It’s time for President Obama’s 2017 budget proposal. This is his last budget proposal and, while not much is new, there are several items that directly affect payroll and payroll departments.
The concern is that some items will pass, if they get proposed enough times. Here are the items that will keep payroll professionals up at night—although in an election year, I don’t think many, if any, will pass.
Withholding Tax. If passed, this proposal would require employer contributions to defined contribution plans to be reported on Form W-2.
Worker misclassification. A proposal in the budget would permit the IRS to issue guidance about the proper classification of workers, and to require prospective reclassification of workers who are currently misclassified and whose reclassification is prohibited under current law. The Department of the Treasury and the IRS would also be permitted to issue generally applicable guidance on the proper classification of workers under common law standards. The administration notes that since 1978, the IRS has not been permitted to issue guidance addressing working classification, and that there have been many changes in working relationships between service providers and service recipients since then. As a result, there has been continued and growing uncertainty about the correct classification of some workers.
Automatic IRA option for employees. This is a slight variation of last year’s proposal—also, myRA is already available to employees without 401(k)s. This proposal would require employers in business for at least two years, who do not currently offer a retirement plan to their employees, to offer an automatic IRA option to employees, under which regular contributions would be made to an IRA on a payroll deduction basis. The administration believes that this proposal, if adopted, could expand retirement savings. The administration has noted that many households are not currently preparing financially for retirement. The proposal could also encourage affected employers to adopt an employer plan that allows much greater tax-favored employee contributions than an IRA, and that offers the option of employer contributions.
Require contractors to provide certified TIN. This is a repeat item. Today, companies that use independent contractors are required to have a W-9 on file in order to pay the contractors. This proposal would require a contractor receiving payments of $600 or more in a calendar year to produce a certified taxpayer identification number (TIN) to the business. A business would be required to verify the contractor’s TIN with the IRS (with an online tool). In a sense, this is new hire reporting for independent contractors. This would be used to match the IRS records for the independent contractor. A business would also be required to withhold a flat-rate percentage from gross payments if the W-9 is not produced and matched the IRS records.
Restore FUTA surtax. This is another repeat item. For many years, the federal unemployment tax (FUTA) surtax was formerly part of the 6.2% gross unemployment tax rate that employers paid on the first $7,000 of wages paid annually to each employee (6% permanent tax rate, 0.2% temporary surtax). The surtax was repealed on June 30, 2011. A proposal in the budget would permanently reinstate the 0.2% FUTA surtax.
Revise unemployment tax computation. This is a repeat item, proposing to increase the federal taxable wage base from $7,000 to $40,000 in 2017. The increase in the taxable wage base would be offset by a decrease in the net FUTA tax rate, which would be lowered from 0.8% to 0.165%. The issue here is that, for states to receive full FUTA credit, the state must have a SUTA wage base equal or exceeding the federal wage base. With the reduction in FUTA percentage, it is possible that the FUTA credit becomes moot, but we’ll have to see.
Repeal FICA income tip credit. This is another repeat item, which will be a sore point for restaurants, especially. A proposal in the budget would repeal the commonly known FICA tip credit that employers receive on tips in excess of minimum wage.
Reduce electronic filing threshold. The current threshold for filing electronic W-2/W-3 is 250. This proposal would reduce the threshold to five.