Bloomberg BNA 2017 Payroll Outlook

U.S. PAYROLL OUTLOOK:2017 AND THETRUMP PRESIDENCY

Howard Perlman, CPP Michael BaerFeb. 14, 2017

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Agenda

• Agenda:

o Payroll Updates for 2017 and Anticipated Changes

• Income Tax Reform• Multistate Taxation• Worker-Status, Joint-Employer Policies• The Fate of Labor Department Initiatives • Health Care Policy Changes• Fighting Payroll Fraud• Wage & Hour, Paid Leave: State & Local• Paycards and Same-Day ACH• Unemployment Insurance Tax• International Payroll

INCOME TAX REFORM

Income Tax Reform

• Federal income tax brackets, proposed changes:o Trump during his presidential campaign proposed lowering the

number to three from seven• For single filers (annual amounts):

o Frist bracket, more than $25,000 to $50,000, rate of 12 percento Second bracket, more than $50,000 to $150,000, rate of 25 percento Third bracket, more than $150,000, rate of 33 percent

• Taxation would trigger for far fewer taxpayers under Trump’s plano Annual income level before taxation would be about 11 times higher, compared with

current level of $2,250o Congressional proposals (some of the most prominent ones):

• H.R. 29 (48 Republican sponsors), Tax Code Termination Act – Would eliminate, effective starting 2022, all taxes under I.R.C. of 1986 except for self-employment, FICA and Railroad Retirement Taxes

• H.R. 25 (36 Republican sponsors), Fair Tax Act of 2017 – Would replace income taxes, FICA taxes, estate and gift taxes with a sales tax of 23 percent, effective 2019

• H.R. 636 (12 Democrat sponsors), Fairness in Taxation Act of 2017 – would keep current income tax brackets and add, effective for 2017, five more brackets for income more than $1 million, rates of 45 to 49%

Income Tax Reform

• States conforming to earlier federal W-2 deadlineo 2017 was the first year for which most states had an annual reconciliation deadline

of Jan. 31

• 26 states, D.C., and Puerto Rico have this deadline. Nebraska has a deadline of Feb. 1.

• Of these states, Iowa and Oklahoma required annual reconciliation for the first time with 2016 forms filed in 2017. The Iowa requirement applied to employers with at least 50 employees for forms filed in 2017, covers all employers for forms filed in 2018.

o There are 11 states requiring annual reconciliation (filing state annual returns and state copies of Form W-2) that still have a deadline of the last day of February.

• These states are: Arizona, Arkansas, Hawaii, Kansas, Maine, Michigan, Missouri, Montana, New Jersey, Oklahoma and West Virginia.

• Maine is a likely candidate for an earlier deadline because in October 2016, it encouraged employers in a tax alert issued that month to file early when possible.

Income Tax Reform

• Other State Changeso 2017 is the first year when Illinois small employers (those with less than $12,000 in

withheld tax liability in a quarter) are required to file quarterly instead of annually

o A midyear change to federal income tax withholding tables could cause some states to change their tables.

• New Mexico and North Dakota specifically indicated they likely would change state tables in response to a federal mid-year change to tables.

• States that have set their annual withholding allowance to the federal amount include not only New Mexico and North Dakota, but Colorado, Maine, Minnesota and Vermont.

• Minnesota specifically indicated that it likely would not change its stables in response to a federal mid-year change to tables.

o North Carolina indicated that might implement a verification code pilot program similar to the federal verification code pilot program for Forms W-2

MULTISTATE TAXATION

Multistate Taxation

• States, Localities Taxing Nonresidents

o Unclear or difficult-to-administer provisions regarding taxation:• Technological issues• Some states define nexus or sufficient presence to trigger

taxability, some do not• Different criteria for determining withholding obligation • Some states adopting tax-free status for disaster-related workers

o Advances aid enforcement

o The Mobile Workforce State Income Tax Simplification Act:• Federal legislation governing multistate income tax• 30-day requirement before nonresident state can tax• S.B. 386, H.R. 2315 failed to pass Senate• Bill yet to be reintroduced in 115th Congress

o Multistate Tax Commission's model:• 20-day threshold• North Dakota law

Multistate Taxation

• Affects Employers o Nonresident state income tax withholding

o Register and withhold

• Affects Employeeso Multiple state tax returns

o Selective enforcement

o States with no income tax

• Compliance is difficult (Impossible?)

