 941 and
Form W-2
Allocate tips when required
File the information report, Form 8027, if required
Employer and Employees’ Recordkeeping Responsibilities (Specific to Large Food
and Beverage Establishments)
The written statement furnished by the employee to the employer for tips received by the
employee must be signed by the employee and should disclose:
The name, address and SSN of the employee.
The name and address of the employer.
The period for which, and the date on which, the statement is furnished. If the statement is for a
calendar month, the month and year should be specied. If the statement is for a period of less
than one calendar month, the beginning and ending dates of the period should be shown (for
example, January 1 through January 8, 20XX).
The total amount of tips received by the employee during the period covered by the statement,
which are required to be reported to the employer.
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No particular form is required; however, Form 4070 (included in Publication 1244, Employee’s
Daily Record of Tips and Report to Employer) may be used unless the employer provides some
other form.
If the employer chooses to use another form, the form must meet the requirements of Treasury
Regulation Section 31.6053-1(b)(2)(ii):
The form is to be used solely for the purpose of reporting tips,
It meets the requirements of subparagraph (1) (of the regulations as listed above), and
A blank copy must be made available to the employee for completion and retention by the
employee.
In lieu of a special form for tip reporting, Treasury Regulation Section 31.6053-1(b)(2)(ii) provides
that an employer may provide regularly used forms (such as time cards) for the employees
to use in reporting tips. The form must include the period for which, and the date on which,
the statement is furnished, the total amount of tips the employee received and identifying
information, which will ensure identification of the employee by the employer.
Tip Rate Determination and Education Program (Tip Agreements)
The IRS began its Tip Rate Determination/Education Program (TRD/EP) for businesses where
tip income is customary to improve and ensure compliance by employers and employees with
statutory provisions on tip income. Employers may participate in the TRD/EP. The program
primarily consists of voluntary tip compliance agreements developed to improve tip income
reporting by helping taxpayers to understand and meet their tip reporting responsibilities. These
voluntary tip compliance agreements offer many benefits for the employer and the employee.
Employers in the food and beverage industry or industries with tipped employees other than the
gaming industry may enter into a Tip Rate Determination Agreement (TRDA). Businesses in the
gaming industry may enter into a Gaming Industry Tip Compliance Agreement (GITCA).
The IRS will assist applicants in understanding and meeting the requirements for participation.
For more information about GITCA and TRDA agreements, search for Market Segment
Understandings (MSU) by using keyword “MSU tips” on IRS.gov.
References
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-T, Federal Income Tax Withholding Methods
Publication 531, Reporting Tip Income
Instructions for Form W-2, Box 1 and box 8
Publication 3148, Tips on Tips - A Guide to Tip Income Reporting for Employees Who Receive
Tip Income
Publication 3144, Tips on Tips - A Guide to Tip Income Reporting for Employers in Businesses
Where Tip Income is Customary
Instructions for Form 941, Line 5b, Taxable Social Security Tips
Form 8027 and instructions, Employer’s Annual Information Return of Tip Income and Allocated
Tips
Publication 1239, Specications for Electronic Filing of Form 8027, Employer’s Annual
Information Return of Tip Income and Allocated Tips
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References for your employees
Publication 1244, Employee’s Daily Record of Tips and Report to Employer (This publication
includes Form 4070, Employee’s Report of Tips to Employer, and Form 4070A, Employee’s Daily
Record of Tips.)
Form 4137, Social Security and Medicare Tax on Unreported Tip Income
Exhibit 4.1,
Form W-2, Wage and Tax Statement, showing allocated tips
24
Chapter 5
Employee Business Expense Reimbursements
Publication 15, (Circular E), Employer’s Tax Guide, defines employee business expense
reimbursements. A reimbursement or allowance arrangement is a system by which you
pay the advances, reimbursements, and charges for your employees’ business expenses.
The reimbursement policy of the employer will determine the proper tax treatment of these
reimbursed employee business expenses. This chapter addresses the two basic types of
reimbursement arrangements that can exist between an employer and an employee and how
you handle these reimbursements for income tax purposes.
There are two general types of expense reimbursement plans that an employer may use to
reimburse employees for out-of-pocket business expenses:
1) An accountable plan, and
2) A nonaccountable plan.
The principal difference is whether employees are required to substantiate expenses
(accountable plan) to their employer for the amounts they incur for job related expenses, or not
(nonaccountable plan).
Accountable Plan
Amounts paid under an accountable plan are not wages and are not subject to income tax
withholding and payment of Social Security, Medicare, State Unemployment Tax Act (SUTA) and
Federal Unemployment Tax Act (FUTA) taxes.
To qualify as an accountable plan, the plan must contain the following features:
The employee’s expenses must be incurred in connection with services as an employee with no
personal expenses.
The employee must substantiate expenses to the employer within a reasonable period of time
from when the expenses were incurred.
The employer must require that any excess advance or reimbursement over the actual
substantiated expense be returned within a reasonable period of time.
If the expenses covered by this arrangement are not substantiated, or amounts in excess
of expenses are not returned within a reasonable period of time, the amount is treated as
paid under a nonaccountable plan. A reasonable period of time depends on the facts and
circumstances. It is considered reasonable if the employees:
1) Receive the advance within 30 days of the time they incur the expense.
2) Adequately account for the expenses within 60 days after the expenses were paid or incurred.
3) Return any amounts in excess of expenses within 120 days after the expense was paid or
incurred.
Also, it is considered reasonable if you give your employees a periodic statement (at least
quarterly) that asks them to either return or adequately account for outstanding amounts and
they do so within 120 days.
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Nonaccountable Plan
Simply stated, a reimbursement plan that doesn’t meet the requirements for an accountable
plan is a nonaccountable plan. Under a nonaccountable reimbursement plan, the employee is
generally not required to substantiate any expenses to the employer. Payments to your employee
for travel and other necessary expenses of your business under a nonaccountable plan are
treated as supplemental wages subject to income tax withholding, Social Security, Medicare,
SUTA and FUTA taxes. The payments are treated as paid under a nonaccountable plan if:
Your employee is not required to or does not substantiate timely those expenses to you with
receipts or other documentation, or
You advance an amount to your employee for business expenses and your employee is not
required to or does not return timely any amount not used for business expenses.
See Section 7 of Publication 15 for more information on supplemental wages.
Per Diem or Other Fixed Allowance
A per diem allowance is a fixed amount of daily reimbursement an employer gives an employee
for lodging, meals and incidental expenses when the employee is away from home on business.
You may reimburse your employees by travel days, miles or some other fixed allowance. In these
cases, your employee is considered to have accounted to you if the payments do not exceed
rates established by the federal government. The standard mileage rates are updated annually.
See www.irs.gov/tax-professionals/standard-mileage-rates for the current rates.
The federal per diem rates for meals and lodging in the continental U.S. are published by the
U.S. General Services Administration (GSA).
Per diem allowances may be used only if the time, place and business purpose of the travel
are substantiated by adequate records or other evidence. An employee can satisfy the
substantiation requirements for business vehicle expenses in two general ways:
1) An employee can submit periodically to the employer a log of business miles driven. The
expense is deemed substantiated to the extent of the standard mileage rate.
2) An employee can submit documentation of actual vehicle expenses (gas, maintenance,
insurance and so on) with support for the percentage of business use of the vehicle (for
example, a log showing both business and personal mileage).
If the per diem or allowance exceeds the federal rate, and you do not require your employees to
return the difference between the two rates, you must report the excess amount as wages. This
excess amount is subject to income tax withholding, and payment of Social Security, Medicare
and FUTA taxes. Report the nontaxable (substantiated) portion of the per diem or mileage
allowance in box 12 of Form W-2 using code L.
Example: The tribe sent an employee on a five-day business trip to Phoenix and gave the
employee a $400 advance to cover meals and incidental expenses ($80 per day). The federal per
diem for meals and incidental expenses for Phoenix is $51.75 for the first and last day of travel
and $69 for non-travel days. The tribe does not require the employee to return the difference
between the advance and the federal per diem rate allowed for Phoenix:
Chapter 5: Employee Business Expense Reimbursements
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Per Diem Daily Rates Total
Advance travel payment $400.00
First and last day per diem ($69.00 x 0.75) $51.75 $103.50
3 non-travel days $69.00 $207.0 0
Total federal diem allowed $310.50
Taxable per diem $89.50
The $89.50 excess federal per diem amount will be included in box 1 on Form W-2. Box 12 will
show $310.50 using code L.
References
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-B, Employer’s Tax Guide to Fringe Benets
Publication 463, Travel, Gift, and Car Expenses
Publication 5137, Fringe Benet Guide
Instructions for Forms W-2 and W-3
Exhibit 5.1 - Reporting Reimbursements Table
Reporting Reimbursements
If the type of reimbursement (or other expense
allowance) arrangement is under
Then the employer reports on Form W-2:
An ACCOUNTABLE PLAN with:
Actual expense reimbursement
Adequate accounting made and excess returned
No amount.
Actual expense reimbursement
Adequate accounting and return of excess both
required but excess not returned
The excess amount as wages in box 1.
Per diem or mileage allowance up to the federal
rate
Adequate accounting and excess returned
No amount.
Per diem or mileage allowance up to the federal
rate
Adequate accounting and return of excess both
required but excess not returned
The excess amount as wages in box 1. The
amount up to the federal rate is reported only in
box 12 – it is not reported in box 1.
Per diem or mileage allowance exceeds the
federal rates
Adequate accounting up to the federal rate only
and excess not returned
The excess amount as wages in box 1. The
amount up to the federal rate is reported only in
box 12 – it is not reported in box 1.
A NONACCOUNTABLE PLAN with:
Either adequate accounting or return of excess, or
both, not required by plan
The entire amount as wages in box 1.
No reimbursement plan The entire amount as wages in box 1.
27
Chapter 6
Fringe Benefits
Publication 15-B, Employer’s Tax Guide to Fringe Benefits, addresses the question, “Are fringe
benefits taxable?” If you provide your employees with a taxable fringe benefit, the benefit is
subject to employment taxes and must be reported on Form W-2. However, you can use special
rules to withhold, deposit and report the employment taxes. See Section 4 of Publication 15-B,
Rules for Withholding, Depositing and Reporting.
What is a Fringe Benefit?
A fringe benefit is any property, service, cash or cash equivalent in addition to regular pay
provided to an employee by an employer in connection with the performance of services.
Treasury Regulation Section 1.61-21 states that gross income includes compensation for
services, including fees, commissions, fringe benefits or similar items. Whether a particular
fringe benefit is taxable depends on whether there is a specific statutory exclusion that applies
to the benefit. Employers should treat taxable fringe benefits as wages for employment tax
purposes.
Because the tax treatment of fringe benefits can vary depending on the facts and circumstances
under which they are provided, it may be helpful to follow a three-step analysis:
1) Identify the particular fringe benefit and start with the assumption that its value will be taxable
as compensation to the employee.
2) Check to see if there are any statutory provisions that exclude the fringe benefit from the
employee’s gross income.
3) Value any portion of the benefit that is not excludable for inclusion in the employee’s gross
income.
Examples of fringe benefits include:
Accident/health benets
Allowances not accounted for (for example, clothing)
Automobile allowances
Awards and prizes
Back pay awards
Bonuses
Cafeteria plans
Club memberships
Dependent care assistance programs
Educational reimbursements
Employee discounts
Frequent ier credits
Group term life insurance
Law enforcement housing assistance
Legal counseling
Local transportation for commuting
Lodging on the employer’s premises
Meal money
Moving expense reimbursements
Parking
Professional licenses or dues for professional organizations
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Severance pay
Scholarships and fellowships
Sick pay
Stipends
Travel reimbursement
Use of vacation homes
Vacations
These fringe benefits may or may not be taxable to the employee who receives the benefit. Refer
to Publication 15-B to determine if fringe benefits are taxable and how to value them.
Employer-Provided Vehicles
Employer-provided vehicles are sometimes available for employees to use during off-duty hours.
The personal use of a tribally-owned vehicle is a taxable fringe benefit. Personal use includes
the value of commuting to and from work in the vehicle, even if the vehicle is taken home for the
convenience of the employer.
The value of the fringe benefit must be included in income as wages and is subject to income
and employment taxes. The three methods that can be used to determine the value of the
vehicle provided to the employee are the:
1) Commuting value rule,
2) Cents-per-mile rule, or
3) Automobile lease rule.
There are certain employees designated as “control employees” who must use the automobile
lease rule. A “control employee” is a government employee who is either an elected official or
whose compensation is equal to or exceeds Federal Government Executive Level V. (See the
Office of Personnel Management website for compensation information.) See Chapter 3 of
Publication 15-B for further information on control employees.
Qualified Nonpersonal Use Vehicle
A qualified nonpersonal use vehicle is any vehicle the employee is not likely to use more than
minimally for personal purposes because of its design. Qualified nonpersonal use vehicles are:
Clearly marked police and re vehicles
Unmarked vehicles used by law enforcement ofcers - the ofcer must be authorized to carry a
rearm, execute search warrants and make arrests
An ambulance or hearse used for its specic purpose
Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds
Delivery trucks with seating for the driver only or driver plus a folding jump seat
A passenger bus with a capacity of at least 20 passengers used for a specic purpose
School buses
Tractors and other special purpose farm vehicles
If an employee drives one of these vehicles home, the personal use of the vehicle is not a
taxable fringe benefit.
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All Other Employer-Provided Vehicles
If you have an employer-provided vehicle that does not qualify as a nonpersonal use vehicle, and
the employee uses the vehicle for personal use (which includes commuting), the personal use of
the vehicle is a noncash taxable fringe benefit.
It is the employer’s responsibility to determine the actual value of this fringe benefit and to
include the taxable portion in the employee’s income.
Example: A tribally-owned pickup truck that is not a police vehicle has the name of the tribe
marked on the vehicle. Usually the employee is allowed to take the vehicle home because he
is “on call.” The vehicle is not a qualified nonpersonal use vehicle, thus, the commuting is a
noncash taxable fringe benefit. The value of the personal use of this vehicle must be included as
wages to the employee, and it is subject to income and employment taxes.
Lodging on Your Business Premises
You can exclude the value of lodging furnished to an employee from the employee’s wages if:
It is furnished on your business premises,
It is furnished for your convenience, and
The employee accepts it as a condition of employment.
This exclusion does not apply if you allow your employee to choose to receive additional pay
instead of lodging.
On your business premises. For this exclusion, your business premises is generally your
employee’s place of work.
For your convenience. Whether you furnish lodging for your convenience as an employer
depends on the facts and circumstances. You furnish the lodging to your employee for your
convenience if you do this for a substantial business reason other than to provide the employee
with additional pay. This is true even if a law or an employment contract provides that the
lodging is furnished as pay. However, a written statement that the lodging is furnished for your
convenience isn’t sufficient.
Condition of employment. Lodging meets this test if you require your employees to accept
the lodging because they need to live on your business premises to be able to properly perform
their duties. Examples include employees who must be available at all times and employees who
couldn’t perform their required duties without being furnished the lodging.
It doesn’t matter whether you must furnish the lodging as pay under the terms of an employment
contract or a law fixing the terms of employment.
Example: Joan, an employee of a hospital, is given the choice of living at the hospital free of
charge or living elsewhere and receiving a cash allowance in addition to her regular salary. If
Joan chooses to live at the hospital, the hospital cannot exclude the value of the lodging from
her wages because she is not required to live at the hospital to properly perform the duties of
her employment.
Example: A police officer of an Indian tribal government is required to live in housing furnished
by the tribe, as a condition of employment. The tribe requires this as a matter of security for the
residents in the neighborhood and as a convenience for the tribe to protect the housing facilities.
The value of the lodging is not included in the police officer’s salary since the housing is a
condition of employment, it is on the business premises and it is a convenience to the tribe.
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References
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 15-B, Employer’s Tax Guide to Fringe Benets
Publication 15-T, Federal Income Tax Withholding Methods
Publication 463, Travel, Gift, and Car Expenses
Publication 525, Taxable and Nontaxable Income
Publication 970, Tax Benets for Education
Publication 5137, Fringe Benet Guide
Instructions for Forms W-2 and W-3
31
Chapter 7
Retirement Plans
This chapter provides basic information on the retirement plans that Indian tribal governments
may have, as well as annual reporting requirements that apply to these plans. Since this area
of law can be quite complex, this chapter is not all-inclusive. Your retirement plan administrator
should address more detailed questions.
Retirement Plans that Indian Tribal Governments May Maintain:
1) Simplified Employee Pension Plan (SEP) – SEPs provide a simplified method for employers
to make contributions to a retirement plan for their employees. Instead of setting up a qualified
plan with a separate trust, the employer contributes to an Individual Retirement Account or
Annuity (IRA) (commonly referred to as a SEP-IRA) set up for each plan participant that meets
the requirements of IRC Section 408(k).
2) SIMPLE IRA Plan – A Savings Incentive Match Plan for Employees (SIMPLE) IRA plan is
described under IRC Section 408(p). This plan provides small employers with a simplified
method to contribute toward their employees’ and their own retirement savings. Employees
may choose to make salary reduction contributions and the employer is required to make
either matching or nonelective contributions. Contributions are made to an IRA set up for each
employee (a SIMPLE IRA). A SIMPLE IRA plan can be established only if the employer had 100
or fewer employees who earned $5,000 or more in compensation during the preceding year.
An employer cannot sponsor a SIMPLE plan if they currently sponsor another plan.
3) 401(k) Plan – A 401(k) plan is also referred to as a cash or deferred arrangement (CODA). A
401(k) plan is a qualified plan (under IRC Section 401(a)) that includes a feature allowing an
employee to elect to have the employer contribute a portion of the employee’s wages (pre-tax
or Roth contributions) to an individual account under the plan. The CODA must be part of a
profit-sharing, stock bonus or pre-ERISA money purchase plan. Indian tribal governments are
allowed to maintain 401(k) plans, effective January 1, 1997.
4) 403(b) Plan – A 403(b) plan (also called a tax-sheltered annuity (TSA) plan) is a retirement
plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Contributions
may be deferred and invested in annuity contracts or mutual funds. Employees save for
retirement by contributing to individual accounts. Employers can also contribute to employees’
accounts. Indian tribal governments are eligible to maintain this type of plan only in limited
circumstances. Generally, the organization associated with the tribal government must be an
educational institution, a 501(c)(3) organization or a grandfathered Indian tribe (see definitions).
5) Qualified Plan – A qualified plan, also referred to as a 401(a) plan, satisfies the requirements
of IRC Section 401(a). Examples of qualified plans include profit-sharing, money purchase,
401(k), target benefit or defined benefit plans.
All these plans, with the exception of certain qualified plans, are deferred compensation plans
that allow employees to save for retirement on a pre-tax basis.
Note: Indian tribal governments cannot maintain governmental deferred compensation plans
under IRC Section 457. They are not an eligible employer for 457 purposes.
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Limits on Contributions and Benefits
There are limits to how much employers and employees can contribute to a plan (or IRA) each
year. The plan must specifically state that contributions or benefits cannot exceed certain limits.
The limits differ depending on the type of plan. IRC Section 415 requires the limits to be adjusted
annually for cost-of-living increases.
Definitions
Deferred Compensation – Deferred compensation is an amount the employer deducts from the
employee’s current compensation and pays to a retirement plan. Employees do not pay tax on
qualified deferred compensation until distributions are received (except with Roth contributions).
Participation in a deferred compensation plan allows employees to “defer” or delay, receiving a
portion of their wages until a later date, generally when they retire or reach a distributable event.
Rollover – The contribution or direct transfer of a qualified plan distribution to another plan
within 60 days. The plan receiving the rollover may be any of the following:
Another qualied plan
An IRA
A SEP-IRA
A SIMPLE IRA (after two years)
For distributions made after December 31, 2001, a Section 403(b) plan
501(c)(3) Organization – Defined generally as one organized and operated exclusively for the
following purposes:
Religious
Charitable
Scientic
Public safety testing
Literary or education
To encourage national or international amateur sports competition
For the prevention of cruelty to children or animals
These organizations include:
Charities
Social welfare agencies
Private hospitals
Health care organizations
Private schools
Religious institutions
Research facilities
Grandfathered Indian Tribe – An Indian tribal government; a subdivision, agency or
instrumentality of an Indian tribal government; or a corporation chartered under federal, state or
tribal law that is owned in part by any of the foregoing is treated as an employer described in
501(c)(3) with respect to any annuity contract purchased in a plan year beginning before January
1, 1995.
