Payroll Year End and2013 Update

October 2012

www.pwc.com

PwC 2

Agenda

New York – MCTMT rulingHealthcare Reform•Health Coverage Reporting•Medicare Increase

Quality Stores DecisionFederal Payroll ChangesState and Local Payroll ChangesInternational Equity Issues

PwC 3

New York - MCTMT

New York Metropolitan Commuter Transportation Mobility Tax ruling

• A Nassau County Supreme Court decision found the MCTMT to be unconstitutional on August 22, 2012.  This litigation is not concluded. 

• Taxpayers who have been paying this tax should continue to pay and file returns. 

• Protective claim considerations and process for filing.

• If this requirement changes, the New York Department of Taxation and Finance will notify taxpayers.

PwC 4

Health Coverage Reporting

The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan.

• Box 12, Code DD

• IRS has issued a table this shows exactly what should be reported- Employer and employee portions of health care cost

• Coordination with HR- Have you started gathering the data?- Are you prepared and have you tested the upload?

• Coordination with vendor / W-2 preparer

PwC 5

Increased Medicare Withholding

For tax years beginning after December 31, 2012, an additional 0.9% hospital insurance tax (Medicare) applies to high-earning workers and self employed.

• Code Sec. 3101(b)(2), employment wages received in excess of: $250,000 for joint returns; $125,000 for married taxpayers filing a separate return; and $200,000 in all other cases.

• Under Code Sec. 1401(b)(2), the additional 0.9% Medicare tax applies to self-employment income for the tax year in excess of the above figures.

• Employer are obligated to withhold the additional 0.9% Medicare tax only on the individual's wages in excess of $200,000 (disregard wages received by the spouse).

• If the additional Medicare tax is not collected by the employer withholding, the individual is obligated to pay the tax.

• There is no employer match for the additional Medicare tax.

• The IRS said it does not plan to add additional boxes to Form W-2

PwC 6

Health FSA

Dollar cap on contributions to health flexible spending account

(“FSA”).

• For tax years beginning after December 31, 2012, for a FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) under the health FSA for a plan year (or other 12-month coverage period) can't exceed $2,500.

• Code Sec. 125(i)). Notice 2012-40, 2012-25 IRB 1046, provides guidance on the effective date of the $2,500 limit on salary reduction contributions to health FSAs under Code Sec. 125(i), and on when and how plans should be amended to comply with the limit

PwC 7

Quality Stores

Sixth Circuit Affirms Quality Stores Decision on FICA Taxation of Severance Pay – Billions of Dollars in Refund Claims Are at Issue

• Severance payments made to employees pursuant to an involuntary reduction in force were not "wages" for FICA tax purposes

• The statute of limitations for filing a refund claim for severance payments made in 2009 closes on April 15, 2013. See §6513(c).

• Where the Sixth Court decision is applicable:- Kentucky - Michigan - Ohio - Tennessee

PwC 8

Federal Taxes in 2013

•FICA Base $113,700 6.2% as of now

•401k $17,500

•Mileage-still pending

•Adoption Assistance-still pending

•Qualified Parking and Transit Pass-still pending

•Foreign Earned Income Exclusion $97,600

•Max Foreign Housing Exclusion

PwC 9

Federal Taxes in 2013

Extension Of Payroll Tax Cut Still Up In The Air (4.2% employee rate)

• White House Press Secretary Jay Carney recently said during an informal press conference held aboard Air Force One that President Obama is still considering all options and that it is still possible that the “payroll tax cut” might be extended before the end of the year [White House website, Press Briefs, Press Gaggle by Press Secretary Jay Carney en route New Orleans, LA, 7/25/12].

PwC 10

Federal Taxes in 2013

IRS Announces Health Savings Account Limitations For 2013. [Rev Proc 2012-26, 2012-20 IRB]

• For calendar year 2013, the annual limitation on deductions under § 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $3,250.

• For calendar year 2013, the annual limitation on deductions under § 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $6,450.

• For calendar year 2013, a “high deductible health plan” is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,250 for self-only coverage or $2,500 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,250 for self-only coverage or $12,500 for family coverage.

PwC 11

State and Local Taxes

PwC 12

SUTA Affects on FUTA

FUTA tax (normally $42 per employee annually) is expected to nearly triple to an average of $124 per employee by 2014

At least 23 states have depleted state UI trust funds, and have had to draw from a special federal UI loan fund as of May 21, 2012.

