COVID-19 Update #10 - The Housing Allowance and the PPP

Over the past two weeks many churches have applied for the a loan through the Paycheck Protection Program (PPP).  In determining average monthly wages, the banks consistently excluded compensation designated as housing allowance paid to ministers.  The housing allowance is not a taxable part of compensation, so it is not reported on a church's payroll reports or on a minister's Form W-2.  Since the banks were using these documents to support the payroll amounts, many refused to include the housing allowance.  Since the housing allowance may be a significant portion of a minister's cash compensation, omitting it from the calculation of average monthly compensation significantly reduced a church's qualifying amount for the PPP. 

SBA Clarifies the Issue of Housing Allowance

The SBA has been updating its frequently asked questions (FAQs) on a regular basis.  Today's addition to the FAQs specifically addresses the question of housing allowance.  Question 32 now specifically states that payroll costs include all cash compensation.  Therefore, the cash housing allowance paid to a minister may be included in a church's payroll costs for the PPP. 

What Does This Mean

This clarification has two applications:

Churches Already With A PPP:  Churches who have already received or been approved to receive a PPP loan cannot go back and request more funds.  However, the inclusion of the housing allowance as a payroll cost will make it easier to meet the expenditure tests that must be met to justify the use of the funds for the upcoming "forgiveness" phase of the program.   Compliance with this phase of the PPP is intricate, so professional assistance may be required.  Additionally, we are still waiting on further guidance regarding various aspects of the "forgiveness" phase.

Churches Applying For A PPP:  Starting Monday April 27, 2020, the PPP will be accepting more applications (new funding was approved on Friday April 24, 2020).  For churches and religious nonprofits applying in the new phase of funding, the average monthly payroll costs may be calculated including the housing allowance.  Lenders may not be fully aware of the intricacies of housing allowance and how it operates.  Therefore, churches should be ready to assist in educating lenders in these unique payroll aspects of ministers' compensation.

COVID-19 Update #9 - Deferral of Tax Deposits

The CARES Act provides for employers and self-employed individuals to shift the timing of certain tax payments over the next few months in the hopes of alleviating some of the financial burden felt at this time.  Of the CARES Act's programs, this one should be approached with the greatest amount of care, concern and planning.

What is Available for  Deferral

The Act allows employers to defer the deposit of the employer's share of Social Security taxes owed on employees' wages as determined by IRC Section 3111(a).  This is the OASDI portion of the taxes and is 6.2% of the first $137,700 of taxable wages.  The Act does not provide for the deferral of the employer's share of the Medicare taxes associated with employees' wages.

For the self-employed individual, a deferral of 50% of the tax determined under IRC Section 1402(a) is available.  This is the portion of the self-employment tax associated with the Social Security tax as calculated on Schedule SE.  Of the 15.3% of self-employment tax calculated, 12.4% is assessed as the Social Security tax.

The deferral of the applicable taxes is for taxes required to be paid or deposited during the period March 27, 2020 to December 31, 2020.   The deferral is not associated with the date the wages were paid, but rather when the taxes are required to be deposited or paid.

Provision for the Deferral

The tax available for the deferral will be due as follows: 

• 50% due by December 31, 2021 and 
• 50% due by December 31, 2022.

Late payment penalties or interest will not be charged on the taxes deferred through the program because the payments are considered as timely made as long as the above schedule is followed.  Of course, the deferred taxes may be paid at any time within this time schedule.  

Example for the Employer  

First Church pays wages to employees other than their ministers totaling $4,000 in April.  Normally First Church is a monthly payroll tax depositor, so its April tax deposit is due by May 15th.  When reviewing the tax deposit for April, First Church determines it consists of the following: 

Federal Income Tax Withholding       $  750

Social Security Tax Withholding        $  248

Medicare Tax Withholding                 $    58

Total Employee Withholding             $1,056

Social Security Tax - Employer          $248

Medicare Tax  - Employer                  $  58

Total Potential Tax Deposit              $1,362

First Church may defer the $248 of employer Social Security taxes.  The tax deposit required at May 15th is $1,114 ($1,362 - $248).  The $248 is now due as follows:  $124 by December 31, 2021 and the remaining $124 by December 31, 2022.  