Catch-Up Contributions – Elective deferrals that are made under IRC Section 414(v) in excess
of the limits under IRC Sections 402(g), 403(b), 408(p) and 415 to 401(k), 403(b), SARSEP (SEP
that includes a salary reduction arrangement), SIMPLE IRA or SIMPLE 401(k) plans. Catch-
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up contributions may be made only by participants who are at least age 50 by the end of the
year in which the catch-up contributions are being made.
Qualified Plan – A qualified plan is a plan that meets the requirements of IRC Section 401(a).
These requirements are generally designed to ensure that the plan is established and operated
for the benefit of a broad class of employees. Meeting the requirements entitles the plan
sponsor, the trust or other funding vehicle and participants to certain income tax advantages.
Nonqualified Plan – A nonqualified plan is a plan that does not meet the requirements of IRC
Section 401(a). As a result, the plan sponsor, participants and trust or other plan funding vehicle
are generally not entitled to income tax benefits, unless the plan is intended to be, and meets
the requirements of, for example, Section 403(b) plans, SEPs, SIMPLE plans and certain IRAs.
Salary Reduction Arrangement – An agreement where the employee chooses to have part of
their pay contributed to a retirement plan rather than receive it in cash.
Elective Deferral – Contributions made by the employer at the election of the employee to a
retirement plan via a salary reduction agreement. The elective deferrals are excluded from the
employee’s gross income (compensation) (except Roth contributions) and include deferrals under
a 401(k), 403(b), SIMPLE IRA or SARSEP plan.
Nonelective Contributions – Employer contributions made to any type of plan, excluding those
employer contributions made under a salary reduction agreement. Employer contributions also
do not include matching contributions.
Income Tax Withholding
Generally, the participant’s pre-tax contributions (deferred compensation) plus any earnings
on these contributions will not be included in gross income until that amount is paid or made
available to the participant or beneficiary.
Therefore, this amount will not be subject to income tax withholding at the time the contribution
is made. However, the total amount contributed during the tax year will be reflected in box 12 on
the participant’s Form W-2.
Social Security, Medicare and FUTA Taxes
Qualified plans, TSAs, SEPs and SIMPLE IRA plans – Generally, elective deferrals made by
an employee are excluded from the employee’s gross income. However, they are included in
wages for purposes of Social Security, Medicare and FUTA taxes.
Employer contributions to these plans are not included in the definition of wages and are not
subject to Social Security, Medicare or FUTA taxes unless the payment is made for services
rendered.
Nonqualified Deferred Compensation Plans – Annual deferrals under a nonqualified plan are
treated as wages subject to Social Security, Medicare and FUTA taxes in the tax year in which
the later of the following occurs:
When the services are performed, or
When there is no substantial risk of forfeiture of the employee’s right to the deferred amount.
A substantial risk of forfeiture exists where rights in property that are transferred are conditioned
on the future performance of services or the occurrence of a condition related to the purpose
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of the transfer. Annual deferrals mean the amount of compensation deferred under the plan
whether by salary reduction or nonelective employer contribution during a taxable year.
Example: The tribe’s nonqualified plan provides for elective deferrals from current salary, as well
as a 1% of salary nonelective contribution for each employee who participates in the plan and
who is employed with the tribe during the plan year. All deferrals and contributions, including the
tribe’s contributions, are fully and immediately vested.
Because these contributions are not subject to a substantial risk of forfeiture (and the services
to which they relate have already been performed), the elective deferrals are required to be taken
into account as wages for purposes of the Social Security, Medicare and FUTA tax at the time of
the deferral. The tribe’s nonelective contribution is required to be taken into account as wages at
the time of the contribution for purposes of the Social Security, Medicare and FUTA tax.
Example: Assume the same facts as above, except the plan has two year vesting for the tribe’s
nonelective contribution. In this case, an employee’s right to the nonelective contributions (and
the associated earnings) are subject to a substantial risk of forfeiture until the employee has
been employed by the tribe for three years.
The tribe’s nonelective contributions (and earnings thereon) are not wages for purposes of
the Social Security, Medicare and FUTA taxes until the employee has completed three years
of service. At that time, the aggregate amount of the tribe’s nonelective contributions, plus
earnings, is required to be taken into account as wages for purposes of the Social Security,
Medicare and FUTA tax. Once an individual has met the vesting requirements, future nonelective
contributions by the tribe are required to be taken into account as wages for these purposes
when the contribution is made.
The following are examples of how you would prepare a Form W-2 to reflect deferred
compensation depending on whether the plan is a qualified plan or a nonqualified plan.
Example - Qualified Plan: Sarah earned $30,000 during the year. She elected to contribute
10% ($3,000) to her employer’s qualified 401(k) plan. The employer also contributed 5%
($1,500) to the plan on Sarah’s behalf. Sarah had federal withholding of $3,000, Social Security
withholding of $1,860 and Medicare withholding of $435.
Sarah’s W-2 will reflect:
Box 1 - $27,000 ($30,000 gross wages less $3,000 elective deferral)
Box 3 - $30,000 – Although Sarah’s elective deferrals are not included in gross wages for federal
income tax purposes, they are includable wages for the Social Security tax
Box 5 - $30,000 – Sarah’s elective deferrals are includable wages for Medicare tax purposes
Box 12 - D $3,000 – Code D is the code for elective deferrals to a 401(k) plan (See W-2
instructions for other retirement plan codes)
Box 13 - Check the Retirement plan box
Box 14 - $1,500 – This is the nonelective employer contribution made for Sarah. This is not a
mandatory entry.
If your state has a state income tax, then box 16 on Form W-2 will normally be the same amount
as the amount shown in box 1 provided the employee was a resident of the state for the entire
year.
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Exhibit 7.1-Qualifed Plan
Form W-2
Example - Nonqualified Plan: Assume the same facts as above except the plan is a
nonqualified plan and there is no substantial risk of forfeiture of the deferred amount.
Box 1 - $27,000
Box 3 - $31,500 – Note: both Sarah’s contributions (elective deferrals) and the employer’s
contributions (nonelective deferrals) are includable wages for the Social Security tax
Box 5 - $31,500 – Same as above with regard to the Medicare tax
Box 12 - D $3,000
Box 13 - Check the Retirement plan box
Box 14 - $1,500 – Not mandatory
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Catch-Up Contributions
Participants age 50 and over may contribute additional elective deferral “catch-up
contributions” to 401(k), 403(b), SIMPLE IRA or SARSEP plans.
Catch-up contributions are combined with regular contributions for W-2 reporting.
Example: Jerry, age 52, earned $25,000 during the year. He contributed 10% ($2,500) of his
salary to his employer’s qualified 401(k) plan. In addition, Jerry contributed $500 in catch-up
contributions during the year. His employer contributed $1,250 to the plan for Jerry. Jerry had
federal withholding of $2,800, Social Security withholding of $1,550 and Medicare withholding of
$363.
Jerry’s W-2 will reflect:
Box 1 - $22,000 ($25,000 gross wages less $3,000 ($2,500 elective deferral plus $500 catch-up
contribution))
Box 3 - $25,000 – The elective deferral and catch-up contributions are includable wages subject
to Social Security tax
Box 5 - $25,000 – Same as above with regard to the Medicare tax
Box 12 - D $3,000 – Elective deferral and catch-up contributions are combined in this box using
the proper retirement code (see W-2 instructions)
Box 13 - Check the Retirement plan box
Box 14 - $1,250 – Not mandatory
Exhibit 7.2-Nonqualiifed Plan
Form W-2
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Exhibit 7.3-Catch-Up Contributions
Form W-2
Distributions
Reporting of distributions from these plans must be made on Form 1099-R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,
rather than Form W-2. For each year the employee receives a payment from the plan, the plan
administrator or annuity provider is required to issue the employee a Form 1099-R no later than
January 31 of the following year.
Loans to employees from a plan may be considered distributions and taxable.
Note: On occasion, the annuity provider may send withholding from distributions to the plan
sponsor or employer. In these cases, the plan sponsor must file Form 945, Annual Return of
Withheld Federal Income Tax, to report the withheld amounts.
Indian Tribes and 403(b) Plans
Indian tribes and wholly owned tribal entities (with the exception of tribally owned public schools
and qualified 501(c)(3) organizations) do not currently qualify to establish a 403(b) plan for their
employees. Contributions to a 403(b) plan are not allowable and are not excludable from gross
income by the employees.
Tribes that entered into a contract for a 403(b) plan prior to January 1, 1995, are allowed to
continue the plan and make current contributions for the employees who were participating
before January 1, 1995, as if they were a 501(c)(3) organization. Current employee contributions
are excludable from the employee’s gross income as authorized in IRC Section 403(b)(1).
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If the tribe entered into a contract for a 403(b) plan after December 31, 1994, the plan is not
qualified under the IRC and the tribe should refer to the IRS Voluntary Correction Program,
which explains acceptable methods to voluntarily correct the situation. If the tribe ceases
contributions, this program explains how the tribe may receive a letter giving them 403(b) status
for prior years. There is a fee to participate in the program.
Form 5500
Most retirement plans covered by ERISA are required to file a Form 5500, Annual Return/Report
of Employee Benefit Plan. An exception to this requirement is a “governmental plan.”
IRC Section 414(d) provides that a “governmental plan” includes a plan established and
maintained for its employees by the government of the United States, by the government of any
state or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.
Certain plans of Indian tribal governments (ITG) are also governmental plans under 414(d).
Specifically, Section 906(a)(1) of the Pension Protection Act of 2006 (PPA) amended Section
414(d) to provide that the term ‘governmental plan’ includes a plan that is established and
maintained by an Indian tribal government (as defined in Section 7701(a)(40)), a subdivision
of an Indian tribal government (determined in accordance with Section 7871(d)), or an
agency or instrumentality of either, and all the participants of which are employees of the
entity substantially all of whose services as an employee are in the performance of essential
governmental functions but not in the performance of commercial activities (whether or not an
essential government function).
Notice 2006-89 provides that the IRS and Treasury anticipate issuing guidance on Section 414(d)
and that, until that guidance is issued, an ITG plan will be treated as satisfying the requirements
to be a governmental plan under Section 414(d) if it complies with those requirements based
on a reasonable and good faith interpretation of Section 906(a)(1) of PPA. Section III.B. of the
notice provides certain approaches that, if taken by September 30, 2007, permit separate plans
to be established for commercial ITG employees and for other ITG employees who perform
essential governmental functions (governmental ITG employees) under the reasonable and good
faith compliance standard. Section III.E. indicates that the relief provided in Section III applied
pending the issuance of further guidance relating to Section 414(d), including the amendment
made by PPA Section 906(a)(1).
Since the issuance of Notice 2006-89, the IRS and Treasury have continued to consult with
Indian tribal government representatives. Based on those consultations and the comments
received in response to Notice 2006-89, and until future guidance is issued, the transition relief
provided under Notice 2006-89 has been revised so that the date “September 30, 2007” in
Section III.B. of Notice 2006-89 was replaced with “the date that is six months after guidance
is issued under §414(d) of the Code, as amended by section 906 of the Pension Protection
Act of 2006, on the determination of whether a retirement plan maintained by an Indian tribal
government is a governmental plan with the meaning of §414 (d).”
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This extension is conditioned on the plans involved not being amended, for periods before the
extended date, to reduce benefits unless the reduction:
1) Does not vary based on whether the participant is a governmental Indian tribal government
employee or a commercial ITG employee, or
2) Is made to the plan for commercial ITG employees and is the minimum reduction necessary to
satisfy the requirements of the IRC.
If a reduction occurs that does not meet either of these conditions, the extension provided under
the notice ends on the date the reduction goes into effect.
References
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 15-T, Federal Income Tax Withholding Methods
Publication 505, Tax Withholding and Estimated Tax
Publication 560, Retirement Plans for Small Business
Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans)
Instructions for Forms W-2 and W-3
Announcement 2001-93, Reporting Elective Deferral Catch-up Contributions on the 2002
Form W-2
Form 5500, Annual Return/Report of Employee Benet Plan
40
Chapter 8
Cafeteria Plans
Section 125 of the Internal Revenue Code makes it possible for employers to offer their
employees a choice between cash and a variety of nontaxable benefits.
A cafeteria plan is a written benefit plan maintained by an employer for the benefit of its
employees. It provides participants an opportunity to receive certain benefits on a pre-tax basis.
The plan must allow employees to choose between two or more benefits consisting of cash (or a
taxable benefit which is treated as cash) and certain “qualified benefits.”
The written plan must include:
A specic description of each benet available under the plan and the period of coverage
The rules governing which employees are eligible to participate in the plan
The procedures for making elections under the plan, including:
` when elections may be made,
the rules governing irrevocability of elections, and
the periods for which elections are effective
The manner in which employer contributions may be made, such as by salary reduction
agreement between the employer and employee, by nonelective employer contributions or both
The maximum amount of employer contributions available to any participant
The plan year
Examples of qualified benefits of a cafeteria plan are:
Accident and health benets (but not Archer medical savings accounts or long-term care
insurance)
Adoption assistance
Dependent care assistance
Group-term life insurance coverage
Health savings accounts, including distributions to pay long-term care services
Filing Requirements
Contributions to a cafeteria plan are usually made under salary reduction agreements between
the employer and the employee in which the employee agrees to contribute a portion of his or
her salary on a pre-tax basis to pay for the qualified benefits. Salary reduction contributions
are not actually or constructively received by the employee. Therefore, those contributions are
not considered wages for federal income tax purposes. In addition, those sums generally are
not subject to FICA and FUTA. Employers may report the employee’s nontaxable cafeteria plan
benefits on the Form W-2, in box 14.
If you maintain a cafeteria plan, you must report on Form 5500 information about the plan each
year by the last day of the 7th month after the plan year ends.
References
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 15-B, Employer’s Tax Guide to Fringe Benets
Publication 15-T, Federal Income Tax Withholding Methods
Form 5500, Annual Return/Report of Employee Benet Plan
Publication 502, Medical and Dental Expenses
Publication 503, Child and Dependent Care Expenses
Form 8839, Qualied Adoption Expenses (attachment to Form 1040)
41
Chapter 9
Scholarships & Educational Assistance
Educational Assistance Programs
IRC Section 127 addresses educational assistance programs and whether this assistance should
be included in income. An educational assistance program must be a written plan that benefits
employees. The plan may not discriminate in favor of highly compensated employees.
Gross income of an employee does not include amounts paid or expenses incurred by the
employer for educational assistance to the employee. The income exclusion from employee
gross income is limited to $5,250 per employee in educational assistance during a calendar year.
The excludable amount is not subject to income tax withholding or other employment taxes. The
education need not be job-related.
For purposes of IRC Section 127, the term “educational assistance” means:
The payment, by an employer, of expenses incurred by or for an employee for the employee’s
education (including, but not limited to tuition, fees and similar payments, books, supplies and
equipment); and
The provision, by an employer, of courses of instruction for an employee (including books,
supplies and equipment), but does not include payment for or the provision of tools or supplies
which may be retained by the employee after completion of a course of instruction, or meals,
lodging or transportation. The term “educational assistance” also does not include any payment
for, or the provision of, any benets for any course or other education involving sports, games or
hobbies.
If you don’t have an educational assistance plan or you provide more than $5,250 to an
employee in annual education assistance, the payment is taxable unless it qualifies as a
“working condition” fringe benefit. See chapter 2, Publication 15-B, Employer’s Tax Guide to
Fringe Benefits, for more information.
Scholarships
A scholarship or fellowship grant is any amount paid or allowed to, or for the benefit of, an
individual to aid the individual in the pursuit of study or research. A scholarship may, for
example, be in the form of a reduction owed by the recipient to an educational organization for
tuition, room and board, or any other fee.
IRC Section 117 provides an exclusion from income for certain scholarships made to an
individual who is candidate for a degree. IRC Section 170 defines an educational institution as
an educational organization, which maintains a regular faculty, a curriculum and has a regularly
enrolled body of students on site.
Nontaxable Benefits
Only “qualified scholarships” may be excluded from income. Where participants are degree
candidates, these payments will ordinarily be excludable from the recipient’s gross income
to the extent of their qualified tuition and related expenses. The student may be either an
undergraduate or graduate.
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A qualified scholarship is defined as any amount expended for “qualified tuition and related
expenses,” which includes:
Tuition and fees required for the enrollment or attendance of a student at an eligible educational
institution.
Course-related expenses, such as fees, books, supplies and equipment that are required for the
courses at the eligible educational institution. These items must be required of all students in the
course of instruction.
Qualified education expenses do not include the cost of:
Room and board
Incidental living expenses
Travel
Research
Clerical help
Equipment and other expenses that are not required for enrollment in or attendance at an eligible
educational institution
This is true even if the fee must be paid to the institution as a condition of enrollment or
attendance. Thus, scholarship receipts that exceed expenses for “qualified tuition and
expenses” are not excludable from a recipient’s gross income (scholarship amounts used to pay
these costs are taxable).
The scholarship may be tax free only if the student is a candidate for a degree at an educational
institution. Thus, in the case of non-degree candidates, the entire amount of the scholarship is
includable in gross income of the recipient regardless of its use.
Reporting Taxable Scholarship Benefits
Do not issue Form 1099-MISC to report scholarship or fellowship grants. A scholarship or
fellowship grant represents payment for services when the grantor requires the recipient to
perform services in return for granting of the scholarship or fellowship. A requirement that the
recipient pursue studies, research or other activities primarily for the benefit of the grantor is
treated as a requirement to perform services.
A scholarship or fellowship grant conditioned on either past, present or future services by the
recipient, or on services that are subject to the direction or supervision of the grantor represents
payment for services and is considered wages.
The grantor of this amount is subject to certain withholding and reporting requirements on
wages, including withholding for income taxes and filing of Forms W-2. The application of Social
Security and Medicare taxes depends on the nature of the employment and the status of the
grantor.
Exceptions
You do not have to include in income the part of any scholarship or fellowship that represents
payment for teaching, research or other services if you receive the amount under the:
National Health Service Corps Scholarship Program, or
Armed Forces Health Professions Scholarship Financial Assistance Program.
You must also be a candidate for degree at an eligible educational institution, and use part of
the scholarship or fellowship to pay qualified education expenses.
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You are not required to report other taxable scholarship or fellowship payments (to a degree or
non-degree candidate) to the IRS on any form.
The recipient of these payments is responsible for determining whether the payment is, in whole
or in part, includable in gross income for federal income tax purposes.
You may wish to advise scholarship recipients that the amount of their scholarship or fellowship
stipends that exceeds their qualified tuition and related expenses, if any, is generally includible in
gross income for federal income tax purposes.
References:
Publication 15, (Circular E), Employer’s Tax Guide (Section 15, Special Rules for Various Types of
Services and Payments, for students)
Publication 15-A, Employer’s Supplemental Tax Guide (Section 5, Wages and Other
Compensation, Scholarship and Fellowship Payments)
Publication 15-B, Employer’s Tax Guide to Fringe Benets, (Section 2, Fringe Benet Exclusion
Rules, Working Condition Benets)
Publication 970, Tax Benets for Education
Instructions for Forms W-2 and W-3
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Chapter 10
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable tax credit for certain workers whose
earned income is below a certain level. Because it is a “credit,” the EITC is subtracted from the
amount of tax owed, if any, on the worker’s individual income tax return. As a refundable credit,
any excess over the total tax is refunded to the individual. Even workers who have not filed
a tax return in the previous year because their wages were below the minimum income level
requirements to file may be able to get the credit – but only if they file a tax return. Therefore,
you must notify each employee who worked for you at any time during the year, and from whom
you did not withhold any income tax about EITC.
You will meet the notification requirements by giving the employee either Notice 797, Possible
Federal Tax Refund Due to the Earned Income Credit (EIC), your own written statement as long
as it has the exact wording of Notice 797 or the official IRS Form W-2, Wage and Tax Statement,
which contains a statement on the back of Copy B. You do not need to notify employees
who claimed exemption from withholding on Form W-4, Employee’s Withholding Allowance
Certificate.
The amount of the credit depends on a worker’s wages and family size.
To claim the EITC, a worker must file a tax return. But many of the workers who are eligible for
the EITC do not ordinarily file tax returns because their incomes are too low to trigger any federal
tax liability. These workers may have had little or no exposure to the federal tax forms that
explain what the EITC is and how to claim it.
The IRS website provides extensive resources on the EITC for individuals, employers and tax
professionals.
References
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC)
45
Chapter 11
Employment Taxes
Employers must deposit and report employment taxes with the Internal Revenue Service.
