There’s a new twist on an old problem: how to stay current with withholding tax obligations. Prudent employers know that the company’s cash flow must be able to manage full timely payment to the taxing authorities of all taxes due. An employer who does not pay the full balance due on a Form 941 could be personally liable to the Internal Revenue Service for the trust portion.
Recent presidential action has increased the potential exposure for employers, by allowing a “payroll tax holiday”. This holiday may be fun for the employee while it lasts, but could cause major problems for both the employee and the employer when the holiday is over.
The executive order, issued August 8, 2020, applies to workers whose biweekly pay is under $4000, pre-tax. The order defers payment of the employee share of Social Security, from Sept. 1, 2020, through Dec. 31, 2020. Last minute guidance issued by the IRS on August 28, 2020, only a few days before the order took effect, clarifies that the employer is responsible for deferring the tax, and later paying it to the IRS by April 30, 2021. If the deferred amounts are not paid in full by April 30, 2021, penalties and interest will begin to accrue. Note that implementing the payroll tax deferral is elective, not mandatory.
The IRS guidance provides that the employers who choose to defer the tax in 2020, must withhold and pay the deferred taxes ratably from compensation and wages paid to the employee between January 1, 2021 and April 30, 2021. If necessary, the employer may “make arrangements to otherwise collect the total [taxes] from the employee”. It is unclear how this will be handled if an employee is no longer working for the employer after December 31, 2020. Moreover, employees may not realize that their net paychecks in 2021 will be smaller than usual, potentially leading to serious hardship.
The employer remains on the hook for the deferred payroll taxes, regardless of whether the taxes are taken out of the employee’s wages in the spring. Failure to pay the deferred tax could result in personal liability of the owner, director, or shareholder of the employer, or other responsible individuals.
Pursuant to Internal Revenue Code Section 6672, the IRS can assert the trust fund recovery penalty against an individual who is under a duty to collect and pay over the withheld income or employment taxes, and fails to do so. There are numerous factors to be reviewed in determining who is responsible. Some of the factors considered by the IRS are the individual’s title and position in the company, authority or control over how funds are disbursed, signatory authority for checks, and ability to hire and fire employees. The person must also have acted willfully, with intent or intentional disregard, in failing to pay the taxes. The IRS will find intent or willfulness if the “responsible person” knowingly paid other expenses while the taxes remained unpaid.
Trust fund recovery penalties, also known as civil penalties, are particularly harsh in their effect. Multiple individuals could be assessed; personal assets can be seized including bank accounts, retirement accounts and real property; and liens are filed, which affect the ability to refinance or sell one’s home, among many other ripple effects. The trust fund recovery penalties are assessed even if the business closes – in fact, especially if the business closes, as the IRS seeks to recover the unpaid trust tax from a different, deeper pocket. Assessments against individuals for trust tax are not dischargeable in bankruptcy.
Tax professionals should be aware of the risks to their business clients, when advising whether the employer should take advantage of the payroll tax deferral for its employees. For the employer, rather than an enjoyable “holiday”, there could be serious consequences.
Yvonne R. Cort is a partner at the law firm of Capell, Barnett, Matalon & Schoenfeld, LLP. Her practice is focused on assisting businesses and individuals in resolving complex IRS and NYS tax issues including audits and collection matters. Yvonne is a frequent speaker for accounting and legal professional groups. She can be reached at email@example.com
In these days of working from home, many New York State resident taxpayers fortunate enough to have a vacation place are spending more time than ever before in their second home. There are also anecdotal reports of snowbird New Yorkers remaining south longer this year due to travel concerns. For some taxpayers, the question arises: why pay New York taxes when I’m living out of state? However, under NYS tax law, a resident taxpayer does not relinquish NYS residency simply by staying in another state. The taxpayer must meet NYS standards for changing domicile – and have the documentation to prove it if audited by New York State.
Let’s start with the basics. There are two ways for an individual to be taxed as a resident of New York: (1) when domiciled in New York; or (2) as a statutory resident of New York. A statutory resident is defined as an individual who is not domiciled in NYS, has a permanent place of abode in NYS and spends more than 183 days of the taxable year in NYS. Note that similar rules apply for determining New York City residency.
Many taxpayers who are domiciled in New York and spend vacations or winter in a second home erroneously believe that if they are out of New York for 6 months of the year, and make a few minor changes, such as obtaining a driver’s license in the new state, they will no longer be subject to tax as a NYS resident. They don’t realize that they may not have changed their domicile, and therefore the statutory resident test cannot be applied.
While a taxpayer may have multiple residences, there can be only one domicile. To change domicile, the taxpayer must have the intent to abandon the old domicile, and make the new place “home”, with all the feeling and sentiment associated with that word. The taxpayer can continue to maintain a residence in New York after changing domicile – but it won’t be “home”.
In considering a change of domicile, the State evaluates five primary factors: size, nature and use of the residence; active business involvement; time spent in each place; location of items near and dear; and family connections. The taxpayer must show, by clear and convincing evidence, that the ties to the new domicile out of New York are stronger and the connections to New York have become much weaker or been severed. While the State will place some value on minor factors such as obtaining a driver’s license or registering to vote, these do not carry as much weight as the primary factors.
Due to today’s COVID19 restrictions, taxpayers may have a better chance of demonstrating more time spent in the proposed new domicile than in the old place. It’s important to recognize that this is only one factor in showing a change of domicile, and no one factor is determinative. And if NYS starts an audit, often a year or two after the tax return is filed, the location where time was spent during the pandemic will be viewed in the context of prior and subsequent years. If the COVID19 time in the out-of-state residence is an outlier, and there have been no other changes, it may be difficult to show that the taxpayer’s home is no longer in New York.
To effectively prove a change of domicile, taxpayers should be mindful of New York State’s requirements and take steps contemporaneously to document all the supporting factors as much as possible. When New Yorkers are considering a change of domicile, they need to know that there’s more to be done than spending more time in their second home.
The information in this article is continuously changing and being updated. This article is for informational purposes only and does not constitute legal or business advice. In no way is Capell Barnett Matalon & Schoenfeld LLP advising that it is appropriate to only follow the information listed here. If you or your business requires assistance, please contact Yvonne Cort, Esq. at firstname.lastname@example.org