Multistate Taxation

• Highlights of Bloomberg BNA’s and Ernst & Young LLP's 2016 Multistate Payroll Tax Compliance Report

o Miscommunication: HR and Payroll not coordinating; leads to noncompliance with state and local requirements.

• More than one-third of responding payroll departments not timely notified of changes in work locations and residences.

o Audits: • New York, California and Pennsylvania lead states most

likely to audit for multistate employment tax• California, New York and Florida for unemployment

insurance• Pennsylvania, New York and Ohio for local tax obligations

o Corrections/Remedies:• 75% of respondents filed at least one Form W-2c to correct

for errors related to multistate taxes• 12% said at least half of their corrections were for multistate

tax issues

WORKER-STATUS, JOINT EMPLOYER POLICIES

Worker-Status, Joint-Employer Policies

• Conflicts regarding classification of certain workers as employees or independent contractors continues.o The Trump administration’s nominee for secretary of Labor,

Andrew Puzder, is a fast-food executive likely to favor guidance beneficial to employers.

• Confirmation hearing to occur Feb. 16.

• Treatment of workers in the expanding on-demand/gig economy might be different under Puzder than it would have been under former secretary Tom Perez.o On-demand/gig workers have a mix of traits traditionally characteristic of

employees and traditionally characteristic of independent contractors, often having to fulfill certain standards of work imposed by a business but getting to select when they work.

o Perez suggested that Congress might want to consider formally recognizing a third category of worker and define its characteristics

• He was inclined to have such workers covered by Fair Labor Standards Act protections.


• Examples of businesses with on-demand/gig workers:o Uber/Lyfto TaskRabbito Instacart/GrubHub personal grocery shopperso Amazono Direct marketing/multilevel marketing businesseso Computer/information technology businesseso Cable/telecommunications businesseso Hair/beauty salonso Health care businesses

• States taking action: o North Dakota on Jan. 4, 2017, and Tennessee on Jan. 17, 2017, entered

into memoranda of understanding with the Labor Department to help provide outreach on proper worker classification to employers and employees, share enforcement information with Labor Department.

• 37 states have such memoranda • MOUs are up for renewal in 2017 for: Alabama, Colorado, Connecticut,

Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, Washington, Wisconsin and Wyoming.

o Recent Utah legislation classified on-demand/gig drivers as contractors • S.B. 201, signed March 28, 2016, and effective May 10, 2016• Additional states might enact similar laws


• Trump administration could shift away from Obama administration’s increasing view of employees of subcontractors or franchisees as also employees of contractors or franchisors.o Joint-employer dynamic:

• NLRB in August 2015 ruling affirmed that with regard to wage and hour violations, businesses could have liability for violations committed by their contractors pertaining to worker pay and could be recognized as employers for this purpose.

o Under the ruling, Browning-Ferris Industries of California Inc. (362 NLRB, No. 186, 2015), an entity can be considered a joint employer if it has the right to control the workers, even if it does not exercise that right.

• The Wage and Hour Division of the Labor Department under Obama, following the NLRB decision, did not confirm to franchisers that a similar joint-employer standard would not apply regarding workers of franchisees.

o Subway IP, Inc. entered into a written voluntary agreement with the Labor Department to share enforcement data regarding franchisee actions, with the unwritten, but verbally agreed to, condition that the agreement would not add to its risk of being found to have FLSA joint-employer liability.

o Trump nominee to the Supreme Court, Neil Gorsuch, is critical of judicial deference to administrative agencies, especially with regard to agency interpretations if a law’s language is ambiguous.

