Vision Payroll

The IRS recently issued guidance for reporting wages paid in 2008 (including accrued wages and vacation pay) on behalf of deceased employees. Although state law generally controls who receives the unpaid wages, the reporting follows the same rules even if the check is reissued in the name of the employee’s estate or beneficiary. If the employee died in 2008, the employer withholds social security and Medicare taxes and reports the payments in boxes 3 and 5 of the 2008 Form W-2. The wages are not to be reported in box 1 of the 2008 Form W-2 and no income tax is to be withheld. Instead, the amount of the payment must be reported in box 3 of the 2008 Form 1099-MISC using the name and taxpayer identification number of the recipient of the payment. If the employee died in 2007 or before, there is no reporting on the 2008 Form W-2 and no withholding of social security and Medicare taxes. The payment must still be reported in box 3 of the 2008 Form 1099-MISC using the name and taxpayer identification number of the recipient of the payment. Contact Vision Payroll to ensure proper reporting for payments of wages made on behalf of your deceased employees.

In Private Letter Ruling 200825043, the IRS concluded that employers who receive a determination letter from the IRS that someone previously classified as an independent contractor should be classified as a employee may use §3509 to reduce the amount of employee FICA tax and federal income tax payable. The federal withholding in such cases is reduced to 1.5% of wages regardless of what the employee claims on a Form W-4. The FICA tax rate is reduced from 7.65% to 1.53% on the employee’s portion. The employer’s rate remains at 7.65%. If the employer did not file Form 1099-MISC for payments made to the newly-classified employee, the employee withholding rates are doubled. Furthermore, no interest is charged on the late payment of the employee’s portion of the tax.