The final list of credit reduction states will be determined by the DOL and announced around November 10, 2012. The following was as of beginning of 2012.

State Rate State Rate State RateAlabama 0.60% Illinois 0.60% North Carolina 0.60%Arizona 0.30% Indiana       0.90% Ohio 0.60%Arkansas 0.60% Kentucky 0.60% Pennsylvania 0.60%California 0.60% Michigan 1.20% Rhode Island 0.60%Colorado 0.30% Minnesota 0.60% South Carolina 0.90%Connecticut 0.60% Missouri 0.60% Vermont 0.60%Delaware 0.30% Nevada 0.60% Virgin Islands 0.60%Florida 0.60% New Jersey 0.60% Virginia 0.60%

Georgia 0.60% New York 0.60% Wisconsin 0.60%

PwC 13

State Income Tax Withholding - Mobility

3485/H.R. 1864, the Mobile Workforce State Income Tax Simplification Act of 2012

• To limit the authority of States to tax certain income of employees for employment duties performed in other States.

• IN THE SENATE OF THE UNITED STATES August 2, 2012

- Mr. BROWN of Ohio introduced the bill; which was read twice and referred to the Committee on Finance

• Letter to Senate committee from 184 employer asking the Senate to pass the bill

PwC 14

State Income Tax Withholding - Mobility

• In General- No part of the wages or other remuneration earned by an employee who performs employment duties in more than one State shall be subject to income tax in any State other than-

- the State of the employee’s residence; and

- the State within which the employee is present and performing employment duties for more than 30 days during the calendar year in which the wages or other remuneration is earned.

• an employer may rely on an employee’s annual determination of the time expected to be spent by such employee in the States in which the employee will perform duties

• if an employer, at its sole discretion, maintains a time and attendance system that tracks where the employee performs duties on a daily basis, data from the time and attendance system shall be used instead of the employee’s determination

PwC 15

State Income Tax Withholding - Mobility

• An employee is considered present and performing employment duties within a State for a day if the employee performs more of the employee’s employment duties within such State than in any other State during a day

• If an employee performs employment duties in a resident State and in only one nonresident State during one day, such employee shall be considered to have performed more of the employee’s employment duties in the nonresident State than in the resident State for such day.

• the portion of the day during which the employee is in transit shall not be considered in determining the location of an employee’s performance of employment duties.

PwC 16

State Payroll Taxes – Domestic Partner Benefits

Domestic Partner Benefits• State and Federal payroll treatment may vary

- Same Sex Domestic Partners vs. Opposite Sex Domestic Partners

- Civil Union vs. Domestic Partners vs. Same Sex Marriages

More recent State changes

• Washington legislation, effective June 7, 2012, legalizes same-sex marriages. [L. 2012, S6239].

• Illinois - The Religious Freedom Protection and Civil Union Act (Public Act 96-1513) was signed January 31, 2011 and became effective June 1, 2011.

• New York - The Marriage Equality Act (Act) was signed into law as Chapters 95 and 96 of the Laws of 2011, on June 24, 2011.

• Rhode Island - As of July 1, 2011, same-sex couples can enter into Civil Unions and be afforded all the rights, benefits, protections, and responsibilities of a married spouse under law.

PwC 17

Local Payroll Taxes - PA - EIT Tax Changes

Pennsylvania local tax changes

• On Friday, Aug.17, 2012, Central Tax Bureau of Pennsylvania (Centax) issued a press release announcing that they signed a mutual cooperative agreement with H.A. Berkheimer to transition all contracts with existing tax collection committees (TCCs) for Act 32 compliance and other municipal contracts.

- For Act 32 compliance, Centax currently has 12 clients. - Berkheimer has been appointed to seven of those and

Keystone has been appointed to one.

• Year-end check up to confirm Act 32 implementation?

• Confirm employees are providing updated residency certificates / need to request employees review or adjust residency certificates?

PwC 18

Local Payroll Taxes - PA - EIT

Rules For Withholding EIT For Workers Who Travel. The Pennsylvania Department of

Community & Economic Development (DCED) website includes guidance on withholding EIT from employees who travel from site to site on a regular basis, but do not maintain a place of employment in the areas where they work.

• An employee working temporarily at a PA facility for a period of time that encompasses a “reporting quarter”, then the facility site is the work location address used to determine the EIT rate and corresponding PSD code.

