D R A F T
FOR DISCUSSION ONLY
UNIFORM WAGE WITHHOLDING
PROCEDURE ACT
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM LAWS
September 2003
With Prefatory Note and Preliminary Comments
Copyright © 2003
by
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM LAWS
______________________________________________________________________________
The ideas, concepts and conclusions set forth in this draft, including the proposed statutory language and any comments or reporter’s notes, have not been reviewed, debated or approved by the National Conference of Commissioners on Uniform State Laws or the Drafting Committee. They do not reflect the views of the Conference and its Commissioners or the Drafting Committee and its Members and Reporter. Proposed statutory language may not be used to ascertain the intent or meaning of any promulgated final statutory proposal made by the National Conference of Commissioners on Uniform State Laws.
UNIFORM WAGE WITHHOLDING PROCEDURE ACT
The Committee appointed by and representing the National Conference of Commissioners on Uniform State Laws in preparing this Uniform Wage Withholding Procedure Act consists of the following individuals:
CHARLES A. TROST, Nashville City Center, 511 Union St., Ste. 2100, Nashville, TN 37219, Chair
JOHN A. CHANIN, 5901 Mount Eagle Dr., Apt. 1115, Alexandria, VA 22303
ROSS B. CLARK, II, Brinkley Plaza, 80 Monroe Ave., Suite 700, Memphis, TN 38103-2467
JOSEPH M. DONEGAN, 1100 Valley Brook Ave., P.O. Box 790, Lyndhurst, NJ 07071
ELWAINE F. POMEROY, 1415 SW Topeka Blvd., Topeka, KS 66612-1818
FRANCIS J. PAVETTI, 18 The Strand, Goshen Point, Waterford, CT 06385, Enactment Plan Coordinator
KAREN ROBERTS WASHINGTON, 2929 Carlisle, Suite 250, Dallas, TX 75204
LAURENCE B. WOHL, University of Dayton, School of Law, 300 College Park, Dayton, OH 45469-2772, Reporter
EX OFFICIO
FRED H. MILLER, University of Oklahoma, College of Law, Room 3056, 300 Timberdell Road, Norman, OK 73019, President
JACK DAVIES, 687 Woodridge Dr., Mendota Heights, MN 55118, Division Chair
AMERICAN BAR ASSOCIATION ADVISOR
DAVID CLARK, P.O. Box 1474, Lafayette, CA 94549, ABA Advisor
SPECIAL CONSULTING ADVISOR
PHILLIP CORN, 1111 Constitution Ave. NW, Room 5201, Washington, DC 20224
EXECUTIVE DIRECTOR
WILLIAM H. HENNING, University of Alabama, School of Law, Box 870382, Tuscaloosa, AL 35487-0382, Executive Director
WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104, Executive Director Emeritus
Copies of this Act may be obtained from:
NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS
211 E. Ontario Street, Suite 1300
Chicago, Illinois 60611
312/915-0195
UNIFORM WAGE WITHHOLDING PROCEDURE ACT
TABLE OF CONTENTS
SECTION 1. SHORT TITLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
SECTION 3. FILING AND PAYMENT DATES.
SECTION 4. EFFECTIVE DATE AND TRANSITION RULES
UNIFORM WAGE WITHHOLDING PROCEDURE ACT
In 1966 the Simplified Tax and Wage Reporting System Program, commonly referred
to by the acronym STAWRS, was created by the Internal Revenue Service and consisted of a
working group of representatives from the Internal Revenue Service, Department of Labor,
Department of the Treasury, Office of Management and Budget, Small Business
Administration, Social Security Administration and various states
and private sector
organizations
. STAWRS conducted a study to determine the extent of definitional
differences for the term “wage” found in federal and state income tax withholding and
unemployment insurance statutes with a view towards modifying the term “wage” in each of
those various provisions in order to achieve a substantially uniform definition across all the
statutory frameworks.
The fifty states, the District of Columbia, and the federal government have a total of 96 different employment tax laws. Within the 96 employment tax laws, there are almost 500 different components or provisions. Employers must maintain separate wage records for federal income tax withholding, state income tax withholding, the federal insurance contributions act (FICA), the federal unemployment tax act (FUTA), and state unemployment insurance (SUI) taxes. In many cases, employers must report this information to government agencies at different times, on different forms, and on assorted media. ...
In addition to requiring employers to report tax-and wage-related information, employment tax laws require government agencies to process the information reported, verify that the information complies with the laws, work with employers to correct reports that do not comply, and provide assistance to employers attempting to comply. The diversity in current laws and filing dates makes it difficult for government agencies to provide consistent, accurate, and timely service to their customers.
