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types of compensation that are included in employee wages and the requirements for tax withholding and payments. Tax requirements for employers are discussed in Publication 15, (Circular E), Employer’s Tax Guide. This chapter highlights some key requirements for employers and matters of special interest to governmental employers.

All governmental entities that employ workers are subject to federal employment taxes on wages, except where the law provides specific exceptions. The Internal Revenue Code defines wages subject to income tax withholding under Section 3401 and defines wages for Social Security and Medicare tax purposes under Section 3121. As discussed in Chapter 2, a broad exception exempts government employment from federal unemployment tax (FUTA).

Social Security and Medicare taxes, also referred to as FICA taxes, consist of Old-Age, Survivors and Disability Insurance (OASDI, or Social Security) and Hospital Insurance (Medicare) taxes. IRC Section 3101 imposes taxes on the employee, and Section 3111 imposes taxes on the employer. State or local entities covered by Social Security and Medicare must withhold and pay over the employee share of the taxes and must pay the employer share. Under Section 3402, employers are also generally required to withhold income tax from wages.

In general, all compensation provided to an employee is included in taxable wages unless an exception is provided by law. An exception may apply for FICA taxes, or federal income tax withholding, or both. The following discussion addresses the treatment of certain forms of compensation, focusing on some that are of interest to government employers.

Social Security and Medicare Wages

IRC Section 3121(a) provides that wages include all remuneration for employment, whether paid in cash or in some other form, unless specifically excluded by statute. Examples of wages for Social Security and Medicare purposes include salaries, fees, stipends, bonuses, prizes, awards and commissions. It is immaterial whether the payments are based on the hour, week, month, year, piecework, percentage of revenue or other system.

An important exception is provided by IRC Section 3121(b)(7)(F), which excludes services performed by state and local government employees from Social Security tax if the employee’s services are not covered under a Section 218 Agreement (voluntary Social Security coverage) and if the employee is a qualifying member of a public retirement system (FICA replacement plan) as described in Treas. Reg. Section 31.3121(b)(7)-2. Chapters 5 and 6 discuss the application of the tax to governmental employees.

The Social Security Administration establishes the maximum amount of wages subject to the Social Security tax each year. This amount is updated annually and is $137,700 in 2020. Since 1994, there has been no wage base limit for Medicare tax.

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Social Security, Medicare and Additional Medicare Tax Rates and Limits

Social Security and Medicare Tax

Additional Medicare Tax

As of 2013, a 0.9% Additional Medicare Tax applies to Medicare wages over a threshold amount based on the taxpayer’s filing status. However, an employer must withhold Additional Medicare Tax from wages in excess of $200,000 it pays to an employee in a calendar year, without regard to the employee’s filing status or wages paid by another employer.

Unlike Social Security and basic Medicare taxes, there is no employer match for Additional Medicare Tax.

An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee and continue withholding it until the end of the calendar year.

For more information on Additional Medicare Tax, see Questions and Answers for the Additional Medicare Tax.

Chapter 5 also discusses in detail the application of Social Security and Medicare to the compensation of governmental employees.

Other Forms of Cash Compensation

In addition to salary or wages, employees may receive cash in other ways. Some common forms of cash compensation include:

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Sick Pay

Sick pay is an amount paid to an employee because of inability to work due to sickness or injury. Sick pay is generally subject to Social Security and Medicare taxes the same as other remuneration paid to the employee, regardless of whether the employer or a third party pays the sick pay. Sick pay paid by an employer is also subject to income tax withholding. The employer withholds income tax from sick pay based on the employee’s Form W-4, Employee’s Withholding Certificate.

Sick pay is sometimes paid by a third party, such as an insurance company or employee trust. The rules on third-party withholding, paying and reporting Social Security and Medicare taxes differ, depending upon whether:

• The third party is acting as an agent of the employer or an independent insurer, and

• The terms of an agreement between the employer and agent or insurer.

If the third party paying sick pay is an agent of the employer, the third party is generally required to withhold income tax from the sick pay. If the third-party payer is not an agent of the employer, the third-party payer is not required to withhold income tax, unless the employee requests that income tax be withheld by completing and giving the third party a Form W-4S, Request for Federal Income Tax Withholding From Sick Pay.