• An individual working for an employer with a central business location in PA, but the

employee “floats” or is transferred daily, weekly or monthly between other business sites, then the central or main employer business location would be the work location address to determine the EIT rate and corresponding PSD code.

• An employee hired by an employer who receives work orders or instructions at home in PA but physically reports to other business sites on a daily, weekly or monthly basis, then the employee’s home address should be used as both the home and work location  address used to determine the EIT rates and corresponding PSD codes.

PwC 19

Local Payroll Taxes - San Francisco City Tax

Proposed Phase Out Of City Payroll Tax - subject to voters' approval on November. 6, 2012.

• The San Francisco Board of Supervisors approved an Initiative Ordinance to phase out the city payroll expense tax over a five-year period beginning in 2014, and replace it with a new gross receipts tax and increased business registration fees.

• For management companies based in the City, the proposed legislation provides the businesses operating as an administrative office, would be subject to an annual administrative expense tax in lieu of the gross receipt tax. The proposed rate is 1.4% of the admin office and related companies total payroll associated with all locations with the city.

• Existing tax incentives remain (enterprise zones, mid-market exemptions)

PwC 20

Local Payroll Taxes – Chicago Employer’s Expense Tax

Chicago Employer’s Expense Tax reduced and eliminated in 2014

• The Employers' Expense Tax applies to businesses that employ 50 or more full-time workers or employees that perform 50% or more of their work service per calendar quarter in the City of Chicago.

• Employees must earn more than $4,300 in a calendar quarter to be considered taxable.

• The ordinance will phase out the Chicago employer's expense tax by $1.00 per year over the next four years resulting in the full repeal of the tax on January 1, 2015.

• The last reduction in the taxation was on July 1, 2012 from $4 to $2.

• Effective 2013, it has not yet been announced if there will be a further reduction

PwC 21

Trailing Tax liability for Mobile EmployeesThe Issue with Equity

• Equity granted to employees has settlement timing across tax years

• Employee has lived in multiple countries/states between the grant and settlement dates

• Many countries/states tax a portion of the award even if the employee is not present in that jurisdiction at the time of the taxable event (so-called “trailing liabilities”). This is both a domestic and international tax issue

• May be expatriates with some type of policy support or locals “on their own”

PwC 22

Trailing Tax Liability for Mobile EmployeesPwC’s 2011 Global Equity Incentives Survey

0%

5%

10%

15%

20%

25%

Methodology to Track Expatriates from Grant to Settlement

2011 2009

PwC 23

Trailing Tax Liabilities for Mobile EmployeesPwC’s 2011 Global Equity Incentives Survey

2011 20090%

10%

20%

30%

40%

50%

60%

Is State-to-State Movement of US EEs Tracked?

Yes No

PwC 24

Trailing Tax Liabilities for Mobile EmployeesPwC’s 2011 Global Equity Incentives Survey

Too Few Mobile EEs to Prioritize

Still Developing Approach Number of Shares Granted to Mobile EEs is

not Significant

Other Waiting for SPA to Provide

0%

10%

20%

30%

40%

50%

60%

70%

Reasons for not Tracking Employee Mobility

2011 2009

PwC 25

Trailing Tax Liabilities for Mobile EmployeesBusiness Problem

• Lack of payroll reporting and tax withholding compliance on equity transactions for mobile employees – globally and between states

• Exposure for non-compliance on trailing liabilities

• Tracking is difficult

• Technical rules vary between countries

• Allocation rules for social taxes are different than income tax

• Employee dissatisfaction?

PwC 26

Short Term Business Travelers

•Common definition of a business traveler

• Business traveler: up to 90 days

• Short-term assignee: 2-12 months

•Stealth / Virtual assignee

•Commuter

PwC 27

Challenges with Short Term Business Travelers

•Identifying Short Term Business Travelers/Short Term

Assignees

•Tracking Short Term Business Travelers/Short Term

Assignees

•Payroll considerations in the home and host location

•Administration

•Permanent Establishment concerns

•Immigration issues: proper work permit/visa

•Charge backs

•Other

Questions???

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or

warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, LLP its members, employees and agents do not accept or assume any liability, responsibility or

duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2012 PwC. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This

document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Mindy Harada, Director 408-817-7849 mindy.harada@us.pwc.com