The diverse state and federal laws governing wage taxes and
withholding significantly increase employer burden....
Reporting complexities caused by existing statutes are very costly to everyone. Small
employers must attempt to understand sometimes subtle distinctions, have knowledge of a
large number of definitions and attempt to understand the different requirements of them for
two different codes within their state. Large and small employers that do business in more
than one state must deal with these issues in each state and the administrative complexities
caused by multi-jurisdictional differences. On the governmental side of the ledger, states must
maintain two separate taxpayer auditing capabilities (and staffs) to insure compliance with two
separate laws. By harmonizing the definition of wages substantial compliance cost savings
,
both for private industry and government, were, and are, anticipated.
As part of their study the STAWRS group analyzed and compared hundreds of federal
and state statutory provisions and administrative positions to determine the existing degree of
harmony of various definitions in various jurisdictions for purposes of determining in each
jurisdiction amounts subject to income tax withholding and amounts subject to unemployment
insurance assessment (and, tangentially, unemployment benefits). The project encompassed
two studies: one focused on income tax withholding, the Harmonized Wage Code for Income
Tax Withholding, and the other, The Harmonized Wage Code for Unemployment Insurance
,
focused on unemployment insurance tax assessment.
The goal of STAWRS was to identify items of compensation that could be excluded
from the income subject to income tax withholding and the income subject to unemployment
insurance tax assessment. These were to be items that were components of compensation but
which were (1) given treatment for income tax withholding purposes differing from one state
to another, (2) given treatment for unemployment tax purposes differing from one state to
another, and (3) perhaps the most confusing for employers, given treatment by individual
states that differed for that state’s income tax withholding law and its unemployment tax law.
These were items, because of the variety of their treatment, that created significant compliance
complexity yet they clearly were items of compensation when paid. STAWRS identified 14
such elements of wages
and recommended that they be excluded from wages for income tax
withholding purposes. This recommendation forms the backbone of this act though this act
goes beyond that recommendation.
This act goes beyond the harmonization of the income tax withholding provisions of
the THWC to include a harmonization of those provisions with the unemployment tax
provisions of the various states. Adoption of a common definition for these items by all states
for both income tax withholding and unemployment insurance tax wage base purposes will
lead to substantial harmonization and significant compliance simplification. These items are
common forms of employee compensation but are not ubiquitous. They are items that are
more likely to occur in a large employer environment for income tax withholding purposes but
are items that are frequently part of the unemployment tax wage base for both large and small
employers. These items, for the most part, are excluded from a wage base for either income
tax withholding or unemployment insurance purposes in some states but not in all.
Harmonization of each component across the income tax withholding statutes and the
unemployment insurance tax assessment statutes of all states will simplify the compliance
process and administration of reporting for large and intra-state employers and small single
state employers alike. This act harmonizes the definition of wages for income tax withholding
purposes by excluding the same components of compensation from withholding of taxes in all
states that have an income tax. It also harmonizes the definition of wages for unemployment
insurance assessment purposes by excluding the same components of compensation from the
unemployment insurance tax wage base in all states. Additionally, for those states that have
an income tax as well as unemployment insurance the definition of wages will be harmonized
by the exclusion of the same components of compensation from both wage bases. The act
creates substantial conformity of definitions, and thus simplification, between an adopting
State’s income tax wage base and its unemployment insurance wage base as well as
substantial conformity of those wage bases among the States
.
Problematically harmonization of the tax withholding provisions with the
unemployment insurance provisions requires the meshing of two different, and somewhat
conflicting, policies within each single jurisdiction as well as among the multiple jurisdictions.
The income tax withholding regime is indifferent as to items in the wage base
whereas the
unemployment insurance tax regime is deeply concerned about the items in the wage base. On
the one hand the policies driving income tax withholding are focused on the single issue of
collection, a ministerial act of collection rather than a political question of what should be
taxed. Items of income that are subject to income tax will continue to be subject to that tax
even if not subject to withholding. On the other hand, policies underlying unemployment
insurance programs are concerned with dispersal of benefits as well as the collection of
sufficient revenues to provide for those benefits. For purposes of unemployment insurance
each item placed in the wage base and subject to unemployment insurance tax will assist
employee’s in meeting threshold requirements
and lead to increased revenues available for
distribution to those in need. Conversely, each item removed from this wage base will make it
more difficult for an employee to reach threshold requirements and will reduce the amount of
revenue available for distribution. Thus, for purposes of unemployment insurance,
components of the wage base are important on three counts. First, an item added to the
unemployment insurance wage base makes it easier for an employee to meet the threshold
amounts of income needed to qualify for benefits; second, an item of income added to the
wage base increases benefits (up to statutory maximums) payable to an unemployed former
employee; and third, the larger the unemployment wage base the greater the unemployment
taxes collected and, thus, the larger the fund to pay benefits.