See Publication 15-A, Employer’s Supplemental Tax Guide, for more details on third-party sick pay.

The following types of sick pay or injury pay are not subject to Social Security and Medicare taxes:

1. Payments received under a workers’ compensation act, or under a statute in the nature of a workers’ compensation act.

2. Payments, or portions of payments, attributable to the employees’ contributions to a sick pay plan.

3. Payments on account of sickness or injury made by, or on behalf of, an employer more than six months after the last calendar month in which the employee worked for the employer.

Vacation Pay

Vacation pay is wages and is subject to Social Security, Medicare and income tax withholding. When vacation pay is paid in addition to regular wages for the vacation period, withhold on the vacation pay as a supplemental wage payment. See Section 7, “Supplemental Wages,” in Publication 15.

Military Differential Pay

Military differential pay is payment:

• Made by an eligible employer to a qualified individual for any period the individual is called to active duty in the uniformed services for a period of more than 30 days, and

• Represents part or all the wages the individual would have received from the employer if the individual were performing services for the employer during that time.

Differential wage payments are treated as wages for income tax withholding but aren’t subject to Social Security, Medicare or FUTA taxes. Employers should report differential wage payments in Box 1 of Form W-2. For more information about the tax treatment of differential wage payments, see IRS Revenue Ruling 2009-11.

Deceased Employee’s Wages

If an employee dies during the year, the employer must report the accrued wages, vacation pay and other compensation paid after the date of death. Also, report wages that were available to the employee while they were alive, regardless of whether the wages were in the employee’s possession, as well as any other regular wage payment, even if it is necessary to reissue the payment in the name of the estate or beneficiary. How the payment is reported depends on the year in which payment is made.

Payment made in the year of death - If you made the payment after the employee’s death but in the same year the employee died, you must withhold Social Security and Medicare taxes on the payment and report the payment on the

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employee’s Form W-2 only as Social Security wages (box 3) and Medicare wages and tips (box 5) to ensure proper Social Security and Medicare taxes withheld in boxes 4 and 6. Do not show the payment in box 1.

Payment made after the year of death - If you made the payment after the year of death, do not report it on Form W-2 and do not withhold Social Security and Medicare taxes.

Whether you made the payment in the year of death or after the year of death, report it in box 3 of Form 1099-MISC, Miscellaneous Income, as a payment to the estate or beneficiary. Use the name and taxpayer identification number (TIN) of the estate or beneficiary on Form 1099-MISC.

See the Instructions for Form W-2 and Publication 559, Survivors, Executors, and Administrators, for more information on the treatment of payments on behalf of a decedent.

Back Pay

Back pay is pay received in a tax year for actual or deemed employment in an earlier year. For Social Security coverage and benefit purposes, all back pay is wages, except amounts specifically and legitimately designated otherwise, such as interest, penalties and legal fees. For tax purposes, back pay is treated as wages in the year received and is reported on Form W-2 for that year. Income, Social Security and Medicare tax withholding apply in the year of payment at the rates in effect for that period.

SSA treatment of back pay under a statute - Under the law, the SSA credits back pay awarded under a statute (for example, under the Americans with Disabilities Act or Fair Labor Standards Act) to an individual’s earnings record in the periods the wages should have been paid. However, payments of back pay under a statute will be posted to the employee’s Social Security earnings record in the year reported on Form W-2 unless the employer or employee notifies the SSA in a special, separate report. If this is done, SSA can then allocate the statutory back pay to the appropriate periods for purposes of retirement benefit calculations. This is important because wages not credited to the proper year may result in lower Social Security benefits or failure to meet the requirements for benefits. See Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration, for more information.

Workers’ Compensation

Amounts received by police officers, firefighters and other employees or their survivors for personal injuries or sickness incurred in the course of employment are excludable from income, Social Security and Medicare taxes if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act that provides compensation to employees for personal injuries or sickness incurred during employment.

This exclusion does not apply to retirement plan benefits based on age, length of service or prior contributions to the plan, even if the individual retired because of an occupational sickness or injury.

Noncash Payments

Generally, noncash payments are wages subject to income, Social Security and Medicare tax. The dollar value of wages paid in a medium other than cash should be computed based on the fair market value of the property at the time of the payment. The fair market value may be based on the prevailing value of the item in the locality or on a reasonable value established for other purposes. Special rules may apply to noncash fringe benefits.

