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Connecticut Employment Tax Issues CBIAs Connecticut Business Tax Conference May 20, 2011 John Biello Tax Division Chief, Audit Unit Connecticut Department.

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Presentation on theme: "Connecticut Employment Tax Issues CBIAs Connecticut Business Tax Conference May 20, 2011 John Biello Tax Division Chief, Audit Unit Connecticut Department."— Presentation transcript:

1 Connecticut Employment Tax Issues CBIAs Connecticut Business Tax Conference May 20, 2011 John Biello Tax Division Chief, Audit Unit Connecticut Department of Revenue Services Ray Casella Tax Attorney Shipman & Goodwin LLP

2 Typical Issues Arising In Employment Tax Audits 1. Under withholding 2. Unremitted tax 3. Unreported wages 4. Deposit and reporting compliance 5. Worker Misclassification

3 #1 Under-Withholding What the auditors will do They will ensure that you are withholding pursuant to your employees Forms CT-W4 They will review your Forms CT-W4 They will review your payroll records If you didnt withhold the amount required by the Form CT-W4, you will have to pay the difference to the DRS + Interest and Penalties

4 #1 Under-Withholding What you should do Make sure you have a valid Form CT-W4 from each employee A Form CT-W4 that claims an exemption from withholding is only valid for one year Make sure you withheld (and are withholding) in accordance with each employees Form CT-W4 Obtain a Form CT-W4NA from nonresident employees who work within and outside of CT

5 #2 Unremitted Tax What the auditors will do They will ensure that the money you are withholding from your employees paychecks is being paid to the DRS. Failing to pay withheld tax to the DRS can result in: 100% Responsible Person Penalty Criminal Prosecution (fines and jail)

6 #2 Unremitted Tax What you should do Keep good records Payroll records Accounting records Bank records Review the work of your payroll personnel to ensure that they are properly remitting withheld taxes

7 #3 Unreported Wages What the auditors will do They will look for evidence of the following: Paying workers in cash Paying personal expenses of workers Providing, but not reporting, taxable fringe benefits

8 #3 Unreported Wages What you should or should not do Do not pay employees in cash Do not pay personal expenses of employees Review all benefits provided to employees and make sure that taxable benefits are included in the employees wages Develop and require substantiation procedures for reimbursing for employee business expenses

9 #4 Deposits and Reporting What the auditors will do Review tax deposits for timeliness Review payroll tax returns and statements for accuracy and timeliness Review filings for compliance with the electronic filing requirements

10 #4 Deposits and Reporting What you should do Understand your deposit and reporting requirements Understand the electronic filing requirements Keep copies of all payroll tax deposits, payroll tax returns, and information returns provided to workers

11 #5 Worker Classification What the auditors will do They will review your accounting records to locate payments to independent contractors They will analyze the level of control you have over these workers to determine if these workers are really misclassified employees THIS IS A BIG ISSUE WITH THE DRS & THE IRS

12 #5 Worker Classification What you should do Review your relationships with independent contractors Apply to those relationships the old 20-factor test for determining if a worker is an employee or an independent contractor Do this now, this is a big issue with the IRS & DRS

13 #5 Worker Classification Common misclassification situations Part-time workers Temporary workers Seasonal help – summer help – holiday help Family members Retirees rehired as contractors Consultants who – over time – end up spending all or most of their time providing services to you.

14 The Classification Process Who Are Employees? This is the hard question Must follow the Classification Process Who are Independent Contractors? This is the easy question They are workers who are not employees.

15 The Classification Process Employees include the following workers: Corporate Officers Statutory Employees Common Law Employees

16 The Classification Process Common Law Employees A worker is an employee under the common law if the employee/employer relationship exists between the service provider and the service recipient.

17 The Classification Process The Common Law Employee/Employer Relationship The employee/employer relationship exists when the service recipient has the right to control and direct the service provider, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.

18 The Classification Process The Common Law Employee/Employer Relationship An employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done.

19 The Classification Process The Common Law Employee/Employer Relationship It is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to control.

20 The Classification Process The Common Law Employee/Employer Relationship The 20 Factor Test 20 factors have been developed to help determine if an employee-employer relationship exists. The importance of each factor depends on the occupation and the facts in each case.

21 The Classification Process The Evolution of the 20 Factor Test The common law 20 Factor Test has evolved into three categories of evidence to use to determine if the right to control the means by which a worker accomplished the work.

22 The Classification Process Three Categories of Evidence: Behavioral Control Evidence Financial Control Evidence Relationship of the Parties Evidence

23 The Classification Process Behavioral Control Evidence Behavioral control evidence includes facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired

24 The Classification Process Financial Control Evidence Financial control evidence includes facts that show whether the business has a right to control the business aspects of the worker's job

25 The Classification Process Relationship of the Parties Evidence Facts that show the parties relationship include: Written contracts describing the intended relationship Whether the worker receives employee-type benefits The permanency of the relationship The extent to which services performed by the worker are a key aspect of the regular business of the company.