Employment taxes are:
Amounts you should generally withhold from your employees’ wages for income, Social Security
and Medicare taxes, and
Matching amounts of Social Security and Medicare tax you pay on behalf of your employees.
Employer Identification Number
An employer identification number (EIN) is a nine-digit number that IRS assigns in the format
XX-XXXXXXX. It is used to identify the tax accounts of employers and certain other entities
that have no employees. The IRS uses the number to identify taxpayers that are required to file
various tax returns. EINs are used by employers, sole proprietors, corporations, partnerships,
nonprofit associations, trusts, estates of decedents, government agencies, certain individuals
and other business entities. Use your EIN on all the items that you send to the IRS and the
Social Security Administration (SSA).
If the employer does not already have an EIN, it will need to get one if the employer:
Pays wages to employees;
Is required to withhold taxes for non-wage payments;
Operates as a corporation, partnership; or
Files any of these tax returns:
employment;
excise;
fiduciary; or
alcohol, tobacco and firearms.
You can get an EIN by applying:
Online,
By fax, or
By mail.
Apply Online
The online EIN application is the preferred method for taxpayers to apply for and obtain an EIN.
Once the application is completed, the information is validated during the online session and
an EIN is issued immediately. The online application process is available for all entities whose
principal business, office or agency, or legal residence (in the case of an individual), is located in
the United States or U.S. Territories. The principal officer, general partner, grantor, owner, trustor,
must have a valid taxpayer identification number (Social Security number, EIN, or individual
taxpayer identification number) to use the online application.
Note: Taxpayers who apply for an EIN online have the option to view, print and save their EIN
assignment notice at the end of the session.
Apply by Fax
Taxpayers can fax the completed Form SS-4, Application for Employer Identification Number, to
the appropriate fax number (see Instructions for Form SS-4, Where to File or Fax) after ensuring
that the Form SS-4 contains all the required information. If it is determined that the entity needs
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a new EIN, one will be assigned using the procedures for the entity type. If the taxpayer’s fax
number is provided, a fax will be sent back with the EIN within four business days.
Apply by Mail
The processing time frame for an EIN application received by mail is four weeks. Ensure that the
Form SS-4 contains all the required information. If it is determined that the entity needs a new
EIN, one will be assigned using the procedures for the entity type and mailed to the taxpayer.
Find where to mail Form SS-4 in the Instructions for Form SS-4.
Other Important Information
Daily Limitation of an EIN
To ensure fair treatment for all taxpayers, the IRS limits EIN issuance to one per responsible
party per day. This limitation applies to all requests for EINs whether online or by fax or mail.
Form SS-4
When completing Form SS-4 Indian tribal governments should select the “Indian tribal
governments/enterprises” box on Line 9a, Type of entity. Designating this box will let IRS know
the entity’s status as a federally recognized Indian tribal government. This will reduce errors and
facilitate processing of tax returns by routing them to specially trained employees. It allows IRS
to code the returns so any questions will be directed to the IRS Indian Tribal Governments office.
Because it takes several weeks to receive an EIN after the Form SS-4 has been filed, apply for
the EIN well before tax returns are due. An EIN may be obtained sooner by using the online EIN
application process or by fax.
Federal Employment Taxes
Employment taxes represent the income, Social Security and Medicare (FICA) taxes withheld
from the wages of an employee plus the employer’s share of Social Security taxes and federal
unemployment (FUTA) taxes. The withheld (employee’s) portion of employment taxes is referred
to as “trust fund” taxes. FUTA is addressed later in this publication.
If the tribe is required to withhold income or Social Security and Medicare taxes, Form 941,
Employer’s Quarterly Federal Tax Return, reporting the amounts withheld must be filed. However,
other forms are used under certain circumstances.
Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, is used for to report
income tax withheld and Social Security and Medicare taxes on wages paid to farmworkers,
including household employees working in a private home on a for-prot farm.
Form 944, Employer’s Annual Federal Tax Return, is used for employers whose liability for Social
Security, Medicare and withheld federal income taxes for the calendar year is $1,000 or less.
Form 945, Annual Return of Withheld Federal Income Tax, is used to report income tax withheld
from non-payroll payments, such as pensions, IRAs, gambling winnings, Indian gaming prots
and backup withholdings.
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Alternative Signature Method (Revenue Procedure 2005-39).
Effective with returns filed after June 2005, corporate officers or duly authorized agents may
sign any of the following forms by facsimile (such as, by rubber stamp, mechanical device or
computer software program):
1) The Form 94X series,
2) Form 1042,
3) Form 8027,
4) Form CT-1, or
5) Any variant of the designated form (for example, Form 941-X).
Officers or agents using a facsimile means of signature are personally responsible for ensuring
that their facsimile signature is affixed to returns. The person filing the form must retain a letter,
signed by the officer or agent authorized to sign the return, declaring under penalties of perjury
that the facsimile signature appearing on the form is the signature adopted by the officer or
agent and that the facsimile signature was affixed to the form by the officer or agent or at the
officer’s or agent’s direction. The letter must list each return by name and identifying number.
The letter should not be sent to the IRS unless specifically requested. The letter must be
maintained for at least four years after the later of the due date of the tax as the return relates, or
the date the tax is paid.
For additional information, see:
Revenue Procedure 2005-39
Publication 15 (Circular E), Employer’s Tax Guide, explains the rules and methods of withholding,
paying, depositing and reporting federal income tax, Social Security and Medicare taxes and
federal unemployment (FUTA) tax on wages, tips and fringe benets. It also explains who is an
employee, what are taxable wages and what are taxable tips.
Publication 15-B, Employer’s Tax Guide to Fringe Benets, provides a more detailed discussion
of fringe benets and information on how to report third-party sick pay.
Publication 15-T, Federal Income Tax Withholding Methods, is a supplement to Pub 15 and Pub
51. It describes various methods of guring withholding and provides the Tables for Withholding
on distribution of Indian Gaming Prots to Tribal Members.
Form I-9, Employment Eligibility Verification
Form I-9, Employment Eligibility Verification, is used for verifying the identity and employment
authorization of individuals hired for employment in the United States. All U.S. employers must
ensure proper completion of Form I-9 for each individual they hire for employment in the United
States. This includes citizens and noncitizens. Both employees and employers (or authorized
representatives of the employer) must complete the form. On the form, an employee must attest
to his or her employment authorization. The employee must also present the employer with
acceptable documents evidencing identity and employment authorization. The employer must
examine the employment eligibility and identity documents an employee presents to determine
whether the documents reasonably appear to be genuine and relate to the employee and record
the document information on the Form I-9. The list of acceptable documents is on the last page
of the form. Employers must retain Form I-9 for a designated period and make it available for
inspection by authorized government officers.
Do not file Form I-9 with the U.S. Citizenship and Immigration Services (USCIS) or U.S.
Immigrations and Customs Enforcement (ICE). Employers must have a completed Form I-9 on
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file for each person on their payroll who is required to complete the form. Form I-9 must be
retained and stored by the employer either for three years after the date of hire or for one year
after employment is terminated, whichever is later. The form must be available for inspection by
authorized U.S. government officials from the Department of Homeland Security, Department of
Labor or Department of Justice.
For questions or more information on employer responsibilities, contact USCIS at 800-375-5283
or visit the Department of Homeland Security website (you may also download the Form I-9
from this link).
Form W-4, Employee’s Withholding Allowance Certificate
When employees are hired, the employer must have the employee complete a Form W-4,
Employee’s Withholding Allowance Certificate; the employer must have a Form W-4 on file for
each employee. The federal income taxes to be withheld is determined by the employee’s gross
wages and the information submitted by the employee on Form W-4.
This information includes:
Step 1, personal information and employee’s marital status,
Step 2, if applicable, to include a spouses job and/or employee’s multiple jobs
Step 3, claim dependents, if applicable,
Step 4, has options for reporting other income, deductions, and employee’s request to have
additional tax withheld, or claiming exemption from withholding by writing “Exempt” in the
space below 4c.
Ask each new employee to submit a signed Form W-4 by his or her first day of work. This Form
W-4 is effective with the first wage payment and lasts until the employee files a new W-4.
If an employee fails to provide a properly completed Form W-4, you must withhold federal
income taxes from the employee’s wages as if the employee were single and claiming no
dependents. If not enough tax is withheld and the employee has not provided a valid Form W-4
or has claimed an exemption from withholding, the employee may be subject to penalties.
An employee may want to change the number of dependents claimed or withholding rate (marital
status) on Form W-4 due to a marriage, a change in the number of dependents or a change in
the amount of itemized deductions or tax credits anticipated for the tax year. If you receive a
revised Form W-4 from an employee, you must put it into effect no later than the start of the first
payroll period ending on or after the 30th day from the date you received the revised Form W-4.
You must honor the request unless the situations described in the sections “Invalid Form W-4”
and “Lock-in Letters” below apply.
Exemption from Withholding
If an employee qualifies, Form W-4 is also used by the employee to tell you not to deduct any
federal income tax from the employee’s wages. To qualify for this exempt status, the employee
must have had no tax liability for the previous year and must expect to have no tax liability for
the current year. However, if the employee can be claimed as a dependent on a parent’s or
another person’s tax return, additional limitations may apply (see the instructions for Form W-4).
A Form W-4 claiming exemption from withholding is valid for only the calendar year in which it is
filed with the employer. To continue to be exempt from withholding in the next year, an employee
must give you a new Form W-4 claiming exempt status by February 15 of that year. If the
employee does not give you a new Form W-4, withhold tax as if the employee is single, with no
withholding allowances. However, if you have an earlier Form W-4 (not claiming exempt status)
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for this employee that is valid, then withhold with the information provided on this valid Form
W-4 until you receive a new one. The employee claims exempt status by writing “Exempt” in the
area beneath box 4c.
Note: Student status does not automatically exempt the employee from income tax withholding.
Invalid Form W-4
Any unauthorized change or addition to Form W-4 makes it invalid. This includes taking out
any language by which the employee certifies that the form is correct, material defacing of the
form or any writing on the form other than the entries requested. A Form W-4 is also invalid
if, by the date an employee gives it to the employer, the employee indicates in any way that it
is false. When you receive an invalid Form W-4, do not use it to determine federal income tax
withholding. Tell the employee that it is invalid and ask for another one. If the employee does
not provide a valid Form W-4, withhold taxes as if the employee is single and claiming no
withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid,
then withhold with the information provided on the valid Form W-4 until you receive a new one.
Lock-in Letters
The IRS uses information reported on Forms W-2 to identify employees with withholding
compliance problems. In some cases, where a serious under-withholding problem is found to
exist for a particular employee, the IRS may issue a notice (commonly referred to as a “lock-
in-letter”) to the employer specifying the withholding rate and maximum number of withholding
allowances permitted for a specific employee for purposes of calculating the required
withholding. The IRS will provide the employee with an opportunity to dispute the determination
before the employer will adjust the withholding based on the lock-in letter.
The IRS will send a letter to the employee explaining that the IRS will require you to start
withholding additional income tax unless the employee contacts the IRS to explain why the
employee should not have withholding increased. A toll-free number and address for the unit
handling this program will be provided in the letter. As an additional safeguard, you will also
receive a notice to provide to the employee.
After the lock-in letter takes effect, you must disregard any Form W-4 that results in less tax
withheld, until the IRS notifies you otherwise. However, you must honor any Form W-4 that
results in more income tax withheld than at the withholding rate and withholding allowances
specified in the lock-in letter. Employers who use electronic Form W-4 systems must make sure
the employee cannot override the lock-in letter to decrease withholding via an electronic Form
W-4 system. Lock-in letter provisions also apply to employees rehired within 12 months from the
date of the notice.
After the lock-in letter takes effect, if the employee wants to claim complete exemption from
withholding or claim a withholding rate, withholding allowances or an additional amount that
results in less income tax withheld than the lock-in letter, the employee must contact the IRS. A
toll-free number and address for the unit handling this program is provided in the lock-in letter.
Recordkeeping Requirements
After the employee completes and signs the Form W-4, you must keep it in your records for
at least 4 years (See Publication 15). This form serves as verification that you are withholding
federal income tax according to the employee’s instructions and needs to be available for
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inspection should the IRS request it. Form W-4 is still subject to review. You may be directed
(in a written notice or in future published guidance) to send certain Forms W-4 to the IRS. You
must be able to supply a hardcopy of an electronic Form W-4. Generally, Forms W-4 are for your
records. They need not be sent to IRS. For more information on withholding, see Publication
505, Tax Withholding and Estimated Tax.
Federal Income Tax
The wages paid to employees generally are subject to income tax withholding if their wages
for any payroll period are more than the dollar amount of their withholding allowances for that
period. The amount to be included is figured separately for each payroll period. Wages include
all pay the employer gives an employee for services performed. The pay may be in cash or in
other forms. It includes salaries, vacation allowances, bonuses, commissions and fringe benefits
not excluded by law. It does not matter how payments are measured or paid. Wages paid in
any form other than money (such as goods, lodging and meals) are measured by the fair market
value. See Publication 15-T for more information about income tax withholding.
The income tax to be withheld is figured on gross wages before any deductions are made
for Social Security and Medicare taxes. You may figure the withholding by different methods,
the most common of which are the percentage method and the wage bracket tables method.
Publication 15-T contains the income tax withholding tables and instructions for using both
of these withholding methods, and it gives more information on reporting and withholding
requirements on wages and tip income.
Social Security and Medicare Taxes
Under the Federal Insurance Contributions Act (FICA), employers must withhold Social Security
and Medicare taxes from wages that employees receive each payroll period.
Generally, meals, lodging, clothing, services and other payments in-kind are subject to Social
Security and Medicare taxes, as are wages paid in cash. However, meals are not taxable
wages if furnished for the employer’s convenience and on the employer’s premises. Lodging is
not taxable if furnished for the employer’s convenience, on the employer’s premises and as a
condition of employment.
The employer must withhold and deposit the employee’s part of the taxes and pay a matching
amount. The Social Security tax is withheld from the employee’s gross wages until the
employee’s cumulative wages for the year reach the wage base limit. Any wages above the wage
base limit are not subject to Social Security withholding. However, there is no wage base limit for
Medicare tax; all covered wages are subject to Medicare tax.
The United States has Social Security agreements with many countries that eliminate dual
taxation and coverage. Compensation subject to Social Security and Medicare taxes may be
exempt under one of these agreements. More information and a list of agreement countries can
be obtained from the Social Security Administration website.
Social Security and Medicare Tax for 2022
The current employee tax rate for Social Security is 6.2%. The employer tax rate for Social
Security is also 6.2%. The 2022 Social Security wage base limit is $147,000. The current
Medicare tax rate is 1.45% each for employers and employees. There is no wage base limit for
Medicare tax.
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Additional Medicare Tax
In addition to withholding Medicare tax at 1.45%, you must withhold a 0.9% Additional Medicare
Tax from wages paid to an employee in excess of $200,000 in a calendar year. You are required
to begin withholding the Additional Medicare Tax in the pay period in which you paid wages in
excess of $200,000 to an employee and continue to withhold it each pay period until the end
of the calendar year. Additional Medicare Tax is only imposed on the employee. There is no
employer share of Additional Medicare Tax. All wages subject to Medicare tax are subject to
Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold.
For the most current information on the Social Security, Medicare and Additional Medicare Tax
rates, see Publication 15, “What’s New” section.
How and When to Deposit Taxes
In general, you must deposit income tax withheld and both the employer and employee Social
Security and Medicare taxes. First, you must determine which deposit schedule to use. There
are two deposit schedules – monthly or semiweekly – for determining when you deposit Social
Security, Medicare and withheld income taxes. These schedules tell you when a deposit is due
after a tax liability arises (for example, when you have a payday).
Important Note:
Remember that Form 941 is a quarterly return, but deposits may be required on a monthly
or semiweekly schedule. Publication 509, Tax Calendars, assists employers in monitoring
due dates of deposits. Publication 509 has deposit due date schedules for both monthly and
semiweekly depositors. The calendars in this publication also include due dates for filing returns,
providing information returns to employees, and other important dates you need to know.
Lookback Period
The deposit schedule for a calendar year is determined from the total taxes reported on your
Form 941 (line 11) in a four-quarter lookback period. The lookback period for Form 941 filers
begins July 1 and ends June 30. See Publication 15, “Depositing Taxes” section for the table
that explains the lookback period for the current calendar year. If you reported $50,000 or less in
taxes for the lookback period, then you are a monthly schedule depositor; if you reported more
than $50,000, then you are a semiweekly schedule depositor.
Monthly Deposit Schedule
Under the monthly deposit schedule, deposit Form 941 taxes on payments made during a month
by the 15th day of the following month.
Note: If this is a new tribal entity, during the first calendar year the tax liability for each quarter
in the lookback period is considered to be zero. Therefore, this entity is considered a monthly
schedule depositor for the first calendar year of the business unless the $100,000 Next-Day
Deposit rule (discussed later) applies.
Semiweekly Deposit Schedule
The employer is a semiweekly schedule depositor for a calendar year if the total taxes on Form
941 during the lookback period was more than $50,000. If the payday falls on Wednesday,
Thursday or Friday, you must deposit the Form 941 taxes no later than the following Wednesday.
If the payday falls on Saturday, Sunday, Monday or Tuesday, deposit by Friday.
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Exhibit 11.1
Semiweekly Deposit Schedule
If the payday falls on a… Then deposit taxes by the following…
Wednesday, Thursday or Friday Wednesday
Saturday, Sunday, Monday or Tuesday Friday
Note: Semiweekly schedule depositors must complete Schedule B (Form 941), Report of Tax
Liability for Semiweekly Schedule Depositors, and submit it with Form 941.
$100,000 Next-Day Deposit Rule
If you accumulate $100,000 or more in taxes on any day during a monthly or semiweekly deposit
period, you must deposit the tax to be received by the IRS by the next business day, whether
you’re a monthly or semiweekly schedule depositor. This may mean that the deposit must be
made on the same day the liability is incurred. If this occurs before the end of the deposit period,
you must make the deposit of all liabilities up to that day and then start from zero the next day
and track for the rest of the deposit period.
If you are a monthly schedule depositor and accumulate a $100,000 tax liability on any day, you
become a semiweekly schedule depositor on the next day and remain so for of the remainder of
the calendar year and for the following calendar year.
Example of Next Day Deposit Rule
Elm, Inc., paid wages and accumulated a tax liability of $40,000 on Wednesday May 4. On
Friday, May 6, Elm, Inc., paid wages and accumulated a liability of $60,000. Up to this point,
Elm, Inc., has been a monthly scheduled depositor. Since Elm, Inc., has accumulated a $100,000
liability on May 6, it became a semi-weekly schedule depositor on May 7. Elm, Inc., will be a
semi-weekly schedule depositor for the remainder of the year and for the following year. Elm,
Inc., is required to deposit the $100,000 so IRS receives it by Monday, May 9, the next business
day. (See Depositing on Time below)
TIP: The $100,000 tax liability threshold requiring a next-day deposit is determined before you
consider any reduction of your liability for nonrefundable credits.
How to Deposit
You are required to deposit employment taxes by electronic funds transfer (EFT). Generally, an
EFT is made using the Electronic Federal Tax Payment System (EFTPS). If you do not want to
use EFTPS, then you can arrange for a tax professional, financial institution, payroll service or
other trusted third party to make electronic deposits for you. EFTPS is a free service provided
by the Department of Treasury. To get more information about EFTPS or to enroll in EFTPS, visit
www.eftps.gov, or call 800-555-4477. Additional information about EFTPS is also available in
Publication 966, Electronic Federal Tax Payment System – A Guide to Getting Started, and in
Publication 15, Chapter 11, “Depositing Taxes.”
For deposits made by EFTPS to be on time, you must submit the deposit by 8 p.m. Eastern time
the day before the date the deposit is due. If you use a third party to make a deposit for you, the
third party may have different cutoff times.
If you fail to submit a deposit transaction on EFTPS by 8 p.m. Eastern time the day before
the date a deposit is due, you can still make your deposit on time by using the Federal Tax
Chapter 11: Employment Taxes
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Collection Service (FTCS). To use the same-day wire payment method, you will need to make
arrangements with your financial institution ahead of time. Please check with the financial
institution regarding availability, deadlines and costs. The financial institution may charge a fee
for payments made this way. To learn more about the information needed to be provided to the
financial institution to make a same-day wire payment, visit www.irs.gov/e-pay and click on
“Same-day wire.”