Fringe Benefits

Fringe benefits, which generally include any compensation other than cash wages or salary, must be included in an employee’s wages unless the law provides an exception. A fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.

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Provider of benefit - You’re the provider of a fringe benefit if it’s provided for services performed for you. You’re considered the provider of a fringe benefit even if a third party, such as your client or customer, provides the benefit to your employee for services the employee performs for you. Thus, you are responsible for any employment tax liability related to the fringe benefit if it’s provided for services performed for you.

Examples of employer-provided fringe benefits include, but are not limited to:

• Vehicles for personal use

• Meals

• Health or life insurance

• Tickets to entertainment or sporting events

• Holiday gifts

• Personal use of employer facilities

• Transportation (commuting) benefits and passes

• De minimis (minimal) benefits

• Tuition reduction

• Educational assistance

• Dependent care assistance

• Employee discounts

• Employer-provided cell phones

• Moving expense reimbursements

• Achievement awards

The tax treatment of some of these benefits is determined by specific statutes; others fall under general rules for broader categories of fringe benefits. Publication 15-B, Employer’s Tax Guide to Fringe Benefits, addresses fringe benefits for all employers. In addition, Publication 5137, Fringe Benefit Guide, addresses fringe benefits for government employers.

Business Expense Reimbursements – Accountable Plan

Payments to employees for travel and other ordinary and necessary expenses of the employer’s business generally are wages subject to Social Security and Medicare taxes and income tax withholding unless they are made under an accountable plan. There are three requirements for a reimbursement to be treated as being paid under an accountable plan:

1. The expenses must qualify as deductible business expenses incurred while performing services for the employer,

2. The employee must adequately account for the expenses to the employer within a reasonable period of time, and

3. The employee must return any amounts received that exceed expenses within a reasonable period of time.

See Publication 15 and Publication 5137 for more information on accountable plans.

The use of per diem rates at or below the federal rate for travel expenses can reduce and simplify the recordkeeping requirements for accounting for these expenses. See Publication 463, Travel, Gift, and Car Expenses, or Publication 5137 for more information on per diem reimbursement systems.

Reimbursements Not Made Under Accountable Plan

If an employer provides reimbursements that do not comply with the accountable plan rules, these amounts are treated as wages and subject to employment taxes the same as other pay of the employee.

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Retirement Plans

Regardless of Social Security coverage, most public employees are covered by some form of retirement plan. The terms of these plans may vary, but in general provide for tax-deferred income placed in trust for the benefit of employees. These plans may involve employee or employer contributions, or both. Under certain provisions of the Internal Revenue Code, contributions may be deferred from tax until they are withdrawn. The term “qualified” is used to describe private-sector plans under IRC Section 401 that meet specific provisions of ERISA that enables them to offer certain tax advantages to the participants. Many public employees, however, are covered by nonqualified plans, generally under IRC Sections 403(b) or 457, discussed below and at Government Retirement Plans Toolkit.

Income Tax Withholding on Qualified Retirement Plans

For income tax withholding purposes, employer and employee contributions made under qualified plans (up to the maximum allowable for the year) are deferred from income tax. The employee is subject to tax on distributions of these amounts when they are withdrawn from the plan. In most cases, withdrawals not rolled over into another plan are subject to mandatory income tax withholding on distribution.

Employer “Pick-Up” Contributions

IRC Section 414(h)(2) allows state and local government entities with IRC Section 414(d) governmental plans to treat contributions that have been designated as employee contributions, but are “picked up” (paid) by the employer, to be treated as employer contributions, and therefore as excludable from income. These “picked up” contributions are also exempt from Social Security and Medicare tax if they aren’t made under a salary reduction agreement. For more information on the conditions required for employer pick-up, see IRC Section 414(h)(2) or search for “Employer pick-up contributions” on IRS.gov.

Section 403(b) Plans

Plans under IRC Section 403(b), also called tax-sheltered annuities, are available to certain employees of public schools, employees of tax-exempt organizations and certain ministers. These plans resemble qualified plans in many respects. Many public school employees are covered by 403(b) plans in addition to receiving Social Security coverage under a Section 218 Agreement.