Warning:  It is important to note there is no deferral of any of the taxes withheld from the employee.  This money doesn't belong to the employer.  There is never any reason to not timely remit employee withholdings.  These funds are called "trust funds".  If not remitted timely, penalties may be assessed against individuals with financial authority within an organization. 

Example for the Self-Employed Individual

Pastor Joe is the senior pastor of First Church.  As a minister, he reports his wages on Schedule SE.  His estimated self-employment taxable income for 2020 is $50,000.  His estimated self-employment tax is $7,650 consisting of $6,200 Social Security tax and $1,450 of Medicare tax.  Pastor Joe decides to make use of the deferral program for 2020.  He may defer 50% of the $6,200, or $3,100, to be paid at a later date.  This deferral amount can be immediately used to reduce his 2020 estimated tax payments.  The deferral is due in two payments:  $1,550 must be paid by 12/31/2021 and the other $1,550 must be paid by 12/31/2022.  

The Deferral and the Paycheck Protection Program

All employers may use the deferral program, including those claiming credits for the paid sick or family leave programs provided for in the Families First Coronavirus Relief Act and the employee retention credits provided by the CARES Act.  However, employers participating in the Paycheck Protection Program (PPP) are limited in their use of the deferral program.  The employer receiving a PPP loan may participate in the deferral program until it has its PPP loan forgiven.  At the date the PPP loan is forgiven, the employer may no longer defer any taxes using the deferral program.  For the time period the PPP loan is outstanding, the deferral is available.  

Caution

As mentioned in the beginning, this is the program that requires care, caution and planning before implementing.  As a tax professional, it is the program that causes me the greatest consternation.  Taxes deferred can easily become a liability that cannot be paid.  While in the short term, the program provides a tremendous relief to the employer and the self employed person, in the long run it may also create a burdensome liability that cannot be easily met.  Any taxpayer using the program must be aware of the amount of the associated liability.  Organizations should record the unpaid tax in a special liability account to provide for clear tracking of amount.  Self-employed individuals may want to specifically set up a monthly savings plan to provide for funds at the applicable due dates.  In essence, the money is borrowed from the government and, as with any other debt, plans are needed to provide for its repayment. 

COVID-19 Update #8 - Update on the Paycheck Protection Program

The Paycheck Protection Program has created a whirlwind of activity over the past 10 days.  While it was the goal of everyone to provide needed funds quickly, rolling out a $349 billion dollar program is no small feat.  Over the past 10 days, the SBA has issued guidance three separate times.  Each set of frequently asked questions (FAQs) has answered another debate in the professional and banking communities.  There have been winners and losers on both sides of these debates and there have been some surprising resolutions by the SBA.  Rather than providing separate blog posts, I have opted to update the original post each time.  Therefore, despite the posting date on the blog on this topic of March 30th, please check the date at the top of the blog for the most recent update.  The blog has been updated as of April 7, 2020.

COVID-19 Update #4 - Emergency Family Leave Provisions and Related Tax Credits

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. The Act includes several tax credits as well as mandated leave requirements.  To assist with application of the provisions, the various provisions are discussed in separate blog posts.  

Required Paid Family Leave for Employees

In addition to the required sick leave employers must offer, the Act also added some emergency provisions to the Family Medical Leave Act of 1993 (FMLA).  The effective date of these provisions is April 1, 2020.

Applicable Employers:  While the FMLA does not generally apply to employers with less than 50 employees, the emergency provisions have changed the applicable definitions of "employer" to address the current circumstances.  The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of the Act requires employers with fewer than 500 employees to provide both paid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). 

Required Leave Circumstances:  The leave generally is available when an employee must take off to care for the employee's child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either (1) closes a school or childcare place or (2) makes a childcare provider unavailable.   Note:  the act specifically indicates an employee's son and/or daughter.  This does not extend to care of others at this time.  Therefore, it would not extend to employees who need to care for their grandchildren.  