In attempting to harmonize the two separate code constructs there must be a careful
balancing of the need for simplicity, and thus compliance cost reduction, with the need not to
compromise benefits that a state has deemed appropriate for its unemployed
.
For large employers and those doing business in more than one state the harmonization
of the most common elements of compensation provide significant alleviation of compliance
complexity. However, relief from compliance burdens for small employers, most of which do
business in a single state will likely be as great or greater than for larger employers. Because
any one small employer has small numbers of employees it is not likely to have employees
dedicated to compliance with federal and state tax and unemployment laws. Consequently,
the small employer will (1) undertake the compliance regimen themselves (i.e., an
entrepreneur will be responsible for compliance or will assign a most likely already
overworked bookkeeper to such responsibility) with the commensurate cost in time and
education necessary to comply (a cost that will be spread over a small employee base
), (2)
comply “by the seat of their pants” frequently, if not regularly, resulting in fines and interest
bearing errors, or (3) place the compliance burden with contract professionals (accountants,
lawyers and payroll services).
States may balk at conforming their own income tax and unemployment tax wage
bases let alone conforming those wage bases to other states’ wage bases and, possibly, even
the federal income tax withholding and FICA wage bases, for a number of good reasons. Two
of these reasons are that conformity may lead to a loss of revenue in a state’s unemployment
insurance system, and conformity may reduce unemployment benefits in some states.
A
report commissioned by the STAWRS project set out the following example in explaining the
revenue impact of reducing the unemployment insurance wage base:
To illustrate the impact on tax revenues, consider the following: An employer has an employee in state A and an employee in state B and each earns $20,000 per year. State A has a taxable wage base of $10,000 as opposed to state B’s $21,000. (Taxable wage base is that portion of an employee’s total wages subject to SUI tax [and may not be the same as that employee’s income tax wage base].) Consider as well that the reduction in taxable wages resulting from these definitional changes is $1,000 per year. There would be no impact in state A inasmuch as the portion of the employee’s taxable wages would be unchanged. However, in state B taxable wages would be reduced from $20,000 to $19,000 and there would be a commensurate reduction in tax paid by the employer.
When considering worker unemployment benefits, there are two types of impacts that can occur. First, there are minimum earning levels in each state that must be met before an employed worker becomes eligible for benefits. If any reduction in wages would drop a worker’s earnings below the minimum earnings level, that worker would no longer be eligible for benefits...
Second, and more likely, is the potential reduction in weekly
benefit amounts (WBA). These amounts are calculated on a
worker’s earnings, generally a combination of annual earnings and
high-quarter earnings. Any reduction of annual or high-quarter
earnings reduces the worker’s WBA...
Though traditional contributions might be diminished and benefits reduced under some
circumstances, it does not appear that the amount of loss of revenue or aggregate reduction in
benefit payments will likely be dramatic if the fourteen items of income are harmonized
within a state and among the states and federal government. However, it is possible that, at
least as to reduction of benefits, though the macro problems will not be significant the micro
problems could be devastating. The dollar amounts of benefits paid to any one individual, or
individuals within any single employee sector, may be reduced by a significant percentage or
eliminated altogether.
The Commissioners believe that the act creates the proper balance between efficiency and cost savings on the one hand and the necessary flexibility required by each State to meet its citizens’ unique needs. The Commissioners recognize that issues of jurisdictional integrity and different needs of the various States could create stumbling blocks to harmonization. Nonetheless, the Commissioners believe that adoption of this act will lead to significant simplification and cost savings for employers and States.SECTION 1. SHORT TITLE. This [act] may be cited as the Uniform Wage Withholding Procedure Act.
SECTION 2. DEFINITIONS. In this [act]:
(1) "Employee" means an individual whose remuneration for services paid by the individual's employer is subject to, or would be subject to, if not excluded under subsection by paragraph (5) of this Section 2, withholding of income tax under the laws of this state or for whom an employer makes contributions under the unemployment insurance laws of this state.
