Payroll Tax and Fringe Benefits
Morgan Lewis’s Payroll Tax and Fringe Benefits attorneys counsel clients on all issues associated with payroll taxes, fringe benefits, independent contractors, and executive compensation. Several members of the practice have previously held leading positions in the U.S. Department of the Treasury or the Internal Revenue Service (IRS) with regulatory and litigation responsibility over these issues. We apply their “inside the Beltway” experience to assist clients in developing tax minimization plans, obtaining favorable private letter rulings, settling tax audits, and handling litigation, including several cases of first impression.
Our practice provides counsel on these increasingly important topics to clients ranging from startup companies to many of the country’s largest and best-known companies, as well as the American Payroll Association and more than 100 members of the Fortune 500.
Since the IRS aggregates these four areas in its audit activity, Morgan Lewis is one of only a handful of firms whose Payroll Tax and Fringe Benefits Practice parallels the IRS’s own internal structure. This allows us to respond cost effectively to the IRS’s audit efforts, while developing tax planning and refund opportunities for our clients.
Our client-focused team assists clients in all matters relating to executive and nonexecutive fringe benefits, payroll taxes, contingent workforce matters, and litigation and dispute resolution.
Our executive and nonexecutive fringe benefits practice encompasses the exclusion, substantiation, and valuation of fringe benefits and related matters, including:
- Qualified transportation fringes
- Expense reimbursement plans
- Meals and lodging (including per diem payments)
- Employee prizes and awards
- Employee discounts
- Adoption assistance
- Executive loans
- Use of corporate jets and SIFL computations
- Income minimization techniques and tax planning opportunities
- Education assistance plans
- Working condition fringes
- No-additional-cost fringes
- Housing assistance and relocation benefits
- Employer-provided automobiles
- Security programs and corporate aircraft
- Intermediate sanctions
- Safe harbor relief provisions
- Company cafeterias and athletic facilities
- Employee computers and cell phones
- Health benefits
- SEC reporting of executive perks
- Executive physicals
Recognizing that payroll taxes comprise more than 70% of all tax revenues collected, the IRS is undertaking the National Research Project (NRP) audit initiative—the largest and most aggressive audit program conducted by the IRS in more than 25 years. These NRP audits are comprehensive payroll tax audits targeting 6,000 taxpayers on payroll tax, fringe benefit, executive compensation, and independent contractor issues. Our team is actively tracking and responding to the NRP audit initiative.
While at the IRS National Office and the Treasury Department, two of our partners were instrumental in the development of employment tax guidance projects that affect virtually every corporation, executive, and employee in the United States. Their extensive efforts included the creation, interpretation, and administration of safe harbors and administrative relief provisions unique to payroll taxes and fringe benefits that can be used to combat the NRP audit initiative. We continue efforts to shape tax relief on behalf of our clients, including countering the IRS’s restrictive cell phone, statutory stock option, and next-day deposit positions.
We regularly advise and counsel on the following payroll tax issues:
- Interest-free adjustments
- FICA taxes
- Supplemental unemployment compensation benefit (SUB-Pay) plans
- Internal compliance check and compliance audits
- Impact of pass-through entities
- Shifting payroll tax liability
- Reporting and withholding issues on statutory and nonstatutory stock options
- Employer identification numbers (EINs)
- Social Security and totalization agreements
- Form W-2 and Form 1099 reporting
- Tip compliance
- Correcting unreported wages
- Section 530 relief
- Payroll tax adjustment and refund processes
- Payroll tax treatment of corporate mergers, acquisitions, and reorganizations
- Federal income tax withholding
- Payroll information reporting
- Litigation settlement payments
- FICA tax treatment of nonqualified deferred compensation under Section 3121(v)
- Accountable plans and per diem arrangements
- Intercompany employee transfers
- Payroll tax treatment of expatriates
- B notices
- Penalty abatements and mitigation
Contingent Workforce Matters
As illustrated by the NRP audit threat, the IRS raises independent contractor, employee leasing, and other contingent workforce relationships as part of its integrated approach to fringe benefits and payroll tax issues. Contingent workforce and independent contractor issues of particular focus include the following:
- Worker reclassification audits
- Employee leasing
- Statutory employers–statutory employees
- Statutory nonemployees
- Responding to Form SS-8 filings
- Professional employer organizations (PEOs), administrative service organizations (ASOs), and other outsourcing arrangements
- Independent contractor treatment
- Temps and perma-temps
- Payrolling arrangements
- Section 530 relief, safe harbors, and compliance
- Classification Settlement Program (CSP) agreements
- Employee benefits or Microsoft issues
- Authorized agents and common paymasters
Litigation and Dispute Resolution
Our attorneys carefully monitor and respond to IRS audit and litigation activities affecting executive compensation, fringe benefits, payroll taxes, and the contingent workforce. Our government sector and private sector experience means that we work to resolve our clients’ issues before they develop into costly tax litigation. In the few instances where a favorable administrative solution cannot be reached due to IRS intransigence, we can litigate the matter using a combination of our group’s technical and government service-informed skills combined with the firm’s broader tax litigation resources.
Unfortunately, more tax litigation is anticipated as the IRS grows increasingly litigious and devotes more audit resources to these targeted practice areas.
To address this growing IRS litigation threat, we assist our clients at all stages of tax controversy matters. In addition to handling audits and IRS Appeals protests, we assist clients in litigation matters before the U.S. Tax Court, the U.S. Court of Federal Claims, and U.S. District Courts. Our representations include litigation on “test” cases, such as the FICA taxation of tipped employees, the excise taxation of frequent flyer miles, the FICA taxation of medical residents, the FICA taxation of employee stock purchase plans, and the deductibility of corporate aircraft operating costs. We have achieved significant successes at both the trial and appellate levels.
Our most recent success was on behalf of the American Payroll Association in its role as amicus curiae in United States v. Quality Stores, 2012 FED App. 0313P (6th Cir. 2012). Quality Stores involved the FICA taxation of severance payments and resulted in the most significant payroll tax victory for taxpayers in the last 10 years.
Our Payroll Tax and Fringe Benefits Practice is dedicated to monitoring and responding to all fringe benefit, payroll tax, and contingent workforce issues that may currently affect or prospectively interest our clients, including actively tracking developments within the IRS and the Treasury Department on such matters.
Our client-centered approach is evidenced by the more than 100 members of the Fortune 500 that have actively utilized our team members as trusted advisors for more than a decade in these four practice areas. Knowing they can trust our advice and assistance, these clients involve Morgan Lewis on all of their significant payroll tax and executive fringe benefit issues.
We often conduct compliance checks as an important client service. Compliance checks can minimize the effect of IRS audits and increase reliance on statutory and regulatory relief provisions while decreasing tax exposure—all while limiting our clients’ costs and administrative efforts. We also regularly identify tax savings for clients and have successfully filed multimillion dollar refund claims for FICA tax overpayments.
With forces of change converging on fringe benefits and payroll taxes, evident in current legislative initiatives and the IRS’s national audit initiative, we are dedicated to providing our clients ready access to a practice with the necessary experience, range of services, reputation, and vision to meet today’s client needs and tomorrow’s challenges.