Amount of Required Leave:  This amount of paid leave is more extensive than the other required sick leave provisions.  (Generally, the first 10 days of leave can be unpaid.  If qualifying, these leave days may have to be considered under the required sick leave provisions of this legislation.  For more information on the required sick leave, see Update #2.)  After 10 days, then paid leave is required, pegged to the employee's pay rate and pay hours. The paid leave rate must be at least 2/3 of the employees regular pay, but it may be capped at  $200 per day and $10,000 in the aggregate per employee.  

For part-time or irregular work schedules, the amount of paid leave is calculated based on the average number of hours the employee was scheduled to work per day for the last six months prior to the date the leave starts. 

Eligible Employee:  An eligible employee is an employee who has been employed for 30 days.  If an employee was laid off after March 1, 2020 and has been rehired, he/she must have been employed for 30 out of the last 60 days prior to the lay off.  

Taxation of Wages:  The required leave payments are taxable, but the compensation is not subject to the employer's portion of OASDI (Social Security tax of 6.2%)

Corresponding Tax Credits for Paid Family Leave

Tax Credits for Employers

Calculating the Credit:  The credit consists of the amount of:

1. The wages paid for the family leave (see note below) subject to the above discussed limits; and 
2. The amount of the cost of maintaining a health plan that is allocable to the paid leave time.

In addition to the base calculation for the credit, an employer is also eligible for a credit on the employer's portion of the Medicare taxes paid on the family leave wages paid. 

Nuance for churches and ministers:  The definition of wages eligible for the credit is defined by IRC Section 3121(a).  Wages paid to ministers performing ministerial duties and to employees of churches that have elected out of the FICA/Medicare system are not wages for purposes of IRC Section 3121(a).  Therefore, the wages paid to ministers and to employees of "electing" churches are not eligible for the credit.  Unless guidance is issued to the contrary, these individuals will need to look to the provisions for self-employed taxpayers to claim the credits.  See the discussion below on self-employed taxpayers claiming a family leave credit. 

Claiming the Credit:  The tax credit corresponding with the EFMLEA mandate is a credit against the employer's 6.2% portion of the Social Security (OASDI) payroll tax.  In the event the credit is more than an employer's OASDI, then the amount is refundable.  

Note:  While guidance as to how to claim the credit is still forth coming, right now we are anticipating the credit being claimed on an employer's Form 941.  

Family Leave Credit for Self-Employed Taxpayers

The Act provides to the self-employed a refundable income tax credit (including against the taxes on self-employment income and net investment income) for family leave similar to the self-employed sick leave credit discussed in a separate blog post.

Applicable Taxpayers: The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer.  As noted above, this should also apply to ministers and to employees of churches electing out of the FICA/Medicare program.  

Limit on the Credit:  The allowable credit is limited to the lesser of either 67% of the average daily self-employment income for the days attributable to family leave or $200 per day.   Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days.  

Additionally, the credit is decreased to the extent that the self-employed person has received days of  paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments.  

Technical guidance from the IRS and the DOL is forthcoming and the above interpretation of the law is subject to change based on newly issued guidance. FAQs from the DOL are available at https://www.dol.gov/agencies/whd/pandemic/ffcra-questions.

Fringe Benefits - A Fresh Look to Start the New Year

It's a new year, so it's time to reevaluate everything your organization provides to its employees.  Each year my firm assists churches and other organizations in making payroll corrections to properly report the value of various benefits offered throughout the year.  To avoid making costly mistakes, it's time for a quick Fringe Benefit 101 update.

Fringe benefits are generally those items provided to employees outside of the normal paycheck.  Fringe benefits take on different shapes and different forms and can result in different tax treatments.  Many of them are paid directly by an organization, so they never come close to the organization's payroll system.  However, some are paid by employees through payroll tax deduction.  The IRS has expressed frustration with the omission of items of additional compensation involving benefits provided outside of the traditional paycheck system from being included in employees' income.