Preliminary Comments
The definition of employee is intended to exclude any relationship in which the service provider is found to be an independent contractor. The distinction between an employee and an independent contractor has been the subject of intense controversy between the Internal Revenue Service and state authorities on the one hand and Taxpayers on the other hand primarily because the recipient of the services of an independent contractor does not make contributions to FICA or FUTA or state unemployment insurance programs on behalf of the service provider whereas the recipient would be required to make these contributions for compensation paid to an employee. Though employment status is a question of common law the Internal Revenue Service has instructed taxpayers that there are 20 factors, each of which is given different weighting depending on the circumstances, which must be considered in making the determination of employee or independent contractor status. (See, Rev. Rul. 87-41, 1987-1 C.B. 296, Regulations Sections 26 CFR 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1). The states generally conform to these 20 factors though interpretations of these factors vary from state to state and court to court. This act does not address the correctness of any position in this regard, it simply accepts whatever status is deemed appropriate under applicable state and federal law.
Additionally, allocations of income from an entity to a limited partner, non-managing member of a limited liability company (or any variation of this type of entity such as limited liability partnerships) or a shareholder of a sub-chapter S corporation (all of which are entities frequently referred to as “pass-thru entities”) are not subject to FICA, FUTA or state unemployment insurance taxes. General partners and managing members of limited liability companies (i.e., those partners or members who are not considered merely passive investors) are subject to self-employment taxes on their distributive share of partnership income imposed under Internal Revenue Code Section 1401 on all distributions from the partnership.
(2) "Employer" means a person that pays remuneration for services to an individual who does not have the status of independent contractor.
(3) "Employment tax" means, at any given time, the total of federal and state income taxes withheld from an employee’s wages and federal and state unemployment insurance taxes incurred by an employer on those wages which are held by the employer and not yet paid to the appropriate government entity.Preliminary Comments
This act impacts only federal and state imposed taxes. It does not effect the assessment or collection of any local taxes even if those taxes are income taxes or some form of unemployment tax.
(4) "Internal Revenue Code" means Title 26 of the United States Code [as amended].
(5) "Wages" means all remuneration, including any remuneration in a medium other than cash valued at its fair market value, received by an employee from the employee's employer and aggregate tips received by the employee in excess of $20 a month from a person other than the employer for services arising in the context of the employment relationship between the employer and the employee.
Preliminary Comments
In kind payments of wages (“medium other than cash”) will be included at the property’s fair market value at the time of payment to the employee by the employer. Cash, of course, will be valued at its face value. It is assumed that cash payments of wages made in a denomination other than United States currency will be its official exchange rate value as of the date of payment.
In general all States currently provide that tips or gratuities are wages and that the employer has the legal obligation to withhold income taxes and to make unemployment insurance contributions on those wages. This provision assumes that each state has or will have a reporting procedure similar to the federal requirement that the employee provide a monthly statement in writing to the employer stating the amount of tips earned during the preceding month. Because tips are frequently paid for via credit and debit cards the record keeping requirements for both employer and employee are somewhat less burdensome than they may have been when such payments were generally made in cash.
This definition of wages is intended to include vacation pay. Currently, vacation pay is defined by all states as a wage with the exception of Delaware. Delaware does include vacation pay as wages for purposes of both income tax withholding and assessment of unemployment insurance taxes except for vacation pay paid during a period of unemployment which is excluded.
Legislative Note: It is anticipated that a jurisdiction adopting this statute will amend both its statute dealing with income tax withholding and its statute dealing with unemployment insurance. In that event, if, subsequent to adoption of this act, a jurisdiction should amend the provisions of this Section 1. of this act in either its income tax withholding statute or its unemployment insurance statute care must be taken to amend both statutory provisions in order to maintain the common definition of wages. To avoid the problem of a legislature inadvertently adopting an amendment effecting one or the other of these statutory schemes but not both, it would be preferable to adopt this act as a whole and have both the jurisdiction’s income tax withholding statute and its unemployment insurance statute incorporate this act’s definition by reference. No matter which method of adoption is chosen, the jurisdiction needs to be certain that adoption of the definition of wages in this act does not have an unintended impact on other statutes that currently incorporate by reference the definition of wages found in either its income tax withholding or unemployment insurance provisions.
The term does not include:
(A) the value of any meals or lodging furnished by or on behalf of an employer if, at the time of furnishing, it is reasonable to believe that the employee will be able to exclude the value from income under Section 119 of the Internal Revenue Code;
Preliminary Comments
This provision excludes from both the income tax withholdings wage base and the unemployment insurance tax and benefits wage base amounts that are excluded because they are items provided by the employer primarily because the physical location for the performance of services requires the employee to live and/or eat on the business premises. No state that imposes income taxes does not already provide such provision or, at least, a provision similar to Internal Revenue Code Section 119 for income tax withholding purposes. However, as stated by a report made to STAWRS:
At present, 23 states treat meals and lodging as wages in their [unemployment
insurance] laws and would be affected by this recommendation [to exclude
meals and lodging from the compensation wage base]. These states include
California (included in this study), New Jersey, New York, and Texas. They
represent in excess of 26% of the nation’s work force. In terms of impact on
affected claims, analysis of California’s data indicate the average benefit claim
over its duration is $2,433 and the average value of the exclusion of the meals
and lodging component on affected claims is $487, amounting to 20% of the
claim of the workers affected. This percentage of reduction, or one close to it,
could occur in New Jersey, New York and Texas as well.
