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Payroll in Practice: 6.21.2022

June 21, 2022, 2:13 PM

Question: An employer located in Texas plans to assign an employee to work for six months in Washington, D.C. Does the employee have to pay district income tax, and does the employer have to withhold it?

Answer: Washington, D.C., income tax applies mainly to residents and part-year residents of the district, which generally does not tax nonresident income. However, individuals who establish domicile in the district or maintain an abode there for 183 or more days in a year are subject to the district income tax regardless of their state of residence.

If the employee continues to reside in Texas but is to temporarily work in the District of Columbia, there will be no state or district tax liability provided the employee is not a deemed resident of another state or the District of Columbia under a physical-presence test such as the 183-day test. However, if the employee provides services in another state, such as Virginia or Maryland, the employee may be subject to income tax on those services in the states where the services were performed.

If the employee will not be a statutory resident, the employee should provide the employer with Form D-4A, Certificate of Nonresidence in the District of Columbia, so that no income tax will be withheld.

Where the employee would live raises another tax concern. The Washington, D.C., metropolitan area extends into Maryland and Virginia. An employee living in one of these neighboring states long enough during a year to establish residency would be subject to that state’s income tax and would be required to file a state income tax return. In Virginia, the threshold is 183 days. In Maryland, the threshold is six months.

Question: An employer discovered an error involving excess group term life insurance. The HR department imputed income for an employee for excess group term life insurance coverage for 2021, but the amounts were not reported to payroll. Wages of $42 and Social Security and Medicare taxes of $3.21 were not reported on the employee’s Form W-2 or on the employer’s Form 941. Is the employer required to correct the Forms W-2 and 941 for such small amounts?

Answer: Generally, a correction is not required for an inconsequential error on Form W-2, Wage and Tax Statement. However, errors involving a Social Security number, employee name, or a dollar amount are never inconsequential. There is no provision for small dollar amounts under this exception to the requirement to correct errors.

However, there is a separate safe harbor provision for certain amounts that are considered de minimis. This relief took effect for Forms W-2 filed after 2016 in response to concerns about potential increases in the number of errors that could result from the Jan. 31 accelerated due date for filing Forms W-2 with the Social Security Administration. Previously, the due dates were Feb. 28 for paper forms or March 31 for electronically filed forms.

Under this safe harbor, employers are not required to adjust amounts on Forms W-2c, Corrected Wage and Tax Statement, for any single reported dollar amount that varied from the correct amount by up to $100 or any single reported withholding amount that varied from the correct amount by up to $25.

If the safe harbor applies, the employer does not have to correct the W-2, and the form is treated as having been filed with all the correct information.

However, the safe harbor does not apply if the employee elects to have the employer issue a correction. If the employee makes that election, the employer is to prepare Form W-2c within 30 days of the election and file it with the SSA. The form must also be furnished to the employee within the same 30 days.

This might also require that the employer file the appropriate amended employer tax return such as Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, during the quarter that the error was discovered.

The safe harbor only applies to inadvertent errors in amounts on filed or furnished information returns. This includes Forms W-2 as well as other information returns, such as Forms 1099-NEC or 1099-MISC. The safe harbor does not apply to intentionally misreported amounts or instances where the employer failed to furnish forms to employees or to file them with the SSA, even if money-amount variances meet the requirements.

This safe harbor may not apply for state or local requirements. For federal purposes, employers are encouraged to voluntarily make corrections so that employees are credited the proper amounts for Social Security benefit purposes.

Information regarding the safe harbor, employee elections, and employer responsibilities and options can be found in IRS Notice 2017-9.

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.

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.

To contact the editor on this story: William Dunn at wdunn@bloombergindustry.com