Depositing on Time
For deposits made by EFTPS to be on time, you must submit the deposit by 8 p.m. Eastern time
the day before the date the deposit is due. If you use a third party to make a deposit on your
behalf, they may have different cutoff times. Regarding the Example of Next Day Deposit Rule
above, the deposit made by EFTPS must be submitted by 8 pm Eastern time on Friday, May 6 to
be meet the due date of Monday May 9.
Deposit Penalties
Penalties may apply if you do not make required deposits on time, if deposits are for less than
the required amount or if you do not make your deposits via EFT. The penalties do not apply
if any failure to make a proper and timely deposit was due to reasonable cause and not to
willful neglect. The IRS may also waive penalties if you inadvertently fail to deposit in the first
quarter you are required to deposit any employment tax, or in the first quarter during which the
frequency of deposits changed, if the employment tax return was timely filed. Always ensure that
tax deposits are timely. For amounts not properly or timely deposited, the penalty rates are:
2% - Deposits made 1 to 5 days late.
5% - Deposits made 6 to 15 days late.
10% - Deposits made 16 or more days late. Also applies to amounts paid within 10 days of the
date of the rst notice the IRS sent asking for the tax due.
10% - Amounts (that should have been deposited) paid directly to the IRS or paid with your tax
return. See Publication 15 for more exceptions.
15% - Amounts still unpaid more than 10 days after the date of the rst notice the IRS sent
asking for the tax due or the day on which you received notice and demand for immediate
payment, whichever is earlier.
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The following example illustrates how a monthly tax depositor would figure their deposit
requirements and due dates:
Period Ending Gross Wages *FICA
Withheld
*Employer’s
FICA
Income Tax
Withheld
Total Taxes
1/31 $4,800.00 $367.20 $367.20 $400.00 $1,134.40
2/28 $4,750.00 $363.38 $363.38 $406.00 $1,132.76
3/31 $4,200.00 $321.30 $321.30 $340.00 $982.60
Quarterly Totals $13,750.00 $1,051.88 $1,051.88 $1,146.0 0 $3,249.76
*Social Security and Medicare taxes are referred to as FICA
The monthly depositor must deposit each month’s taxes by the 15th of the following month
($1,134.40 by February 15; $1,132.76 by March 15 and $982.60 by April 15). If the total taxes
for all three months of the quarter had been less than $2,500, then the taxes could have been
deposited or paid with the Form 941 to be filed by April 30.
If you do not pay the withheld employment taxes (trust fund taxes), the IRS may take additional
collection action and may require you to:
File and pay employment taxes monthly rather than quarterly
Open a special bank account for depositing the withheld employment tax amounts, under
penalty of prosecution
See Publication 15 for more information.
Basic Federal Employment Tax Responsibilities
The following provides a brief summary of basic federal employment tax responsibilities.
Because the individual circumstances for each tribe can vary greatly, its responsibilities for
withholding, depositing and reporting employment taxes can differ.
New Employees:
Verify work eligibility of employees via Form I-9, Employment Eligibility Verication, (available for
download from U.S. Citizenship and Immigration Services or by calling 800-870-3676)
Record employee’s name and SSN from Social Security card
Ask employees for Form W-4, Employee’s Withholding Allowance Certicate
Each Payday:
Withhold federal income tax based on each employee’s Form W-4
Withhold employee’s share of Social Security and Medicare taxes
Deposit Requirements:
You may pay the income, Social Security and Medicare taxes with Form 941 if the total tax
liability for the quarter is less than $2,500 and the taxes are paid in full with a timely led return
If the total tax liability for the quarter is $2,500 or more deposits are required. See Publication 15,
for deposit requirements
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Quarterly (by April 30, July 31, October 31 and January 31):
File Form 941, Employer’s Quarterly Federal Tax Return
Annually:
For Employees:
Before December 1 - remind employees to submit a new Form W-4 if they need to change their
withholding
Reconcile amounts on Forms 941 with Forms W-2 and W-3
By January 31 - furnish each employee copies B, C and 2 of Form W-2
By January 31 - le Copy A of Forms W-2 via Form W-3 with the SSA if ling paper forms or ling
electronically
By February 15 - ask for a new Form W-4 from employees claiming exemption from income tax
withholding
For Independent Contractors:
By January 31 - furnish each recipient a Form 1099 (such as Form 1099-NEC). Form W-9 may be
used to secure the vendor’s taxpayer identication number (SSN or EIN).
By January 31 - le Form 945 for any nonpayroll income tax withholding, such as backup
withholding. See the Instructions for Form 945 for details on depositing nonpayroll income tax
withholding.
By January 31 - le Copy A of Forms 1099-NEC reporting nonemployee compensation in box 1
via transmittal Form 1096 with the IRS using either paper forms or ling electronically.
References:
IRS Tax Calendar for Businesses and Self-Employed
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 15-T, Federal Income Tax Withholding Methods
Publication 505, Tax Withholding and Estimated Tax
Publication 509, Tax Calendars
Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
Publication 519, U.S. Tax Guide for Aliens
Form W-4, Employee’s Withholding Allowance Certicate, Instructions
Publication 966, Electronic Federal Tax Payment System
Form I-9, Employment Eligibility Verication
Publication 1635, Understanding Your Employer Identication Number
Form SS-4, Application for Employer Identication Number
EIN Applications for Indian Tribal Governments and Their Entities: Video
Form, 1099-NEC, Nonemployee Compensation
Instructions Forms 1099-MISC and 1099-NEC
56
Chapter 12
Preparation of Payroll Checks
Payroll Files
In Chapter 11, Form W-4, Employee’s Withholding Allowance Certificate, and Form I-9,
Employment Eligibility Verification, are discussed. These are forms that employees may have
on file with your payroll department. It is important to maintain separate files for each employee
with the employee’s completed and signed payroll forms.
Payroll Records
Other employment tax records maintained in your payroll records are discussed in Publication
15. Payroll records should be retained for a minimum of four years. Those records include:
Notication of assignment of employer identication number (EIN) or other record of your EIN
Amounts and dates of all wage, annuity and pension payments
Amounts of tips reported
Records of allocated tips
Fair market value of in-kind wages paid
Names, addresses, Social Security numbers and occupations of employees and recipients
Any employee copies of Form W-2 that were returned to you as undeliverable
Dates of employment for each employee
Periods for which employees and recipients were paid while absent due to sickness or injury and
the amount and weekly rate of payments you or third-party payers made to them
Copies of employees’ and recipients’ income tax withholding allowance certicates (Forms W-4)
Dates and amounts of tax deposits made and acknowledgment numbers for deposits made
using the Electronic Federal Tax Payment System (EFTPS)
Copies of returns led and conrmation numbers
Records of fringe benets provided, including substantiation
Notice 797, Possible Federal Refund Due to Earned Income Tax Credit, or other proof of
notication of Earned Income Tax Credit (EITC) eligibility
Form I-9, Employment Eligibility Verication
Travel reimbursement plan for nonaccountable plans
Payroll Period
The payroll period is a span of time for which wages are paid. When you have a regular payroll
period, withhold income tax for that time period even if your employee does not work the full
period.
Each tribe or entity determines the dates on which it will pay its employees. Some entities have
weekly paydays, some on the first and fifteenth of the month (semimonthly), some pay every
other week (biweekly), some on a monthly basis and some at irregular intervals. Some entities
have different classes of workers (for instance, factory and office) who are paid at different
times. It is important to know the payroll period covered for each individual for each paycheck
that will be issued. Knowing the proper payroll period is one element to ensure that Social
Security, Medicare and federal income tax is withheld in the proper amounts from employee’s
wages. Publication 15 has a detailed discussion of this topic.
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Wages
Wages subject to federal employment taxes include all pay remitted to an employee for services
performed. The pay may be in cash or in other forms. It includes salaries, vacation allowances,
bonuses, commissions and fringe benefits. It doesn’t matter how the employer determines
or make the payments. Publication 15-A provides additional information on wages and other
compensation, including:
Adoption assistance
Awards
Back pay
Below-market loans
Cafeteria plans
Deferred compensation
Educational assistance
Group-term life insurance
Outplacement services
Retirement plans
Supplemental unemployment benets
A common item that must be included as wages is employee business expense reimbursement
that is under a nonaccountable plan. Accountable and nonaccountable plans are discussed in
Publication 463, Travel, Gift, and Car Expenses, and in Chapter 5 of this publication.
Unusual situations may be encountered in determining gross wages paid to an employee.
The general rule is all payments in cash, cash equivalents, goods and services are wages for
purposes of withholding. Publication 15-A is a good reference for determining what constitutes
wages.
Timekeeping
A manual or computerized timekeeping system is generally used to record the hours employees
worked during any given pay period. Some type of record will be given to the payroll department
as a voucher from which a paycheck will be generated. The timesheet or other voucher should
be signed by the appropriate party, or parties, and retained for recordkeeping purposes.
Once the payroll department is assured of proper reporting of time, it should be determined
if any miscellaneous items (as discussed above) should be included in the gross wage
computation. Gross wages are the dollar value of the total wages for the pay period. Gross
wages are the starting point for computing withholdings and net payroll.
Part-Time Workers
For income tax withholding and Social Security, Medicare and federal unemployment tax
(FUTA) purposes, there are no differences between full-time employees, part-time employees
and employees hired for short periods. It doesn’t matter whether the worker has another job
or has the maximum amount of Social Security tax withheld by another employer. Income tax
withholding may be figured the same way as for full-time workers, or it may be figured by the
part-year employment method explained in Publication 15-A.
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Review Payroll Records
After gross wages are computed for each employee, inspect the employee’s file to determine
federal and state (if applicable) income tax withholding allowances. You may be required to
withhold other items such as child support payments, wage garnishments by court order, federal
income tax wage levies, health insurance, charitable payroll deductions and other items. The
payroll department should retain copies of all items that support a deduction to an employee’s
wages for four years.
Federal Income Tax Withholding
To know how much federal income tax to withhold from employees’ wages, refer to the Form
W-4 on file for each employee. If a new employee does not give you a completed Form W-4,
withhold tax as if the employee is single, with no withholding allowances.
Generally, Form W-4 remains in effect until the employee submits a new one. If an employee
gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the
start of the first payroll period ending on or after the 30th day from the date you received the
replacement Form W-4.
Form W-4 claiming exemption for the previous calendar year expires on February 15. A new
Form W-4 is required annually if the employee claimed exemption from withholding. Begin
withholding for any employee who previously claimed exemption from withholding but hasn’t
given you a new Form W-4 by February 16 of the current year. Withhold based on the last valid
Form W-4 you have for the employee that doesn’t claim exemption from withholding or, if one
doesn’t exist, as if the employee is single with zero withholding allowances.
The amount of income tax withholding must be based on marital status and withholding
allowances. Employees may not base their withholding amounts on a fixed dollar amount or
percentage. However, an employee may specify a dollar amount to be withheld in addition to the
amount of withholding based on filing status and withholding allowances claimed on Form W-4.
Employees may claim fewer withholding allowances than they are entitled to claim. They may
wish to claim fewer allowances to ensure that they have enough withholding or to offset other
sources of taxable income that are not subject to adequate withholding.
An employee may claim exemption from income tax withholding because the employee had no
income tax liability last year and expects none this year. The Form W-4 instructions state that
you cannot claim exemption from withholding if your income exceeds a certain dollar threshold
and includes more than a certain dollar amount of unearned income (for example, interest and
dividends) and another person can claim you as a dependent on their tax return. See the Form
W-4 instructions for these dollar amounts. The wages are still subject to Social Security and
Medicare taxes.
In general, if wages are paid to nonresident aliens, then income tax (unless exempted by
regulations), Social Security and Medicare taxes must be withheld just as is completed for a
U.S. citizen. The general rules for nonresident aliens are found in Publication 515, Withholding of
Tax on Nonresident Aliens and Foreign Entities, and Publication 519, U.S. Tax Guide for Aliens.
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Social Security and Medicare Taxes
The Federal Insurance Contributions Act (FICA) provides for a federal system of old age,
survivors, disability and hospital insurance. The old age, survivors and disability insurance part
is financed by the Social Security tax. The hospital insurance part is financed by the Medicare
tax. Each of these taxes is reported separately.
Social Security and Medicare taxes are levied on both the employer and employees. The
employer must withhold and deposit the employee’s part of the taxes and must pay a matching
amount. Generally, employee wages are subject to Social Security and Medicare taxes
regardless of the employee’s age or whether he or she is receiving Social Security benefits.
Other Payroll Deductions
Before arriving at the employee’s net paycheck, the individual’s payroll folder must be reviewed
to determine if other amounts are required to be withheld. Many states require the employer to
withhold state income taxes. Income earned by members of an Indian tribe who live and work on
their reservation is generally not subject to state income tax. Contact your state tax authority for
information and instructions on their requirements.
Miscellaneous payroll deductions may include insurance, charitable items, union dues and
others. In each case, you should have an authorization signed by the employee to allow you
to make deductions from their wages and remit to the various organizations. Each signed
authorization should have instructions on when and where to remit payments. It’s important to
be able to account for each deduction from an employee’s paycheck.
There may be involuntary deductions from an employee’s paycheck such as a court ordered
judgment, a federal or state tax levy or court enforced child support payments. In these cases,
federal or state law requires the employer to make the deductions and remit them to the
appropriate agency, even if the employee disagrees with the process. Again, the employer is
required to keep all payroll records for at least four years.
Payroll Taxes
After you have computed payroll, you must calculate your payroll tax liability.
Federal income, Social Security and Medicare taxes are withheld from your employees’ pay.
Taxes withheld from employees’ pay make up what is known as “trust fund” taxes. They are
called trust fund taxes because you are entrusted to deposit the taxes withheld from your
employees’ wages with a federal depository. See Chapter 19 for more specific information on
trust fund penalties.
NOTE: As the employer, you are entrusted with the responsibility of remitting other payroll
deductions withheld from employees’ wages to the proper payee.
Net Paycheck
Once you ensure that you have computed the payroll correctly, then you’re ready to issue payroll
checks. You may want to use a computerized or manual payroll system to monitor the process.
Often, someone other than the payroll clerk is required to sign payroll checks as a matter of
internal control.
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Many computerized payroll systems automatically print a check stub with fields to list the gross
wages and each of the items deducted, with columns for the current pay period and year-to-date
totals for each category. If your system does not automatically track these items, then you may
want to design a spreadsheet to do so. Employees need to be able to reconcile these items from
time to time during the year to ensure that the proper amounts are being withheld.
Example 12.1
Sample Payroll Ledger Sheet for an Hourly Employee Paid Weekly For the Quarter
Ending March 31
Name SSN Address W-4 W-5
John Doe 123-45-6789 111 Elm St.
Anytown, USA
Married,
3 exemptions
None
Date Hrs. Hourly
Rate
Gross
Pay
Social
Security
Medicare
Federal
WH
State
WH
Insurance
Other Net Pay
January
Week 1 40 $10.00 $400.00 $24.80 $5.80 $7. 0 0 $4.00 $25.00 $0.00 $333.40
Week 2 38 $10.00 $380.00 $23.56 $5.51 $5.00 $4.00 $25.00 $0.00 $316.93
Week 3 40 $10.00 $400.00 $24.80 $5.80 $7. 0 0 $4.00 $25.00 $0.00 $333.40
Week 4 40 $10.00 $400.00 $24.80 $5.80 $7. 0 0 $4.00 $25.00 $0.00 $333.40
February
Week 5 38 $10.00 $380.00 $23.56 $5.51 $5.00 $4.00 $25.00 $0.00 $316.93
Week 6 38 $10.00 $380.00 $23.56 $5.51 $5.00 $4.00 $25.00 $0.00 $316.93
Week 7 40 $10.00 $400.00 $24.80 $5.80 $7. 0 0 $4.00 $25.00 $0.00 $333.40
Week 8 40 $10.00 $400.00 $24.80 $5.80 $7. 0 0 $4.00 $25.00 $0.00 $333.40
March
Week 9 32 $10.00 $320.00 $19.84 $4.64 $0.00 $2.00 $25.00 $0.00 $268.52
Week 10
31 $10.00 $310.00 $19.22 $4.50 $0.00 $0.00 $25.00 $0.00 $261.28
We ek 11
40 $10.00 $400.00 $24.80 $5.80 $7.0 0 $4.00 $25.00 $0.00 $333.40
Vacation
40 $10.00 $400.00 $24.80 $5.80 $7.0 0 $4.00 $25.00 $0.00 $333.40
Week 13
40 $10.00 $400.00 $24.80 $5.80 $7.0 0 $4.00 $25.00 $0.00 $333.40
Total
$4,970.00
$308.14 $72.07 $71.00 $46.00 $325.00 $0.00 $4,147.79
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Example 12.2
Sample Payroll Ledger Sheet for a Salaried Employee Paid Semi-Monthly
Name SSN Address W-4 W-5
John Doe 000-65-4321 111 Elm St.
Anytown, USA
Married,
2 exemptions
None
Date Semi-
Monthly
Salary
Gross
Pay
Social
Security
Medicare Federal
WH
State
WH
Insurance Other Net Pay
Jan 15 $900.00 $900.00 $55.80 $13.05 $32.00 $10.00 $35.00 $0.00 $754.15
Jan 31 $900.00 $900.00 $55.80 $13.05 $32.00 $10.00 $35.00 $0.00 $754.15
Feb 15 $900.00 $900.00 $55.80 $13.05 $32.00 $10.00 $35.00 $0.00 $754.15
Feb 28 $900.00 $900.00 $55.80 $13.05 $32.00 $10.00 $35.00 $0.00 $754.15
Mar 15 $900.00 $900.00 $55.80 $13.05 $32.00 $10.00 $35.00 $0.00 $754.15
Mar 31 $900.00 $900.00 $55.80 $13.05 $32.00 $10.00 $35.00 $0.00 $754.15
Total $5,400.00 $5,400.00 $334.80 $78.30 $192.00 $60.00 $210.00 $0.00 $4,524.90
References:
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 15-T, Federal Income Tax Withholding Methods
Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
Publication 519, U.S. Tax Guide for Aliens
Instructions, Form W-4
62
Chapter 13
Form 941, Employer’s Quarterly Federal Tax Return
Employers who withhold income taxes from wages or who must pay Social Security or Medicare
tax use Form 941 to report those taxes.
Due Dates for Filing Form 941
Form 941 is due by the last day of the month after each quarter ends. The return filing dates are:
Quarter Ends Due date
January, February, March March 31 April 30*
April, May, June June 30 July 31*
July, August, September September 30 October 31*
October, November, December December 31 January 31*
*If the due date for a return falls on a Saturday, Sunday or legal holiday, the due date is the next
business day.
If you paid the quarterly tax payments in full, you’re allowed an additional 10 days to file the
return. For example, your return for the quarter that ends June 30 would be due on August 10
instead of July 31.
Semiweekly schedule depositors, and monthly schedule depositors who accumulate $100,000
or more on any day, must complete a Schedule B (Form 941), Report of Tax Liability for
Semiweekly Schedule Depositors, and attach it to Form 941. You do not need to complete a
Schedule B if you accumulate less than $2,500 in tax liability during the quarter and you pay in
full with a timely filed return.
The IRS uses Schedule B to determine if you have timely deposited your employment and
withholding tax liabilities. Unless Schedule B is properly completed and filed with your Form 941,
the IRS may not be able to process your return correctly and deposit penalties could be applied.
Do not file more than one Form 941 per quarter and do not report more than one calendar
quarter on a return.
Seasonal employers are not required to file for quarters when they regularly have no tax liability
because they have paid no wages. To alert the IRS that you will not have to file a return for one
or more quarters during the year, check the seasonal employer box above line 16 on Form 941
each time you file. See section 12 of Publication 15 for more information.
If the tribe has an entity that ceases to do business or pay wages, a final return needs to be
filed. The instructions on Form 941 give information on how to file the final return.
Annual Employment Tax Filing for Small Employers
Certain employers will need to file Form 944, Employer’s Annual Federal Tax Return, instead of
Form 941. Form 944 must be filed by employers whose liability for Social Security, Medicare and
withheld federal income taxes for the calendar year is $1,000 or less. The IRS will directly notify
employers who are required to file Form 944. If you believe you are eligible but are not notified,
you can contact the IRS at 800-829-4933 to determine your eligibility. Do not file Form 944
unless directed to do so by the IRS.
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How to Complete the Form 941
Your EIN must be shown on the Form 941. If you have not received notification of your EIN, write
“Applied For” and the date you applied in the space provided for the EIN. Be sure to include your
name and EIN on the top of page 2 on the Form 941; this is commonly missed when completing
the Form 941.