The report making the above quoted statement pointed out that in California this
reduction represents only “...about 0.2% of the total benefit outlay, [however,] it represents
almost a 20% reduction for the 7600 affected claimants. Additionally, 660 claimants, or 0.1%
of the claimant population would lose their eligibility entirely.”
Any attempt to harmonize
the income tax withholding provisions with the unemployment insurance provisions within a
given state will have to recognize the difficulty of dealing with these two different policy
concerns. Of course, for those who have remuneration from their employers other than meals
and lodging at, or in excess of, the maximum taxable unemployment insurance wage base the
exclusion of the value of meals and lodging is of no consequence.
The Commissioners are most troubled by the prospect of low income workers being disadvantaged for the benefit of administrative convenience no matter how small the number of effected workers. Possible methods of achieving the administrative goal without disadvantaging these people is suggested in the legislative note accompanying this provision. However, if a method cannot be determined by a state to reconcile this conflict, then the Commissioners recommend that this provision not be adopted by that state.
Legislative Note: The Commissioners are troubled by the implications of excluding items from the unemployment wage base that will result in the loss of benefits to the lowest wage individuals. Consequently, it is presumed that a state adopting this provision will amend its unemployment tax regime to eliminate the burden imposed on these employees. One method of approaching this issue would be for the state to increase the rate of unemployment tax on other income paid to individuals whose compensation is in part excluded under this provision and to reduce the benefit threshold amount for those individuals. Another possible method to ameliorate the problem concerning the Commissioners would be to base unemployment tax assessment and benefit threshold in part on an hours worked basis rather than amount of compensation basis.
As an example of this problem consider an employee who receives from an employer
meals that qualify as exempt from income tax under statutory provisions similar to Section
119 of the Internal Revenue Code
. Though the value of the meals is correctly excluded from
the income tax withholding wage base it is considered income for purposes of establishing the
unemployment insurance tax imposed on the employer and considered part of the wage base
for determining an unemployed individual’s unemployment benefits. Not all income for
unemployment insurance purposes is income for tax withholding purposes.
(B) any payment made to, or on behalf of, an employee or the employee's beneficiary under a cafeteria plan under Section 125 of the Internal Revenue Code, if the payment would not be treated as wages without regard to the plan and it is reasonable to believe that Section 125 of the Internal Revenue Code would not treat the payment as included as taxable wages because of the constructive receipt of the payment;
Preliminary Comments
This provision provides that benefits otherwise excludeable from an employee’s gross income and subject to income tax and unemployment insurance tax will not be considered includeable in either the income tax or unemployment insurance wage base merely because of constructive receipt issues. Section 125 of the Internal Revenue Code permits taxpayers to select from a group of benefits provided by their employer. Individually, these benefits are permitted, under the Internal Revenue Code, to be provided on a tax free basis to an employer’s employees. Without the intervention of this code provision, however, the fact that employees have the opportunity to select which tax free benefit, from a variety of offerings, they prefer to have is sufficient to make these otherwise tax free benefits taxable under the doctrine of constructive receipt. It appears that all states currently have extant a similar provision for income tax withholding purposes. However, many states do not exempt items paid under Internal Revenue Code Section 125 plans from tax liability (or benefit calculation) for unemployment insurance purposes. For any state that does not have a provision excluding from either wage base the items contemplated under Internal Revenue Code Section 125 it will be incumbent upon that jurisdiction to adopt such a conforming provision. In the absence of such provision in the unemployment insurance arena such amounts will be a component of the unemployment insurance wage base.
(C) remuneration paid to, or on behalf of, an employee for moving expenses if, at the time of the payment, it is reasonable to believe that a corresponding deduction is allowable to the recipient under Section 217 of the Internal Revenue Code, as determined without regard to Section 67 of the Internal Revenue Code, or is excludeable from the employee's federal gross income under Section 132(a)(6) of the Internal Revenue Code;
Preliminary Comments
This provision requires the exclusion from the wage base for purposes of income tax withholding and unemployment insurance tax and wage base calculation amounts paid for what are commonly referred to as moving expenses. All states that impose income taxes already provide such a provision except for two states with no provision. Generally it can be presumed that employer paid or reimbursed moving expenses will be paid primarily to those whose regular wages already exceed the maximum unemployment insurance wage base. Thus, this provision should have no impact on the benefits payable to any employee receiving unemployment benefits nor any employer’s unemployment insurance tax liability even if a state’s deductions or exclusions are not as generous as those provided under the Internal Revenue Code.
