To be sure, it might be a stretch to consider these holiday gifts. However, the IRS has issued several proposed regulations that clarify a number of tax code provisions, as well as at least one announcement postponing the effective date of a regulation. Among them:
The Additional Medicare Tax
Section 9015 of the Patient Protection and Affordable Care Act (PPACA), enacted in 2010, contained an additional Medicare tax that goes into effect in 2013. The tax of 0.9 percent applies to employees’ wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds certain levels, depending on the filing status of the taxpayer. Moreover, employers are responsible for withholding the tax from employees’ compensation exceeding $200,000 in a calendar year, as this overview of the PPACA by the IRS explains. Employers can get hit with penalties if they don’t withhold the tax as required.
The IRS’ REG-130074-11 outlines proposed regulations regarding the Additional Medicare Tax. Among other clarifications, the proposed regulations note that employers calculate employees’ wages to determine the amounts to withhold just as they would for FICA (Federal Insurance Contributions Act) amounts. That means if an employee considers amounts deferred under a nonqualified deferred compensation plan as wages for FICA, these amounts also are considered when determining the Additional Medicare Tax. However, the Additional Tax doesn’t include an employer portion, unlike the existing Medicare tax.
The Additional Medicare Tax kicks in once employees have earned $250,000 for those that file jointly, $125,000 for married taxpayers who file separately and $200,000 for everyone else. Again, however, the employer needs to withhold the tax only once an employee has earned $200,000 in a calendar year. The employer can disregard any earnings of an employee’s spouse.
The Treasury Department and the IRS intend to finalize these regulations in 2013, although the Notice indicates that taxpayers can rely on these proposed regulations even before the final ones are published.
Whistle-blower provisions for violation of IRS laws
In REG-141066-09, issued in mid-December, the IRS provides guidance on the award program for individuals who submit to the IRS information regarding an underpayment of tax or a violation of internal revenue laws. This follows from Section 406 of the Tax Relief and Health Care Act of 2006, which amended section 7623 of the Code; section 7623 generally allows an award of between 15 and 30 percent of the amounts collected by the IRS based on information provided by an individual.
Among other provisions, the proposed rules clarify the process for submitting information and filing claims for awards. For instance, it states, “an individual submitting a claim should identify a person and describe and document the facts supporting the claimant’s belief that the person owes taxes or violated the tax laws.” The proposed rules also restate who isn’t eligible for an award. One example: individuals who already are required by Federal laws or regulations to disclose information.
The proposal is seeking comments on several provisions, including whether additional safeguards are needed to protect taxpayer return information, and whether the IRS should pay multiple awards if two or more claims relate to the same amount collected. The deadline for receiving comments is February 19, 2013.
Service charges versus tips
IRS Announcement 2012-50, also issued in December, extends the time businesses have to comply with the rules involving the proper treatment of service charges, as specified in Rev. Rul. 2012-18, which was covered in the Internal Revenue Bulletin 2012-26. The extension until January 1, 2014, allows businesses more time to modify their business practices and make needed system changes, the IRS said.l
Internal Revenue Bulletin 2012-26 identified several criteria that distinguish tips from service charges. Specifically, if any of the following are NOT present, that “creates doubt as to whether a payment is a tip.” These are: (1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment.
The Bulletin provides this example: the payment of a fixed charge imposed by a banquet hall that is distributed to the employees who render services, such as the waiter, bus-person and bartender, is a service charge and not a tip. To the extent any portion of a service charge paid by a customer is distributed to an employee, it is wages for FICA tax purposes.