Mitigating Overpayment of Employment Taxes 24th Annual Illinois Statewide APA Payroll Conference “Be a Payroll Champion” Mitigating Overpayment of Employment Taxes

Presenters Scott Bankert Regional Manager Employment Tax Consulting 314-684-2075 scott.bankert@equifax.com

Notice/Disclaimer The information provided herein is intended as general guidance and is not intended to convey specific tax or legal advice. This webinar is intended for the benefit of our customers and potential customers. This webinar cannot be shared with third parties.

Agenda General Overview Common Causes of Overpaid Employment Taxes: State Unemployment Insurance (SUI) Rate Revisions Mid-Year Wage Base Carryover Multi-State SUI Sourcing Out-of-State SUI Wage Credits Credits on Account Other Opportunities Summary Questions and Answers

Federal Unemployment Insurance Unemployment Insurance Employment Tax Types Social Security Insurance (FICA) Federal Unemployment Insurance (FUTA) State Unemployment Insurance (SUI) Tax Rate: 2016/2017 - 6.2% Wage Base: 2016 – $118,500 2017 - $127,200 Max Tax Cost: 2016 – $7,347 2017 – $7,886 Tax Rate: 2016/2017 - 0.6%(1) Wage Base: 2016 – $7,000 2017 – $7,000 Max Tax Cost: 2016 – $42 2017 – $42 Tax Rate: 2016 – 2.51%(2) Wage Base: 2016 – $17,800(3) 2017 – $18,085(3) Est. Avg. Tax Cost: 2016 – $447 Rate does not take into consideration the impact of FUTA credit reductions (CA and VI had a net FUTA rate of 2.4% for 2016). Total SUI tax revenues for all taxing jurisdictions divided by total SUI taxable payroll, per the U.S. DOL. 2017 has not been released yet. Simple average of all taxing jurisdictions for 2016 and estimated simple average for 2017.

The costs of unemployment remain escalated despite an improved economic environment $5,259 Average benefit paid per unemployment claim (3Q 2016)1 $3,104,032,870 Title XII Loans Outstanding (3/21/2017)4 10.26% National Annual Benefit Charge Overpayment Rate (2015)5 2 States Facing FUTA Tax Increases in 2017 (as of 3/21/2017)4 $446 Average Tax Cost Per Employee (2016)2 15.5 Average Weeks A Person Draws Unemployment (3Q 2016) 1 4.7% National Total Unemployment Rate (February 2017)3 $39,632,905 Title XII Loan Interest – 2017 (accrued as of 3/21/2017) 4 35 Underfunded state trust funds (10/1/2016) 1 129% Amount of each benefit paid that employers must contribute to their state trust fund (3Q 2016) 1 Source: As of 1/7/2017 1. U.S. DOL Data Summary 2. Simple average of SUI wage bases*U.S. DOL Average Tax Rate 3. Bureau of Labor Statistics Monthly Current Population Survey 4. Treasury Direct Title XII Advance Activities Schedule 5. U.S. DOL Benefit Accuracy Measurement Report

SUI Tax Rates in 2017 and Beyond – U.S. Source: Average SUI Tax Rate (%) per U.S. Department of Labor. Average SUI Tax Rates beyond 2016 are estimates and for illustrative purposes only and should be not be relied upon in budgeting or as a basis for material financial decisions.

SUI Tax Rates in 2017 and Beyond – U.S. Approx. 2.5% increase per year Source: Average SUI Tax Rate (%) per U.S. Department of Labor. Average SUI Tax Rates beyond 2016 are estimates and for illustrative purposes only and should be not be relied upon in budgeting or as a basis for material financial decisions.

SUI Tax Rates in 2017 and Beyond – U.S. $17,782 $13,268 Source: Average SUI Tax Rate (%) per U.S. Department of Labor. Average SUI Tax Rates beyond 2016 are estimates and for illustrative purposes only and should be not be relied upon in budgeting or as a basis for material financial decisions.

SUI Tax Rates in 2017 and Beyond – U.S. Tom Source: Average SUI Tax Rate (%) per U.S. Department of Labor. Average SUI Tax Rates beyond 2016 are estimates and for illustrative purposes only and should be not be relied upon in budgeting or as a basis for material financial decisions.

