Wednesday, June 26, 2019

Update on the Massachusetts Family & Medical Leave Tax

First, you will be delighted to know that it is unclear as to whether this is a tax (for purposes of claiming a deduction) or if it is something else (what else it may be is also unclear). 

William Delaney, EA
Westwood, MA
Second, you will be delighted to know that it has not been determined if these leave payments are exempt income (such as disability payments) or fully taxable income (such as unemployment compensation).  The MA Dept. of Family and Medical Leave (DFML) is in discussions with the Internal Revenue Service on this issue (why the discussion is not being led by the Mass. Dept. of Revenue is unclear).

Third, but not the least of all, it is still unclear as to whether the employee withholding will be pre-tax or after-tax.  This is also under discussion.  Why it should be pre-tax is anyone’s guess, but you never know.

Every W-2 employee is subject to the “tax” withholding.  Every employer is subject to the withholding requirement (if there is at least one W-2 employee or, in the absence of payroll, if the majority of the “employees” are 1099 contractors).  Certain categories of payroll employees and 1099 contractors are exempt.  The law follows the “shall not include” provisions of MGL Ch. 151A, Sec. 6.

The effective date for withholding is October 1, 2019.  All employers presently in the MATaxConnect system as subject to withholding of income tax will be automatically registered and this “tax” will appear along with any other tax withholding/tax filing requirements on the TaxConnect web site.

There is a “tax” calculation worksheet on the DOR web site.  Here is an example for a small employer who is NOT required to make a contribution…

Total Contribution (using $10,000 of quarterly W-2 income – one employee) –
$10,000 x .0075% = $75.00.

The DFML has allocated this “tax” to the two applicable state programs being funded.  82.5% to Medical Leave; 17.5% to Family Leave.

The employee’s contribution amount is…

Medical Leave – 82.5% x $75.00 = $61.88  Family Leave – 17.5% x $75.00 = $13.12

The employer (under 25 employees) is NOT required to make a contribution.
The employee, on the other hand, IS required to make a contribution (via withholding) equal to…

Medical Leave – 40% of $61.88 = $24.76
Family Leave – 100% of $12.12 = $12.12

Now to how to remit quarterly, using MATaxConnect.  Go to your already established TaxConnect employer account and click on the “needs attention” box associated with this “tax.”  Be sure to click on the various options so that the pop-up boxes will appear.  Use them to enter the total tax (by category) to be remitted.

When you wish to enter employee detail, two options are offered.  One – enter the detail for each employee (and/or contractor, if applicable) in the same manner that you make employee entries into the stste DUA system (this becomes important in a minute or two).  The system will then compute the total contribution due (see $10,000 example – above).  Pay what is owed and it works (for the 25 or more employees employer).  For the employer exempt from making a contribution, the system (we hope) will recognize that the employee withholding will be less than the automatically calculated total contribution (how that will happen is unclear).

Fast forward to the second quarter (Jan-Mar 2020) and start to file a return.  OK, the system already has the data base, so we don’t need to repeat the same employee information again, but wait---that’s a false assumption.  According to the MA DOR and the DFML the employee data base will NOT be retained.  It must be re-entered (because it may change, said they).  If you think that Bill Delaney is on life support and did not hear them correctly---I checked with Jeff Schweitzer, who was also there.  He heard the same thing.  So, warm up those typing fingers guys and gals.  This isn’t going to be easy.

Oh, did I mention that the system does not store accumulated wages and, therefore, it cannot track when the maximum wage base has been reached (it’s the same amount as the social security wage base maximum).  I kid you not---it’s the stone age, guys and gals.

Now for a few chuckles.  If that 1099 payment is made to a single-member LLC which files as a Schedule C (default option), that payment is not considered to part of what the employer (i.e. work provider) counts for purposes of determining if the contribution calculation must include 1099 contractors.  This isn’t a “contractor;” it’s an LLC (don’t you see)!  This MAY change; it is still under discussion.

Finally, for something serious and important.  Suppose (somehow) your taxpayer client either doesn’t file or files each quarter and declares -0- wages?  Let’s suppose one of his (I don’t have any) employees decides to apply for this leave.  DFML will search the MA DOR data base (the one which you [mostly] so dutifully type into each quarter) and discover that it is showing zilch.  However, the employee is entitled to and will receive a benefit.  The employer will be audited by MA DOR and assessed for the “tax,” interest and penalty.  In addition, the employer must also pay the full amount of the employee benefit.