(D) premiums paid by an employer for group-term life insurance on the life of an employee to the extent the premium is excluded from the employee's federal gross income under Section 79 of the Internal Revenue Code;
Preliminary Comments
There is no state that imposes either an income tax or an unemployment insurance tax that does not have either a provision similar to this provision or has no provision that would subject such premiums to income tax or have implications on their unemployment insurance regime.
(E) payments made to an employee by an employer as an employee achievement award as defined in Section 274(j) of the Internal Revenue Code;
Preliminary Comments
Employee achievement awards are small awards given to employees for achievement in longevity or safety. For federal income tax purposes, if awards are not pursuant to a written plan, the sum of all achievement awards paid to any one employee during any year that the employer can deduct as a business expense cannot exceed $400 per year. If awards are made pursuant to an established written plan or program that does not discriminate in favor of highly paid individuals (i.e., a qualified plan), then the sum of all achievement awards paid to an employee during any year that the employer can deduct as a business expense cannot exceed $1,600 (including any awards from a non-qualified plan).
(F) payments paid by an employer for insurance or annuities or into a fund to provide for any payment made to, or on behalf of, an employee or any of the employee's dependents:
(i) because of sickness, if not mandated under [this state's workers' compensation law], made after six calendar months following the month in which the employee ceased working for the employer, if it is reasonable to believe that the payments are not subject to taxation as income to the recipient of the payments under [the income tax laws of this state]; or
(ii) under a plan or system maintained by the employer which makes provision for the employer's employees, or the employees' dependents, generally or for a class or classes of the employer's employees, or for a class or classes of employees and their dependents, on account of:
(I) sickness, if mandated under [this state's workers' compensation law];
(II) disability resulting from an accident and received under [this state's workers' compensation law] if it is reasonable to believe that it is not subject to income taxation to the recipient of the payments under [the income tax laws of this state];
(III) medical or hospitalization expenses in connection with sickness or a disability resulting from an accident; or
(IV) death;
(iii) Notwithstanding the subparagraphs (i) and (ii), if an employee makes an election in writing to have income tax withheld on any payment of sick pay, the payment shall be considered wages for purposes of withholding of income taxes;
(G) a payment or series of payments made to an employee, or any of the employee's dependents, for death or disability which:
(i) is paid on or after the termination of an employee's employment with the employer because of the employee's death or retirement due to disability; and
(ii) would not have been paid if the employee's employment had not been so terminated;
(H) a payment made by an employer to a survivor or the estate of a former employee after the calendar year in which the employee died;
Preliminary Comments
In general only income from sick pay or wage continuation plans maintained by the employer but not mandated by a state’s workers’ compensation law are included in an employee’s income wage base for purposes of either income tax withholding or unemployment insurance benefit determination or tax assessment . Amounts paid due to an employee’s death but are considered income in respect of a decedent (as defined at Internal Revenue Code Section 691) are not excluded and this act does not intend to change that treatment.
(I) a payment made or the value of benefits provided which afford an employee dependent care assistance pursuant to a qualifying dependent care program if, at the time of the payment or provision of the benefit, it is reasonable to believe the payment or benefit is excludable from the employee's federal gross income under Section 129 of the Internal Revenue Code;
Preliminary Comments
This provision excludes the value of benefits provided by an employer to an employee under an employer provided dependent care plan providing non-discriminatory access to dependent care for young children who are dependents and dependent adults who are unable to care for themselves due to physical or mental incapacity. It is intended that these individuals be the same as those defined as “qualifying individuals” at Internal Revenue Code Section 21(b)(1). It is further intended that the State statutory provisions will require a written, non-discriminatory plan similar to that under and meeting the requirements of Internal Revenue Code Section 129. Inclusion of this provision will require many states to adopt dependent care provisions not currently extant. Currently, 42 states have concurring statutes for income tax withholding and 1 state has no provision (9 states have no income tax). On the unemployment insurance side of the ledger, however, only 15 states’ statutes conform to these requirements, and 35 states have no provisions dealing with this issue. Two states, Alabama and Michigan provide that payments made directly to the care giver or care facility are not wages to the recipient employee while benefits provided through a wage reduction plan are considered wages to the recipient employee (presumably because of some degree of constructive receipt).