In reviewing fringe benefits, it is important to understand the basic premise of our tax system.  Under our taxing system:

1. All items improving an employee are taxable to the employee until a tax provision can be identified to make it nontaxable;
2. Most tax provisions affording tax free treatment of a benefit have rules that have to be followed; and 
3. Not all benefits are treated the same for all applicable taxes.  For example, an employee's elective deferral into a retirement plan is excluded from federal income tax, but it is taxable for purposes of Social Security and Medicare taxes.

Mistakes in the proper treatment of fringe benefits can be costly in terms of payroll taxes and related penalties, but also in terms of an organization's tax exempt status.  Fringe benefits provided without the correct framework create private benefit or inurement of benefit and may threaten an organization's tax exempt status for both federal and state purposes.  Additionally, benefits provided incorrectly to organizational leaders or decision makers may constitute excess benefit transactions and subject individuals to intermediate sanctions requiring repayment of the benefit and penalties up to 225% payable to the IRS.

Since 2016 has just begun, it is a good time for a benefit review.  The review should include the following:

Step 1:  Take an inventory of any and all benefits provided to anyone in the organization even if the benefit is only provided to one staff member.   Look for those expenses that are paid directly for a staff member or allow a staff member to take advantage of one of the organization's services without charge or at a reduced charge.

Step 2:  Review the organizational minutes, budget, employment contracts, etc to confirm that any and all benefits have been properly authorized as additional compensation to the applicable staff member.   This step is crucial to avoid the creation of automatic excess benefit transactions under IRC Section 4958.  It is also necessary to confirm that a staff member's compensation is still within the realm of reasonable compensation.

Step 3:  Review the rules regarding the benefit to determine if the rules are being met.  Virtually every benefit that can be provided by an organization has a required framework to achieve tax favored treatment.  For example, the majority of benefits are required to be offered on a nondiscriminatory basis and cannot be offered just to those in upper management.  For churches, this requires a good review of any benefit exclusively offered to the ministerial staff members.

Step 4:  Determine the steps that need to be taken to bring the benefit into alignment with the rules.  If there is a plan already in place that appears to comply with the rules, have this plan reviewed every few years to determine if it is still in alignment with the rules.   This may require the assistance of either a CPA and/or an attorney.  When selecting these professionals always select those who are experienced in working with nonprofit organizations.  Churches should select professionals with specific experience working with churches, since some benefits afford special considerations for churches.

Step 5:  Review the reporting requirements for the benefit and determine the applicable taxes that may or may not be due. As previously mentioned, some benefits require special reporting and some are exempt from federal income tax but still subject to Social Security & Medicare taxes.

Step 6:  Document the results and make corrections in the payroll system to achieve the appropriate tax treatment.  It's only January, so make any payroll corrections now to avoid having to amend quarterly Forms 941 in the future.  Additionally, if a benefit is going to create taxable income to an employee, it is better to make that determination at the beginning of the year, rather than the end of the year.

The IRS provides Publication 15-B, An Employer's Tax Guide to Fringe Benefits, as a useful guide in evaluating benefits and related tax requirements and can be obtained at www.irs.gov.  Don't let your organization's benefit plans become an unexpected tax burden to either the organization or its employees,  Be proactive in protecting and benefiting both the organization and the employees with your 2016 benefit review.

Designating Housing Allowances - A "Must Do" Step for the Church

Ministers performing qualifying ministerial services may have a portion of their compensation designated as a housing allowance pursuant to Section 107(2) of the Internal Revenue Code.  (Terminology varies interchanging such words as housing, parsonage, rental or manse depending on the culture of the church.  The Internal Revenue Code and Regulations refer to it as "rental allowance".)  Within certain limitations, this portion of a minister's compensation is not subject to federal income tax. 

Internal Revenue Regulation 1.107(b) requires that in order to be "rental allowance", the amount must be designated as such pursuant to an official action taken in advance of the payment of the allowance by the employing church or other qualifying organization. Two cases decided in 2013 remind us of the critical need to properly designate housing or rental allowances.