Employer contributions to tax-sheltered annuities under Section 403(b) for public school employees are exempt from Social Security and Medicare taxes, unless the contributions are made by reason of a salary reduction agreement. Eligible participants may defer amounts from income tax up to an annual limit ($19,500 in 2020, subject to annual cost of living adjustments (COLA)). This amount may be increased for certain employees with more than 15 years of service. Employees age 50 or older may also make additional tax-deferred “catch-up” contributions.

Employee contributions, including those made by salary reduction arrangements, are subject to Social Security and Medicare tax (See IRC Section 3121(a)(5)(D)).

For more information, see Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans), and the 403(b) plan webpage on IRS.gov.

Section 457 (Nonqualified) Plans

Many public employees participate in nonqualified IRC Section 457 deferred compensation plans. These plans can be established by state and local governments or tax-exempt organizations. If they meet the requirements of Section 457(b), they are considered “eligible” plans; if not they are considered “ineligible” plans and are governed by Section 457(f).

Section 457(b) – Eligible Plans

Governmental Section 457(b) plans must be funded with assets held in trust for the benefit of employees. Plans eligible under Section 457(b) may defer amounts from income tax up to an annual limit ($19,500 in 2020, subject to COLA).

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Governmental Section 457(b) plans may make “catch-up” contributions to employees age 50 or older, in addition to the basic Section 457(b) catch-up.

Social Security and Medicare taxes generally apply to all employer and employee contributions. Amounts deferred from wages into eligible Section 457(b) plans are not subject to income tax withholding until they are distributed from the plan or made available to the participant or beneficiary. See Section VI of Notice 2003-20 and IRC 457(b) Deferred Compensation Plans for more information.

Section 457(f) – Ineligible Plans

Nonqualified state or local government plans that do not meet the requirements of Section 457(b) are ineligible plans, or Section 457(f) plans. There is no limit on the annual deferrals on these plans, but to defer taxation, all deferrals must be subject to substantial risk of forfeiture. Amounts deferred under a Section 457(f) plan are generally subject to Social Security and Medicare taxes at the later of the time 1) when the services giving rise to the related compensation are performed, or 2) when there is no substantial risk of forfeiture of the rights to the amounts.

Reporting Responsibilities

Basic federal tax requirements that generally apply to all employers are discussed below. For a more detailed explanation, see Publication 15.

Employer Identification Number (EIN)

When two entities are combined (for example, when one municipality annexes another, or when school districts are consolidated) the EIN of the annexed area or abolished district should no longer be used, as it is no longer a separate entity. A continuing entity that absorbs or annexes another can retain and use its EIN. However, if a new entity is created from the dissolution of two or more pre-existing entities, the new entity should obtain a new EIN. When an unincorporated area is incorporated, it becomes a separate entity and must obtain its own EIN.

See Publication 1635, Employer Identification Number, Understanding Your EIN, and About Form 8832, Entity Classification Election, for additional information on how to avoid common EIN problems.

Notify the IRS immediately if you change your business name or address. Write to the IRS office where you file your returns, using the Without a Payment address provided in the instructions for your employment tax return, to notify the IRS of any business name or address change.

Form SSA-1945

State and local government employers must notify employees hired in jobs not covered by Social Security of the effects of the Windfall Elimination Provision and the Government Pension Offset. Section 419(c) of the Social Security Protection Act of 2004 requires newly hired public employees to sign Form SSA-1945, Statement Concerning Your Employment in a Job Not Covered by Social Security. This indicates they are aware of a possible reduction in their future Social Security benefit entitlement. For more detailed information about this law, see Chapter 7 or Form SSA-1945.

Form W-2

An employer is responsible for furnishing Form W-2, Wage and Tax Statement, to each employee from whom income, Social Security or Medicare tax was withheld, or would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholding on Form W-4, Employee’s Withholding Certificate. The aggregate amounts are reported on Form W-3, Transmittal of Wage and Tax Statements.

Employers are required to send Copy A of Forms W-2 and W-3 to the Social Security Administration by January 31 of the following year for both paper and electronic forms. Employers must furnish Copy B to employees by January 31 of the following year.