Historical Average Tax Cost Per Employee Tom Total Includes: FUTA: $7,000 x 0.6% = $42 per employee. FICA: National Wage Index x 6.2% = Cost per employee. SUI: Average tax cost per employee. Tax cost does not take into consideration FUTA credit reductions associated with outstanding Title XII loans.

State Unemployment Insurance Rate Revisions Tom hand to Rori

Some Reasons for SUI Rate Revisions State errors in rate calculations Legislative changes Amendments to taxable wages Historical benefit charge adjustments Statutory elections Voluntary Contributions Joint Accounts Other Rating Strategies Transfers of experience (“TOE”)

Statutory Elections Map DC DE MA MD NH NJ PR RI VI VT AK WA OR CA NV AZ NM TX OK AR LA FL GA AL MS ID MT WY UT CO ND SD NE KS MN WI MI IA MO IL IN OH PA NC SC KY TN WV VA ME HI NY Rori VC (18 Jurisdictions) JA (5 Jurisdictions) Both VC and JA (5 Jurisdictions) Not applicable (22 Jurisdictions) VC, JA, and PVE (1 Jurisdiction) VC and NWO (1 Jurisdiction) VC, JA, and NWO (1 Jurisdiction) Jurisdictions include 50 U.S. States, DC, PR, and VI Joint Accounts (JA), Voluntary Contributions (VC), Negative Write-Offs (NWO), and Payroll Variations Elections (PVE)

Transfers of Experience (“TOE”) Employers undergoing mergers, acquisitions, reorganizations, and divestitures may have the option or be required to transfer the experience between predecessor and successor: Transfer: Movement of business operations (including employment), or portion thereof, from one legal entity to another, by any means; can involve asset-only or employee-only conveyances. Experience: History of changes in the factors used in the development of a UI tax rate over a specified period, including benefit charges, taxable payroll, and taxes paid. The TOE can positively OR negatively impact rates. The effective date of the rate revision can vary. States can sometimes take years to process a transfer. Rori

Including Former Employer A Rate Revision Example 1 Employer A is merging with and into Employer B. The transaction is effective 1/1/2016. The TOE is effective 1/1/2016 and is mandatory. Before After Parent Co Parent Co Employer A 3.00% Employer B 5.00% Employer B Rori Employer A Is Dissolved Including Former Employer A

Rate Revision Example 1 The expected revised rate is 4.0%, effective 01/01/2016. The merged entity should pay at the assigned rate of 5.0% while booking a receivable for the expected revised rate. Upon issuance of the revised rate, the merged entity can apply the overpayment toward future tax contributions due or request a refund. Rate Assignment Taxable Payroll 2016 Rate Cost Original Rate for Employer B $70,000,000 5.00% $ 3,500,000 Revised Rate for Employer B 70,000,000 4.00% 2,800,000   Overpayment $ 700,000 Rori

Rate Revision Example 2 Employer A purchases assets and workforce of Employer B effective 1/1/2016. Employer A creates NewCo and transfers all employees from Employer B to NewCo. The transaction is NOT reported to state. NewCo rate is 2.70% while Employer B has a rate of 1.0%. Before After Employer A Employer A Employer B 1.00% Rori NewCo 2.70%

Rate Revision Example 2 NewCo should request a TOE from Employer B resulting in a revised rate of 1.0%. If NewCo and/or Employer B fail to report the transaction, and the state does not mandate the TOE, NewCo will significantly overpay SUI tax for 2016 and future years. Company Taxable Payroll 2016 Rate Cost NewCo at New Employer Rate $30,000,000 2.70% $ 810,000 NewCo at Transferred Rate 30,000,000 1.00% 300,000   Overpayment $ 510,000

Mid-Year Wage Base Carryovers Tom

Wage Base Carryovers – Federal Wages paid by the predecessor can be used by a successor for purposes of the annual wage limitation (FICA and FUTA), if:  The successor acquired property used in a trade or business, or a separate unit of a trade or business, of the predecessor; Predecessor employees were employed by the successor immediately after the acquisition; and The wages were paid during the calendar year in which the acquisition occurred and prior to the acquisition.1 “Use of assets” doctrine.2 1 IRC §§3121(a)(1) and 3306(b)(1) and Treas. Reg. §§31.3131(a)(1)-1(b)(2) and 31.3306(b)(1)-1(b)(2). 2 Revenue Rulings 68-105 and 72-269.