Under “Report for this Quarter of 20XX” at the top of Form 941, check the appropriate box of
the quarter for which you are filing. Make sure the quarter checked is the same as shown on any
attached Schedule B (Form 941).
Make entries on Form 941 as follows to enable accurate scanning and processing:
Use 10-point Courier font (if possible) for all entries if you are typing or using a computer to
complete your form. Portable Document Format (PDF) forms on IRS.gov have fillable fields with
acceptable font specifications.
Do not enter dollar signs and decimal points. Commas are optional. Enter dollars to the left of the
preprinted decimal point and cents to the right of it.
Leave blank any data eld (except lines 1, 2 and 10) with a value of zero.
Enter negative amounts using a minus sign (if possible). Otherwise, use parentheses.
Enter your name and EIN on all pages and attachments.
Staple multiple sheets in the upper left corner when ling.
Where to File
Electronic Filing
You can electronically file (e-file) the form 941. Benefits of e-fling include saving you time, it
is secure and accurate, and you receive acknowledgement within 24 hours. If you wish to e-file
your employment tax form, then choose one of the two following options:
Option 1: Submitting the forms yourself. You will need to purchase IRS-approved software.
This list of providers offers options based on the relevant tax year. You may have to pay a f
see to electronically file the returns. The software will require your signature to e-file the
return. Depending on the software, you can apply for an online signature PIN. (allow
at least 45 days to receive your PIN) or scan and attach Form 8453-EMP, Employment Tax
Declaration for an IRS e file Return.
Option 2: Have a tax professional to file for you. Use the Authorized IRS e-file Provider
Locator Service to find a tax professional who can submit the forms for you.
If you are filing your return or paying your federal taxes electronically, a valid employer
identification number (EIN) is required at the time the return is filed or the payment is made.
Go to IRS.gov/e-file-employment for more information on electronic filing.
Paper Filing
If you file a paper return, where you file depends on where you are located and whether you
include a payment with Form 941. See the following chart to determine where to mail the return,
with or without payment. Private Delivery Services (PDS) cannot deliver to P.O. Boxes. You must
use the U.S. Postal Service to mail an item to a P. O. box address. Go to IRS.gov/PDS for the
current list of PDSs. For the IRS mailing address to use if you are using a PDS, go to www.irs.
gov/PDS street Addresses Payment with Return
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Payment of Tax Liabiity of Less Than $2500 for Quarter
You may make a payment with Form 941 instead of depositing it if your net tax liability during the
quarter (line 10 of Form 941) is less than $2,500 and you pay in full with a timely filed return. Use
Form 941-V, Payment Voucher. See Publication 15 for additional information and exceptions.
Note: Do not use the Form 941-V to make federal tax deposits.
Correcting Form 941
Corrections to a previously filed Form 941 must be made on Form 941-X, Adjusted Employer’s
Quarterly Federal Tax Return or Claim for Refund. Form 941-X is a stand-alone form
corresponding to, and relates line-by-line with, the employment tax return it is correcting. You
will be able to file Form 941-X when an error is discovered. You must:
Correct the error using Form 941-X
File a separate Form 941-X for each Form 941 to be corrected
File Form 941-X separately. Do not le with the Form 941
Form 941 no longer provides adjustment lines (formally lines 7d through 7g) for correcting prior
quarter errors. However, current period adjustments for fraction of cents, third-party sick pay,
tips and group-term life insurance will continue to be reported on Form 941 lines 7 through 9.
Report the correction of underreported and overreported amounts for the same tax period on
a single Form 941-X unless you are requesting a refund. If you are requesting a refund and are
correcting both underreported and overreported amounts file one Form 941-X correcting the
underreported amounts only and a second Form 941-X correcting the overreported amounts.
Mailing Addresses for Form 941 Without a payment ... With a payment ...
Connecticut, Delaware, District
of Columbia, Georgia, Illinois,
Indiana, Kentucky, Maine, Maryland,
Massachusetts, Michigan, New
Hampshire, New Jersey, New York,
North Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina,
Tennessee, Vermont, Virginia, West
Virginia, Wisconsin
Department of the Treasury
Internal Revenue Service
Kansas City,
MO 64999-0005
Internal Revenue Service
P.O. Box 806532 Cincinnati,
OH 45280-6532
Alabama, Alaska, Arizona, Arkansas,
California, Colorado, Florida, Hawaii,
Idaho, Iowa, Kansas, Louisiana,
Minnesota, Mississippi, Missouri,
Montana, Nebraska, Nevada, New
Mexico, North Dakota, Oklahoma,
Oregon, South Dakota, Texas, Utah,
Washington, Wyoming
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0005
Internal Revenue Service
P.O. Box 932100 Louisville,
KY 40293-2100
No legal residence or principal place
of business in any state
Internal Revenue Service
P.O. Box 409101 Ogden,
UT 84409
Internal Revenue Service
P.O. Box 932100 Louisville,
KY 40293-2100
Special filing address for exempt
organizations; federal, state, and
local governmental entities; and
Indian tribal governmental entities,
regardless of location
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0005
Internal Revenue Service
P.O. Box 932100 Louisville,
KY 40293-2100
Chapter 13: Form 941, Employer’s Quarterly Federal Tax Return
65
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Credit for COBRA premium assistance payments is limited to periods of coverage beginning
on or after April 1, 2021, through periods of coverage beginning on or before September 30,
2021. Section 9501 of the ARP provides for COBRA premium assistance in the form of a full
reduction in the premium otherwise payable by certain individuals and their families who elect
COBRA continuation coverage due to a loss of coverage as the result of a reduction in hours or
an involuntary termination of employment (assistance eligible individuals). This COBRA premium
assistance is available for periods of coverage beginning on or after April 1, 2021, through
periods of coverage beginning on or before September 30, 2021. A premium payee is entitled
to the COBRA premium assistance credit at the time an eligible individual elects coverage.
Therefore, due to the COBRA notice and election period requirements (generally, employers have
60 days to provide notice and assistance eligible individuals have 60 days to elect coverage),
some employers may be eligible to claim the COBRA premium assistance credit on employment
tax returns for the first quarter of 2022.
New Credit for COBRA Premium Assistance Payments
Credit for COBRA premium assistance payments is limited to periods of coverage beginning on or
after April 1, 2021, through periods of coverage beginning on or before September 30, 2021. Section
9501 of the ARP provides for COBRA premium assistance in the form of a full reduction in the
premium otherwise payable by certain individuals and their families who elect COBRA continuation
coverage due to a loss of coverage as the result of a reduction in hours or an involuntary termination
of employment (assistance eligible individuals). This COBRA premium assistance is available for
For more information on COBRA premium assistance payments and the credit, see Notice 2021-
31, 2021-23 I.R.B. 1173, Notice 2021-46, 2021-33 I.R.B. 303, Publication 15 and the Form 941
instructions.
References
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Form 941, Employer’s Quarterly Federal Tax Return, and Instructions
Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors
Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, and
Instructions
Form 944, Employer’s Annual Federal Tax Return, and Instructions
76
Chapter 14
Form 943, Agricultural Employees
Agricultural workers are subject to FICA tax if certain wage tests are met. Amounts paid to
seasonal farmworkers are excluded from FICA tax if specific provisions are met.
You are an employer of farmworkers if your employees:
Raise or harvest agricultural or horticultural products on a farm (including the raising and feeding
of livestock)
Work in connection with the operation, management, conservation, improvement or maintenance
of your farm and its tools and equipment
Provide services relating to salvaging timber, or clearing land of brush and other debris, left by a
hurricane (also known as hurricane labor), if the major part of the service is performed on a farm
Handle, process or package any agricultural or horticultural commodity if you produced over half
of the commodity (for a group of up to 20 unincorporated operators, all the commodity)
Perform work related to cotton ginning, turpentine, gum resin products or the operation and
maintenance of irrigation facilities
The term “farm” includes stock, dairy, poultry, fruit, fur-bearing animal and truck farms, as well
as plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily
for the raising or harvesting of agricultural or horticultural commodities and orchards.
Farmwork does not include reselling activities that do not involve any substantial activity of
raising agricultural commodities, such as a retail store or a greenhouse used primarily for display
or storage. Refer to the How Do Employment Taxes Apply to Farmwork? table within Publication
51, (Circular A), Agricultural Employer’s Tax Guide, to distinguish between farm and nonfarm
activities.
Crew Leaders
A crew leader is a person who furnishes and pays workers to do farmwork for a farm operator. A
crew leader must pay the workers on his/her behalf, or for the farm operator and the crew leader
must not have a written agreement with the farm operator stating that he or she is an employee.
If you are a crew leader, you are an employer of farmworkers.
Taxable Wages
Cash wages you pay to employees for farmwork are subject to Social Security and Medicare
taxes, if the wages meet the wage test (discussed below). They are also subject to income tax
withholding. Additionally, they may also be liable for federal unemployment (FUTA) tax.
Cash wages include checks, money orders, etc. Do not count the value of food, lodging and
other noncash items. For more information on what payments are considered taxable wages,
see Publication 15.
Wage Test
All cash wages you pay to an employee during the year for farmwork are subject to Social
Security and Medicare taxes and income tax withholding if:
1) You pay cash wages to an employee of $150 or more in a year for farmwork (count all cash
wages paid on a time, piecework or other basis). The $150 test applies separately to each
farmworker that you employ. If you employ a family of workers, each member is treated
separately. Don’t count wages paid by other employers. Or
Chapter 14: Form 943, Agricultural Employees
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2) The total you pay for farmwork (cash and noncash) to all your employees is $2,500 or more
during the year.
Example 1: A tribe is the owner of a local mushroom farm. The tribe paid their employees to
plant mushrooms. John was paid $95, Tom was paid $175 and Kirk $900. The tribe had no other
employees on the farm. Wages paid to Tom and Kirk were subject to FICA tax because they met
the $150 or more requirement. John’s wages were not subject to FICA because he did not meet
the wage requirement.
Exceptions: The $150 and $2,500 test do not apply to:
Wages you pay to a farmworker who receives less than $150 in annual cash wages are not
subject to Social Security and Medicare taxes, or income tax withholding, even if you pay $2,500
or more in that year to all your farmworkers, if the farmworker:
a) Is employed in agriculture as a hand-harvest laborer,
b) Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of
employment,
c) Commutes daily from his or her home to the farm, and
d) Had been employed in agriculture less than 13 weeks in the preceding calendar year.
Amounts you pay to these seasonal farmworkers, however, count toward the $2,500-or-more
test to determine whether wages you pay to other farmworkers are subject to Social Security
and Medicare taxes.
Example 2: A tribe, a local avocado grower, hired Marion, a high school student, to harvest
a new crop of avocados. Marion, who had never harvested avocados before, was paid by the
pound as is customary in the industry. Marion was transported by a bus provided by the tribe
from her home to the farm. She was given instructions by the tribe on where and how to harvest
the avocados. The tribe inspected and approved the avocados that Marion harvested. Marion
earned $125.
The amount Marion earned is not subject to FICA tax based on the provision of IRC Section
3121(a)(8)(B). This exception to FICA tax applies regardless of the fact that Marion had the status
of common law employee.
Employers of Both Farm and Nonfarm Workers
If you employ both farm and nonfarm workers, you must treat employment taxes for the
farmworkers (Form 943) separately from employment taxes for the nonfarm workers (Form 941
and Form 944). Form 943 taxes and Form 941/944 taxes are not combined for applying any of
the deposit schedule rules.
Due Date of Form 943
Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, should be filed
with the IRS by January 31, unless a weekend day or holiday, then due the next business day.
However, if you deposited all Form 943 taxes when due, you may file Form 943 in February;
check the Form 943 instructions for the specific date.
Chapter 14: Form 943, Agricultural Employees
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Depositing Taxes
You are required to make federal tax deposits by electronic funds transfer (EFT). Generally, an
EFT is made using the Electronic Federal Tax Payment System (EFTPS). If you do not want to
use EFTPS, you can arrange for your financial institution, payroll service or other trusted third-
party to make electronic deposits for you. Also, you may arrange for your financial institution to
initiate a same-day wire payment for you. EFTPS is a free service provided by the Department of
Treasury. EFT services provided by your financial institution, payroll service or other third-party
may have a fee. To get more information about EFTPS or to enroll in EFTPS, visit www.eftps.gov
or call 800-555-4477.
You must deposit both the employer and employee shares of Social Security and Medicare
taxes and federal income tax withheld.
Making Payment with Form 943
Make a payment with your Form 943 only if:
1) You report less than a $2,500 tax liability for the year (Form 943, line 11) and you pay in full
with a return that is filed on time, or
2) You are a monthly schedule depositor making a payment in accordance with the Accuracy of
Deposits Rule. (See Publication 51 Section 7, Depositing Taxes, for more details.) This amount
may be $2,500 or more.
Otherwise, you must deposit the amount at an authorized financial institution or by using EFT.
Do not use Form 943-V, Payment Voucher, to make federal tax deposits.
Caution: If you pay an amount with Form 943 that should have been deposited, you may be
subject to a penalty.
For more information about depositing Social Security, Medicare and income taxes withheld, see
Publication 51 Section 7, Depositing Taxes. Publication 51 also contains information about penalties
that may apply if deposits are not made on time and/or if the Form 943 is not filed timely.
Where to File
Electronic Filing
You can electronically file (e-file) the form 943. Benefits of e-fling include saving you time, it
is secure and accurate, and you receive acknowledgement within 24 hours. If you wish to e-file
your employment tax form, then choose one of the two following options:
Option 1: Submitting the forms yourself. You will need to purchase IRS-approved software.
This list of providers offers options based on the relevant tax year. You may have to pay a
fee to electronically file the returns. The software will require your signature to e-file the
return. Depending on the software, you can apply for an online signature PIN. (allow
at least 45 days to receive your PIN) or scan and attach Form 8453-EMP, Employment Tax
Declaration for an IRS e file Return.
Option 2: Have a tax professional to file for you. Use the ] Authorized IRS e-file Provider
Locator Service to find a tax professional who can submit the forms for you.
If you are filing your return or paying your federal taxes electronically, a valid employer
identification number (EIN) is required at the time the return is filed or the payment is made. Go
to IRS.gov/e-file-employment for more information on electronic filing.
Chapter 14: Form 943, Agricultural Employees
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Paper Filing
If you file a paper return, where you file depends on where you are located and whether you
include a payment with Form 943. See the following chart to determine where to mail the return,
with or without payment. Private Delivery Services (PDS) cannot deliver to P.O. Boxes. You must
use the U.S. Postal Service to mail an item to a P. O. box address. IRS.gov/PDS for the current
list of PDSs. For the IRS mailing address to use if you are using a PDS, go to www.irs.gov/
PDSstreetAddresses
Mailing Addresses for Form 941 Without a payment ... With a payment ...
Connecticut, Delaware, District
of Columbia, Georgia, Illinois,
Indiana, Kentucky, Maine, Maryland,
Massachusetts, Michigan, New
Hampshire, New Jersey, New York,
North Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina,
Tennessee, Vermont, Virginia, West
Virginia, Wisconsin
Department of the
Treasury Internal Revenue
Service Kansas City,
MO 64999-0005
Internal Revenue
Service P.O. Box 806532
Cincinnati,
OH 45280-6532
Alabama, Alaska, Arizona, Arkansas,
California, Colorado, Florida, Hawaii,
Idaho, Iowa, Kansas, Louisiana,
Minnesota, Mississippi, Missouri,
Montana, Nebraska, Nevada, New
Mexico, North Dakota, Oklahoma,
Oregon, South Dakota, Texas, Utah,
Washington, Wyoming
Department of the
Treasury Internal Revenue
Service Ogden,
UT 84201-0005
Internal Revenue
Service P.O. Box 932100
Louisville,
KY 40293-2100
No legal residence or principal place
of business in any state
Internal Revenue Service
P.O. Box 409101 Ogden,
UT 84409
Internal Revenue
Service P.O. Box 932100
Louisville,
KY 40293-2100
Special filing address for exempt
organizations; federal, state, and
local governmental entities; and
Indian tribal governmental entities,
regardless of location
Department of the
Treasury Internal Revenue
Service Ogden,
UT 84201-0005
Internal Revenue
Service P.O. Box 932100
Louisville,
KY 40293-2100
See Publication 51 for more complete information on agricultural workers. There are special
rules for Social Security and Medicare withholding on agricultural workers. Refer to Section 4,
Social Security and Medicare Taxes, and Publication 15-T, Federal Income Tax Withholding
Methods.
Correcting Form 943
Corrections to a previously filed Form 943 must be made on Form 943-X, Adjusted Employer’s
Annual Federal Tax Return for Agricultural Employees or Claim for Refund. Form 943-X is a
stand-alone form that corresponds to, and relates line-by-line with, the employment tax return it
is correcting. You will be able to file Form 943-X when an error is discovered, rather than having
to wait to file it at the end of the year with the next employment tax return. You must:
Correct the error using Form 943-X.
File a separate Form 943-X for each prior year you are correcting.
File Form 943-X separately. Do not le with the Form 943.
Explain the error being corrected on Form 943-X, indicate when the error was discovered and
provide the applicable certications.
Chapter 14: Form 943, Agricultural Employees
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Report the correction of underreported and overreported amounts for the same tax period on
a single Form 943-X unless you are requesting a refund or abatement. If you are requesting a
refund or abatement and are correcting both underreported and overreported amounts, file one
Form 943-X correcting the underreported amounts only and a second Form 943-X correcting the
overreported amounts.
Use Form 843, Claim for Refund and Request for Abatement, to request a refund or abatement
of assessed interest or penalties. Do not request a refund or abatement of assessed interest or
penalties on Form 943 or Form 943-X.
Follow the chart on the back of Form 943-X for help in choosing whether to use the adjustment
process or the claim process.
Continue to report current year adjustments for fraction of cents, third-party sick pay, tips and
group-term life insurance on Form 943, line 10.
References
Publication 51, (Circular A), Agricultural Employer’s Tax Guide
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-T, Federal Income Tax Withholding Methods
Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees
Form 943-X, Adjusted Employer’s Annual Federal Tax Return for Agricultural Employees or Claim
for Refund
81
Chapter 15
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Beginning January 1, 2000, Indian tribes are not required to file Form 940, Employer’s
Annual Federal Unemployment (FUTA) Tax Return, as long as they participate in the State
Unemployment Tax Act (SUTA).
Services rendered by employees of a federally recognized Indian tribal government employer
(including any subdivision, subsidiary or business enterprise wholly owned by the tribe) are
exempt from FUTA tax and no Form 940 is required. However, the tribe must have participated in
the state unemployment system for the full year and be in compliance with state unemployment
law.
This applies to all enterprises wholly owned by an Indian tribe whether or not they might
compete with similar private businesses. This also includes entities that are jointly owned by two
or more tribes providing they are wholly owned. If an enterprise is jointly owned by an Indian
tribe and another entity that is not tribally owned, then this entity would not be exempt from
paying FUTA. In other words, the enterprise must be owned 100% by the tribe or tribes. There
are certain services that may be excluded from the required coverage. See Publication 15 or
Publication 15-A for a list of these exceptions.
States must give Indian tribes the option to elect the reimbursement method rather than paying
the SUTA tax (tax contribution method). Employers electing the reimbursement option are
required to reimburse the Unemployment Fund on a dollar-for-dollar basis for benefits paid
to their former employees and charged to their accounts. This requirement applies to benefit
payments that are calculated based on remuneration paid to employees on or after the date the
election becomes effective.
If a tribe wishes to use the reimbursement option, each of its subdivisions, subsidiaries and
wholly-owned business enterprises will need to make a separate election as to whether to
use the reimbursement method. Some entities may find the tax contribution method more
advantageous to its particular enterprise.
Two or more wholly-owned tribal enterprises can elect the benefit reimbursement option as a
group for sharing the cost of benefits paid to former employees. The members of the group will
be severally and jointly liable for reimbursement.
States may enact safeguards (including requiring the tribe to post a payment bond) to ensure
that tribes using the reimbursement method make the required payments to the state. For state
specific information on unemployment benefits, employment assistance or employer information,
visit the Office of Workforce Security website.
However, whether a tribe uses the reimbursement method or the tax contribution method to pay
SUTA, if the tribe fails to make required payments to the state’s unemployment fund or payments
of penalty or interest, then the state may terminate the tribe from the program. This would result
in tribal employees not being covered for unemployment insurance.
States are not required to terminate coverage due to nonpayment. This is generally done only
as a last resort because termination of coverage punishes workers who have no control over
whether their employers satisfy their unemployment compensation obligations.