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Employers who file 250 or more Forms W-2 must file them electronically. Statements may be furnished to employees electronically only if the employee affirmatively consents to it. See Publication 1141, General Rules and Specifications for Substitute Forms W-2 and W-3, for more information.

SSA’s Regional Employer Services Liaison Officers (ESLOs) provide assistance with filing Forms W-2 and other wage reporting questions. See ESLO or call 800-772-6270. Specifications for electronic reporting of Form W-2 information can be found at the SSA employer page.

Form 941

Form 941, Employer’s QUARTERLY Federal Tax Return, is used to report:

• Wages paid,

• Federal income taxes withheld,

• Both the employer’s and employees’ share of Social Security and Medicare taxes, and

• Additional Medicare tax withheld from employees.

The IRS matches amounts reported on your four quarterly Forms 941 with Form W-2 amounts totaled on your Form W-3. If the amounts don’t agree, the IRS or SSA may contact you.

To prepare Form 941, the total wages and compensation for the quarter must be determined. Wage payments are included in the quarter in which they are paid. For example, an employee works for the county in a pay period ending on March 20 but is not paid until April 5. In this situation, the employee’s wage payment is included in the second quarter when the payment is made, not the first quarter when the work was done. Special timing rules apply in determining when certain noncash fringe benefits are treated as paid. See Publication 15-B.

Total wages and compensation entered on line 2 of Form 941 include all payments to employees. Examples of these payments include:

1. Wages, salaries, commissions, fees and bonuses

2. Vacation allowances

3. Dismissal and severance pay

4. Tip income

5. Noncash payments, including goods, lodging, food, clothing or services

Wages from which Social Security and Medicare tax must be withheld may differ from total wages. This may be because certain amounts are not included in wages for income tax withholding purposes but are subject to Social Security and Medicare tax (for example, deferred compensation in a nonqualified deferred compensation plan). Another common reason for a difference in the totals is that earnings exceeding the annual wage base are not subject to the OASDI portion of Social Security tax. The total income tax withheld (line 3) includes all federal income tax withheld from all employees for the calendar quarter covered by the return.

Form 941 must be filed with the IRS by the last day of the month following the calendar quarter. For example, the first quarter return covering January through March is due by April 30. See the Instructions for Form 941 for additional information.

Form 944

Certain taxpayers with small payrolls (those whose annual liability for Social Security, Medicare and withheld federal income taxes is $1,000 or less) will file and pay these taxes only once a year instead of every quarter. The IRS will notify taxpayers when they must use Form 944, Employer’s ANNUAL Federal Tax Return. An employer may contact the IRS to request to file a quarterly Form 941 instead of a Form 944. See Revenue Procedure 2009-51. The deposit requirements, discussed below, are the same for annual and quarterly filers. For more information regarding this form, see Publication 15 or the Instructions for Form 944.

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Form 941-X and Form 944-X

Employers correct errors to Form 941 or 944 by filing Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, or Form 944-X, Adjusted Employer’s ANNUAL Federal Tax Return or Claim for Refund. These forms are stand-alone returns that should be filed as soon as the error is discovered. The return for the period when the error is discovered is not affected. Additional requirements are discussed in the Instructions for Form 941 and Form 944, as well as in the Instructions for Form 941-X and Form 944-X.

Form 945

Nonpayroll federal income tax withholding (reported on Forms 1099 and Form W-2G, Certain Gambling Winnings) must be reported on Form 945, Annual Return of Withheld Federal Income Tax. Separate deposits are required for payroll (Form 941 or Form 944) and nonpayroll (Form 945) withholding. Nonpayroll items include:

• Pensions (including distributions from tax-favored retirement plans, for example, 401(k), 403(b) and governmental 457(b) plans) and annuities

• Payments subject to backup withholding

• Gambling winnings

• Certain other payments, such as unemployment compensation and Social Security, subject to voluntary withholding

Multiple Employers and the Wage Base

Because each employer must withhold Social Security tax on wages up to the annual maximum, an employee who works for more than one employer in one calendar year may have excess Social Security taxes withheld. To get a refund of the excess Social Security tax withheld by the employers, the employee shows the overpayment on Form 1040, U.S. Individual Income Tax Return. Employers are not responsible for making any adjustments based on wages paid by other employers and cannot claim a refund in this situation, because each employer is responsible for withholding and paying Social Security tax on wages paid to each employee up to the wage base.