In Ricky Williams v. Comm., pro se TC Summary Opinion 2013-60, the minister entered into an employment contract with his church.  The initial contract provided for a housing allowance for a period of six months.  Any provision extending beyond the six months would have to be formally decided at a later date.  The church never revisited this issue, so none of Reverend Williams' future compensation was designated as housing.  During an examination of his 2007 Form 1040, Rev. Williams asserted that over $33,000 of his compensation should be considered as housing allowance.  The IRS disagreed, so off to court they went.  The court ruled that Rev. Williams could not claim the housing allowance, since the church had never formally designated an amount as housing allowance after the initial six month provision.  Therefore, for 2007, no housing allowance existed.  Rev. Williams produced a new employment agreement dated in 2012 that included the housing allowance provision, but the court reiterated the requirement of having the designation prior to receiving the funds. The 2012 employment agreement was too little, too late.

In Donald L. Rogers, V. Comm., TC Memo 2013-177, Rev. Rogers' church paid his mortgage payments and utilities directly rather than pay him an allowance for the expenses.  Despite making the payments directly, the church failed to formally designate the payments as payments made pursuant to IRC Section 107.  Lacking the formal designation, the court agreed with the IRS that the payments represented taxable compensation to Reverend Rogers. 

Many churches are lax in their housing allowance designations.  I recommend that housing allowance designations be approved every year and be approved by either the appropriate committee, the board of directors or by a high ranking employee that has specifically been granted the authority to make the designations on behalf of the church or other qualified organization.  Remember the designation has to be done prior to the payment of the allowance, so beware of late designations or of designations that attempt to reclassify prior payments.  In this area, it pays to do it well and do it early in order to provide the maximum benefit to the minister.

Cautionary Note:  In Freedom From Religion Foundation, Inc. v. Lew, 112 AFTR 2d 2013-7107, the court ruled that IRC Section 107(2) is unconstitutional.  This ruling makes the housing allowance, but not the provision of a parsonage, unconstitutional.  The judge delayed the mandate for the IRS to enforce the ruling until the conclusion of the appeals process.  The government has appealed the decision to the 7th Circuit Court of Appeals.  Therefore, the future fate of this tax provision is in the hands of the U.S. Department of Justice and the 7th Circuit Court of Appeals.

Relief From the IRS for Misclassified Workers

In Notice 2011-95 issued on September 21, 2011, the IRS announced a new voluntary compliance program focused on assisting employers in the proper classification of its workers. The new settlement program provides a hugh financial relief for those employers who have improperly classified certain workers as independent contractors that should be classified as employees.

The Issue

It is all too common that employers classify workers as independent contractors that should be treated as employees. There are many reasons this occurs, but some of the most common that I hear include:

• The employer is just hiring the worker on a trial basis


• The worker is only going to be working on an infrequent basis


• The worker is only going to be working on a one time occurence


• The worker is going to be paid a flat fee


• The worker wants to be treated as an independent contractor


• It is too expensive to treat a worker as an employee

Unfortunately none of the above excuses are valid. Relying on such excuses, an employer can end up in the expensive situation of having to pay back payroll taxes when the IRS or a state authority steps into the picture. Even voluntarily correction of a workers classification can be so expensive the an employer prefers to continue on an incorrect path rather than make the necessary corrections.

IRS Provides An Out

The new program announced by the IRS will allow an employer to properly classify a worker as an employee on a prospective basis for a very small payment. Employers are eligible to enter the compliance program if they:

• Consistently have treated the workers in the past as nonemployees;


• Have filed all required Forms 1099 for the workers for the previous three years;


• Are not currently under audit by the IRS; and


• Are not currenlty under audit by the Department of Labor or a state agency.

An employer can apply for the program by filing Form 8952 at least 60 days before they want to begin treating the workers as employees. For example, if an employer would like to begin treating certain workers as employees as of the beginning of 2012, then it must file the Form 8952 by November 2, 2011.

The form includes a calculation that assesses the amount due on the reclassification. The amount is based on the wages paid during the most recently completed tax year and it is the equivalent of approximately 1.3% of the wages paid. This is a substantial savings over the options that exist outside of this program.