(J) fringe benefits provided to or for the benefit of an employee if, at the time of provision or reimbursement, it is reasonable to believe that the benefit is excludeable from the employee's federal gross income under Section 132 of the Internal Revenue Code;
Preliminary Comments
Of those jurisdictions imposing an income tax forty-two have provisions that provide this treatment for purposes of income tax withholding and one state has no provision. For purposes of unemployment insurance withholding only thirty-three states have provisions similar to this provision. Ten states currently have no or minimally matching provisions.
(K) a payment that reimburses expenses incurred on behalf of an employer or as an allowance provided by an employer for, but not in excess of, those expenditures that meet the requirements of Section 62(a)(2)(A) of the Internal Revenue Code and that are not in excess of the lesser of the allowance or the substantiated expenses incurred by the employee for the expenditures;
Preliminary Comments
Though the THWC report indicates that all states provide this exclusion for both income tax and unemployment insurance tax purposes, there are numerous states that do not currently comply with the reporting requirements set out in the Internal Revenue Code. If those states should adopt reporting requirements similar to those mandated for federal tax purposes no additional compliance costs would be incurred by employers or employees who are currently complying with the federal requirements.
(L) a payment made to, or on behalf of, an employee or the employee's beneficiary
from or to a plan or plans described in Section 3306(b)(5)(A) through (F) of the Internal
Revenue Code;
Preliminary Comments
This provision deals with contributions to pension, profit-sharing and similar arrangements that meet the requirements for tax exemption under Sections 401 and 501 of the Internal Revenue Code. All states provide similar exclusions for both income tax and unemployment insurance tax purposes but the provisions for many states are complex and could be simplified. It should be noted that these amounts are subject to FICA taxes when contributed to such a plan.
(M) a payment made to an employee as the result of the employer's transitory passage through this state while engaged in the interstate transportation of goods or people;
(N) a payment made to an employee for services performed outside of this state if, at the time of the payment, it is reasonable to believe that the payment is excludable from the employee's gross income under [the statutes of this state] for income tax or unemployment insurance purposes;
Preliminary Comments
Forty six states have adopted provisions similar to this provision. At present no state imposes an income tax on wages earned by and paid to a state resident while out of state. If a State did include such income in its taxable base, it would be impossible to enforce a withholding requirement on a foreign corporation that had no presence in the state, but it could enforce withholding requirements on any corporation that is present in the state. Additionally, if a state exercised jurisdiction over a corporation and chose to include this income in the unemployment wage base there would be an impact on an employee’s benefit wage base as well as an imposition of unemployment taxes on the employer.
(O) an amount paid for a scholarship or fellowship by an employer to an employee or a dependent of the employee who is a candidate for a degree at an educational organization described in Section 170(b)(1)(A)(ii) of the Internal Revenue Code and used by the individual for qualified tuition and related expenses, as the terms are defined in Section 117(b) of the Internal Revenue Code;
(P) any reduction in tuition provided by an employer that is an organization described in Section 170(b)(1)(A)(ii) of the Internal Revenue Code to an employee of the employer, including a retired or a disabled employee, and the surviving spouse of a deceased employee, or a dependent of the employee for the education, below the graduate level, of the employee or dependent of the employee at the organization or another organization described in Section 170(b)(1)(A)(ii) of the Internal Revenue Code; and
Preliminary Comments
Arizona, California, Indiana, Ohio, Kansas, and Mississippi are the only jurisdictions that have provisions comparable to this one. None of the other States or the District of Columbia have any provision dealing directly with this issue, though discussions with the STAWRS team indicates that most states currently follow the federal rule through administrative policy.
The language of this provision is largely the same language of Internal Revenue Code Sections 117(a) and (b). Thus, like the federal law, this provision is intended to exclude from an individual’s gross income only those amounts which are used to pay for tuition, fees, books, supplies and equipment required for enrollment at, or to take courses pursuing a degree at, “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on...” Internal Revenue Code Section 170(b)(1)(A)(ii).
(Q) an amount paid to an individual for jury service by a court, or by a governmental entity on behalf of a court.
Preliminary Comments
All states exclude this payment from income tax withholding requirements as well as unemployment insurance purposes. However, some states accomplish this exclusion by excluding such payments from the definition of wages and others simply exclude jury service from the definition of employment. For those taking this later approach, this provision will require them to amend that portion of their statutes to conform to a treatment of these payments as exclusion from the definition of wages.
SECTION 3. FILING AND PAYMENT DATES.
(a) All employment taxes must be reported quarterly unless it is reasonable to believe that the total amount owed by the employer for the entire calendar year will not exceed $2,500, in which case the employment taxes must be reported annually.