Special Reporting Situations for Government Employers

Medicare Qualified Government Employment

As explained in Chapter 2, all employees hired after March 31, 1986, are subject to mandatory Medicare tax. Federal, state and local employers that provide coverage under a public retirement system may have employees who are not subject to Social Security but are subject to Medicare tax. This is referred to as Medicare Qualified Government Employment (MQGE).

MQGE Forms W-2 are filed separately from those for employees covered by Social Security and Medicare, or from Forms W-2 having no Social Security or Medicare wages. Paper MQGE Forms W-2 must be transmitted with a covering Form W-3 with “Medicare Govt. Emp.” checked in box b. See the Instructions for Forms W-2 and W-3.

Employees Covered for MQGE and FICA

If they are employed in more than one capacity, some state and local employees may be subject to both Medicare-only withholding and full Social Security and Medicare in the same reporting year. When an employee is in a continuous employment relationship with the same employer for the year, and the employer has both types of employees, the employer has two reporting options:

1. Prepare a single Form W-2 with the total annual wages in box 1, the total Medicare wages and taxes from BOTH positions in box 5 and box 6. Social Security and Medicare wages and taxes are entered in box 3 and box 4 (SSA prefers that this method be used to reduce errors), or

2. Use a separate Form W-2 for wage data from the Medicare-only position and a second Form W-2 for FICA wage data from the positions with both Social Security and Medicare coverage.

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See SSA Specifications for Filing Forms W-2 Electronically (EFW2) for specifics on how to report these various employee wage situations. Special Situations - 2.5 – Government Employer, covers the situations discussed above.

Information Reporting for Election Workers

If the compensation of an election worker is less than a statutorily established amount that is subject to an adjustment for inflation each year ($1,900 for 2020), it is generally not subject to mandatory Social Security and Medicare tax (IRC Sections 3121(b)(7)(F)(iv) and 3121(u)(2)(B)(ii)(V)). However, under a state’s Section 218 Agreement an election worker’s compensation may be subject to Social Security and Medicare taxes at a level below the statutory amount. In any case, compensation of election workers is not subject to income tax withholding.

If an election worker’s wages are subject to withholding of Social Security and Medicare tax, Form W-2 reporting is required for all compensation, regardless of the amount. If an election worker’s compensation is not subject to withholding of Social Security and Medicare tax, Form W-2 reporting is required for payments that aggregate $600 or more in a calendar year.

See Election Workers: Reporting and Withholding and Revenue Ruling 2000-6 for more information.

Information Returns

Government entities must file with the IRS, and furnish to recipients, information returns for certain types of payments. In most cases, these payments are reported on Form 1099-MISC, Miscellaneous Income or Form 1099-NEC, Nonemployee Compensation.

IRC Section 6041(a) states that all persons engaged in a trade or business and making payment in the course of the trade or business to another person of rent, salaries, wages, premiums, annuities, compensation, remuneration or other fixed and determinable gains, profits and income (with certain exceptions) of $600 or more in any year must furnish an information return indicating the amount of the income and the name and address of the recipient of the payment.

Common payments that must be reported (payments of $600 or more) include services, rents, income payments, awards and prizes, and medical and health care payments.

Payees for whom payments must be reported include individuals, partnerships, estates, trusts, and medical and legal service providers.

Never use Form 1099-MISC/Form 1099-NEC to report payments for services by an employee. Only use Forms W-2 and W-3 to report compensation to employees.

The Form W-9, Request for Taxpayer Identification Number and Certification, is used to get the payee’s correct name and taxpayer identification number by an individual or entity required to file information returns with the IRS. Obtain this information before payments are made. (See Backup Withholding, below.) Payments for nonemployee compensation are discussed in the Instructions for Form 1099-MISC and 1099-NEC.

Governments must file Form 1099-G, Certain Government Payments, for payments including:

• State or local income tax refunds

• Unemployment compensation

• Taxable grants

See the Instructions for Form 1099-G for more information.

