SECTION IV EMPLOYMENT TAX = PAYROLL TAX

Employment Tax

“Wages” for purposes of FICA (Social Security and Medicare) and federal income tax withholding means all payments received for “employment” with certain exceptions. Unless payments to employees are excepted from the term “wages” or the services performed by the employee are excepted from the term “employment,” the payments are subject to FICA and federal income tax withholding. Independent contractors and employees are generally involved in gaming operations, and the gaming operation is responsible for filing certain IRS tax forms. See the Independent Contractor vs. Employee section of this publication.

Tribal gaming operations (employers) must generally withhold income and FICA taxes. These are deposited to the IRS on the employees’ behalf. Employers may also be subject to depositing unemployment tax on wages paid to an employee (see exception below).

Employers are responsible for filing Form W-2, Wage and Tax Statement, and Form 941, Employer’s Quarterly Federal Tax Return. To know how much income tax to withhold from employees’ wages, employers should have a Form W-4, Employee’s Withholding Allowance Certificate, on file for each employee.

Exception – Federal employment tax also includes tax imposed under the Federal Unemployment Tax Act (FUTA). Beginning January 1, 2000, Indian tribes and any wholly owned tribal business are not required to file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, if they participate in the State Unemployment Tax Act (SUTA) system. The employer is no longer exempt from FUTA if the employer elects not to participate in SUTA. The employer will become liable for FUTA taxes and will be required to file Form 940 with the IRS. Employers should be aware that nonparticipation in the state unemployment program may make tribal employees ineligible for unemployment benefits. For more information on FUTA tax for tribal governments and their wholly owned tribal businesses, see Publication 4268, Employment Tax For Indian Tribal Governments.

Forms to File for Employees

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Reporting Tip Income

All tips received by an employee are taxable income subject to federal income tax. An employee must include in gross income all tips received directly or indirectly such as:

• Cash tips

• Charge tips

• Tip-outs

• An employee’s share of a tip-splitting or tip-pooling arrangement

When an employee receives tips greater than $20 in a calendar month while working for any one employer, FICA and federal income tax withholding applies to these funds. FICA and federal tax withholding does not apply to tips of less than $20 in a calendar month. Once the tip amount in a calendar month reaches $20, the employee must report their tips to the employer to be included as wages – not just the amount over $20. This must be done in writing by the tenth day of the month following the month the employee receives the tips.

Example: Joe is a dealer at a tribal casino. He received $800 in tips in March. Joe must report his tips to his employer by April 10, or more frequently if required by the employer. The tips are subject to FICA and federal income tax withholding.

The IRS office of Indian Tribal Governments offers workshops and presentations on tip income reporting. The IRS has developed tools to assist employers and employees with tip compliance. Employees are required to report tips to their employer monthly unless the tips were less than $20. Publication 1244, Employee’s Daily Record of Tips and Report to Employer, a pocket-sized record available for order from the IRS, includes two forms, 4070 and 4070A, for facilitating this reporting. The Form 4070A, Employee’s Daily Record of Tips, is a monthly form tipped employees may use for keeping a daily record of tips received and tips paid out. The Form 4070, Employee’s Report of Tips to Employer, is a monthly form tipped employees may use to provide their employer a summary of the total amounts of tips received. For more information see Publication 531, Reporting Tip Income, or contact the Indian Tribal Governments specialist in your area.

Many tribal gaming establishments have restaurants or bars that may run extended hours and allow tipping. These establishments often meet the definition of a large food or beverage establishment resulting in a filing requirement for Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Generally, a large food or beverage establishment is where there are more than 10 employees who collectively work more than 80 hours in the typical business day. For more information consult the Form 8027 Instructions.

Other Resources

Publication 3144, Tips on Tips: A Guide to Tip Income Reporting for Employers in Businesses where Tip Income is Customary Publication 3148, Tips on Tips: A Guide to Tip Income Reporting for Employees Who Receive Tip Income

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Tip Rate Determination/Education Program (TRD/EP)

Compliance with tip income reporting requirements can be one of the most complicated and difficult issues for employers and employees. If noncompliance exists, both parties can be liable for payment of significant tax, penalties and interest. To reduce burden and improve tip reporting compliance by employers and employees, the IRS has developed TRD/EP. In addition to participating in ITG educational and outreach programs, gaming operations may enter into a Tip Rate Determination Agreement (TRDA) or a Gaming Industry Tip Compliance Agreement (GITCA).