(b) All reports of employment taxes must be filed and submitted to [insert state rule] on forms, or electronically, as prescribed by [the responsible state agency].
(c) All payments of employment taxes must be made by the employer by check, electronically, or any other form as required by [insert appropriate state agency].
(d) All payments of employment taxes must be made to the [insert appropriate state agency] as follows:
Preliminary Comments
This provision anticipates a rather substantial administrative change in States’ physical collection of withholding and unemployment insurance taxes. Currently, these taxes are collected by two separate entities – the income taxing authorities and the entity responsible for administering the unemployment insurance law. As drafted, this section of the act would require the collection function to be conducted by the same agency or department which would then be responsible for the ministerial act of properly allocating the funds between the State’s income taxing authority and the department responsible for enforcing the State’s unemployment compensation law.
Ideally, this same “collection” agency will be able to verify compliance with both the income tax withholding and unemployment insurance tax laws because there will be no divergence between those laws regarding the definition of wages; at least to the extent of the conforming items set out in this act.
(1) if the total amount owed at the end of a calendar year is no more than $2,500, no later than January 31 of the following year;
(2) if the total amount owed on June 30 or December 31 is greater than $2,500, but no more than $5,000, no later than the end of the calendar month following the June or December in which the amount exceeds $2,500;
(3) if the total amount owed is greater than $5,000, but no more than $50,000, no later than the 15th day of the calendar month immediately following the month in which the amount exceeds $5,000;
(4) if the total amount owed is greater than $50,000, but no more than $100,000, no later than the third business day immediately following the Friday of the week in which the amount exceeds $50,000; and
(5) if the total amount owed is greater than $100,000, no later than three business days following the day the amount exceeds $100,000.
Preliminary Comments
In general payment thresholds and dates as well as filing dates for both withheld income taxes and unemployment insurance taxes are specified by statute only in general terms. The specifics are left to the various concerned administrative agencies. However, to enhance the possibilities of conformity, this recommended provision is set forth with greater detail than is found in most current state statutes.
Analysis of the various States’ filing requirements and payment thresholds show a wide variety of dates and amounts. In fact, there are approximately 90 different threshold amounts and 109 different filing dates among all the 50 States and the District of Columbia. Employers are unlikely to have to deal with more than a few jurisdictions and/or more than a few payment threshold amounts. Consequently, any multi-state employer likely will have far fewer than the nearly 200 different filing and payment requirements. Nonetheless, the multitude of dates and amounts with which any one employer may need to comply under the current state of the law is daunting. Further, the burden on small employers doing business in more than one state can be dramatic because the cost of keeping track of the various filing and payment dates in relation to the size of the employer may be high.
In any event, ignoring transition problems (which may, in some cases, be insurmountable), common dates for compliance will greatly ease burdens imposed on all employers. Further, the costs of auditing and assuring compliance incurred by the States presumably will be reduced simply because complexity is reduced.
This provision also does not provide for a look back period as does the Internal Revenue Code and some state withholding statutes. A look back provision permits payors to base their payment thresholds, and thus frequency of payment of taxes, on prior year compensation history. Because the income taxes withheld and the taxes owed for unemployment insurance purposes are based upon current compensation, it does not appear that look back rules are essential to timely and accurate compliance with the payment rules. In an era of instant information and computerized payroll systems, it does not appear that essential data for proper compliance is difficult to aggregate. On the other hand it is recognized that payments based upon current payrolls may cause cash management problems for employers which have significantly fluctuating payrolls. Nonetheless, payments based upon current compensation rather than look back estimates will make it less likely that employers will become in arrears in payments of their Trust Fund obligations (i.e., their obligations to pay over withholding taxes). For large taxpayers, at least for federal taxes, this is not an issue because regardless of any look back rules at any time an employer has accumulated $100,000 of payroll taxes they must be paid over to the government by the next business day after such accumulation. For mid-size taxpayers, particularly those with quickly growing business or those the business of which is highly volatile, the problem of temptation to use rather than pay over Trust Fund monies may cause them much difficulty and deprive the government of monies owed.
SECTION 4. EFFECTIVE DATE AND TRANSITION RULES
(a) The effective date of this [Act] is [seven years after NCCUSL adoption.]
(b) Reserved
Preliminary Comments
No transition rules are specified in this act. Because of many different existing collection dates and amounts in the various states, it would be impossible to address the transition issues facing each state in a single process. It is intended by the Commissioners that by deferring the effective date of this act for 7 years after its adoption by the Commission on Uniform State Laws that this will give all states sufficient time to effect the transition with the least impact possible.