26 What to Do? Consult a Tax Advisor Perform a Self-Audit Contact the IRS for Help – Form SS-8 Section 530 Relief – from IRS A workers classification will be respected by the IRS if : 1. Consistent Treatment 2.Consistent Reporting 3.Reasonable Basis The DRS does not (formally) have a similar program

27 Multi-State Employees Connecticut residents working both in Connecticut and in another state. Connecticut nonresidents working both in Connecticut and in another state.

28 Multi-State Employees CT resident working in CT and another state General Rule: All wages of a CT resident are subject to CT withholding, even though some services are provided in another state. Modification: If the employer is required to withhold income tax for services in another state, the amount of CT withholding can be reduced.

29 Multi-State Employees CT resident working in CT and another state Step 1:Determine the other states actual withholding Step 2: Determine CT withholding as if all services performed in CT (Total CT Withholding) Step 3: Prorate the Total CT Withholding between a CT portion and a non-CT portion Step 4:Compare other states actual withholding to non-CT prorated portion. Step 5:Withhold CT prorated portion plus the excess, if any, of the non-CT prorated portion over the other states actual withholding

30 Multi-State Employees CT resident working in CT and another state Example 1: Connecticut Resident earns $1,000 Works 40% in CT & 60% in MA Required MA withholding is $25

31 Multi-State Employees CT resident working in CT and another state Step 1:Determine MA withholding = $25 Step 2: Determine Total CT Withholding as if all wages earned in CT $1,000 X 5% = $50 Step 3:Prorate Total CT Withholding MA Prorated Portion $50 x 60% = $30 CT Prorated Portion $50 x 40% = $20

32 Multi-State Employees CT resident working in CT and another state Step 4:Compare other states actual withholding to non-CT prorated portion: MA prorated portion$30 MA actual withholding$25 Excess MA prorated portion over MA actual withholding$5

33 Multi-State Employees CT resident working in CT and another state Step 5:Withhold CT prorated portion plus the excess, if any, of the non-CT prorated portion over the other states actual withholding: CT prorated portion$20 Plus: Excess MA prorated portion over MA actual withholding $5 Equals: Required CT withholding$25

34 Multi-State Employees CT resident working in CT and another state Example 2: Connecticut Resident earns $1,000 Works 40% in CT & 60% in MA Required MA withholding is $35

35 Multi-State Employees CT resident working in CT and another state Step 1:Determine MA withholding = $35 Step 2: Determine Total CT Withholding as if all wages earned in CT $1,000 X 5% = $50 Step 3:Prorate Total CT Withholding MA Prorated Portion $50 x 60% = $30 CT Prorated Portion $50 x 40% = $20

36 Multi-State Employees CT resident working in CT and another state Step 4:Compare other states actual withholding to non-CT prorated portion: MA prorated portion$30 MA actual withholding$35 Excess MA prorated portion over MA actual withholding$0

37 Multi-State Employees CT resident working in CT and another state Step 5:Withhold CT prorated portion plus the excess, if any, of the non-CT prorated portion over the other states actual withholding: CT prorated portion$20 Plus: Excess MA prorated portion over MA actual withholding $0 Equals: Required CT withholding$20

38 Multi-State Employees CT resident working in CT and another state Comparison Example 1 Example 2 Actual MA Withholding2535 MA Prorated Portion3030 CT Prorated Portion2020 Required CT Withholding: CT Prorated Portion2020 Excess MA prorated over actual MA 5 0 Total required CT withholding2520

39 Multi-State Employees Nonresident working in CT and in another state General Rules: Wages paid to a nonresident for services rendered in CT are subject to CT income tax withholding. Employers must withhold CT tax on all wages paid to a nonresident, unless the employer can properly determine (allocate) the wages attributable to services rendered in Connecticut. 14-Day Exception: Employers are not required to withhold CT income tax from wages paid to nonresident employees for services performed in CT if the employee is assigned to a primary work location outside of CT and works in14 or fewer days during the year.

40 Multi-State Employees Nonresident working in CT and in another state Two methods to allocate wages to CT: 1. Form CT-W4NA Method 2. Adequate Current Records Method

41 Multi-State Employees Nonresident working in CT and in another state Form CT-W4NA Method Form CT-W4NA - Employees Withholding Certificate Nonresident Apportionment Employer can obtain Form CT-W4NA from the employee and rely on the estimated percentage of services performed in Connecticut provided on the Form CT-W4NA by the employee.

42 Multi-State Employees Nonresident working in CT and in another state Adequate Current Records Method If an employer maintains current records to determine the amount of a nonresidents wages paid for services performed in CT, the employer can withhold CT tax based on those records, whether or not the employee filed a CT-W4NA.

43 Multi-State Employees Nonresident working in CT and in another state Determining the amount of CT tax to withhold: Form CT-W4NA Method Determine the amount that would be withheld if all wages were attributable to CT and multiple that amount by the percentage listed on the CT-W4NA. Adequate Current Records Method Determine the amount that would be withheld if all wages were attributable to CT and multiple that amount a fraction the numerator of which is the wages paid for services performed in CT and the denominator is the total wages paid for the year wherever performed by the percentage listed on the CT-W4NA.

44 What is New at the DRS DRS Delinquency Initiative Taxes and taxpayers covered Tax periods involved Description of the program What it means to taxpayers


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