Wage Base Carryovers – State Wages paid by the predecessor can typically be used by a successor for purposes of the annual wage limitation, if: A transfer of a trade or business, or a portion thereof, occurred; and Proper compliance documents have been filed and acknowledged by the state workforce agencies.1 Improper reporting of the transaction may cost the employer the ability to carryover wages for purposes of the annual SUI taxable wage base limits. 1 Pursuant to P.L. 108-295, the SUTA Dumping Prevention Act of 2004 and related unemployment tax provision of each taxing jurisdictions. Each jurisdiction’s transfer of experience and wage base carryover provisions should be reviewed to ensure ability to carryover the annual taxable wage base.

Mid-Year Wage Base Carryover Example Employer A is merging with and into Employer B. The transaction is effective 7/1/2016. Of the 1,000 employees transferred, 900 employees make $50,000 per year and 100 make $150,000 per year. Before After Parent Co Parent Co Tom Employer A Employer B Employer B Employer A is Dissolved Including Former Employer A

Mid-Year Wage Base Carryover Example Type of Tax Taxable Wage Base Total Gross Wages (Predecessor) Taxable Wages (Predecessor) Total Gross Wages (Successor) Taxable Wages (Successor) Total Taxable Wages Total Taxable Wage Base Limits Overpaid Taxable Wages # of EEs Total Overpaid Taxable Wages Tax Rate Potential Overpayment FUTA $7,000 $25,000 $14,000 900 $6,300,000 0.60% $37,800 7,000 75,000 14,000 100 700,000 4,200 FICA 118,500 25,000 50,000 6.20% 150,000 31,500 3,150,000 195,300 SUI 18,000 36,000 16,200,000 4.00% 648,000 1,800,000 72,000 Overpayment $957,300 There is generally a 3 year statute of limitations to recover overpaid employment taxes. Of the 1,000 employees transferred, 900 employees make $50,000 per year and 100 make $150,000 per year.

Multi-State SUI Sourcing Tom hand to Rori

SUI Sourcing In order to avoid duplicate taxation or coverage when an employee works for one employer in more than one state, the U.S. DOL mandated the incorporation of "localization of work" (a/k/a “SUI sourcing”) provisions into each state’s UI law. All states have adopted a uniform set of statutory factors to determine where SUI wages should be sourced (i.e., reported). These “four factors”1 are applied in the order of priority presented below: Localization of Services Base of Operations Place of Direction and Control Residence 1 Pursuant to U.S. DOL Unemployment Insurance Program Letter (UIPL) 20-04, including Attachment 1, and related state unemployment insurance tax provisions. Note: If the above four factors do not apply: a) Follow the laws of the states in which services are performed [perhaps under a provision for election of coverage]; or b) Participate in interstate reciprocal coverage agreements that allow employers to effectively choose the state of coverage.

Four-Factor Test Localization of Services: Localization refers to the state in which a majority of services are performed. Base of Operations: The state in which the employee maintains a base of operations and performs some service. Rori

Four-Factor Test Place of Direction and Control: The state from which the employee receives direction and control and performs some service. Residence: The employee’s state of residency and performs some service. Rori

SUI Sourcing Example 1 John Doe is a district manager responsible for territories in Alabama, Florida, Georgia, and South Carolina. John maintains an office at his employer’s headquarters in Florida and does not have an office in any other state. John’s employer reports his wages for SUI tax purposes to all four states. Rori

SUI Sourcing Example 1 As Reported: State Gross Wages Taxable Wage Base Taxable Wages Tax Rate Tax Cost AL $ 20,000 $ 8,000 4.50% $ 360 FL 30,000 7,000 5.00% 350 GA 10,000 9,500 4.00% 380 SC 14,000 3.50%   $ 70,000  $ 1,440 As Reported Using SUI Sourcing Rules: $ 70,000 $ 7,000 $ 350 Overpayment $ 1,090 Rori