• TRDA – Under this arrangement, the employer determines tip rates for various occupations within the establishment using historical tip data. The IRS reviews the data and validates the rates. At least 75% of the tipped employees must agree to participate by signing a Tipped Employee Participation Agreement. This arrangement is available for all tipped employees, gaming or nongaming, at the tribal gaming operation.

• GITCA – Under this arrangement, a gaming industry employer and the IRS work together to reach an agreement that objectively establishes minimum tip rates for tipped employees in specified occupational categories, prescribes a threshold level of participation by the employer’s employees and reduces compliance burdens for the employee and enforcement burdens for the IRS. See Revenue Procedure 2007-32 for more information on GITCAs.

Other Resources

Publication 4932, Gaming Industry Tip Compliance Agreement (GITCA) Publication 4985, Gaming Industry Tip Compliance Agreement (GITCA) for Tipped Employees

Independent Contractor vs. Employee

For federal tax purposes, the distinction between independent contractor and employee is important. Workers may be classified as employees or independent contractors. Worker classification affects your employees’ eligibility for Social Security and Medicare benefits and determines your tax responsibilities. The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These relevant facts fall into three main categories: behavioral control, financial control and relationship of the parties. In each case, it is important to consider all the facts – no single fact provides the answer. (see Publication 1779, Independent Contractor or Employee) This determination is necessary for the purposes of filing the correct forms and paying the appropriate taxes (see Publication 4268, Employment Tax For Indian Tribal Governments). For more information contact the Indian Tribal Governments specialist in your area.

A trade or business must file Form 1099-MISC, Miscellaneous Income, to report payments of $600 or more to persons not treated as employees for services performed in a trade or business. The $600 threshold applies to all payments made during the calendar year, not to any one payment. If you have a question regarding Form 1099-MISC, refer to the 1099-MISC instructions or contact the Indian Tribal Governments specialist in your area.

Form 1099-MISC requires a worker’s name, address and TIN. The worker should complete Form W-9, Request for Taxpayer Identification Number and Certification. Employers use Form W-9 to verify a worker’s TIN and to certify that the TIN is correct. Employers should secure the worker’s TIN before making the first payment; otherwise, payments would be subject to backup withholding. Report backup withholding on Form 945, Annual Return of Withheld Federal Income Tax. See Section VI for additional information related to filing electronically and the TIN matching program.

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Forms to File for Independent Contractors

Example 1: Employer pays John $1,000 per week to clean the bingo hall. John operates his own janitorial service that performs work for numerous entities, has the right to hire and fire his own help, and provides his own tools and supplies. The employer does not have the right to direct and control John. Therefore, he is not an employee. The employer should file Form 1099-MISC for John.

Example 2: Employer pays Jack $500 per week to clean the bingo hall. Jack works for only this employer, does not have the right to hire and fire assistants and the employer requires that he personally does the work. The employer provides the supplies and tools for Jack. Based on the above facts, Jack is an employee. The employer should withhold income tax and employment taxes and report the payments on Form W-2.

How to Make Federal Tax Payments

You must deposit through Electronic Federal Tax Payment System (EFTPS) amounts withheld such as:

• Employer and employee Social Security and Medicare taxes (Form 941)

• Income tax withheld (Form 941)

• Backup withholding (Form 945)

• Gambling withholding (Form 945)

• Foreign person withholding (Form 1042) (See Section VI)

Using EFTPS to deposit federal taxes provides substantial benefits to taxpayers and the government. EFTPS users can make tax payments 24 hours a day, seven days a week with a computer or by telephone. EFTPS also significantly reduces payment-related errors that could result in a penalty. The system helps taxpayers schedule dates to make payments even when they are out of town or on vacation when a payment is due. EFTPS business users can schedule payments up to 120 days in advance of the desired payment date. You can find more information including how to enroll online or by calling EFTPS Customer Service at 800-555- 4477 (TDD 800-733-4829).