The law requires states to notify the IRS and the U.S. Department of Labor when the state
terminates the tribe from coverage due to nonpayment.
Chapter 15: Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
82
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Once the IRS is notified that the tribe is in noncompliance with the state, the tribe will become
liable for FUTA taxes and will be required to file Form 940 with the IRS.
Form 940 is an annual return, due on January 31 of the subsequent year. However, if you
deposited all FUTA tax when due, you have 10 additional days to file. If the due date falls on a
Saturday, Sunday or legal holiday, the due date will be the next business day.
The FUTA tax rate is 6% on the first $7,000 of wages you pay each employee during the year.
Only the employer pays the FUTA tax. Do not collect or deduct it from your employees’ wages.
Although Form 940 covers a calendar year, you may have to make deposits of the tax
before filing the return. Deposit FUTA tax quarterly if the FUTA tax exceeds $500. For more
information on FUTA taxes and for assistance with filing Form 940, see Publication 15 and
Publication 15-A.
Note: When a tribe is required to file Form 940 due to failure to meet state unemployment
program requirements, tribal employees will not be eligible for unemployment compensation
benefits, even though the tax per the Form 940 is paid. In essence, the tribe’s employees will
not receive unemployment compensation benefits when they otherwise would be eligible.
Unemployment Insurance
The Federal-State Unemployment Insurance Program provides unemployment benefits to
eligible workers who are unemployed through no fault of their own (as determined by state law)
and meet other eligibility requirements of state law.
Unemployment insurance payments (benets) are intended to provide temporary nancial
assistance to unemployed workers who meet the requirements of state law.
Each state administers a separate unemployment insurance program within guidelines
established by federal law.
Eligibility for unemployment insurance, benet amounts and the length of time benets
areavailable are determined by the state law under which unemployment insurance claims
areestablished.
In the majority of states, benet funding is based solely on a tax imposed on employers. (Three
states require minimal employee contributions.)
Employers should contact their state’s unemployment tax agency to find out whether they
owe state unemployment tax. For a list of state unemployment tax agencies, visit the U.S.
Department of Labor’s website.
What are Unemployment Compensation Wages?
Wages subject to unemployment compensation (UC) vary from state to state because each
state has a different method for computing UC. States may base the UC on a wage base and
an experience rate.
A state experience rate is the rate at which the state taxes your payroll for UC. This rate may
be adjusted from time to time based on the number and length of claims for unemployment
compensation that your former employees make against the fund. If you don’t know your
rate, contact your state employment security agency. Each state may have a different wage
base upon which the UC is computed. This rate can vary from year to year. It may also vary,
depending on the duties performed.
Chapter 15: Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
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Example: A state’s current wage base subject to UC is $10,100. The UC program has assigned
the tribe an experience rate of 1%, based on the employment history of the tribe. The tribe would
pay a maximum of $10,100 x .01 or $101 per year for each employee subject to UC.
What if Wages are not Paid in Cash?
If you pay your employees in some form other than cash or a readily negotiable instrument (such
as a check), you pay them “in-kind.” Payments in-kind may be in the form of goods, lodging, food,
clothing or services. Generally, wages paid in-kind are treated the same as wages paid in money.
The value of a wage payment in-kind is its fair market price on the day the payment is made.
References
Publication 15, (Circular E), Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and Instructions
84
Chapter 16
Form 945, Annual Return of Withheld Federal Income Tax
Purpose of Form 945
Use Form 945 to report withheld federal income tax from nonpayroll payments. Nonpayroll
payments include:
Pensions (including distributions from tax-favored retirement plans, for example, Section 401(k),
Section 403(b) and governmental Section 457(b) plans) and annuities
Military retirement
Gambling winnings
Indian gaming prots
Voluntary withholding on certain government payments
Voluntary withholding on dividends and other distributions by an Alaska Native Corporation
Backup withholding
Report all federal income tax withholding from nonpayroll payments or distributions annually on
one Form 945. Do not file more than one Form 945 for any calendar year.
All federal income tax withholding reported on Forms 1099 (for example, Form 1099-MISC,
Miscellaneous Income) or Form W-2G, Certain Gambling Winnings, must be reported on Form
945. Don’t report federal income tax withholding from wages on Form 945.
All employment taxes and federal income tax withholding reported on Form W-2 must be
reported on Form 941, Employer’s Quarterly Federal Tax Return, Form 944, Employer’s Annual
Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural
Employees.
Due Date for Filing Form 945
If you withhold federal income tax (including backup withholding) from nonpayroll payments, you
must file Form 945. You do not have to file Form 945 for those years in which you do not have a
nonpayroll tax liability.
Form 945 is generally due by the last of the first calendar month after the calendar year ends (for
2022, file Form 945 by January 31, 2023). However, if you made deposits on time in full payment
of the taxes for the year, you are allowed an additional 10 days to file the return. Your return
will be considered timely filed if it is properly addressed and mailed first-class or sent by an
IRS-designated private delivery service on or before the due date. See Publication 15 for more
information on IRS-designated private delivery services.
Where to File Form 945
Electronic Filing
You can electronically file (e-file) the form 945. Benefits of e-fling include saving you time, it
is secure and accurate, and you receive acknowledgement within 24 hours. If you wish to e-file
your employment tax form, then choose one of the two following options:
Option 1: Submitting the forms yourself. You will need to purchase IRS-approved software.
This list of providers offers options based on the relevant tax year. You may have to pay a
fee to electronically file the returns. The software will require your signature to e-file the
return. Depending on the software, you can apply for an online signature PIN. (allow
Chapter 16: Form 945, Annual Return of Withheld Federal Income Tax
85
www.irs.gov/tribes
at least 45 days to receive your PIN) or scan and attach Form 8453-EMP, Employment Tax
Declaration for an IRS e file Return.
Option 2: Have a tax professional to file for you. Use the Authorized IRS e-file Provider
Locator Service to find a tax professional who can submit the forms for you.
If you are filing your return or paying your federal taxes electronically, a valid employer
identification number (EIN) is required at the time the return is filed or the payment is made. Go
to IRS.gov/e-file-employment, for more information on electronic filing.
Paper Return Filing
If you file a paper return, where you file depends on where you are located and whether you
include a payment with Form 945. See the following chart to determine where to mail the return,
with or without payment. Private Delivery Services (PDS) cannot deliver to P.O. Boxes. You must
use the U.S. Postal Service to mail an item to a P. O. box address. Go to IRS.gov/PDS for the
current list of PDSs. For the IRS mailing address to use if you are using a PDS, go to IRS.gov/
PDSstreetAddresses.
Mailing Addresses for Form 941 Without a payment ... With a payment ...
Connecticut, Delaware, District
of Columbia, Georgia, Illinois,
Indiana, Kentucky, Maine, Maryland,
Massachusetts, Michigan, New
Hampshire, New Jersey, New York,
North Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina,
Tennessee, Vermont, Virginia, West
Virginia, Wisconsin
Department of the Treasury
Internal Revenue Service
Kansas City,
MO 64999-0005
Internal Revenue
Service P.O. Box 806532
Cincinnati,
OH 45280-6532
Alabama, Alaska, Arizona,
Arkansas, California, Colorado,
Florida, Hawaii, Idaho, Iowa,
Kansas, Louisiana, Minnesota,
Mississippi, Missouri, Montana,
Nebraska, Nevada, New Mexico,
North Dakota, Oklahoma, Oregon,
South Dakota, Texas, Utah,
Washington, Wyoming
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0005
Internal Revenue
Service P.O. Box 932100
Louisville,
KY 40293-2100
No legal residence or principal
place of business in any state
Internal Revenue Service
P.O. Box 409101
Ogden, UT 84409
Internal Revenue
Service P.O. Box 932100
Louisville,
KY 40293-2100
Special filing address for exempt
organizations; federal, state, and
local governmental entities; and
Indian tribal governmental
entities, regardless of location
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0005
Internal Revenue
Service P.O. Box 932100
Louisville,
KY 40293-2100
Depositing Withheld Taxes
Deposit all nonpayroll (Form 945) withheld federal income tax, including backup withholding, by
EFT. Combine all Form 945 taxes for deposit purposes. Do not combine deposits for Forms 941,
943 or 944 with deposits for Form 945.
Generally, the deposit rules that apply to Form 941 also apply to Form 945. However, because
Form 945 is an annual return, the rules for determining your deposit schedule (discussed below)
Chapter 16: Form 945, Annual Return of Withheld Federal Income Tax
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are different from those for Form 941. See section 11 of Publication 15 for a detailed discussion
of the deposit rules.
Determining Your Deposit Schedule
There are two deposit schedules—monthly or semiweekly—for determining when you must
deposit withheld federal income tax. These schedules tell you when a deposit is due after a tax
liability arises (that is, you make a payment subject to federal income tax withholding, including
backup withholding). Before the beginning of each calendar year, you must determine which of
the two deposit schedules you must use.
For 2022, you are a monthly schedule depositor for Form 945 if the total tax reported on your
2020 Form 945 (line 3) was $50,000 or less. If the total tax reported for 2020 was more than
$50,000, you are a semiweekly schedule depositor (use Form 945-A to record semiweekly tax
liabilities).
Semiweekly Deposit Schedule
If the payday falls on a… Then deposit taxes by the following…
Wednesday, Thursday or Friday Wednesday
Saturday, Sunday, Monday or Tuesday Friday
Note: Semiweekly schedule depositors must complete 945-A, Annual Record of Federal Tax
Liability, and submit it with Form 945.
$100,000 Next-Day Deposit Rule
If you accumulate $100,000 or more in taxes on any day during a monthly or semiweekly deposit
period, you must deposit the tax to be received by the IRS by the next business day, whether
you’re a monthly or semiweekly schedule depositor. This may mean that the deposit be made on
the same day as the liability is incurred.
If you are a monthly schedule depositor and accumulate a $100,000 liability or more on any day
during a calendar month, your deposit schedule changes on the next day to semiweekly for the
remainder of the year and for the following year. For more information, see the $100,000 Next-
Day Deposit Rule in section 11 of Publication 15.
Example of Next Day Deposit Rule
Elm, Inc., paid wages and accumulated a tax liability of $40,000 on Wednesday May 4. On
Friday, May 6, Elm, Inc., paid wages and accumulated a liability of $60,000. Up to this point,
Elm, Inc., has been a monthly scheduled depositor. Since Elm, Inc., has accumulated a $100,000
liability on May 6, it became a semi-weekly schedule depositor on May 7. Elm, Inc., will be a
semi-weekly schedule depositor for the remainder of the year and for the following year. Elm,
Inc., is required to deposit the $100,000 so the IRS receives it by Monday, May 9, the next
business day.
(See Depositing on Time below)
TIP: The $100,000 tax liability threshold requiring a next-day deposit is determined before you
consider any reduction of your liability for nonrefundable credits.
How to Deposit
You are required to deposit employment taxes by electronic funds transfer (EFT). Generally, an
EFT is made using the Electronic Federal Tax Payment System (EFTPS). If you do not want to
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use EFTPS, then you can arrange for a tax professional, financial institution, payroll service or
other trusted third party to make electronic deposits for you. EFTPS is a free service provided
by the Department of Treasury. To get more information about EFTPS or to enroll in EFTPS, visit
www.eftps.gov, or call 800-555-4477. Additional information about EFTPS is also available in
Publication 966, Electronic Federal Tax Payment System – A Guide to Getting Started, and in
Publication 15, Chapter 11, “Depositing Taxes.”
For deposits made by EFTPS to be on time, you must submit the deposit by 8 p.m. Eastern time
the day before the date the deposit is due. If you use a third party to make a deposit for you, the
third party may have different cutoff times.
If you fail to submit a deposit transaction on EFTPS by 8 p.m. Eastern time the day before
the date a deposit is due, you can still make your deposit on time by using the Federal Tax
Collection Service (FTCS). To use the same-day wire payment method, you will need to make
arrangements with your financial institution ahead of time. Please check with the financial
institution regarding availability, deadlines, and costs. The financial institution may charge a fee
for payments made this way. To learn more about the information needed to be provided to the
financial institution to make a same-day wire payment, visit www.irs.gov/e-pay and click on
“Same-day wire.”
Depositing on Time
For deposits made by EFTPS to be on time, you must submit the deposit by 8 p.m. Eastern time
the day before the date the deposit is due. If you use a third party to make a deposit on your
behalf, they may have different cutoff times. Regarding the Example of Next Day Deposit Rule
above, the deposit made by EFTPS must be submitted by 8 pm Eastern time on Friday, May 6 to
be meet the due date of Monday May 9.
Deposit Penalties
Penalties may apply if you do not make required deposits on time, if deposits are for less than
the required amount or if you do not make your deposits via EFT. The penalties do not apply if
any failure to make a proper and timely deposit was due to reasonable cause and not to willful
neglect. The IRS may also waive penalties if you inadvertently fail to deposit in the first quarter
you were required to deposit any employment tax, or in the first quarter during which the
frequency of deposits changed, if the employment tax return was timely filed. Always ensure that
tax deposits are timely. For amounts not properly or timely deposited, the penalty rates are:
2% - Deposits made 1 to 5 days late.
5% - Deposits made 6 to 15 days late.
10% - Deposits made 16 or more days late. Also applies to amounts paid within 10 days of the
date of the first notice the IRS sent asking for the tax due.
10% - Amounts (that should have been deposited) paid directly to the IRS or paid with your tax
return. See Publication 15 for more exceptions.
15% - Amounts still unpaid more than 10 days after the date of the first notice the IRS sent
asking for the tax due or the day on which you received notice and demand for immediate
payment, whichever is earlier.
Correcting Form 945
Use Form 945-X to correct administrative errors only on a previously filed Form 945. An
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administrative error occurs if the federal income tax (including backup withholding) you reported
on Form 945 is not the amount you actually withheld from payees. For example, if the total
federal income tax you withheld was incorrectly reported on Form 945 due to a mathematical or
transposition error, this would be an administrative error.
When you discover an error on a previously filed Form 945, you must:
Correct that error using Form 945-X.
File a separate Form 945-X for each Form 945 that you are correcting.
File Form 945-X separately. Do not le Form 945-X with Form 945.
Report the correction of underreported and overreported amounts for the same year on a single
Form 945-X, unless you are requesting a refund or abatement. If you are requesting a refund
or abatement, file one Form 945-X correcting the underreported amounts and a second Form
945-X correcting the overreported amounts.
References
Publication 15, (Circular E), Employer’s Tax Guide
Form 945, Annual Return of Withheld Federal Income Tax
Form 945-A, Annual Record of Federal Tax Liability
Instructions for Form 945
Form 945-X, Adjusted Annual Return of Withheld Federal Income Tax or Claim for Refund
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Chapter 17
Wage Reports
For the latest information about developments related to Forms W-2 and W-3 and their
instructions, such as legislation enacted after they were published, go to www.irs.gov/w2.
Form W-2, Wage and Tax Statement
Every employer engaged in a trade or business who pays remuneration, including noncash
payments of $600 or more for the year (or any amount if any income, Social Security or
Medicare tax was withheld) for services performed by an employee must file a Form W-2 for
each employee (even if the employee is related to the employer) from whom:
Income, Social Security or Medicare tax was withheld
Income tax would have been withheld if the employee had claimed no more than one withholding
allowance or had not claimed exemption from withholding on Form W-4
Form W-2 must show total wages and other compensation paid (even if not subject to
withholding); total wages subject to Social Security and Medicare taxes; allocated tips (if any)
and amounts deducted for income, Social Security and Medicare taxes.
Due Date of Form W-2
The due date for filing Forms W-2 with the SSA is now January 31 regardless of whether you file
using paper forms or electronically.
Extensions of time to file Form W-2 with the SSA are no longer automatic. For filings due on or
after January 1, 2017, you may request one 30-day extension to file Form W-2 by submitting
a complete application on Form 8809, Application for Extension of Time to File Information
Returns, including a detailed explanation of why you need additional time and signed under
penalties of perjury. The IRS will only grant the extension in extraordinary circumstances or
catastrophe. This does not affect extensions of time to furnish Forms W-2 to employees.
If an employee’s employment ends before the close of the year, the employee may request the
form earlier. You must give the employee a Form W-2 within 30 days of the employee’s request
or final payment, whichever is later.
You should keep any undeliverable employee copies of Form W-2 (Copies B and C) as part of
your records for four years.
If you file 250 or more Forms W-2 for the year, you are required to file them electronically.
Social Security Numbers
Do not truncate Social Security numbers shown on Forms W-2 (for example, xxx-xx-4567); the
complete Social Security numbers are required.
Form W-3, Transmittal of Wage and Tax Statements
Each year, you must file Form W-3 to transmit Copy A of Forms W-2 to the Social Security
Administration (SSA) by January 31. The SSA will process these forms and provide the IRS with
the income tax data that it needs from those forms.
The Form W-3 is required to be filed electronically if you file 250 or more Forms W-2 for the year.
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Paper Forms W-2 (Copy A) and W-3 (entire page) should be mailed to:
Social Security Administration
Direct Operations Center
Wilkes-Barre, PA 18769-0001
Note: See the Instructions for additional information if sending by Certified Mail or by IRS-
approved private delivery service.
Note: The totals on the Form W-3 you file should equal the totals from all Forms 941 filed for the
same year.
Business Services Online (BSO)
The SSA has enhanced its secure BSO website to make it easier to register and navigate.
Use BSO’s online fill-in forms to create, save and submit Forms W-2 and W-2c to the SSA
electronically. BSO lets you print copies of these forms to file with state or local governments,
distribute to your employees and keep for your records. BSO generates Form W-3 automatically
based on your Forms W-2. You also can use BSO to upload wage files to the SSA, check on the
status of previously submitted wage reports and take advantage of other convenient services for
employers and businesses.
For additional information about SSA’s BSO website, see the discussion in Chapter 18 of this
publication.
Correcting Forms W-2 and W-3
If there is an error on Forms W-2 or W-3, make the correction by filing Form W-2c, Corrected
Wage and Tax Statement, and Form W-3c, Transmittal of Corrected Wage and Tax Statements.
See Forms W-2 and W-3 Instructions, Special Situations for Forms W-2c and W-3c section, for
further information.
Common Errors on Forms W-2
Forms W-2 provide information to your employees, the SSA, the IRS and state and local
governments. Avoid making the following errors, which cause processing delays. Do not:
Omit the decimal point and cents from entries.
Make entries using ink that is too light. Use only black ink.
Make entries that are too small or too large. Use 12-point Courier font, if possible.
Add dollar signs to the money-amount boxes. They have been removed from Copy A and are not
required.
Inappropriately check the “Retirement plan” checkbox in box 13.
Misformat the employee’s name in box e. Enter the employee’s rst name and middle initial in the
rst box, surname in the second box and sufx (such as “Jr.”) in the third box (optional).
Cut, fold or staple Copy A paper forms mailed to SSA.
Download Copy A of Forms W-2 or Form W-3 from IRS.gov and le with SSA.
Mail any other copy other than Copy A of Form W-2 to the SSA.
Remember: Amounts reported on Forms W-2, W-3 and 941/943/944 may not match for valid
reasons. If they do not match, determine that the reasons are valid. Keep your reconciliation in
case you receive a Combined Annual Wage Reporting (CAWR) discrepancy notice.
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Reconciling Forms W-2, W-3 and 941 (or Form 943/944)
When there are discrepancies between amounts reported on Form 941 (or annual Forms 943 or
944) filed with the IRS and Forms W-2 and W-3 filed with the SSA, the IRS must contact you to
resolve the discrepancies.
Amounts reported on the four quarterly Forms 941 (or annual Forms 943 or 944) that should
agree with the Forms W-2 and Form W-3 filed with the SSA are:
Federal income tax withholding,
Social Security wages and Social Security tips, and
Medicare wages and tips.
If the totals do not agree, investigate and correct the discrepancy.
The CAWR is the system that permits an employer to file a single statement to report its
employees’ earnings. Both the IRS and SSA use the information reported by employers to
ensure that the proper amount of taxes has been paid and reported. CAWR cases are identified
by the SSA when it appears that the amounts do not agree with the Forms 941, 943, W-2 and
W-3, or for not filing any or all the required Forms W-2.
If you receive a CAWR discrepancy notice, you should review your copies of Forms 941 (or
annual Forms 943 or 944), W-2 and W-3 that you filed and perform a complete review to find
the error. Send a complete explanation of the error and what you did to make the necessary
corrections (including any corrected forms) to the address noted on the CAWR discrepancy
notice. If you have questions about a CAWR discrepancy, please call the number on the notice.