Taxpayers responsible for filing 10 or more information returns of any one type (for example, Form 1099-MISC or Form 1099-NEC) must file them electronically with the IRS. If a written statement to an information return recipient is required, it may be furnished to them electronically rather than by paper if the recipient consents affirmatively to that and the payer meets necessary requirements. For more details on electronic and other information return requirements, see the General

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Instructions for Certain Information Returns and Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G.

Backup Withholding

You generally must withhold 24% (starting in 2018, previously 28%) of certain taxable payments if the payee fails to furnish you with their correct TIN prior to payment. This withholding is referred to as “backup withholding” and is reported on Form 945. Publication 15 provides additional information.

Information Reporting Customer Service Site

You may call 866-455-7438 (toll-free), 304-263-8700 (toll call) or 304-579-4827 (TDD/TTY for persons who are deaf, hard of hearing or have a speech disability) to discuss your questions. You can also reach the center by email at mccirp@irs.gov. Don’t include TINs or attachments in email correspondence because electronic mail isn’t secure.

Depositing Taxes

In general, employers are required to deposit federal employment taxes (federal income tax withheld and both the employer and employee Social Security and Medicare taxes) if the total tax liability for Form 941 or Form 944 for the current or previous quarter (year for Form 944) is $2,500 or more. These taxes are required to be deposited using the Electronic Federal Tax Payment System (EFTPS). A balance due on the Form 941 or 944 of less than $2,500 is not required to be deposited; it may be paid with the return. For more information on using the EFTPS, see IRS Publication 966, Electronic Federal Tax Payment System A Guide To Getting Started.

Deposit Requirements for Nonpayroll (Form 945) Tax Liabilities

Separate deposits are required for nonpayroll (Form 945) and payroll income tax withholding. Don’t combine deposits for Forms 941 (or Form 944) and Form 945 tax liabilities.

The general deposit rules and dollar thresholds that apply to Form 941 also apply to Form 945. However, because Form 945 is an annual return, the rules for determining your deposit schedule (discussed below) are different from those for Form 941. See the Instructions for Form 945 for more information.

When to Deposit

An employer will use either the monthly or the semiweekly schedule for depositing Social Security, Medicare and withheld income taxes. These schedules determine when a deposit is due after a tax liability arises (a payday). Before the beginning of each calendar year, employers must determine which of the two deposit schedules they must use. The deposit schedule used is based on the total tax liability reported on Form 941 during a four-quarter lookback period. The deposit schedule is not determined by how often employees are paid. To determine your payment schedule for Forms 941, 944 and 945, review Publication 15.

Calculating Federal Income Tax Withholding

Employers are generally required to withhold federal income tax from the wages paid to employees. The withheld amount is credited to the employees’ individual income taxes.

Each employee should submit a signed Form W-4 when employment begins. The amount of federal income tax withheld on an employee depends on five factors:

1. Payroll period;

2. Employee marital status, as shown on Form W-4;

3. Amount of wages;

4. Number of withholding allowances claimed by the employee on Form W-4; and

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5. Additional amounts the employee requests to have withheld.

However, Form W-4 is revised annually. Future revisions of Form W-4 and Publication 15 may provide for a different procedure for determining the amount to withhold.

If a new employee doesn’t give you a completed Form W-4, withhold income tax by treating the employee as single with the number of withholding allowances provided for this situation in the current year’s revision of Publication 15. For 2020, withhold income tax on employees who don’t give you a completed Form W-4 by treating them as single, with no withholding allowances.

Publication 15 contains the tax withholding tables and percentage tables to figure out how much to withhold. It also explains the procedure used in calculating withholding.

Federal Unemployment Tax Act

The Federal Unemployment Tax Act (FUTA) provides a federal-state insurance system for workers who lose their jobs. Most private employers pay both a federal and state unemployment tax. State and local governments, including their political subdivisions are exempt from FUTA tax. However, state and local government employees, with certain exceptions, must be covered by state unemployment insurance. Contact your state employment or labor agency for more information.

Interest and Penalties

Tax that isn’t paid when due or in the manner required may be subject to civil penalties and interest on the amount due.

Employment Tax Penalties

The following are the most commonly assessed penalties related to employment tax. There are penalties for filing a return late and paying or depositing taxes late, unless there is reasonable cause.

