STAWRS and the harmonized wage code project: making employment tax laws more consistent across federal and state boundaries - Simplified Tax and Wage Reporting System

The Simplified Tax and Wage Reporting System (STAWRS) Program is a multi-agency partnership between the Department of Labor, Internal Revenue Service, Department of the Treasury, Small Business Administration, Social Security Administration, Office of Management and Budget, various states, and private organizations. The STAWRS mission is to reduce the tax and wage reporting burden on employers and government agencies while improving the efficiency and effectiveness of government operations. The goals of STAWRS are:

* provide timely and accurate tax information to employers to strengthen customer service;

* decrease the number of tax- and wage-related forms that employers must file;

* provide employers more opportunities to file tax-and wage-related forms electronically;

* simplify federal and state tax employment laws;

* provide employers the opportunity to file employment-related returns to one location;

* increase voluntary compliance; and

* support federal and state electronic tax strategies.

To achieve its mission and goals, STAWRS established three major initiatives: single point filing, streamlined customer service, and simplified requirements. The Harmonized Wage Code (HWC) project falls under the simplified requirements initiative. In support of the STAWRS mission, the HWC project works to make federal and state employment tax and wage reporting laws more consistent and, therefore, easier for employers to follow. The HWC project supports the IRS's strategic objectives of revolutionizing how taxpayers transact and communicate with the IRS by simplifying employer tax laws and strengthening federal-state partnership in tax code reform.

Background

The HWC project was established to harmonize the federal and state employment tax laws, primarily by providing uniform definitions of key provisions. The HWC project encompasses a total of 96 employment tax laws including the tax laws of the federal government, the 50 states, and the District of Columbia. The covered employment tax laws include federal and state income tax withholding (ITW) laws; the Federal Insurance Contributions Act (FICA), which encompasses Social Security and Medicare taxes; the Federal Unemployment Tax Act (FUTA); and state unemployment insurance (SUI) tax laws.

The HWC project has garnered support from employers, trade organizations, payroll companies, and federal and state agencies, all of which agree that the current employment tax laws are complex and inconsistent and, therefore, confusing to understand and expensive to administer and comply with, by both employers and the affected government agencies.

The benefits of a harmonized wage code would be uniform and less complex laws, regulations, instructions, and procedures. A harmonized wage code would also mean fewer forms that require less information, combined federal and state forms, simplified record keeping, easier interpretation of the laws, and lower operating costs.

HWC Strategy

The HWC project addresses complex tax law issues, requiring input and feedback at the employer, state, and federal levels. The HWC project team solicited and worked with partners to develop a strategy to address those issues. The first steps included development of a harmonized wage code database and development of a harmonized wage code. The HWC database would include the research on the 96 federal and state employment tax laws, and their 500 associated provisions. The harmonized wage code would reflect the project team's recommendations on how to apply the information captured in the database to create a model law for federal and state agencies to follow.

HWC Database

The HWC database is an in-depth compilation of the component provisions of federal and state employment tax laws. It includes the federal and state income tax withholding provisions, state unemployment insurance tax laws, FICA, and FUTA.

The database allows users to compare the state and federal treatment of different provisions by documenting whether the provisions in the various jurisdictions are identical, similar, or different. In organizing the database, FUTA was used as the "base provision" against which the social welfare provisions (i.e., FICA and SUI) were compared. The federal income tax (FIT) withholding provisions were used as the base provisions against which the revenue provisions were compared. Where a provision occurred only in a state law and not at the federal level, that state law was then used as the base provision.

The HWC database, as well as project information, is available through the STAWRS Web site at www.biztax.govemployers.gov/stawrs/hwc/indexhwc_db.htm.

Developing the HWC

Early STAWRS research confirmed that a single model law would be exceedingly complex and difficult to draft and implement. Therefore, the project team adopted an incremental approach to the HWC that could provide a significant number of employers with much needed simplification in a more reasonable time frame. Eighty-five percent of the 6.7 million employers in the United States employ 20 or fewer workers, and these employers deal with significantly fewer components of the employment tax laws than do the remaining employers who employ more than 20 workers. Targeting the employment tax provisions used by small employers could yield maximum benefit to the greatest number of employers. Thus, the first step in drafting a harmonized wage code became the development of the Targeted Harmonized Wage Code (THWC). Further research on employment tax provisions revealed that almost all small employers deal with no more than the following 14 specific components:

* Vacation Pay

* Payments for Jury Duty

* Meals and Lodging

* Group-Term Life Insurance

* Dependent Child Care

* Tips

* Employee Business Expense Reimbursement

* Health Insurance

* Cafeteria Plans

* Moving Expenses

* Death Benefits

* Sick Pay

* Fringe Benefits (excluded from income)

* Contributions to Qualified Pension Plans

Creating uniformity across these 14 items affords the benefits of a harmonized wage code to most small employers, and thus to a large majority of all employers. Benefits would also accrue to government agencies, since adoption of the THWC would require few, if any, legislative changes. Thus, many states and the IRS could adopt the THWC through administrative action. Indeed, an encouraging fact is that eight states are already in complete conformity with the THWC recommendations.

