ULC

Wage Withholding and Unemployment Insurance Procedure Act Summary

In every state with an income tax, taxes are withheld from wages.  Unemployment insurance taxes are withheld from wages in every state in the United States.  The Internal Revenue Code requires that federal income taxes be withheld.  The burden for withholding, reporting and paying these taxes falls upon employers in the United States.  The basis for determining the amounts to be withheld from wages (the wage base) is different in every state in which wages are withheld.  The states use different wage bases from the base upon which federal income tax withholding is figured.  This means that every employer must keep separate records for each tax system.  In addition, the reporting requirements are also variable and non-uniform, each state being different.  An employer that withholds and reports in more than one state must keep separate records for each tax system in each state for which employee wages are withheld.  The costs of compliance are very great and the risk of inadvertent non-compliance resulting in penalties and fines increases as well.

In 1996 the Internal Revenue Service organized a group to consider these problems.  It came to be known as the “Simplified Tax and Wage Reporting System Program” (STAWRS).  The federal component of the STAWRS working group came from the Internal Revenue Service, the Department of Labor, Department of the Treasury, Office of Management and Budget, Small Business Administration and the Social Security Administration.  It was joined by representatives from the states of California, Kentucky, Minnesota, Montana, Nevada, New York, Texas and Wisconsin.  The Federation of Tax Administrators was a member of the working group.  The private sector was also represented by a number of companies and associations that provide payroll and like services.

The objective of STAWRS was to study the multiplicity of these tax systems and make recommendations that would serve to harmonize them.  The ultimate objective would be the same rules for determining the wage base for withholding purposes, and uniform reporting requirements in every state.  STAWRS issued two reports, “The Harmonized Wage Code for Income Tax Withholding” and “The Targeted Harmonized Wage Code.”

Implementation of this impressive body of information, however, requires a vehicle for carrying these reforms into the law.  That is exactly the purpose of the Uniform Wage Withholding and Unemployment Insurance Procedure Act, promulgated by the Uniform Law Commissioners in 2004.  It does two basic things.  First, it establishes uniform exclusions from the compensation of every employee to determine the wage base for withholding the taxes.  It does this for both state income tax withholding purposes and for unemployment compensation tax purposes.  Second, it establishes uniform reporting requirements so that each employer will report to each state in exactly the same way and at the same time.

Compensation to employees comes in a variety of forms that include cash and non-cash benefits like medical insurance and transportation costs.  Some of these benefits are excluded from the wage base upon which withholding tax is figured in every state.  The objective of the Uniform Act is to simplify and harmonize these exclusions so that every state uses the same wage base for the purpose of determining how much is to be withheld.

Wages are defined as all remuneration (the sum total an employee receives) subject to income and unemployment taxes less the specific exclusions.  Exclusions include such items as moving expenses, deductions for medical cafeteria plans, life and medical insurance premiums paid on behalf of an employee, dependent care, retirement benefits and educational benefits as examples.  In almost all cases, these exclusions are limited by their eligibility for exclusion for federal income tax purposes under the Internal Revenue Code.  This achieves harmonization to the degree possible between state and federal tax withholding and provides a national standard for determining exclusions.

In some instances, exclusions for unemployment tax can be ignored.  Exclusions that decrease the wage base for unemployment compensation can have the effect of denying low wage employees of benefits when they become unemployed.  If that is the case in any state, it should adjust the exclusions for withholding unemployment taxes accordingly to avoid this undesired effect.

Lastly, the Uniform Act would establish the times when withheld wages are to be reported and paid for both income and unemployment compensation taxes.  These requirements are quarterly for most employers.  However, employers with few employees and limited withholding amounts for income tax purposes have a graduated time to pay that may be yearly if they do not exceed $2500.00 per calendar year and, bi-yearly if they are between $2500.00 and $5000.00.  For amounts between $5000.00 and $50,000.00, the time of payment depends upon when the undeposited amounts accrue sufficiently.  An employer, who may have fluctuating payrolls, by reporting anticipated changes in payroll, can change which time period applies without penalty, depending upon the amount of withholding anticipated.

The Uniform Wage Withholding and Unemployment Insurance Procedure Act has the capacity to reduce the costs of tax withholding and collection for employers dramatically.  It would provide a tax cut, in essence, that does not affect the revenue of any state.  States may maintain their revenue stream, because no tax rates are changed.  Uniformity of reporting and payment, in addition, will reduce state administrative costs and make tax collection easier.  This is again a tax benefit that will not require any change in tax rates.  States should consider the Uniform Act as soon as possible.