IRSAC Outlines Common Pay Agent, FICA Exemption Recommendations

The Internal Revenue Service Advisory Council’s recommendations to IRS include a focus on common pay agent reporting and foreign student FICA exemptions, an IRSAC member said March 21.

Common Pay Agents

Common pay agents and Certified Professional Employer Organizations are agents appointed by employers to file employer tax returns and deposit taxes to the government.

Employers often use a common pay agent or CPEO if they are paying wages under multiple legal entities or subsidiaries, said Martin Armstrong, an IRSAC member and vice president of payroll shared services for Charter Communications. Armstrong is also a member of Bloomberg Tax’s Payroll Advisory Board.

However, “problems arise when multiple employers use the same pay agent,” he added, speaking at the American Payroll Association’s Capital Summit.

Employers transferring and paying an employee between multiple subsidiaries or legal entities must issue separate Forms W-2 to that employee for each legal entity or subsidiary that paid wages to the employee, he said.

The Forms W-2 make it appear as if the employee was working for the common pay agent, since the common pay agent’s federal employer identification number appears on the Form W-2, not the actual employer’s FEIN, he said.

An employee is subject to Social Security taxes on the first $147,000 in earnings, in 2022. Each employer is obligated to withhold Social Security taxes without regard for the taxes withheld by previous or concurrent employers.

When the common pay agent sends Forms W-2 for multiple employers but for a single high-earning employee to the IRS, the Service will respond with a notice incorrectly stating that the employer overwithheld Social Security taxes from the employee’s pay, Armstrong said, because the taxes are all reported under a single FEIN, the common pay agent’s. The employer will have to provide clarification to the employee and the IRS so the employee’s tax return can be processed.

To resolve the issue, IRSAC recommends that the IRS create Form W-2 with a checkbox to be used by common pay agents, which will be recognized by the IRS and tax preparer software.

The IRS should further modify Form W-2 by including a new box that shows the actual employer’s FEIN, he added. This will avoid confusion by listing the employer on Form W-2 separately from its common pay agent.

Foreign Student Social Security and Medicare Exemptions

Nonresident students and scholars working in the United States under F-1, J-1, M-1, or Q-1 visas are generally exempt from Social Security and Medicare tax contributions, Armstrong said.

J-1 and Q-1 nonstudent visa holders are generally exempt for two calendar years, and F-1, J-1, and M-1 student visa holders are generally exempt for five calendar years.

“They have to give us all this paperwork,” he said. “It is complicated when you have someone who is on a visa, because it is up to us to make sure they are legally able to work for us.”

If nonresident students and scholars fail to provide the necessary documentation to the employer, the employer may erroneously withhold FICA taxes from their wages.

Employers only realize their mistake when the employee’s Form W-2 comes out, he said.

“And therein lies the problem. Problem number one is, for some reason, they didn’t know to give us this information so they can have a FICA exemption,” he said. “And you know where they find this out from? Their other friends in other companies.”

The IRS can issue a refund directly to the employee if the employee provides the agency the necessary documentation. However, the IRS can also advise the employee to contact their employer to resolve the issue, he said.

Difficulties arise when the employer is trying to initiate contact with an employee who is in their country of origin to issue the refund, he said.

If the IRS issues the refund, the agency adjusts the employer’s Form 941 without informing the employer of the specific details of the changes in the IRS notice sent to employers, he said.

The employer will also have to request a refund for their portion of the FICA taxes.

IRSAC recommends removing the requirement for employers to refund employees once Form W-2 is issued, he said.

The second recommendation is to require employees to provide all exemption documentation to the IRS for a tax refund, he said.

The third recommendation is to create a grid on the IRS letter sent to employers to allow employers to provide quarterly wage and tax adjustments without requesting a refund for their portion of the FICA tax, he said.

The fourth recommendation is to permit employers to file Form 941-X to recover their employer Social Security tax, he said. “Because that’s the only reason, let’s face it, that you really want to do that,” he said.