SUI Sourcing Example 2 Jan Doe is a sales manager responsible for territories in Alabama, Florida, Georgia, and South Carolina. Jan has access to regional offices in each state. Jan receives direction and control from Florida and South Carolina. Jan’s home is located in Alabama. Jan’s employer reports her wages for SUI tax purposes to all four states. Rori

SUI Sourcing Example 2 As Reported: State Gross Wages   State Gross Wages Taxable Wage Base Taxable Wages Tax Rate Tax Cost AL $ 20,000 $ 8,000 6.00% $ 480 FL 20,000 7,000 2.00% 140 GA 9,500 523 SC 14,000 4.00% 560 $ 80,000  $ 1,703 As Reported Using SUI Sourcing Rules: $ 80,000 Overpayment $ 1,223 Rori

Out-of-State SUI Wage Credits Tom

Out-of-State SUI Wage Credits Employers often have a need to transfer or relocate employees from one taxing jurisdiction to another (e.g., a state-to-state transfer). Many states allow employers to take credit for taxable wages paid to another state (except Louisiana, Minnesota, and Montana). Requirements include: Permanent change in the SUI sourcing state. Transfer within the same legal entity. Many states allow refund claims three to five years after the initial filing and payment of tax. Tom

OOS Wage Credit Common Triggers Headquarter move Consolidation of locations Post M&A integration Expansion/Growth New factory New office facility Employee movements Promotions Relocations Other job changes Telecommuting (work-from-home) Implementation of policy Revocation of policy Tom

Out-of-State SUI Wage Credit Example Effective 7/1/2016, 1,000 employees were relocated from the old headquarters in Florida to a new headquarters in New York. Tax Cost (Without Using OOS Wage Credits):   Original State Wage Base New State Credit From Prior State Wage Base Remaining Tax Rate Tax Cost # of Employees Total Tax Cost FL $7,000 NY $10,700 $ 0 5.00% $535 1,000 $535,000 Tax Cost (Using OOS Wage Credits): $3,700 $185 $185,000 Overpayment $350,000 Tom

Credits on Account Tom to Rori

Credits on Account – Why They Might Occur Rate Revision Transfer of Experience Retroactive rate revisions Improper Rate entry into system Clerical errors Delays in proper rate receipt Payment made to incorrect account Overpayment of non-SUI taxes (such as income tax withholding and disability insurance) Rori

Credits on Account – Ways to Identify Call the state workforce agencies (power of attorney may be verified). Verify employer account standing on state workforce agency websites (user name and password will be needed). Review documents from state (rate notices, blank QCRs, etc.) and third party vendors for notices of credits or opportunity to apply for credits. Rori

Credits on Account – Ways to Recover Identify state refund method for overpayments. Notify your payroll tax group or third-party payroll tax filer to apply the credit to current or future tax liabilities. Send a letter requesting a refund. Fill out state-specific application for refund. Rori

Other Opportunities Tom

Michigan Unemployment Tax Credit Michigan offered a tax credit for 2009, 2010, and 2011 to offset the FUTA tax increases of 0.3% in 2009, 0.6% in 2010, and 0.9% in 2011. 2009: Maximum $21 per employee 2010: Maximum $42 per employee 2011: Maximum $63 per employee Generally, the amount of the credit is 50% of the additional FUTA tax paid by the employer. Employers with a positive account balance in operation for five or more years prior to the credit year, subject to additional requirements, can receive the tax credit. Tom

Summary Tom

Summary Three Main Employment Taxes – FICA, FUTA, and SUI Rate Revisions – Pay at assigned rate, accrue at revised rate Mid-Year Wage Base Carryover – Most transactions qualify Meet Compliance Requirements for SUI Must File for a Refund Multi-State SUI Sourcing – Report employees to proper state Out-of-State SUI Wage Credits – Take advantage of credits Credits on Account – Identify, review, and recover Statute of Limitations – Typically three years (some are five/six) Stay Informed – http://insight.equifax.com Tom

Questions and Answers For more information about Equifax Unemployment Cost Management services: Send an e-mail to workforce@equifax.com Visit http://insight.equifax.com