Payroll in Practice: 12.20.2021

Question: As part of a sales promotion, a vendor held a contest for an employer’s sales associates. The top employees received gift cards for the employer’s stores, paid for by the vendor. Should the cards be reported as income? If so, should the employer report the income on Form W-2, or should the vendor report the income on either Form 1099-MISC or 1099-NEC?

Answer: The gift cards would not be reportable in Box 3 of Form 1099-MISC, Miscellaneous Income, as other income because they are payments for services. The cards would not be reportable on Form 1099-NEC, Nonemployee Compensation, because the services were performed by employees and do not constitute self-employment.

Assuming there is a business purpose to running the promotion, the vendor would be allowed a business expense deduction, possibly as promotional expenses. The company has sales revenue from the sale of the gift cards to the vendor.

The gift cards are considered taxable fringe benefits because the contest involved services provided by employees to the company’s stores and the company is deemed to be the provider of the gift cards. As such, they must be reported on Form W-2, Wage and Tax Statement. This is true even though the gift cards are provided by the vendor. The benefit was provided for services performed for the company. The gift card awards are the result of those services.

The company must include the value of the cards in the wages of the recipients and withhold, or gross up, and deposit appropriate income and payroll taxes. The value of the cards would be deductible by the company as wages.

Although the amount of the gift card given to each employee may be relatively small, the cards are considered a cash item and, on that basis, may not be de minimis because it is neither difficult nor impracticable to trace the identity of the recipients and amounts paid.

Question: Is a new Form W-4 required when a company transfers an employee to a related (sister) company?

Answer: Generally, yes. Assuming the two organizations report under separate employer identification numbers and are not in a common paymaster relationship with regard to that employee, the transfer will require the employee to submit a new Form W-4, Employee’s Withholding Certificate, to the new employer.

There are some exceptions. For example, under the alternative method, the successor employer assumes all reporting responsibilities for employees acquired from the predecessor. When a successor employer takes on employees from the predecessor under the alternative method, the successor could obtain the Forms W-4 employees provided to the predecessor employer and use those to compute withholding. However, even in that situation it is advisable to obtain new Forms W-4 from the employees obtained by the successor employer.

In most cases, an employee’s new employer is required to solicit and obtain a W-4 from the employee. If the employee does not provide a W-4, the employer must withhold based on a marital status of single or married filing separately, with no entries on Steps 2, 3, or 4 of the form.

Each employer must retain federal withholding records, including Forms W-4 presented by employees, for at least four years after filing Form 941 for the fourth quarter for the year the applicable tax becomes due or is paid. For Form W-4, the applicable year would be the last year the form was effective. States may impose different retention periods.

Since the first employer is to retain the Forms W-4 it received from its employees, those same forms should not be passed on to the new employer. Any form used by the new employer will have to be signed by the employee or, if electronically submitted, signed according to the regulations covering electronic submission of Forms W-4.

A new employer that fails to obtain a Form W-4 and withholds based on forms provided to the other employer may be liable for failure-to-withhold penalties if the employee ends up with an insufficient amount of tax withheld.

The onboarding process should be similar to the process for onboarding new hires. It should include obtaining Forms W-4 and I-9 and filing a new hire report.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, N.C., and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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