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Trust Fund Recovery Penalty

To encourage prompt payment of withheld income and other employment taxes, IRC Section 6672 provides for the trust fund recovery penalty. These taxes are called trust fund taxes because the employees’ money is held in trust until a federal tax deposit is made in that amount. This penalty may be imposed on all persons the IRS determines is responsible for collecting, accounting for and paying over these taxes, and who acted willfully in not doing so. The penalty is the full amount of the unpaid trust fund tax.

A responsible person can be an officer, employee or volunteer. A responsible person also may include one who signs checks for the business or otherwise has authority to cause the spending of funds. Willfully means voluntarily, consciously and intentionally. A responsible person acts willfully if the person knows that the required actions are not taking place.

Information Reporting Penalties

The penalty rates and maximums for not filing correct information returns or not furnishing correct payee statements, including inflationary adjustments, are reflected at Increase in Information Return Penalties.

Note that these penalties can be substantial amounts, and increased penalties can apply for certain failures in the case of intentional disregard.

Interest

Interest is assessed on any taxes due and unpaid, in addition to any penalties that may be imposed. However, the law allows an employer who has made an underpayment of Social Security and Medicare taxes or income tax withholding to make an interest-free adjustment (IRC Section 6205(a)(1)). The following requirements must be met:

1. Correction of the error must be made in the period in which the error was ascertained, and

2. Payment of the tax must be made no later than the due date of the return for the return period in which the error was ascertained. Additional tax due as a result of an IRS examination or ruling may qualify for an interest-free adjustment.

See Revenue Ruling 2009-39 for additional information about interest-free adjustments.

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Frequently Asked Questions

1. If board members are paid nominal amounts, for example, under $1,000 per year, must Social Security and Medicare taxes be withheld? Generally, yes. Elected and most appointed officials are employees of the public entity they serve and are generally subject to the withholding rules that apply to other workers. Withhold Social Security and Medicare taxes for any official who is either 1) covered under a Section 218 Agreement or 2) not a qualified participant in a public retirement system (also called a FICA replacement plan) and therefore subject to mandatory coverage. Any official elected or appointed after March 31, 1986, is subject to Medicare. See Chapter 4 for more information on who is an employee. [IRS]

2. What is the statute of limitations date for an adjustment or claim for refund of payroll taxes? The general rule is that an adjustment or claim for refund of any overpayment of federal payroll taxes must be filed within three years from the date the return was due or three years from the date it was filed, if that date is later. For this purpose, a Form 941 and Form 944 return for any calendar quarter is considered filed on April 15 of the following calendar year, if it's in fact filed by that date.

[IRS]

3. What is the Social Security tax treatment of prison inmate labor? Generally, services performed by inmates, for the state or local political subdivision that operates the prison are excluded from Social Security coverage, whether or not performed outside the confines of the prison. Inmates usually are not in an employment relationship with the state or political subdivision. In general, services performed by inmates, as part of the rehabilitative and therapeutic program of the institution, are not usually performed as employees. Services performed by inmates for an entity other than the state or local governmental unit, for example a work-release program, may be covered if an employment relationship exists. The relevant factor for determining Social Security coverage is whether an employer/employee relationship exists between the inmate and the nongovernmental employer, not the place where the inmate is incarcerated. Services performed by inmates outside the institution for the same unit of government that operates it are considered performed in the institution.

4. Are services of police officers and firefighters considered emergency services that are excluded from Social Security and Medicare coverage? Police officers and firefighters are not considered emergency workers for purposes of the exclusion from Social Security and Medicare coverage for certain emergency workers. This exclusion applies only to services of an employee who was hired because of an unforeseen emergency to work in connection with that emergency on a temporary basis (for example, an individual hired to battle a major forest fire or to provide emergency assistance in other similar disasters such as volcano eruption, severe ice storm, earthquake or flood). Regular, long-term police and fire employees are not emergency workers for this purpose and subject to the same rules as other public employees to determine whether they are covered by Social Security. [IRS]

5. How are tax deposits made? Deposits of employment taxes must be made electronically. In some cases, employment taxes may be paid with the tax return if the amount of tax is below certain threshold and deposits are not required. See Publication 15, (Circular E), Employer’s Tax Guide. [IRS]

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n Chapter 4