HWC for Income Tax Withholding and Unemployment insurance

With the release of the THWC, the HWC project entered its next phase: the development of a harmonized wage code for employers. As the team began to formulate their recommendations for the HWC, they considered the differences between the income tax withholding and the unemployment insurance (UI) and other provisions. The ITW provisions are designed to bring revenue into the Treasury evenly throughout the year and to avoid taxpayers (employees) having to pay the full amount of their taxes only once a year. The FICA, FUTA, and SUI rules, in contrast, are designed to support social welfare programs. Because the laws have two distinct purposes, the project team concluded that they should be addressed separately. This led to the objective of developing two harmonized wage codes, one for ITW and one for UI (including FICA, FUTA, and SUI).

The issues, recommendations, and proposed model laws for each of the HWCs are delineated in the HWC reports. The structure of the HWC/ITW and HWC/UI reports is similar. Both present a list of recommended provisions that should be included in a harmonized wage code and also present additional uniform definitions for harmonization. For example, the basic concept of the federal employment tax laws is to provide a definition of "wages" including all remuneration for employment, and then list exceptions to, or exclusions from, that definition. Thus, any provision that is not recommended for exception or exclusion is regarded as wages or employment and, thus, subject to withholding. In contrast, provisions that do provide for an exclusion from income tax withholding are not subject to withholding. Additionally, the reports include recommendations for a number of non-wage provisions and definitions for harmonization.

The HWC/ITW Report was released in January 2001 and is available on the STAWRS Web site. The HWC/UI report has been drafted and is being reviewed by the project team.

HWC Project Future

The HWC project has several goals for 2001: completing the HWC/UI Report, researching and developing other new HWC reports, advocating the adoption of the THWC, and establishing new partners for HWC implementation.

Although the HWC project adopted an incremental approach to the development of a harmonized wage code, the ultimate goal is to have one harmonized wage code for all employment tax laws. To advance this objective, STAWRS has met with several organizations regarding development of a single harmonized wage code. Most recently, STAWRS presented its research and findings to the National Conference of Commissioners on Uniform State Laws (NCCUSL), which, as a result, has formed a committee to study the HWC concept. Additionally, STAWRS recently received an endorsement from the Section of Taxation of the American Bar Association for the harmonized wage code concept.

While STAWRS pursues support for HWC implementation, it continues its research and report development efforts. The Department of Labor and STAWRS are conducting a joint study on the effects on ITW and UI of implementing the THWC. The Department of Labor is studying a sampling of eight states to determine the effects of the THWC on the UI tax and benefits areas. The results of this study are expected in late 2001.

In addition, STAWRS is studying a sampling of eight states to determine the effect on state revenue of implementing the THWC. STAWRS will combine the research from both the ITW and the UI studies to determine the overall economic effect of the THWC. The expected release date for this report is late 2001.

Finally, STAWRS has set a tentative release date for the HWC/UI Report at mid-S Summer 2001. The HWC/UI report will be followed by a Harmonized Filing Dates Report, focusing on the filing dates for federal and state employment tax reports. The project team expects to issue this report by the end of the Summer 2001.

STAWRS has set ambitious goals for its HWC project, from establishing new partnerships to completing complex research and publishing reports. Many of these goals will be attained in 2001, but the work toward implementation and harmonization will continue into the future. Stakeholder support to promote HWC will be essential in assisting federal and state agencies in adopting the model laws.

For additional information about STAWRS and the Harmonized Wage Code project, please contact Philip M. Corn, HWC Project Manager, at Phil.Corn@irs.gov, or Midori Morgan-Gaide, STAWRS Executive-in-Charge, at Midori.Morgan-Gaide@irs.gov.

PHILIP M. CORN is the project manager of the Harmonized Wage Code project and is on assignment from the IRS office of Chief Counsel where he is a special assistant on employment tax issues. MIDORI MORGAN-GAIDE, also an employee of the Internal Revenue Service, is the executive in charge of the Simplified Tax and Wage Reporting System.

COPYRIGHT 2001 Tax Executives Institute, Inc.
COPYRIGHT 2002 Gale Group