When to Make Deposits

If you have a deposit requirement for Form 941, you may make a deposit:

• The same day you pay your employees, or

• Before the due date.

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Form 941 Deposit Due Date

If you are a new employer and have never filed a Form 941, you are a monthly schedule depositor for the first calendar year of your business unless you meet a special exception to the rule. Monthly schedule depositors should deposit taxes from all their paydays in a month by the 15th of the next month, even if they pay wages every week.

Employers with prior payrolls and taxes of $2,500 or more per quarter must determine if they make either monthly schedule deposits or semiweekly schedule deposits. This determination is based on your Form 941 taxes during a four-quarter lookback period.

1. Identify your lookback period.

Your Lookback Period for Calendar Year 2020

2. Add the total taxes reported during the lookback period.

3. Determine your deposit schedule.

Monthly Schedule Depositors

Deposit each month’s taxes by the 15th day of the following month (for example, taxes from paydays during July are deposited by August 15).

Semiweekly Schedule Depositors

Exception: If you accumulate a tax liability of $100,000 or more on any day during a deposit period, you must deposit the tax by the next business day, whether you are a monthly or semiweekly schedule depositor. Monthly depositors must then follow the semiweekly schedule for the rest of the year. For more information about the $100,000 Next-Day Deposit Rule and the applicable deposit period, see Publication 15. (Circular E), Employer’s Tax Guide, Depositing Taxes.

Remember: Deposit rules are based on when wages are paid, not earned. For example, monthly schedule depositors with wages earned in June, but paid in July, deposit August 15. Form 945 and Form 1042 may have different deposit requirements. For more information, refer to the form instructions or contact your Indian Tribal Governments specialist. Some businesses paying a minimal amount of tax may make their payments with the tax returns.

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Resource

The Employer’s Tax Calendar from Publication 509, Tax Calendars, lists due dates for filing returns and for making employment tax deposits throughout the year. Use this calendar with Publication 15, which explains the deposit rules.

Employment Tax Penalties

Employment tax penalties can multiply quickly. There are three main employment tax penalties: failure to deposit, failure to file and failure to pay. These penalties are often assessed at the same time.

• Failure to deposit - this penalty reaches 10% when past due by 16 days. This means even before the return is due you could have a 10% penalty.

• Failure to file - accrues at 5% per month reduced by applicable failure to pay penalty, capping at 25%.

• Failure to pay - begins accruing once the return due date has passed and all tax is not paid, also capping at 25%.

Example: The last deposit of the quarter is due at the end of the month and it is not paid. Your employment tax return preparer misses a week of work beginning near the last day of the next month (when the return is due). At this point, the deposit is late, the return is late and failure to pay the tax is now assessed. For being 45 days late the penalties are 15% and increasing by 5% per month for the next 4 months, going from 15% to 35%. If the last deposit was supposed to be $20,000 then the penalty at 45 days is $3,000 and at 5 months is $7,000.

For more information see the chapter on penalties in Publication 4268, Employment Tax For Indian Tribal Governments, and Publication 5343, Helpful Hints for Indian Tribes and Tribal Entities to Avoid Penalties on Federal Tax Deposits and Information Returns.

Trust Fund Recovery Penalty (Failure to Withhold and Pay Employment Tax)

A trust fund recovery penalty may apply when an employer does not withhold or deposit employment tax that is withheld or supposed to be withheld. This penalty can be applied to any entity, including governmental entities such as Indian tribes. Under this penalty, officers or employees of a tribal gaming operation could become personally liable for the tax payment and could be penalized an amount equal to the unpaid tax. This penalty may apply when unpaid tax cannot be immediately collected from the tribal gaming operation. The trust fund recovery penalty may be imposed on anyone the IRS determines is responsible for collecting, accounting for and depositing this tax, and who acted willfully in not doing so. Willfully, in this case, means voluntarily, consciously and intentionally.

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Gaming Tax Law and Bank Secrecy Act Issues