THE FATE OF LABOR DEPARTMENTINITIATIVES

The Fate of Labor Department Initiatives

Payroll-related labor issues addressed by the administration of President Obama (in addition to those previously discussed):

• Overtime salary basis threshold changeo Labor Department issued final regulation that was to double the amount of salary

needed to qualify as exempt from OTo Court stays implementation (was to be effective Dec. 1, 2016).

• Federal contractor minimum wage/paid leave requirements

• Tipped workerso Tip pool regulation challenged, upheld by court, challenged again

• Domestic worker FLSA coverageo 2014 court injunction suspended 2015 implementation, rule upheld

• Separately, change in EEOC-1 Form to include payroll datao Effective for 2017 reporting, W-2 wage data and hours worked data to be included

The Fate of Labor Department Initiatives

President Trump’s administration likely is to attempt to roll-back provisions:

• Overtime salary basis threshold changeo Trump pick for Labor Secretary against ruleo Trump officials ask court for delay in filing brief

• Federal contractor minimum wage/paid leave requirementso Rules in place could be rescinded, but requirements in place

• Tipped workerso Court challenge to be monitored

• Domestic worker FLSA coverageo Coverage in place, new rule needed to rescind

• Change in EEOC-1 Form may not be implementedo New EEOC leadership likely not to favor expanded reporting

HEALTH CARE POLICY CHANGES

Health Care Policy Changes

• Trump and congressional Republicans want to repeal part or all of the Affordable Care Act, which includes numerous payroll-related provisions.

• Components of payroll compliance regarding the ACA include: o Determining the number of full-time equivalent employees for

applicable large employer status, regarding whether sufficient health insurance must be offered.

• Filing Forms 1095-C and 1095-B, with 1094 transmittalso Reporting the cost of employer-sponsored health coverage in

Form W-2’s Box 12, using Code DD.o Withholding additional Medicare tax of 0.9 percent on annual

wages of more than $200,000.o Enforcing a limit to tax-free contributions for health flexible-

spending accounts, with a 2017 annual limit of $2,600.


• Trump’s first executive order, signed Jan. 20, was the “Executive Order Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal.” o “Pending such repeal, it is imperative for the executive branch

to ensure that the law is being efficiently implemented.”o “To the maximum extent permitted by law, …executive

departments and agencies … shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, health care providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance….”

o New Secretary of Health and Human Services, Tom Price, confirmed Feb. 10, is a major opponent of ACA.


• While Republicans are seeking a repeal of the ACA, it is uncertain when the repeal would be enacted, when it would take effect, and to what extent there would be payroll-related requirements under a replacement.

• There are about 10 bills under consideration in the current congressional session that would repeal part or all of the ACA.

• Example: H.R. 175, ObamaCare Repeal Act, with 37 Republican sponsors.o Would upon enactment repeal the Patient Protection and

Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and restore provisions of law that were repealed by those acts and reword provisions of law amended by those acts to what they were before their enactment.

FIGHTING PAYROLL FRAUD

Fighting Payroll Fraud

• Federal Changes Affecting Payroll:

o 2016 Form W-2 filing modification established by the Consolidated Appropriations Act, enacted December 2015 • Jan. 31 filing deadline took effect starting with 2016 forms

due in 2017, and numerous states adopted this standard for annual reconciliation (as previously discussed).o With a shorter W-2 filing period, the federal government

hopes to reduce opportunities for fraud.

o Combatting Fraud: Other Key W-2 issues• Spoofing/Phishing scheme re-emerges• Special W-2 Coding (Box 9 on 2017 form)• Other IRS-service provider initiatives• Early interaction w/small employers• Truncated SSNs? May see regulations in 2017

Fighting Payroll Fraud

• Employers Struggle in Securing Systems and Data in 2017

o Likelihood of data breach or system compromise greater in 2017

o ADP, other service providers suffered breaches in 2016• Access through customers failing to follow secure protocols

o Two general categories of data and system compromise• Data mining (phishing, etc.)• Attempts to compromise the integrity of an entire network

o What should payroll do?• Involvement in creating incident-response plans

o General template but no “one-size fits all”o Disaster recovery planning “with a twist”

