California Payroll Conference

1. California Payroll Conference September 11 and 12, 2014 Payroll Amendments and Corrections Brandon Le Du brandon.j.le.du@us.pwc.com

2. Agenda • Payroll adjustments and the tax perspective • Tax amendments • Payroll notices and inquiries • Payroll tax audits

3. Learning Objectives • Payroll adjustments and the tax perspective • Timing of payroll adjustments and the impact on payroll tax filings • Managing and tracking payroll adjustments • Tax amendments • Learn the benefit and process for amending quarterly returns • Learn potential best practice for tracking and amending quarterly returns • Payroll notices and inquiries • Track compliance notices and identify root cause • Identify common payroll compliance notices and resolution • Learn how to resolve and prevent future payroll tax notices • Payroll tax audits • Introduction to recent topics in payroll tax audits

4. Payroll Adjustments

5. Payroll Adjustments Prior-quarter adjustments - made to taxes and/or wages after the original quarterly tax return was filed. • For Year-End, these adjustments are captured in the W-2’s (no W-2c is needed) • For Quarterly tax filings, these adjustments are not captured in the original tax returns. Quarterly tax filings and Payroll are now out-of-balance with the W-2’s Q1-Adjusted Payroll Q2 - Payroll Q3 - Payroll Q4 - Payroll • Tax Return Implication • Quarterly tax returns and wage detail (i.e., CA, NY) need to be amended to balance with the employee W-2’s • Company will likely be faced with state penalties for underpayment – federal allows for a penalty and interest free adjustment

6. Payroll Adjustments Prior-year adjustments - made to taxes and/or wages after year-end. • For Year-End, these adjustments are not captured in W-2’s (a W-2c is needed) • For Quarterly tax filings, these adjustments are not captured in the original tax returns. Quarterly tax filings and Payroll are now out-of-balance with the W-2 and W-2c’s Tax return implication • Amended returns bring quarterly filings into balance with the W-2C for the employee • May require amendment to each quarter, due to wage detail that is included with certain state and local tax returns • May require amendment to each quarter, to avoid causing negative wages in a certain quarter. • Important to consider statute of limitations – most states 3 years. 2013 Adjusted Payroll 2014 Payroll

7. Payroll Adjustments Tracking Changes • Prepare a spreadsheet tracker of payroll corrections by employee and check dates • Change in subject wages and withholding for the respective tax • Root cause and source of the correction

8. Tax Amendments

9. Tax Amendments • Current Year Amendments • Reimbursement of employee income tax withholding and FICA tax are permitted • The employer corrects the quarterly returns for each period • Current year adjustments are captured in the W-2 (no W-2c is needed in the current year) • Prior Year Amendments income tax withholding is not permitted (Exception for administrative errors) • Reimbursement of employer and employee portion of FICA is permitted • To claim reimbursement of the employee portion of FICA, the employer must: • Refund the employee • Issue W-2c to correct the total FICA withheld • Obtain a written confirmation from the employee to confirm they have not/will not file a claim for a refund of FICA through the personal income tax return

10. Federal Form 941-X

11. Tax Amendments Federal Form 941X • Errors discovered before form 941 is filed • FIT, SS or M/C taxes (under/over) discovered after filing form 941 • Under - Timely if filed with return in the quarter is was discovered and payment is made timely (even if not collected from EE) • Over – over withholding does not need to be reported if repaid to EE • For SS and M/C affidavit and receipt required • FIT, repay before end of year or send to IRS • Form 843 “Claim for Refund and Request for Abatement” 3 year statute of limitation

12. California Form DE-9ADJ

13. Tax Amendments California Form DE-9ADJ • Amends wages for 2011 and thereafter; Quarterly adjustments for wages, taxes, and employee wage detail • DE7 used for prior years – annualizes adjustments rather than quarterly; DE6 used to amend quarterly wage detail • VPDI filers use form DE938 to adjust quarterly returns • Effective 7-1-2014, CA has revised penalties from 10% to 15%

14. Special Procedure for corrections in same sex marriage case Employers provided two alternatives • Employer reimbursed employees for the amount of over-collected FIT and FICA for 1st 3 quarters of 2013; Employer reduces FIT and FICA on 4th quarter 941. • Employer doesn’t reimburse employees, then files 941-X for FICA only refunds

15. Increase in Excludible Transit Benefits • Prior to the enactment of the American Taxpayer Relief Act (ATRA), the maximum amount excludible for the aggregate of transportation in a commuter highway vehicle and any transit pass (referred to as “transit benefits”) for 2012 was $125 per month. • The American Tax Relief Act increased the maximum transit benefit exclusion to $240 per month retroactive to January 1, 2012. The exclusion applies whether the employer provided the transit benefits out of its own funds or whether the transit benefits were provided through salary reduction arrangements.

16. Payroll Notices and Inquiries

17. Payroll Notices and Inquiries Tracking compliance notices

18. Payroll Notices and Inquiries Federal Penalty Notices Types of Notices You May Receive • Underpayment of quarterly return • Late deposit based on 941 Schedule B • Late filing of W-2 or 941 • FUTA underpayment based on accreditation with state unemployment agency • Form 941s out of balance with form W-2 • Mismatch on SSA# on employee W-2 (Should this be SSN?) • These notices, if not addressed, could lead to tax levies

19. Payroll Notices and Inquiries State Penalty Notices Types of Notices You May Receive • Wage detail penalties • Late deposits • Late returns • Payment of SUI at incorrect rate These notices, if not addressed, could also lead to tax levies

20. Payroll Notices and Inquiries State Unemployment Insurance • An additional employer surcharge may apply in certain states • In states with a FUTA credit reduction, the maximum FUTA credit is reduced below 5.4%

21. Payroll Notices and Inquiries • Local Municipal/County Notices • Calculated tax based on rate • Additional withholding tax, due to a correction of local wages before quarter-end

22. Payroll Tax Audits

23. Payroll Tax Audits • Business Travel • Threshold for reporting and withholding for business travelers • Trailing Liability for Stock Compensation • Employee is working in another state during the vesting period of stock units • Employee Classification • Independent Contractor vs. Employee • California aggressively pursuing misclassification based on unemployment/disability claims; information share with IRS

24. Conclusion What can we learn from amendments and penalty notices? • Identify root causes within the payroll process • Review how employees are onboarded • Review how codes are set up for earnings and deductions • Clarifications of federal and state payroll tax laws

25. Thank you for your attention