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Allocating partial tax payments pays off
Although this case involved a proprietor, it applies to
any business, from a repair shop to Google.
The case. E, a proprietor, owed several quarters of
payroll taxes. He designated that a partial payment to
the IRS t be applied to the principal of taxes due. He
wanted to pay down the taxes owed, and leave interest
and penalties to be paid later.
But the IRS allocated the payment to interest and
penalties, leaving the balance of overdue taxes to
accumulate more penalties and interest.
Held. For the taxpayer. When a partial payment of
taxes is made, the IRS has the right to allocate the
payment first to interest and penalties, and use what
is left to reduce taxes owed. But the IRS does not have
right to allocate a partial payment as it sees fit when
the taxpayer clearly states where the payment is to
be applied.
The IRS must follow taxpayers’ instructions. In this case, the taxpayer stated clearly how the payment was to be applied. He wanted to reduce the principal tax liability so that additional interest and penalties would not accrue. He was entitled to that allocation.
[Edwards v. Commissioner, T.C. Summ. Op. 2023]
IRS now allows penalty-free withdrawals of bad ERC claims
The IRS has just announced that small business owners and others can withdraw ERC claims and be treated as though the claim never was filed, avoiding repayment of refunds plus interest and penalties for bad claims. The new wrinkle. Even ERC claims under audit may be withdrawn and avoid penalties. Normally, taxpayers cannot amend or withdraw claims under audit without penalties.
Now, a taxpayer under audit can simply send a withdrawal request to their auditor or in response to a written notice from the IRS. Claims eligible to be withdrawn are those made on an adjusted employment return (an amended return, such as an 1120X). The return must have been filed exclusively to claim the ERC and not contain other adjustments or issues. Partial withdrawals are not allowed—the entire amount of the ERC claim must be withdrawn. In addition, the IRS must not have paid the refund yet or, if it issued a refund check, the taxpayer cannot have cashed or deposited it.
Taxpayers found ineligible to withdraw a claim under these rules can file an amended return to reduce or eliminate their ERC claims.
Who the new IRS policy helps. The withdrawal option is intended for taxpayers who were pressured or misled into filing ineligible ERC claims by marketers and promoters.
The IRS continues to investigate ERC claims. If it concludes a taxpayer knowingly filed a false claim, it still could pursue criminal charges even after the claim is withdrawn—there currently are least 300 active criminal ERC cases.
See how to withdraw a claim (IRS Fact Sheet 2023-24). [IR-2023-193]
BONUSES AND AWARDS
Bonuses
No matter how small the amount, cash bonuses are wages subject to FITW, FICA, FUTA, and applicable state and local payroll taxes. If given after FIT was withheld from regular wages—or with regular wages but identified as separate—you can use the 25% supplemental withholding rate. If wages exceed $1 million for the year, withhold at 39.6%. [26 CFR 31.3402(g)-1]
Bonuses can be given in two ways, as follows:
Discretionary (lump-sum) bonus. For a bonus to be discretionary (excludable from overtime calculations), it must be the employer who decides when and how much to give. The bonus cannot be required by a contract, agreement or promise, or be given in a pattern so that it is expected. To be discretionary, the bonus must be a complete surprise to the employee.
Exception: A holiday bonus can be discretionary, even if expected each year. [29 CFR 778.211]
Nondiscretionary bonuses are those required under a contract, agreement or promise, express or implied—e.g., for higher or faster production, as inducements to take a job or not leave—or bonuses employees have come to expect (except for holiday bonuses). Nondiscretionary bonuses for hourly employees must be added to weekly gross pay for the week in which they are earned and must be included when computing the week’s O.T. [29 CFR 7788.209]
Example: Minh earns $14/hr. One week, Minh works 42 hours and earns a $50 prorated production bonus. Minh’s normal pay: $588 for the week ($14 x 42 hrs) + $50 bonus = $638 straight-time pay.
Overtime pay: $638 for the week (including the nondiscretionary bonus) ÷ 42 hours worked = $15.19 regular rate of pay x 50% premium rate = $7.60 (rounded) x 2 hours’ O.T. = $15.20 (rounded) premium pay.
Gross pay: $638 straight-time pay + $15.20 premium pay = $653.20 gross pay for the week.
Signing and related bonuses. A bonus given for signing or cancelling an employment contract is wages subject to FIT, FITW, FICA and FUTA.
Why risk handling bonuses incorrectly?
Call us at (704) 506- 1137 and see what we can do for you.
Prizes and awards
Include in wages the fair market value (FMV)—not the cost—of prizes and awards and apply all taxes. Also include the FMV of prizes/awards for production, attendance, efficiency, or other on-the-job achievements in that employee’s straight-time pay to compute the O.T. premium.
Length-of-service or safety awards [IRC §3121 (a) (20)] can be excluded from federal taxable wages—if they:
- are not “disguised compensation”;
- are given under a written qualified plan or program that does not favor highly compensated employees;
- do not exceed an average of $400 per employee (or $1,600 for the year) and, if not paid under a qualified plan, do not exceed $400 per employee;
- are not tangible personal property, cash or cash equivalents, such as stocks, bonds, meals, lodging, or tickets for sports or theater; and
- are given in some kind of ceremony. [IRC §74(c), 274(j)]
Length-of-service awards are federal taxable wages if given before 5 years’ service but nontaxable after 5 years’ service and not given more frequently than every 5 years.
Safety awards are excluded from federal taxable wages if also given to management, administrative, professional, clerical and part-time employees but not to more than 10% of eligible employees during the taxable year. If, say, 12% of employees qualify, all safety awards are taxable for all employees.
Suggestion awards are excluded from an employee’s hourly pay rate when calculating overtime pay—if:
- the employee was not required to give suggestions;
- the award was not geared to the person’s salary;
- no time limit was set for submitting suggestions;
- offering suggestions is not part of that employee’s job (e.g., the job is not troubleshooting equipment and the suggestion applies to equipment, or in response to a survey of employees asking for ideas on how to improve some procedure);
- the employee made a suggestion completely on his or her own (no employer input at all); and
- the employer had no idea that the employee was working on the suggestion.
Noncash prizes
Include the FMV in wages subject to FIT, FITW, FICA and FUTA. [Rev. Rul. 57-18, CB 1957-1, 35]
Nontaxable gifts. If given infrequently, turkeys, fruit baskets, hams, wine, flowers and tickets to a show, sporting or other event (but not season tickets) generally are de minimis (nontaxable) fringes.
Taxable gifts. Cash or cash in kind (gift certificates) for any amount are wages subject to FIT, FITW, FICA and FUTA—e.g., a gift certificate for a turkey is taxable; a turkey is not. [26 CFR 1.132- 6(e); TAM 200437030]
Company-paid parties and picnics
The cost is 100% (not 50%) deductible to the business and nontaxable to employees and their families—if infrequent and given to promote employee health, goodwill, contentment or efficiency—e.g., holiday or cocktail parties, company picnics. [IRC §132, Rev. Rul. 2004-109 and Rev. Rul. 2004-110]
Why risk it being taxable?
Call us at (704) 506- 1137 and see what we can do for you.
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