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Full Text: Treasury's Testimony On Simplifying Domestic Employment Rules At Finance Hearing On Social Security Taxes.

JUL. 21, 1993

Full Text: Treasury's Testimony On Simplifying Domestic Employment Rules At Finance Hearing On Social Security Taxes.

DATED JUL. 21, 1993
DOCUMENT ATTRIBUTES
  • Authors
    Hardock, Randolf H.
  • Institutional Authors
    Treasury Department
    Office of the Assistant Secretary for Tax Policy
  • Cross-Reference
    For a related news story, see the July 22, 1993, Tax Notes Today

    table of contents.
  • Code Sections
  • Index Terms
    FUTA tax
    FICA tax, Medicare
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 93-7952
  • Tax Analysts Electronic Citation
    93 TNT 153-38
STATEMENT OF RANDOLF HURST HARDOCK ACTING BENEFITS TAX COUNSEL DEPARTMENT OF THE TREASURY BEFORE THE COMMITTEE ON FINANCE UNITED STATES SENATE
====== FULL TEXT ======

July 21, 1993

Mr. Chairman and Members of the Committee:

I am pleased to be here today to present the views of the Department of the Treasury on proposed changes to the Federal employment tax rules governing household employees. The Department believes that significant simplification in this area can be accomplished in a manner that both reduces the administrative burden on taxpayers and preserves the important policy of providing social security coverage for household employees. As I will discuss in more detail, the Department supports S. 1231, the bill recently introduced by Chairman Moynihan. The Chairman's bill would dramatically simplify the current law requirements for filing and payment of employment taxes on household employees, which we believe would be a significant step toward improving compliance among household employers and expanding social security coverage for household employees. We will be pleased to work further with the Chairman and the Committee on this important issue.

BACKGROUND

For background purposes, I would like to briefly describe the tax filing and payment requirements that apply under current law. Household employers who pay cash wages of $50 or more per quarter must pay social security taxes (including Medicare taxes) on the wages paid to the household employee. The social security taxes are comprised of both an employer and employee portion and are paid each quarter on a Form 942. Household employers who pay cash wages of $1,000 or more in any calendar quarter in the current year or the preceding year also are subject to Federal unemployment taxes and must file an annual Federal unemployment tax return on Form 940 or Form 940EZ. Quarterly deposits are required if certain liability thresholds for unemployment taxes are met. In addition, the states also require the filing and payment of state unemployment taxes, which also are typically done on a quarterly basis.

In addition to employment taxes, the household employer also may withhold and remit income taxes on a quarterly basis. However, wage withholding for household employers is not mandatory and is subject to agreement between the household employer and employee. If such an agreement is made, the withheld income taxes are reported and paid quarterly on the Form 942 along with social security taxes.

A household employer also must provide household employees with a wage and tax statement on Form W-2 no later than January 31st of each calendar year. Copies of the Form W-2 also must be filed with the Social Security Administration and, in some cases, filed along with a transmittal of income and tax statements on Form W-3.

SIMPLIFICATION OF FILING AND PAYMENT OF EMPLOYMENT TAXES

The Department strongly supports the provisions in the Chairman's bill that would facilitate annual filing and payment of all employment and income taxes for household employees. The simplification that would be achieved by the Chairman's bill would significantly reduce the filing burden on household employers. As indicated in the attached chart, household employers potentially could reduce their obligations from eleven different state and Federal tax form filings to two -- their own Federal income tax return and a wage and income tax statement provided to the employee and the Social Security Administration. In the aggregate, this would eliminate the need for an estimated 1.4 million quarterly Forms 942 that are filed each year by household employers.

This simplification would be achieved by giving the Internal Revenue Service the authority to institute what is essentially a "one-stop" filing procedure for both state and Federal employment taxes for household employees. As a result, household employers' filing obligations potentially would be reduced from the various Federal and state quarterly filings discussed above to a single annual filing as part of their own Federal tax return. Under the bill the employment taxes of household employees would be reported as a separate line item on the household employer's income tax return. This method would provide the household employer the choice of either increasing his or her own income tax withholding as a method of remitting these amounts or, if the household employer remits estimated income taxes quarterly, increasing his or her quarterly income tax payments. The bill explicitly provides that no penalty for failure to pay quarterly estimated tax will apply to the extent that any underpayment is attributable to the employment taxes of household employees.

In addition to the simplification in reporting and payment of employment taxes that would be achieved by the bill, the Department also believes that these changes could have positive compliance effects. Including these amounts on the annual income tax return will increase household employers' awareness of their employment tax obligations and remove compliance barriers by eliminating the complications of the quarterly reporting and payment system.