To reduce the discrepancies between amounts reported on Forms W-2, W-3 and Forms 941/943:
Be sure the amounts on Form W-3 match the total amounts from Forms W-2.
Reconcile Form W-3 with your four quarterly Forms 941 (or annual Forms 943 or 944) by
comparing amounts reported for income tax withholding, Social Security wages, Medicare wages
and tips and Social Security tips.
The amounts for Social Security and Medicare taxes on the four quarterly Forms 941 (or annual
Forms 943 or 944) should be approximately twice the amounts shown on Form W-3. This is
because the amounts on the Forms 941 represent both the employee and employer share of
FICA while the Forms W-2 only represents the employee share.
References
Publication 15, (Circular E), Employer’s Tax Guide
Form W-2, Wage and Tax Statement
Form W-3, Transmittal of Wage and Tax Statements
Instructions for Forms W-2 and W-3
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Chapter 18
Electronic Filing Requirements for Form W-2, Wage and Tax Statement
Form W-2, Wage and Tax Statement
Forms W-2 are filed with the Social Security Administration (SSA). Employers are required to
file Forms W-2 to report wages, tips, Social Security, Medicare tax and federal income tax
withholdings, and other items with regard to an employee’s annual wages. The SSA provides
Form W-2 information to the IRS.
Social Security Business Services Online (BSO) is a suite of business services enabling
organizations and authorized individuals to conduct business with, and submit confidential
information to, the SSA. It allows registered users to submit a wage file, create, save, print
and submit Forms W-2 and W-2c electronically, view status, error and notice information,
acknowledge notices, request a one-time 30-day extension and verify names and Social
Security numbers of employees. Other services include Electronic Records Express, which
enables users to upload electronic records to support the processing of disability claims. You
must be a registered BSO user to use these services. To get a User ID and Password, you must
visit SSA’s website.
When employers file 250 or more Forms W-2 for a given year, they are required to file them with
the SSA electronically. The employer must provide a paper copy of Form W-2 to employees, and
retain a copy of the paper document for their own records. They should also retain copies of
electronic files transmitted.
Electronic submission of Forms W-2 and W-3 is considered the best practice and is
recommended by the Social Security Administration.
Before year-end, you should register with the SSA either online or by telephoning 800-772-
6270 Monday through Friday from 7 a.m. to 7 p.m. Eastern time. It is preferable to register in
December for new registrations and submitting test files. Register early so you’ll be ready when
the filing season begins.
The SSA has Employer Services Liaison Officers (ESLO) in regional offices across the country
that can help you.
The SSA must confirm your identity before issuing a User ID and password. They also have
to know how to contact you if the need arises. You will be asked to provide your name as it
appears on your Social Security card, Social Security number, date of birth, mailing address,
work telephone number, fax number (optional), email address (optional), company name,
employer identification number (EIN) and company telephone number. Your SSN, date of birth
and EIN will be verified against SSA records.
Once the information is verified, a User ID will be issued immediately.
The first time you log on to the system, you will be asked to create and enter your personal
password. You can change your password at any time, and you are required to change it at least
once every 365 days for security purposes.
The SSA will notify the tribe of the electronic registration.
If the tribe wishes to participate in the verification of Social Security numbers online, access
to this service involves a more rigorous process and requires pre-authorization from the tribal
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entity/employer. If access is requested, the employer will be notified via first class mail withintwo
weeks and will include an activation code, which is needed to activate the service.
Commercial Software Packages
Most commercial software packages for payroll programs have detailed instructions for year-end
closing and procedures for transmitting data electronically. You will also need to consult with
your software developers to determine if they have compatible state W-2 electronic products if
you are required to file W-2s with your state. You will also want to verify with your state if they
support the Specifications for Filing Forms W-2 Electronically (EFW2) format used by the SSA.
Requests for Waiver of Requirement
Under Treasury Regulations Section 301.6011-2(c)(2), the Commissioner of Internal Revenue
may waive the electronic requirements on a filer’s written showing of hardship. In determining
whether hardship has been shown, the principal factor is the amount, if any, by which the cost of
filing returns electronically exceeds the cost of filing returns on paper forms.
A request for waiver must be filed at least 45 days before the filing of the first return for which
a waiver is requested. The filer must send the request to the IRS using Form 8508, Request for
Waiver From Filing Information Returns Electronically.
Accuracy
Accurate reporting of employees’ Form W-2 information directly affects the eligibility for and
amount of any Social Security and Medicare benefits payable to employees and their families.
That is why we continually emphasize the importance of recording the right name, SSN and
wages for each employee. Accurate reporting can also prevent penalty assessments for
inaccurate or late filing.
Frequently Asked Questions
1. Who should I call if I have problems with the SSA registration process?
Call 800-772-6270 Monday through Friday between 7:00 a.m. and 7:00 p.m. Eastern time.
2. What if I have 250 or more Form W-2s and I submit paper forms to the SSA?
The IRS may penalize you.
3. Where can I find AccuWage?
By accessing www.ssa.gov/employer/accuwage/index/html.
4. When is my filing deadline to the SSA?
A paper copy of Form W-2 must be provided to the employee by January 31 of each year. The
due date for filing Forms W-2 with the SSA is January 31, regardless of whether you file paper
forms or electronically.
5. Can I correct W-2 information that has already been processed?
You can submit corrections to the Form W-2 processed information electronically, or using paper
Forms W-3c and W-2c. If there are 250 or more corrections, you must transmit the corrections
electronically.
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6. I believe my Social Security payments reported to IRS on Form 941 and my Form W-2
reports filed with SSA last year may not balance. What should I do?
Check your records. If your Form W-2 reports need to be corrected, you should file Forms W-3c
and W-2c with SSA. If your Form W-2 reports were correct as filed, then you should file Form
941-X with IRS to correct your previous Form 941.
References
Instructions for Forms W-2 and W-3
Social Security Business Services Online Electronic W-2 Filing Handbook
Social Security Number Verification Service 800-772-6270
SSNVS information line for technical questions 888-772-2970 – 7:00 a.m. - 700 p.m. Eastern
time, Monday - Friday
Social Security specications for Filing Forms W-2 Electronically
Social Security Business Services Online
Form 8508, Request for Waiver From Filing Information Returns Electronically
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Chapter 19
Reporting Compensation & Non-Compensation Payments on Form1099-MISC & Form 1099-NEC
Form 1099-Misc
File Form 1099-MISC, Miscellaneous Information for each person to whom you paid the
following during the year:
At least $10 in royalties (see the instructions for box 2) or broker payments in lieu of dividends or
tax-exempt interest (see the instructions for box 8);
At least $600 in:
Rents (box 1);
Prizes and awards (see instructions for (box 3);
Other income payments (box 3);
Medical and health care payments (box 6);
Crop insurance proceeds (box 9);
Fish purchased for resale (box 11)
Generally, the cash paid from a notional principal contract to an individual, partnership or
estate (box 3);
Gross proceeds paid to an attorney (box 10);
Any fishing boat proceeds (box 5)
Section 409A deferrals (box 12); or
Nonqualified deferred compensation (box 15).
In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of
consumer products to a buyer for resale anywhere other than a permanent retail establishment
(box 7).
You must also file Form 1099-MISC for each person from whom you withheld any federal income
tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.
Reportable Payments to Corporations
The following payments made to corporations generally must be reported on Form 1099-MISC:
Medical and health care payments (box 6)
Gross proceeds paid to an attorney (box 10)
Substitute payments in lieu of dividends or tax-exempt interest (box 8)
See Instructions for 1099-MISC and General Instructions for Certain Information Returns for
additional filing requirements.
Indian Gaming Profits, Payments to Tribal Members
If you make payments to members of Indian tribes from the net revenues of class II or class III
gaming activities conducted or licensed by the tribes, you must withhold federal income tax on
such payments that meet or exceed thresholds. File Form 1099-MISC to report the payments
and withholding to tribal members. Report the payments in box 3 and the federal income tax
withheld in box 4. Pub. 15-T contains the necessary Tables for Withholding on Distributions of
Indian Gaming Profits to Tribal Members. Form more information see Chapter 3, Treatment of
Certain Payments.
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Due Date for Form 1099-MISC
You can furnish each recipient with a single payee statement reporting all Form 1099-MISC
payment types. You are required to furnish the payee statements by January 31 and file with the
IRS by February 28, (March 31, if filing electronically).
Form 1099-NEC
File Form 1099-NEC, Nonemployee Compensation (NEC), for each person in the course of your
business to whom you have paid the following during the year:
At least $600 in:
Services performed by someone who is not your employee (including parts and materials) (box 1);
Cash payments for sh (or other aquatic life) you purchase from anyone engaged in the trade or
business of catching sh (box 1); or
Payments to an attorney (box 1). (See Payments to attorneys, later.)
You must also file Form 1099-NEC for each person receiving non-employee compensation from
whom you have withheld any federal income tax (report in box 4) under the backup withholding
rules regardless of the amount of the payment.
Reportable Payments to Corporations
The following payments made to corporations generally must be reported on Form 1099-
NEC.
Fish purchases for cash reported in box 1.
Attorneys’ fees reported in box 1.
Payments by a federal executive agency for services (vendors) reported in box 1.
Due Date for Form 1099-NEC
Form 1099-NEC is due on or before January 31, whether using paper or electronic filing
procedures.
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Where to Mail if Filing a Paper Return
State Mail to Address
Alabama, Arizona, Arkansas, Delaware, Florida,
Georgia, Kentucky, Maine, Massachusetts,
Mississippi, New Hampshire, New Jersey, New
Mexico, New York, North Carolina, Ohio, Texas,
Vermont, Virginia
Internal Revenue Service Austin Submission
Processing Center P.O. Box 149213
Austin, TX 78714
Alaska, Colorado, Hawaii, Idaho, Illinois,
Indiana, Iowa, Kansas, Michigan, Minnesota,
Missouri, Montana, Nebraska, Nevada, North
Dakota, Oklahoma, Oregon, South Carolina,
South Dakota, Tennessee, Utah, Washington,
Wisconsin, Wyoming
Department of the Treasury IRS Submission
Processing Center P.O. Box 219256
Kansas City, MO 64121-9256
California, Connecticut, District of Columbia,
Louisiana, Maryland, Pennsylvania, Rhode
Island, West Virginia
Department of the Treasury IRS Submission
Processing Center
1973 North Rulon White Blvd.
Ogden, UT 84201
Electronic Filing Option
You can file electronically through the Filing Information Returns Electronically System (FIRE
System); however, you must have software that can produce a file in the proper format; refer
to Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922,
5498, and W-2G, for more information on how to prepare and upload files when using the FIRE
System. The FIRE System does not provide a fill-in form option for information return reporting.
The FIRE System operates 24 hours a day, 7 days a week.
The IRS encourages you to file electronically.
If you are required to file 250 or more information returns of any one type, you must file
electronically. The Taxpayer First Act of 2019, enacted July 1, 2019, authorized the Department
of the Treasury and the IRS to issue regulations that reduce the 250-return requirement for 2022
tax returns. If final regulations are issued and if they are effective for 2022 tax returns required
to be filed in 2023, IRS will post an article at IRS.gov explaining the change. Until regulations are
issued, however, the number remains at 250, as reflected in this publication. If you are required
to file electronically but fail to do so, and you do not have an approved waiver, you may be
subject to a penalty.
Backup Withholding “B” Processes
Under Internal Revenue Code Section 3406(b), persons (payers) making certain payments
to payees must withhold and pay to the IRS a specified percentage of 24% under certain
conditions (described below).
Backup withholding will apply if:
The payee fails to furnish his or her taxpayer identication number (TIN) to you
The IRS noties you to impose backup withholding because the payee furnished an incorrect TIN
(CP2100 or CP2100A)
The IRS noties you to begin backup withholding because of payee underreporting
Payee failure to certify that he or she is not subject to backup withholding.
Failure to follow the backup withholding rules can result in penalties to the payer for filing
incorrect information returns. The payer may also become liable for any uncollected amounts.
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Which Payments May be Subject to Backup Withholding?
Backup withholding can apply to most kinds of payments that are reported on Form 1099, some
of these payments include:
Rents, prots or other gains
Commissions, fees or other payments for work you do as an independent contractor
Reportable gross proceeds paid to attorneys
Payments by shing boat operators, but only the part that is in money and that represents a
share of the proceeds of the catch
Royalty payments
The current backup withholding rate is 24% on the total gross payments.
First and Second Annual Solicitation Requirements
A solicitation is a request for a payee’s correct TIN. You must make the request to satisfy the
backup withholding requirements and to avoid a penalty for filing another information return with
a missing or an incorrect TIN. The payee must furnish a certified TIN (initial solicitation) on Form
W-9, Request for Taxpayer Identification Number and Certification, with respect to payments of
interest, dividends and amounts subject to broker reporting. For other payments, the payee may
provide the TIN in any manner.
Missing TINs
For all payees you must make the initial solicitation when the payee opens the account or when
the transaction occurs. If the payee does not provide a TIN when you initially ask for it, you
must begin backup withholding. In addition, to avoid a penalty for filing an incorrect information
return, you must make a first annual solicitation by December 31 of the year in which the
account is opened (for accounts opened before December) or January 31 of the following year
(for accounts opened during the preceding December). If the payee does not provide a TIN after
the first annual solicitation, you must make the second annual solicitation by December 31 of the
year following the calendar year in which the account was opened.
For Incorrect TINs
You must make up to two annual solicitations in response to an IRS CP2100 or CP2100A Notice.
You must send a B Notice within 15 business days after you receive one of these notices. If you
receive a Proposed Penalty Notice (972CG) but not a CP2100 or CP2100A Notice, you must make
your annual solicitation by December 31 of the year you received the Proposed Penalty Notice.
However, if you already sent a B Notice in the calendar year in response to a CP2100 or
CP2100A Notice, you do not have to send another solicitation in response to the Proposed
Penalty Notice. If the IRS notifies you in the next calendar year that a TIN is still incorrect, you
must make a second annual solicitation within 15 business days after you receive the second
CP2100 or CP2100A Notice.
What is a CP2100 or CP2100A Notice?
A CP2100 or CP2100A Notice informs payers that they may be responsible for backup
withholding. It is accompanied by a listing of missing, incorrect or not currently issued payee
TINs. Filers with 50 or more error documents receive a CP2100; filers with less than 50 error
documents receive a CP2100A.
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What to Do if You Receive a CP2100 or CP2100A Notice
Compare the listings with your records.
For missing TINs: Determine if you are already backup withholding on the account. If you are not,
begin backup withholding immediately. You must make up to three solicitations for the TIN (initial,
rst annual, second annual) to avoid a penalty for failing to include a TIN on the information return.
For incorrect TINs: Compare the accounts on the listing with your business records. If they agree,
send the appropriate B Notice to the payee. If an account does not agree, this could be the result
of a recent update, an error in the information you submitted or an IRS processing error. If this is
what happened, the only thing you should do is correct or update your records.
Reminder: You don’t have to call or write the IRS to say that you made the correction or update.
If you have any questions about backup withholding, information reporting, Forms 1099, or the
CP2100 or CP2100A Notices and listings, you may call:
The Information Reporting Program Customer Service Section
Toll-Free Telephone: 866-455-7438
Hours: 8:30 a.m. - 4:30 p.m. Monday - Friday, Eastern time
See Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for additional
information and copies of the first and second annual solicitation notices for your use.
References
Publication 1220, Specications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922,
5498, and W-2G
Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s)
Form 1099-MISC, Miscellaneous Information
Form 1099-NEC, Nonemployee Compensation
Instructions for 1099-MISC and 1099-NEC
General Instructions for Certain Information Returns
Form W-9, Request for Taxpayer Identication Number and Certication
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Chapter 20
Records Retention
Fires, natural disasters, equipment failure and human error may cause records to be lost or
destroyed. The extent to which payroll records can be reconstructed depends primarily on
backups, storage and cataloging of archived records.
Reconstructed records are no substitute for maintenance of original records, as they are never
as accurate or complete as the originals. An extensive effort to reconstruct records is sometimes
required. However, a reconstruction may lack the authenticity and credibility of original records
to regulators, state agencies, federal agencies or the courts. Reconstructed records, simply put,
are better than nothing.
Backup of Records
Instructions on how to back up your accounting and payroll records can be found in accounting
and bookkeeping textbooks, from the manufacturer of your payroll system and many other
sources. The form of backup will depend on the system you use to maintain your records. For
instance, a manual payroll system creates physical copies of payroll entries. A computerized
system will use your computer’s hard drive or another electronic medium for storage.
However you decide to back up your payroll records, it is important to follow instructions, and to
test a backup copy from time to time to ensure that you are copying the intended files. Backups
of either manual or computerized systems should be made routinely, checked for accuracy and
stored in a safe place.
Storage
The site you select for storage of records should be carefully chosen. You will want your backup
copies to be reasonably secure from physical damage including fire, flood, theft, insects,
rodents, temperature and humidity. While paper documents may seem more sensitive to these
hazards, you will want to provide the same safeguards for your computerized records.
You also want to ensure privacy of your records by restricting access to those persons with a
“need to know.” Payroll records contain a great deal of personal information and employees
depend on their employers to keep this information confidential. Employee names, addresses
and Social Security numbers, in addition to items like notices of employee levies, garnishments
and child support payments should always be kept secure.
Record Retention
Keep all records of employment taxes for at least four years. These should be available for IRS
review. Your records should include:
Your EIN
Amounts and dates of all wage, annuity and pension payments
Amounts of tips reported to you by your employees
Records of allocated tips
The fair market value of in-kind wages paid
Names, addresses, Social Security numbers and occupations of employees and recipients
Any employee copies of Forms W-2 and W-2c returned to you as undeliverable
Dates of employment for each employee
Periods for which employees and recipients were paid while absent due to sickness or injury and
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the amount and weekly rate of payments you or third party payers made to them
Copies of employees’ and recipients’ income tax withholding allowance certicates (Forms W-4,
W-4P, W-4(SP), W-4S and W-4V)
Dates and amounts of tax deposits you made and acknowledgment numbers for deposits made
by EFTPS or EFT
Copies of returns led and conrmation numbers if led electronically or proof of ling (such as
postage mail receipt)
Records of fringe benets and expense reimbursements provided to your employees, including
substantiation
Documentation to substantiate any credits claimed. For more information on substantiation
requirements, go to IRS.gov/PLC and IRS.gov/ERC.
Documentation to substantiate the amount of any employer or employee share of social security
tax that you deferred and paid.
Original records should be well labeled and organized. Because payroll records “close out” at
year-end, a new file should be started for each employee for each year. Some payroll records
such as Form W-4, garnishments, court ordered deductions for child support and others, may
span more than one calendar year. A copy of the original document should be made for the prior
year file. Keep the original in the new file folder for the employee.
All payroll reconciliation workpapers generated in your payroll office should be retained. Often
payroll reconciliations coincide with the payroll deposits you make with the bank, over the
telephone or online using EFTPS. You will want to keep all the workpapers, receipts, recordation
of telephone or online deposits, photocopies of checks written for payroll deposits, copies of
the front and back of canceled checks written for payroll deposits and any IRS correspondence.
These records will be useful when you prepare your quarterly payroll reports.
Copies for Easy Access
Sometimes, the IRS will send correspondence about payroll tax deposits or payroll tax reports.
This correspondence may have a short response time. It is recommended you keep accessible
copies of payroll deposits and payroll reports for the past two years. (This should be an extra
copy in addition to the ones you are going to take to storage).
Preparing Hard Copy Files for Storage
After you file year-end payroll reports Forms W-2 and W-3, you will prepare files for storage.
It is well worth the time to organize, label and place the files (whether electronic or hard copy)
in some sort of storage container. If you store large quantities of records, it is helpful to label
the box with a list of contents and the calendar year. For instance, you may have a storage box
labeled “Payroll Records – 20XX.” You should also attach a packing list to inventory the contents
of each box.
Preparing Computerized Copies for Storage
After you follow established procedures for backing up your computerized payroll records, test
the media on which they are stored. You want to ensure that you copied the correct information
and there are no glitches or errors to prevent you from reloading it if the need arises.
A secure, off-site location is generally recommended for storage of backups to your
computerized records. They should be well labeled and write-protected so no one can
accidentally write over your valuable back up.
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For additional information regarding storing and safeguarding taxpayer data, refer to Publication
4557, Safeguarding Taxpayer Data.
Reconstruction
After taking steps to prepare complete and accurate records and storing them according to
established procedures, something unexpected may happen to cause your records to be lost or
destroyed.