• Keeping payroll running is a major priority• Prepare for worst-case scenarios• Resolution may be as simple as resetting passwords or could

end up being as costly as paying cyber insurance claims

WAGE & HOUR, PAID LEAVE: STATE & LOCAL

Wage & Hour, Paid Leave: State & Local

• Hourly minimum wages were increased: o Dec. 31, 2016: New Yorko Jan. 1, 2017 (18 states): Alaska, Arizona, Arkansas, California,

Colorado, Connecticut, Florida, Hawaii, Massachusetts, Michigan, Missouri, Montana, New Jersey, Ohio, Rhode Island (only cash tip minimum wage), South Dakota, Vermont and Washington

o Jan. 7: Maineo July 1: D.C., Maryland, Oregon

• Of the above, all state minimum wages are to be adjusted for 2018 on those dates, except Arkansas and Rhode Island are to have no adjustment, Maine adjustment is Jan. 1. Minnesota for 2018 starts annual inflation-related minimum wage adjustment Jan. 1.

• Nevada’s Office of the Labor Commissioner in April will determine if the state will have a minimum wage increase July 1 because of inflation. The rate has been unchanged since 2010.


• California and New York recently joined Oregon in having multiple minimum wages based on location and/or employer size instead of one statewide hourly minimum wage.

o Oregon’s system, effective July 1, 2016: three separate minimum wages: standard statewide, Portland metropolitan area, nonurban counties.

o New York’s system, effective Dec. 31, 2016: four separate minimum wages: standard statewide; one covering Nassau, Suffolk and Westchester counties; New York City employers with up to 10 employees; New York City employers with at least 11 employees

o California’s system, effective Jan. 1, 2017: employers with up to 25 employees, employers with at least 26 employees.


• Vermont (effective Jan. 1, 2017), Puerto Rico (effective Jan. 26, 2017) and Arizona (effective July 1, 2017) join the list of jurisdictions that require some or all employers to provide paid sick leave to some employees under some circumstances.o The list before 2017 included California, Connecticut,

Massachusetts, Oregon and D.C.

• Numerous cities, towns and counties are establishing and adjusting minimum wages and benefit requirements.o But there is resistance to such changes, such as:

• Barrington, in Cook County, Illinois, opted out of the county’s minimum wage and paid-sick leave rules that are to take effect July 1, 2017.

• Iowa is considering a ban on local minimum wage and benefit requirements, which would affect four counties with such rules.

PAYCARDS AND SAME-DAY ACH

Paycards and Same-Day ACH

• Rule on Paycards to Take Effect Oct. 1 Effectively Suspended

o CFPB rule calls for disclosures before a card is established• Issuing banks primarily responsible for disclosure forms• Includes short-form and long-form disclosures of fees, etc.

o Formally allows paycards to be alternative to direct deposit• Regulation E requirement for direct deposit that alternative be

available• Paycards as alternative mean employers can move to all electronic

payo More workers were paid through paycards in 2015 than paychecks

• According to survey done by Aite Group LLC.o Senators move to overturn rule

• Resolution (S.J. Res 19) sponsored by 10 Senators would invoke the Congressional Review Act to set aside rule.

• Overturning the rule would require simple majority in both houses of Congress and approval from the White House.

o Some states applying strict paycard procedures• Connecticut, New Jersey, New York and Pennsylvania have

more rigid rules

Paycards and Same-Day ACH

• Same-Day Automated Clearing House (ACH) transactions now are available, 2017 is the first full year.

o With same-day ACH, direct deposits can be settled the same day they were initiated if they were timely initiated.

• There are two processing windows. Regardless of time zone, for the first window, funds must be submitted by 10:30 a.m. Eastern time, with a settlement deadline of 1 p.m. Eastern time; for the second window, funds must be submitted by 2:45p.m. Eastern time, with a settlement deadline of 5 p.m. Eastern time.

o For each direct deposit to an employee, the maximum amount that can be transmitted is $25,000 (this limit does not apply to the total amount transmitted by an electronic ACH file for multiple employees).

o Currently, all financial institutions must receive same-day ACH credit transactions. Effective Sept. 15, 2017, all financial institutions also must receive same-day ACH debit transactions. Current funds availability to employee is end of processing day of recipient financial institution. Effective March 16, 2018, funds-availability deadline is 5 p.m. local time of recipient.

