Late last year, the IRS sent notices to approximately 2,000 taxpayers as part of its Employment Tax National Research Project. In February 2010, the IRS will begin examining employers specifically targeting employment taxes: FICA, Social Security, Medicare, and federal income tax withholding. In addition, the IRS plans to audit approximately 2,000 additional taxpayers in each of 2011 and 2012. The IRS will use the results of these approximately 6,000 audits to gauge noncompliance and to determine specific noncompliant employment-tax issues.

This undertaking indicates the IRS may be more attentive to employment tax issues. As a result, taxpayers should consider examining their employment tax compliance and policies.

Generally, employment taxes on salaries are straightforward and in many cases, an outside payroll firm does this calculation. However, the application of employment taxes in less obvious situations may be problematic, and even the most diligent payroll and benefits departments might overlook these issues. Employment tax-related issues may include:

  • Worker classification issues (employee versus independent contractor)
  • Fringe benefit issues, including:
    • Company-provided cars/mileage
    • Company-provided travel for spouse and family
    • Company-provided club memberships
    • Per diem reimbursements/adequate documentation policy for reimbursements
    • Reimbursement of legal fees and other indemnification payments
    • Company-provided computers
    • Company-provided cell phones
    • Personal usage of private aircraft
    • Company-provided gift cards and other taxable benefits
  • Nonqualified deferred compensation, constructive receipt issues, options, restricted stock, stock appreciation rights, and phantom stock
  • Reasonable compensation issues
  • Section 162(m) $1-million-deduction-limit issues
  • Section 280G “Golden Parachute” issues
  • Employment tax issues for non- U.S. citizens and non-residents of the United States
  • FICA tax issues and refund claims
  • Correction of payroll tax and reporting errors
  • Railroad Retirement Tax
  • Household employees