Watch out for unscrupulous payroll providers
In a recent fact sheet, the IRS warned that, while most third-party payroll service providers are reputable, some have been prosecuted for stealing funds intended for the payment of payroll taxes. The agency offers some steps employers can take to protect themselves:
- Enroll in the Electronic Federal Tax Payment System (EFTPS) and make sure the provider uses it to make tax deposits.
- Don’t substitute the provider’s address for your own. That way, you’ll continue to receive any bills, notices or other official correspondence.
Be sure to contact the IRS immediately about any notices, particularly if they relate to a payment that was, or should have been, made by the provider.
IRS clarifies 50% limit on meal and entertainment deductions
In general, when meal and entertainment expenses are incurred in the context of an employer-employee or customer–independent contractor relationship, one party will be subject to a 50% limitation on the deduction. In July, the IRS finalized regulations that clarify which party is subject to the 50% limit.
In the employer-employee setting, if an employer reimburses an employee for meal or entertainment expenses and treats the reimbursement as compensation, the employee reports the entire amount as taxable income. The employer deducts the payment as compensation, and the employee may be able to claim a business expense deduction, subject to the 50% limit. If the employer doesn’t treat the reimbursement as compensation, the employee excludes the entire amount from taxable income and the employer deducts the expense, subject to the 50% limit.
In a customer–independent contractor setting, if the contractor accounts for meal and entertainment expenses reimbursed by the customer, and meets substantiation requirements, the 50% limit applies to the customer. Otherwise, it applies to the contractor. The final regulations also allow parties to agree as to who will be subject to the 50% limit.
A U.S. Tax Court case — Shenk v. Commissioner — demonstrates the importance of filing the relevant forms with the IRS. In this case, a husband and wife divorced, and the divorce judgment provided that the ex-spouses would divide the dependency exemptions for their three children, even though the wife had primary residential custody.
Despite the language of the judgment, the court found that the husband wasn’t entitled to claim any dependency exemptions. The reason? The wife did not formally release (by filing Form 8332) her exemption claims with respect to the children claimed as dependents by the husband.