Monthly Archives: September 2016

September 26, 2016

Tax Reporting For Deferred Compensation Payments Following Death of Employee: Are You Reporting Correctly?

By Rebecca Hudson and Arthur Hundhausen

When an employee dies, deferred compensation may be due and payable to the employee’s beneficiary or estate. Employers are often tripped up by the corresponding tax reporting and withholding requirements and whether income tax and FICA tax withholdings are due from such payments. This article briefly addresses these tricky questions.

No Income Taxes Should Be Withheld

Under many employer-sponsored deferred compensation arrangements, employees earn compensation in one year that will not be paid until a future date. This may include traditional deferred compensation plans, short-term and long-term incentive arrangements, and stock awards, to name a few. When an employee/plan participant dies, the terms of the plan or arrangement typically dictate when and how the future payments are to be made to the employee’s beneficiary or estate. Employers should follow the terms of the plan and make payments and plan distributions to beneficiaries at the required times.

The proper income tax treatment of compensation that is earned preceding death, but is unpaid at the time of death, and is ultimately paid to a beneficiary or the estate of the deceased employee is outlined in IRS Revenue Rulings 71-456 and 86-109. These rulings provide that for income tax withholding purposes, these amounts do not constitute “wages.” Consequently, employers should not withhold income taxes on the amounts paid to a beneficiary or estate following an employee’s death.

FICA Taxes Still Withheld and Due If Compensation Paid In Year of Death

In an odd, and less-than-intuitive provision, the federal tax code (Code) treats FICA tax withholding differently depending on whether the compensation payments are made to the beneficiary/estate in the calendar year of the employee’s or former employee’s death, or in succeeding calendar years. Section 3121(a)(14) of the Code states that if compensation amounts are paid in the calendar year of the employee’s death or former employee’s death, such amounts will constitute FICA “wages” and therefore, are subject to FICA (Social Security and Medicare) tax withholding. However, Code Section 3121(a)(14) also confirms that these amounts will not constitute “wages” for FICA purposes, and therefore will not be subject to FICA tax withholding, if they are paid in the calendar year or years after the year in which the employee or former employee died.

Form W-2 or 1099?

So what tax reporting forms must be issued to the beneficiary or estate to reflect the compensation payments made following an employee’s death? Under IRS Revenue Ruling 64-150, all amounts earned but unpaid at an employee’s or former employee’s death received by an estate or beneficiary of a deceased employee should be reported as non-employee compensation on a Form 1099-MISC. But, as explained below, the amounts reported on the Form 1099-MISC must take into account FICA tax withholding and therefore, will depend on whether the payments are made in the calendar year of the employee’s or former employee’s death or in the calendar year(s) after the death.

Specifically, for payments made in the same calendar year as the employee or former employee died, the payments are not subject to income tax withholding but are subject to FICA withholding. Therefore, employers should issue a Form W-2 for that year in the name of the employee or former employee (with the social security number of the employee), solely to reflect the FICA wages and the corresponding FICA tax withheld. The compensation/plan distributions should be reported in box 3, Social Security wages, and box 5, Medicare wages and tips, on the Form W-2. The corresponding employee Social Security tax withheld should be reported in box 4, and the corresponding employee Medicare tax withheld should be reported in box 6, on the same Form W-2. Finally, the net amount of the compensation/plan distributions made to the beneficiary/estate in that calendar year (“net” meaning the full amount of the payment less the amount of FICA taxes withheld) should be reported on a Form 1099-MISC, box 3, Other income, issued to the beneficiary/estate.

For payments made in the calendar year(s) following the year in which the employee or former employee died, no income tax or FICA taxes should be withheld and no Form W-2 is required. Instead, the full amount of the distribution payments should be reported on a Form 1099-MISC, box 3, Other income, issued to the beneficiary/estate.

September 22, 2016

Minimum Wage For Federal Contractors Going Up In 2017

By Mark Wiletsky

On January 1, 2017, the new minimum wage for employees working on covered federal contracts will be $10.20 per hour, up five cents from the current hourly minimum of $10.15. An even bigger increase will go into effect for tipped employees working on or in connection with covered contracts as the tipped-employee minimum cash wage goes up from $5.85 to $6.80 per hour.

Inflation-Based Increases

According to President Obama’s 2014 Executive Order establishing a minimum wage for employees working on federal contracts, and the Department of Labor’s (DOL’s) corresponding regulations, the annual minimum wage for non-tipped employees increases based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), as published by the Bureau of Labor Statistics, rounded to the nearest five cents. The annual percentage increase in the CPI-W over the past year was 0.287% which would raise the minimum wage rate to $10.18. Because the hourly rate must be rounded to the nearest multiple of five cents, the new rate beginning January 1, 2017 will be $10.20.

For tipped employees, the Executive Order requires that the minimum cash wage increase by $0.95 (or a lesser amount, if necessary) until it reaches 70% of the contractor minimum wage for non-tipped employees. For 2017, the hourly cash wage for tipped employees will go up by $0.95 cents to $6.80 per hour. Employers must remember that at all times, the amount of tips received by the employee must equal at least the difference between the cash wage paid and the Executive Order minimum wage. If the employee does not receive sufficient tips, the contractor must increase the cash wage paid so that the cash wage in combination with the tips received equals the Executive Order minimum wage.

Required Minimum Wage Notice

Covered federal contractors are required to inform all workers performing on or in connection with a covered contract of the applicable minimum wage rate under the Executive Order. The required notice may be met by posting the free poster on Federal Minimum Wage for Contractors provided on the Wage and Hour Division’s website. As with all employment law posters, this notice should be displayed in a conspicuous place at the worksite.