WAGE THRESHOLD

The Department strongly agrees with the position in the Chairman's bill that it is appropriate to increase the wage threshold that triggers employment tax obligations for household employees. The original $50 quarterly threshold no longer is an accurate measure of "casual labor" and results in burdensome filing obligations that cannot be justified in light of the insignificant amount of taxes owed. Moreover, the low threshold leads to such high rates of noncompliance that it could undermine the public's belief in the fairness of the tax system overall. However, the Department strongly believes that any increase in the wage threshold must be balanced against the need to maintain social security coverage and benefits for household employees.

Under the Chairman's bill, the wage threshold would be raised to the dollar amount needed to earn one quarter of social security coverage. For 1994, that amount would be $610. Although we would not oppose a wage threshold that is explicitly tied to the social security coverage amounts, the Department believes that greater simplification could be achieved by adopting a somewhat higher threshold that is an even dollar figure. We believe that an even $1,000 threshold would provide significant administrative advantages because it is easier for taxpayers to remember and to calculate from year to year. On the other hand, the Department would not favor a threshold above $1,000 per year. We believe that the simplicity achieved at a threshold above $1,000 would not justify the associated loss in social security coverage for household employees.

In addition, the Department believes that while indexing is necessary to avoid an outdated wage threshold in the future, it is preferable to index the threshold by even dollar amounts and to reduce the frequency of changes in the threshold from year to year. For these reasons, we would suggest an indexing method that would raise the threshold in even dollar amounts, such as $200 or $500 increments. For example, using either a $200 or $500 indexing method, a $1,000 threshold would be indexed to $1,200 after five years or to $1,500 after eleven years, assuming a four percent annual increase in wages. The Department believes that this type of procedure would retain the benefits of indexing but also would help to reduce taxpayer confusion and administrative complexity resulting from more frequent changes to the wage threshold.

TEENAGER EXEMPTION

The Department notes that the Chairman's bill would exempt from the definition of "employment" any household work performed by individuals under the age of 18. The Department has concerns that such an exemption would create disparities between teenagers who perform domestic work and those who work for a trade or business. In addition, if a teenager exemption is included, we believe that the Committee should consider whether it would be more appropriate to lower the age for exemption, given that a segment of older teenage household employees may be engaged in full-time work.

Mr. Chairman, that concludes my formal statement. I will be pleased to answer any questions that you or other Members may wish to ask.

       INCOME TAX, SOCIAL SECURITY, AND UNEMPLOYMENT INSURANCE

 

          FORMS REQUIRED TO BE FILED BY HOUSEHOLD EMPLOYERS

                               BEFORE

1. IRS FORM 942                           APRIL 15

 

2. STATE UNEMPLOYMENT FORM /*/            APRIL 30

 

3. IRS FORM 942                            JULY 15

 

4. STATE UNEMPLOYMENT FORM /*/             JULY 31

 

5. IRS FORM 942                         OCTOBER 15

 

6. STATE UNEMPLOYMENT FORM /*/          OCTOBER 31

 

7. IRS FORM 942                         JANUARY 15

 

8. STATE UNEMPLOYMENT FORM /*/          JANUARY 31

 

9. IRS FORMS W-2 TO WORKERS /**/        JANUARY 31

 

10. IRS FORM 940 or 940EZ              FEBRUARY 10

 

11. IRS FORM 1040                         APRIL 15

                         FOOTNOTES TO TABLE

     /*/ Date of state unemployment forms varies. Quarterly Federal

 

unemployment payment also may be due on Form 8109.

     /**/ Form W-2 (along with Form W-3, if applicable must also be

 

filed with the SSA by February 28.

                          END OF FOOTNOTES

                                AFTER

1. IRS FORMS W-2 TO WORKERS /**/          JANUARY 31

 

2. IRS FORM 1040                            APRIL 15

                          FOOTNOTE TO TABLE

     /**/ Form W-2 (along with Form W-3, if applicable must also be

 

filed with the SSA by February 28.

                           END OF FOOTNOTE

DOCUMENT ATTRIBUTES
  • Authors
    Hardock, Randolf H.
  • Institutional Authors
    Treasury Department
    Office of the Assistant Secretary for Tax Policy
  • Cross-Reference
    For a related news story, see the July 22, 1993, Tax Notes Today

    table of contents.
  • Code Sections
  • Index Terms
    FUTA tax
    FICA tax, Medicare
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 93-7952
  • Tax Analysts Electronic Citation
    93 TNT 153-38
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