NEW YORK, Oct. 10, 2011 — Income tax fraud involving phony Forms W-2 and a substantial increase in the number of states using the alternative base period (ABP) for computing unemployment insurance benefits have caused some taxing authorities, including the IRS, to consider accelerating the due date of wage and tax returns, according to a report prepared by Ernst & Young LLP on behalf of The National Payroll Reporting Consortium, Inc. (NPRC).
The report, titled Business processes and considerations in meeting employee wage reporting deadlines, analyzes the current level of difficulty employers face in meeting their quarterly and annual wage and tax reporting obligations.It also looks at the extent to which electronic reporting systems have reduced or increased these challenges, and options governments might consider to improve both the speed and accuracy of wage and tax return filings. The study finds that with a greater number of states using the ABP, it is likely that some will consider accelerating the wage reporting due dates by as many as 15 days.
“The technological advances in the last decade, including electronic filing and web-based reporting applications, would presumably simplify filing payroll tax returns,” said Pete Isberg, President of NPRC. “However, the growing diversity in jurisdictional requirements governing wage and tax reporting and the increased variables in employee compensation packages challenge businesses to meet wage and tax return deadlines.”
Absent uniformity in the definition of taxable wages and in the form and format used to report them, historical and current analysis of federal and state UI and W-2 reporting requirements demonstrate that businesses require at least one month to meet their quarterly and annual reporting obligations. To prevent a large volume of amended returns, businesses also require a reasonable amount of time for employees to review their Forms W-2 before jurisdictional copies are filed.
“To require that employers report their wage and tax information sooner than one month following the close of reporting period would be forcing a trade of speed for accuracy,” said Debera Salam, Ernst & Young LLP Director of Payroll Information and Process Services, and a principal author of the report.
Other key findings:
- UI Reporting: The states allow one month following the close of the quarter to file UI returns and reports, with the exception of New Jersey (30 days) and Michigan (25 days). Further investigation should be conducted to determine if businesses can file UI wage reports a few days before the end of the month following the close of the quarter without jeopardizing accuracy.
- Form W-2 Reporting: More than half the states that require filing Form W-2 provide that both paper and electronic/magnetic media copies be filed by Feb. 28. Federal Forms W-2 are due on Feb. 28 only if filed on paper, otherwise the due date is March 31. The report indicates that employer W-2 filing deadlines for both paper and electronic copies could be shifted to Feb. 28 without significant cost or difficulty.
- Electronic Reporting: Making broader use of paperless reporting systems is one alternative for achieving more rapid governmental access to employee wage and tax detail. An analysis of state UI reporting requirements shows a trend in reducing the threshold at which electronic/magnetic media filing is required, with seven states currently mandating paperless filing for all employers. A similar, less drastic, trend is reflected in the states’ Form W-2 filing requirements, with 14 states setting the threshold for paperless filing at 50 or fewer forms. As jurisdictions contemplate reducing electronic reporting requirements, they should keep in mind that electronic filing systems can significantly delay reporting by multi-jurisdictional employers if they are too difficult and if they reject files that contain other than “fatal” errors.
The study offers a number of policy considerations in order to better streamline the payroll tax filing process, such as:
- Expanding the application of the special accounting rule (IRS Announcement 85-113, 1985-31 IRB 31) to include all non-cash fringe benefits and other similar compensatory items where it is reasonable to expect delay in obtaining the correct wage amount.
- Issuing regulations to provide that an employer should not be required to withhold income and employment taxes from fringe benefits received by Dec. 31 for which it is impossible to ascertain the fair market value as of that day.
- Publishing clear administrative guidance that employers can easily reference in determining the types of compensatory amounts that are included in taxable wages. Refer to California’s guidance on taxable wages for unemployment and state income tax purposes (California Pub. DE44) and Pennsylvania’s Form W-2 reporting guidance (Pennsylvania Rev-415 AS) as models.
- here possible, adopting uniform reporting standards such as EFW2 or NASWA.
About NPRC
NPRC is a non-profit trade association of organizations that provide payroll processing and employment tax services directly to employers. NPRC members serve more than 1.5 million employers with a combined total of more than 35 million employees, over one-third of the private sector workforce.
About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. 