September 20, 2016

Overtime Rule Lawsuit Seeks To Stop December 1st Changes

By Mark Wiletsky

Twenty-one states have sued the federal Department of Labor (DOL) seeking to prevent the new overtime exemption salary boost from going into effect on December 1, 2016. In a lawsuit filed in the Eastern District of Texas, the states argue that the DOL exceeded its authority when it issued its final rule increasing the salary level for exempt employees to $47,476 per year, with automatic updates to the salary threshold every three years.

Legal Challenge To The Overtime Rule

In the states’ complaint against the DOL, the states argue that the new rule is unlawful. One of their primary arguments is that enforcing the Fair Labor Standards Act (FLSA) and the new overtime rule against the states infringes upon state sovereignty in violation of the Tenth Amendment. The complaint cites the increased payroll costs to the states that would result from having to comply with the new exempt salary levels.

The states argue numerous other reasons why the new overtime rule should be stopped, including that the DOL exceeded the authority granted to it by Congress when it focused on the salary level as the litmus test for exempt status rather than on the duties of white collar workers. The states argue that exempt status should apply to any “bona fide executive, administrative, or professional” employee, even if their salary falls below the new threshold.

The states also take issue with the automatic increases in the new rule through which the DOL will index the salary thresholds every three years. The states assert that the DOL should have to go through the normal notice and comment period in order to make future changes to the salary levels. Read more >>

September 13, 2016

Colorado Hospital Targeted For Alleged Age Discrimination Against Nurses

By Steve Gutierrez

senior nurse A Chief Nursing Officer (CNO) is alleged to have stated that a younger nurse could “dance around the older nurses.” Not hard to imagine that such a statement would raise the hackles of many nurses over age 40, but do comments like that mean that the hospital discriminated against one or more nurses on the basis of their age when the nurses were discharged or resigned? That is the question facing Montrose Memorial Hospital after the Equal Employment Opportunity Commission (EEOC) filed an age discrimination lawsuit against the Western Slope hospital last Friday.

EEOC Cites Numerous Age-Related Comments

In its complaint, the EEOC alleges that Montrose Memorial Hospital’s CNO, Joan Napolilli, made various age-biased statements to charging party Katherine Casias and other nurses. Casias began work for the hospital in 1985 as a licensed practical nurse but then earned her degree cum laude as a registered nurse (RN). The alleged comments attributed to Napolilli include:

a younger RN could “dance around the older nurses;”
younger nurses are “easier to train” and “cheaper to employ;”
Casias was not “fresh enough” and was chastised for not smiling or saying hello enough;
referring to Casias as an “old bitch;”
older workers at the hospital were “a bunch of monkeys” and she’d “like to fill the hospital with new nurses and get rid of all the old ones;” and
telling a nurse supervisor to “work that old grey-haired bitch into the ground” and to work her “long and hard until she quit or got fired.”

The complaint also alleges that Nurse Manager Susan Smith told an RN that “you’re getting too old for this job.”

If proven to have actually been said, comments expressing an aversion to workers over 40 and a preference for younger workers can be direct evidence of age discrimination under the Age Discrimination in Employment Act (ADEA). Read more >>

September 6, 2016

Tips For Avoiding Retaliation Claims Under EEOC’s New Guidance

By Bryan Benard

In recent years, the Equal Employment Opportunity Commission (EEOC) has received more retaliation charges than any other type of discrimination claim. Last year, almost 45 percent of EEOC charges included an allegation of retaliation – yes, almost half!

Because of the alarming frequency of charges and the need for employees to report discrimination without fear of reprisal, the EEOC recently issued a new enforcement guidance on retaliation that replaces and updates its 1998 compliance manual on the subject. Even though the EEOC’s position is not necessarily the final word on these issues, as courts often disagree with the EEOC’s interpretation of federal discrimination laws, employers should know how EEOC staff, including its investigators and litigators, will approach retaliation charges. Here is a look at the new guidance with tips on how to avoid becoming another retaliation charge statistic.

Overview of Retaliation and Protected Activities

The federal discrimination laws enforced by the EEOC, such as Title VII, the Age Discrimination in Employment Act (ADEA), the Americans with Disabilities Act (ADA) and others, prohibit employers from taking adverse action against an employee or applicant because the individual engaged in “protected activity.” Adverse actions that can be seen as retaliatory by the EEOC include not just discipline or discharge, but also transferring the employee to a less desirable position or shift, giving a negative or lower performance evaluation, increasing scrutiny, or making the person’s work more difficult.

“Protected activity” falls into two categories: participation and opposition. Participation activity is when an individual “participates” in an EEO process, which can include filing a charge, being involved in an investigation, or testifying or serving as a witness in a proceeding or hearing. Opposition activity is when an individual complains, questions, or otherwise opposes any discriminatory practice. Employees have the right to engage in both types of protected activity without being subject to retaliation from their employer.

Harassment As Retaliation

According to the EEOC, harassing conduct can be seen as retaliation, even if it does not rise to the level of being severe or pervasive enough to alter the terms and conditions of employment. The agency states that harassment can constitute actionable retaliation so long as the conduct is sufficiently material to deter protected activity in the given context.

Evidence That May Support a Retaliation Finding

To determine whether there is a causal connection between a materially adverse action and the individual’s protected activity, the EEOC will consider different types of relevant evidence, alone or in combination. Some of the facts that may lead to a retaliation finding include:

Suspicious timing, especially when the adverse action occurs shortly after the individual engaged in protected activity;
Inconsistent or shifting explanations, such as where the employer changes its stated reasons for taking the adverse action;
Treating similarly situated employees more favorably than the individual who engaged in protected activity;
Statements or other evidence that suggest the employer’s justification for taking the adverse action is not believable, was pre-determined, or is hiding a retaliatory reason.