Application of Program for Churches and Other Nonprofit Organizations

One of the greatest liabilities for a church or a nonprofit is errors in the area of payroll. While not all of them center around worker classification, it is one of the most common errors. Churches and nonprofits often make incorrect decisions in this area due to relying on what another church/nonprofit or by relying on what they believe should be the correct classification. The fact is that the definition of an employee is very broad and encompassses most workers in nonprofits other than outside consultants or workers that are clearly operating a business that is available to general public. Some of the most common workers that are misclassified include:

• Nursery workers


• Musicians


• Maintenance workers


• Other workers that work either part time or on an irregular schedule

Action Required

This program is a definite consideration for all churches/organizations that have a worker classification issue. All organizations should take the time to review the workers currently classified as independent contractors to determine if that classification is correct. It may be necessary to engage a professional to assist with the proper classification of a worker. If this review discloses workers that should be classified as employees, then an organization should consider filing Form 8952 to take advantage of this program. Employers that are accepted into this program will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special 6 year statute of limitations, rather than the usual three years than generally applies to payroll taxes.

Consequences of Participant Designated Accounts

One subject that continually makes its way into practically every speech I deliver has to do with the tax consequences of maintaining participant designated accounts for fundraising activities. I have been speaking about this particular subject for approximately 4 years as the IRS has continued to get more and more serious about the ramifications of maintaining these types of accounts.

Possible Scenario:

Youth group needs money to help pay for camp fees for the students. A local advertiser tells the church that they will pay the church a set amount, if the students will go to a local stadium and place flyers in all the stadium seats prior to the big game on Sunday. The youth minister tells the kids that the funds paid to the church will be designated to the students' camp fees according to how long they assist in putting out the flyers.

Potential Consequences:

Payroll - The students have now been paid for their help in putting out the flyers. Therefore, they have been paid for their personal services. This has been done under the direction of the church staff. Therefore, all the students who have money credited to their camp fees have been compensated for their services and have been turned into employees of the church. Now the church is required to have all of the employment forms completed on the students and pay all the related payroll taxes. This was the result a few years ago with two booster clubs in Kentucky. See the story at http://www.kentucky.com/211/story/485490.html.

Tax Exemption - The IRS has ruled that this type of activity is private benefit to the students. Substantial private benefit to individuals can jeopardize an organizations exempt status. This was the conclusion in PLR 201035034 issued by the IRS last year. In the letter ruling, the IRS revoked the tax exempt status of a booster club due to the fact that practically all of their activities were performed to generate funds directed into participant accounts.

Income Tax - While not automatic, many fundraising activities do not generate unrelated business income due to the exception provided for activities conducted by volunteers. If all the volunteers have been turned into paid employees, this exception is no longer available. Therefore, it is possible that the activity will generate unrelated business income and subject the organization to filing Form 990-T.

Just How Serious????

Responses to this topic have varied from incredulous to skeptical to dismay. With the issuance of the above private letter ruling, it was obvious the IRS was beginning to take this issue to a more public level. Earlier this year I was informed that exempt organization agents were being trained in this specific issue.

On June 27, 2011, the Director of Exempt Organizations, Lois Lerner, issued a directive to the Director of Examinations and the Director of Rulings & Agreements. The directive clearly states that such programs are considered to be private benefit and could result in an organization losing its exempt status and the amounts credited to a participant's account could result in employment taxes. With this directive, the issue will be considered one for review for organizations that are undergoing examinations and/or that are requesting rulings as to their tax exempt status.

Conclusion

While these types of fundraising programs still can provide additional funds for a church, school or other type of organization, the distribution of the funds cannot be connected with the work performed by the person. The funds must be used for the general purposes of the organization or to provide for a reduced cost of an activity for all involved, working or not.