UNEMPLOYMENT INSURANCE TAX

Unemployment Insurance Tax

• Unemployment-taxable wage bases changed for 2017 for 21 states:o 19 states had increases: Alaska, Colorado, Hawaii, Idaho, Iowa, Minnesota,

Montana, Nevada, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Rhode Island (two wage bases), Utah, Vermont and Washington

• A wage base increase that was to take effect for P.R. for 2017 under a law (Puerto Rico Chap. 453, L. 2017) signed Jan. 26 was postponed by Puerto Rico’s Department of Labor and Human Resources.

o Two states had decreases: North Dakota and Wyoming

• Twenty-three states and Puerto Rico are projected to have wage base changes for 2018.o Seventeen states annually adjust based on state average annual wage, state

average fiscal-year wage or percentage change in the sate average weekly wage.

o Oklahoma and Vermont adjust based on fusion of state average annual age and fund-balance amounts.

o Missouri and Tennessee are adjust based on fund balanceso New York, Pennsylvania and Puerto Rico are to have predetermined

changes established by law.


• When including surtaxes, the range of unemployment tax rates for experienced employers was adjusted by 20 states and Puerto Rico for 2017.

• Some states change their unemployment tax rate ranges on a basis other than annually on Jan. 1:o New Hampshire, the first day of each quartero Tennessee, Jan. 1 and July 1o New Jersey and Vermont, July 1

• This is the first full year of far stricter electronic requirements for filing unemployment tax and wage reports or paying unemployment tax for California and Pennsylvania.o California, effective Jan. 1, 2017: employers with at least 10 employees required

to file and pay electronically (previously, at least 250 employees for filing, with no electronic payment requirement). Effective Jan. 1, 2018: all employers.

o Pennsylvania before 2017 already required all employers to electronically file, but effective starting with tax due for fourth quarter of 2016, when an employer has a total liability of at least $5,000 among unemployment tax, interest and penalties, the employer must pay electronically that quarter and all subsequent quarters.


• Federal Unemployment Tax Act credit reductions:o The only two jurisdictions that could have a FUTA credit

reduction for 2017, payable with the Form 940 for 2017 filed in 2018, are California and the U.S. Virgin Islands.

• The rate of the credit reduction, as both have had a federal unemployment loan balance on Jan. 1 of seven consecutive years, would be 2.1 percent, with an additional federal unemployment tax cost of up to $147 for each employee.

• Each jurisdiction could have a benefit-cost rate add-on credit reduction, estimated at 0.1 percent for California (additional cost of up to $7 for each employee) and 1.1 percent (additional cost of up to $77 for each employee) for the U.S. V.I.o Both jurisdictions successfully applied for a fifth-year waiver/BCR

add-on cancellation application for 2016, and perhaps will attempt this for 2017.

• As of Feb. 8, the federal unemployment loan balances are $3.89 billion for California and $69.13 million for the U.S. V.I.o Repayment is unlikely for California, but more feasible for the U.S. V.I.

INTERNATIONAL PAYROLL

International Payroll

• Key Global Payroll Themes in 2017:

o Data Protection

• European Union Privacy Shield up for review in 2017.• EU’s General Data Protection Regulation (GDPR) starts May 2018• Penalties for noncompliance are severe

• Countries moving to restrict data transfers like the EU

o Payroll to be “more critical” to international business

• Increasing levels of complexity, automation

• New developments payroll software must understand

• Pay data facilitates decisions at higher levels

International Payroll

• Key Global Payroll Themes in 2017:

o Big question: Will mandatory pension requirements proliferate?

o Minimum Wage Increases

o Countries to watch in 2017:

• India: going cashless?

• Australia: “single-touch payroll”

• Brazil: eSocial program

• United Kingdom: implementing new apprenticeship levy

QUESTIONS?

Bloomberg BNA 2017 Payroll Outlook

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