Every effort should be made to find lost records, or partial records that may have “survived” a
disaster. If partial records are recovered, they are the best place to begin a reconstruction.
A reconstruction of records is best approached in reverse order. In other words, begin with the
end of the year and work backward. The following steps may help in the reconstruction process:
1) Determine exactly what has been lost.
2) Determine if you lost the only copy of an item.
3) For those items where you lost the only copy, rank the relative importance of the lost items,
starting with those of highest importance.
4) Make a list of the items you determine warrant the time and expense of reconstruction.
5) Determine if there is a state, federal or other agency from which you can request a copy of a
lost report. For instance, you can request either a transcript or a photocopy of a filed return
from the IRS. Either can be certified as an actual copy and can take the place of your copy of
a lost return. Transcripts are available at no cost.
6) For items of public record, contact your local courthouse for a copy.
7) For bank records, contact your bank. It could be expensive to get copies of canceled checks,
but they are available.
You will want to evaluate the need for the records in relation to the cost of reconstruction. For
assistance with IRS records, call the Business and Specialty Tax Line at 800-829-4933.
References
Publication 15, (Circular E), Employer’s Tax Guide
Publication 4557, Safeguarding Taxpayer Data
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Chapter 21
Penalties
The best way to avoid penalties is to understand what can be done to reduce or eliminate them
before they are assessed. In an effort to assist, we created Publication 5343, Helpful Hints for
Indian Tribes and Tribal Entities to Avoid Penalties on Federal Tax Deposits and Information
Returns. Hopefully, the suggestions outlined in this publication will reduce penalty assessments,
but if a penalty is asserted, the publication outlines the steps to address it.
The goal of each payroll or accounting department is compliance with the different filing, paying
and depositing requirements. There may be times when this doesn’t happen.
The following penalties may be assessed for failure to comply with filing and payment
requirements:
Failure to File – a penalty of 5% (of the tax required to be shown on a return) may be imposed
for each month or part of a month that a return is not filed (not to exceed 25%).
Failure to Pay – a penalty of .05% may be imposed per month of the amount of tax shown on
the return not timely paid (not to exceed 25%).
Dishonored Payments – Any form of payment that is dishonored and returned from a financial
institution is subject to a penalty of $25 or 2% of the payment, whichever is more. However,
the penalty on dishonored payments of $24.99 or less is an amount equal to the payment. For
example, a dishonored payment of $18 is charged a penalty of $18.
Failure to File Correct Information Returns (by the Due Date) – You may be required to
file information returns to report certain types of payments made during the year (for example,
Forms 1099-MISC, W-2). If you fail to file a correct information return by the due date and cannot
show reasonable cause, you may be subject to a penalty as provided under IRC Section 6721,
Failure to File Correct Information Returns. Section 6721 imposes a penalty per return for each
of the following infractions related to information returns:
Failure to le timely,
Failure to include all information required to be shown,
Including incorrect information,
Filing on paper forms when you are required to le electronically,
Reporting an incorrect TIN,
Failure to report a TIN, or
Failure to le paper forms that are machine readable.
Failure to Furnish Correct Payee Statements (Information Returns)
If you fail to furnish a correct information return by the due date and cannot show reasonable
cause, you may be subject to a penalty as provided under IRC Section 6722, Failure to Furnish
Correct Information Returns. Section 6722 imposes a penalty per return for each of the
following infractions related to information returns:
Failure to furnish a payee statement on or before the due date to the person to whom the
statement must be furnished,
Failure to furnish all information required, or
Failure to furnish correct information.
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Effective with returns due after January 1, 2016, penalties for not filing information returns and
not furnishing correct payee statements are subject to inflationary adjustments.
The amount of the penalty is based on when you file the correct information return (IRC 6721) or
furnish the correct payee statement (IRC 6722). The penalty for not filing a correct information
return is separate from the penalty for not providing the correct payee statement. For example,
if you don’t file a correct Form 1099-MISC with the IRS and don’t provide a correct Form 1099-
MISC statement to the payee, you may be subject to two separate penalties.
The IRC Section 6721 and 6722 penalty rates are:
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Failure to Make Federal Tax Deposits on Time in an Authorized Government Depository
Penalties may apply if you do not make required deposits on time, make deposits for less than
the required amount or if you do not use EFTPS or EFT when required. For amounts not properly
or timely deposited, the penalty rates are:
2% - Deposits made 1 to 5 days late
5% - Deposits made 6 to 15 days late
10% - Deposits made 16 or more days late (Also applies to amounts paid within 10 days
of the date of the first notice the IRS sent asking for the tax due)
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10% - Deposits made at an unauthorized financial institution, paid directly to the IRS or
paid with your tax return (unless otherwise excepted)
10% - Amounts subject to electronic deposit
15% - Amounts still unpaid more than 10 days after the date of the first notice the IRS
sent asking for the tax due or the day on which you receive notice and demand for
immediate payment, whichever is earlier
Failure to Collect and Pay Over Trust Fund Taxes – If federal income, Social Security and
Medicare taxes to be withheld are not withheld or are not deposited or paid to the United
States Treasury, the trust fund recovery penalty may apply. This penalty is the full amount of the
unpaid trust fund tax. It may be imposed on all persons who are determined by the IRS to be
responsible for collecting, accounting for and paying over theses taxes. Refer to Chapter 23 for
further information on the trust fund recovery penalty.
Penalty Relief
If a penalty is assessed and you do not think the assessment is correct or you still have
questions, the law allows the IRS to remove or reduce the penalties if you can show you acted
reasonably and in good faith, or relied on the incorrect advice of an IRS employee.
Upon receipt of your assessment notice, you may send IRS a signed statement explaining why
you believe the penalty should be removed or reduced. Please be sure to explain in detail what
caused the problem. Your statement will be reviewed and you will be notified if your explanation
is accepted.
Please refer to Notice 746, Information About Your Notice, Penalty and Interest, for detailed
information on why penalties are assessed and in what amounts, and the removal of penalties.
For questions regarding a Notice received, call the phone number on the Notice. If further
assistance is needed, call the IRS Business and Specialty Tax Line at 800-829-4933.
How are Penalties Paid?
If you receive a notice of penalty, it will include instructions to send payment with the voucher at
the bottom of the notice. Electronic payment options are available on IRS.gov/Payments. If you
have questions regarding the payment of penalties, please call the number on the notice, or call
the IRS Business Specialty Tax Line at 800-829-4933.
References
Publication 15, (Circular E), Employer’s Tax Guide
Notice 746, Information About Your Notice, Penalty and Interest
Publication 5343, Helpful Hints for Indian Tribes and Tribal Entities to Avoid Penalties on Federal
Tax Deposits and Information Returns
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Chapter 22
IRS Notices and Letters
Understanding Your Notice or Letter
The IRS will mail you a notice or letter that will explain the reason for the contact and give you
instructions on how to handle the issue.
Why was I Notified by the IRS?
The IRS sends notices and letters if:
You have a balance due
You are due a larger or smaller refund
We have a question about your tax return
We need to verify your identity
We need additional information
We changed your return
We need to notify you of delays in processing your return
Do Not Ignore the Notice or Letter
You can respond to most IRS notices and letters quickly and easily. If you ignore the notice or
letter, the IRS may take enforcement action (see Chapter 23, The Collection Process, for more
information).
Read the Notice or Letter and Follow Instructions
Each notice or letter contains a lot of valuable information, so it is very important that you
read it carefully. The notice or letter will tell you if you need to take any corrective action or
provide additional information. Be sure to follow the instructions provided if corrective action or
additional information is requested.
If, after reviewing the letter or notice, you believe there is an error, write to the IRS office that
sent it to you within the time frame given. You should also provide photocopies of any records
that may help correct the error. You may also call the number listed on your notice or bill for
assistance. If you are correct, IRS will make the necessary adjustment to your account and send
you a corrected notice.
Respond
If your notice or letter requires a response by a specific date, there are two main reasons you will
want to comply:
To minimize additional interest and penalty charges
To preserve your appeal rights if you do not agree
Correction Notice
If the IRS changed or corrected your tax return, compare the information provided in the notice
or letter with the information in your original return.
If you agree, you don’t need to reply unless a payment is due.
If you don’t agree, it’s important that you respond. Follow the instructions on the notice for the
best way to respond to IRS. You may be able to call to resolve the issue. Have a copy of your
tax return and the notice with you when you call. If you choose to write to IRS, be sure to include
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information and any documents you want considered. Also, write your Social Security number,
EIN or individual taxpayer identication number on each page of the letter you send. Mail your
reply to the address shown on the notice. Allow at least 30 days for a response.
Pay
If you agree with the information provided in the notice or letter, pay as much as you can, even
if you cannot pay the full amount you owe. You can pay online or apply for an Online Payment
Agreement or Offer in Compromise. Visit our payments page at www.irs.gov/payments for
more information. This page provides information on other ways you can pay, including EFTPS,
Electronic Funds Withdrawal, Same-day wire, Check or money orders, and Cash. However, if
you decide to pay by mail, in order to make sure your payment credits properly to your account,
be sure to return the tear-off stub on your bill and use the return envelope, if provided. Please
ensure that on the face of the check itself – not a tear-off stub - you:
Make your check or money order payable to the United States Treasury
Enter the employer identication number
Enter the tax year and form number
Ensure that your name, address and telephone number are on the payment
Do NOT send cash
Keep a Copy of Your Notice or Letter
It’s important to keep a copy of all notices or letters with your tax records. You may need these
documents at a later date.
Contact Us
Most correspondence can be handled without calling or visiting an IRS office if you follow the
instructions in your letter or notice. The IRS provides a contact phone number on the top right-
hand corner of the notice or letter. Typically, you only need to contact us if you do not agree with
the information, if we requested additional information, if you have a balance due or if you have
additional questions not addressed in the original notice or letter. You can also write to us at the
address in the notice or letter. If you write, allow at least 30 days for our response.
For questions regarding a Notice received, call the phone number on the Notice. If further
assistance is needed, call the IRS Business and Specialty Tax Line at 800-829-4933.
Location of the Notice or Letter Number
You can find the notice (CP) or letter (LTR) number on either the top or the bottom right-hand
corner of your correspondence. You can find more information about your notice or letter
received by visiting Understanding Your IRS Notice or Letter and entering the notice or letter
number in the search box.
When the Notice or Letter Looks Suspicious
The IRS does not initiate contact with taxpayers by email, text messages or social media
channels to request personal or financial information. This includes requests for PIN numbers,
passwords or similar access information for credit cards, banks or other financial accounts.
Phishing is a scam typically carried out through unsolicited email or websites that pose as
legitimate sites and lure unsuspecting victims to provide personal and financial information.
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Report all unsolicited email claiming to be from the IRS or an IRS-related function to phishing@
irs.gov. If you’ve experienced any monetary losses due to an IRS-related incident, please
report it to the Treasury Inspector General Administration and file a complaint with the Federal
Trade Commission through their Complaint Assistant to make the information available to
investigators.
Taxpayer Advocate Service
The Taxpayer Advocate Service (TAS) is your voice at the IRS. TAS is an independent
organization within the IRS whose employees assist taxpayers who are experiencing economic
harm, who are seeking help in resolving tax problems that have not been resolved through
normal channels or who believe that an IRS system or procedure is not working as it should.
They ensure that you are treated fairly, and know and understand your rights. If you are having
tax problems and have not been able to resolve them with the IRS, you may be eligible for free
TAS assistance if you:
Are experiencing economic harm or signicant cost (including fees for professional
representation),
Have experienced a delay of more than 30 days to resolve your tax issue, or
Have not received a response or resolution to the problem by the date that the IRS promised.
The service is free, confidential, tailored to meet your needs and is available for businesses as
well as individuals. There is at least one local Taxpayer Advocate in each state, as well as in
Puerto Rico and the District of Columbia. Because they are part of the IRS, advocates know the
tax system and how to navigate it. If you qualify, you will receive personalized service from a
knowledgeable advocate who will:
Listen to your situation,
Help you understand what needs to be done to resolve it, and
Stay with you every step of the way until your problem is resolved.
You can reach the Taxpayer Advocate Service by:
Calling toll–free 877-777-4778 or TTY/TTD 800-829-4059,
Writing or calling your local Taxpayer Advocate, whose address and phone number are listed
in the government listings in your local telephone directory and in Publication 1546, Taxpayer
Advocate Service – We are Here to Help You,
Filing Form 911, Request for Taxpayer Advocate Service Assistance, or
Requesting that an IRS employee complete Form 911 for you.
References
Publication 15, (Circular E), Employer’s Tax Guide
Notice 746, Information About Your Notice, Penalty and Interest
Publication 1546, Taxpayer Advocate Service - We are Here to Help You
Form 911, Request for Taxpayer Advocate Service Assistance
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Chapter 23
The Collection Process
The Collection Process: What to Do When You Owe Taxes
It is highly recommended that you have one designated office for each entity to receive and
review all IRS notices. It’s important to pay attention to the time frame stated in the notice
and to respond to the notice promptly. This internal control will alleviate notices being lost or
misdirected.
When employment tax returns are filed, IRS checks to see if the math is accurate and if the
correct amount of tax has been paid or timely deposited. If you have not paid all you owe,
IRS will send a bill called a Notice of Tax Due and Demand for Payment. The bill includes the
taxes, plus penalties and interest. We encourage you to pay your bill as quickly as possible.
See Publication 594 for options for paying in full and options if you can’t pay in full now. If you
received a bill for unpaid taxes, you should pay the entire amount, or tell IRS right away why you
cannot. If you received a tax notice or if you would like to know if there are any outstanding tax
debts, the IRS Business and Specialty Tax Line at 800-829-4933.
If you do not pay the taxes you owe and if you make no effort to pay them, IRS can ask you to
take action to pay your taxes, such as selling or mortgaging assets or getting a loan. If you still
make no effort to pay your bill or to work out a payment plan, IRS may also take more serious
action, such as seizing bank accounts or other assets.
If You Cannot Pay in Full, There is Still Something You Can Do…
Publication 594, The IRS Collection Process, tells you the steps the IRS may take to collect your
balance due account.
If you cannot pay all your taxes now, pay as much as you can. Paying now reduces the amount
of interest and penalty owed on the account. Call or visit the nearest IRS office to explain your
situation. To set up an appointment, go to IRS/Contact Your Local IRS Office. They will assist
you with resolving the account. If unable to get assistance, call the Business and Specialty Tax
Line at 800-829-4933.
If you are unable to pay what you owe, you should contact the IRS as soon as possible. The IRS
may be able to offer you a number of payment solutions including:
Extension of time to pay – You may be eligible for a short extension of time to pay of up to 120
days. You should request an extension if you would be able to pay the taxes in full within the
extended time frame.
Installment agreement – Installment agreements paid by direct deposit from a bank account or
payroll deduction from wages will help avoid agreement default by ensuring timely payments and
will reduce the burden of mailing payments and save postage costs.
Delaying collection – If the IRS determines that you are unable to pay, it may delay collection
until your nancial condition improves.
Offer in Compromise – You may be able to settle your tax bill for less than the amount you owe
by submitting an Offer in Compromise. However, the criteria for accepting an offer are strict and
relatively few offers are accepted each year.
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What if You Believe Your Bill is Wrong?
If you believe your bill is wrong, let IRS know as soon as possible. Call the number on your bill or
call the Business and Specialty Tax Line at 800-829-4933.
To help the IRS correct the problem, gather a copy of the bill along with copies of any records,
tax returns and canceled checks, that will help us understand why you believe your bill is wrong.
If we find you are correct, we will adjust your account.
Before any action that is explained in this section is taken, you have the opportunity to
voluntarily pay what is owed. But if you do not pay your taxes in full and do not contact IRS to
let them know why you cannot pay or why you disagree with our decision to take enforcement
action, the law requires IRS to take action. IRS may:
File a lien against property (make a legal claim to property as security or payment for a tax debt)
Serve a levy on property (legally seize property to satisfy a tax debt)
Assess a trust fund recovery penalty for employment taxes
These enforced collection actions are the means by which the Notice and Demand for Tax
Payment is enforced. Publication 1660, Collection Appeal Rights, and Publication 5, Your
Appeal Rights and How To Prepare a Protest If You Disagree, give detailed information about the
appeals process.
Liens
Liens give a legal claim to property as security or payment for a tax debt. A Notice of Federal
Tax Lien may be filed only after:
We assess the liability,
We send you a Notice and Demand for Payment (a bill that tells how much is owed in taxes), and
You neglect or refuse to pay the debt in time.
Once these requirements are met, a lien is created for the amount of the tax debt. Filing this
notice publicly notifies other possible creditors that the federal government has a claim against
the debtor’s property, including property acquired after the lien is filed.
Liens can be attached to all property or rights to property, including an employer’s accounts
receivable.
Levies
A levy is a legal seizure of property to satisfy a tax debt. Levies are different from liens. A lien is a
claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.
If the taxes are not paid, or arrangements are not made to settle the debt, the IRS may seize and
sell any type of real or personal property.
Generally, these three requirements must be met before a levy action is taken:
Tax is assessed and a Notice and Demand for Payment is issued,
You neglected or refused to pay the tax, and
A Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice) was issued at
least 30 days before the levy.
Trust Fund Recovery Penalty
To encourage prompt payment of withheld income and employment taxes, including Social
Security taxes, railroad retirement taxes or collected excise taxes, Congress passed a law that
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provides for the trust fund recovery penalty. (These taxes are called trust fund taxes because
you hold the employee’s money in trust until you make a federal tax deposit in that amount.)
If IRS plans to assess the trust fund recovery penalty, it will send you a letter stating that you
have been determined to be a responsible person. You have 60 days from the date of this letter
to appeal the proposal. If you do not respond to the letter, IRS will assess the penalty against you
as a responsible person and send you a Notice and Demand for Payment. The business does not
have to have stopped operating in order for the Trust Fund Recovery Penalty to be assessed.
A responsible person is a person or group of people who has the duty to perform and the power
to direct the collecting, accounting and paying of trust fund taxes.
This person may be:
An ofcer or an employee of a corporation,
A tribal council member,
A member or employee of a partnership,
A corporate director or shareholder,
A member of a board of trustees of a nonprot organization,
Another person with authority and control over funds to direct their disbursement, or
Another corporation.
Assessing the Trust Fund Recovery Penalty
IRS may assess the penalty against anyone:
Who is responsible for collecting or paying withheld income and employment taxes, or for paying
collected excise taxes, and
Who willfully fails or neglects to collect or pay them.
For willfulness to exist, the responsible person must:
Have been aware or should have been aware of the unpaid taxes, and
Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent
or bad motive is required).
Have used available funds to pay other creditors when the business is unable to pay the
employment taxes
The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is
computed based on:
The unpaid income taxes withheld, plus
The employee’s portion of the withheld FICA taxes.
For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.
Once IRS asserts this penalty, it can take collection action against your personal assets. For
instance, IRS can file a federal tax lien or take levy or seizure action.
You can avoid the trust fund recovery penalty by making sure that all employment taxes are
collected, accounted for and paid to the IRS when required.
References
Publication 594, The IRS Collection Process
Publication 1660, Collection Appeal Rights
Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don’t Agree
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Glossary of Terms
Consolidated Appropriations Act ....................................... CAA
Combined Annual Wage Reporting ................................... CAWR
Cash or Deferred Arrangement .......................................... CODA
Electronic Data Transfer ..................................................... EDT
Electronic Filing .................................................................. E-FILE
Electronic Federal Tax Payment System ........................... EFTPS
Electronic Funds Transfer ................................................. EFT
Employer Identification Number ......................................... EIN
Earned Income Tax Credit ................................................. EITC
Employee Retirement Income Security Act ....................... ERISA
Federal Insurance Contributions Act ................................. FICA
Federal Tax Deposit ........................................................... FTD
Federal Unemployment Tax Act ......................................... FUTA
U.S. Immigration and Customs Enforcement Service ....... ICE
Individual Retirement Account ........................................... IRA
Old-Age, Survivors, and Disability Insurance .................... OASDI
Salary Reduction Simplified Employee Pension ................ SARSEP
Self-Employment Contributions Act ................................... SECA
Simplified Employee Pension ............................................ SEP
Savings Incentive Match Plan for Employees .................... SIMPLE
State Unemployment Tax Act ............................................ SUTA
Social Security Administration ........................................... SSA
Social Security Number ..................................................... SSN
Taxpayer Advocate Service ................................................ TAS
Unemployment Compensation .......................................... UC