Form 1099-Misc Reporting Nightmare

Perhaps you have heard the ugly rumors of the increased mandatory reporting for payments to vendors. Unfortunately, it isn't all rumor, but it is truth. In an effort to make the health care bill "deficit neutral", the legislation included a provision that would require Forms 1099-Misc to be filed for virtually all vendor payments, including those to corporations, that exceed $600 for the year. It seems that this provision alone is anticipated to raise $17 billion of the nearly $1 trillion needed for the health care legislation. While this looked good on paper, no one attempted to consider the logistics or the cost to comply with such legislation. For example, what would be the cost to businesses to comply or better yet, could the IRS handle all of those Forms 1099-Misc. It is estimated that the provision will increase the filings by five fold. The provision is set to become effective in 2012. However, help may be on the horizon. It seems that both Democrats and Republicans are realizing this is not the best idea and something may have to be done. Rep. Dave Camp of Michigan has introduced H.R. 5893 to repeal this provision citing information that the compliance with the provision will cost American businesses more than the amount of revenue generated for the government. The cost is anticipated to be extremely burdensome to small business and small organizations. This translates into money diverted to regulatory compliance that a nonprofit should be able to use to fund its programs. At this point, we are watching Congress to see what will happen. We don't have to begin gearing up for the reporting just at this time, and have some time for Congress to save the day. Stay tuned to the final outcome on this issue and more guidance on when, or if, you will need to send a Form W-9 to Office Depot to gain their address and employer identification number.

Payroll Tax Responsibilities - A Gentle Reminder

A recent Tax Court memo decision serves as a good reminder that an organization is ultimately responsible for payroll tax deposits and filings even if the duties are delegated to an outside provider. In McNair Eye Center, Inc. v. Commissioner, TC Memo 2010-81, the owner of the eye center was held to be ultimately responsible for the timely deposit of payroll taxes despite the fact he hired an outside CPA to take on those responsibilities. The CPA filed the 2005 Forms 941 in February of 2006 and failed to pay the 2005 payroll taxes. The IRS determined, and the Court agreed, that the ultimate responsibility for the payment of the payroll taxes was the owner of the eye center. Therefore, there was not a reasonable cause to abate the penalties related to the late payment of the payroll taxes and the late filing of Forms 941.

While this case involves a for profit entity, the rules are the same for nonprofit organizations. Organizations should take seriously all responsibilities surrounding payroll. The ultimate responsibility for the payment of the payroll taxes is often attributed to the board of directors of the nonprofit or the officers of the nonprofit. This is true even if the organization has hired someone to handle all of the payroll functions of the organization and even if the organization uses an outside payroll service to process its payroll.

Not only are the related penalties a concern for an organization, but anyone deemed to be a "responsible person" can be held personally liable for unpaid payroll taxes. Therefore, it is in everyone's best interest to institute procedures to confirm the organization's compliance in regards to its payroll tax deposits and its payroll tax filings.

HIRE Act of 2010 - The Tax Man Giveth

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act better known as the HIRE Act of 2010. (Do you wonder how many people it took, or how long it took them, to come up with the name for this legislation that would create the acronym HIRE?) This act relieves employers from paying the social security portion or OASDI portion of the employment taxes on wages paid during 2010 to qualified workers.

CAUTION: There is no relief from the employer portion of Medicare taxes or any of the taxes that are withheld from the employee.

The OASDI portion of the employment tax is the 6.2% of the FICA taxes assessed on wages up to $106,800 during 2010. The maximum OASDI tax an employer must pay on any worker is $6,621.60. In essence, an employer will not have to pay this tax on wages paid between March 19, 2010 and December 31, 2010 to a qualified worker.

A qualified worker is one that is:

• Employed after February 3, 2010;
• Provides a signed affidavit that he has not been employed for more than 40 hours during the past 60 days;
• Isn't employed to replace another employee unless the other employee separated from employment either voluntarily or for cause (i.e., you can't fire the entire staff and then hire new ones simply to benefit from this new law); and
• Isn't related to the employer.

The tax relief that is attributable to the first quarter of 2010 will not be refunded, but will be applied to pay other payroll taxes that are due for the second quarter. After that, the employer will simply not have to remit the taxes. (This gives the IRS enough time to draft the new Form 941. There simply isn't time before Form 941 is due for the first quarter of 2010.)