TAP F04-041

Form W-4 Employer Compliance

Statement of Issue:

On the draft Form 941 for 2005, Line 1 identifies the number of employees in the middle of the third month of each quarter for income tax purposes. Line 4 identifies total exemption from withholding Social Security and Medicare Taxes for qualified state, county, and municipal governments and certain other employers. The form does not provide a place for employers to identify the number of nonresident employees subject to income tax as identified in Line 1 but not subject to Social Security and Medicare Taxes.

Proposal:

All Employer Forms should identify the existence of nonresident employees who are generally exempt from contributions to Social Security and Medicare Tax.

The Committee recommends (1) changing Form 941 Line 5 so that Line 5a reads, “Number of employees listed in Line 1 who are exempt from Social Security and Medicare Wages and tips.” The subsequent information would become lines 5b, 5c, 5d, and 5e; (2) creating a citizenship checkbox on Form W-4 or a new Form W-4 for Nonresidents (i.e. Form NR W4); and (3) including a citizenship checkbox and a checkbox for exempt from taxes withheld on Form W-2.

OTBR Director, Michael Chesman responded as follows: The tax treatment of these employees is often different from that of American citizens. While the Service has noted the different treatment in its publications, it has not yet emphasized the differences in its forms. However, a number of changes are pending.

Form 940: The form is currently being redesigned. It has been recommended that a box and indicator for exemption from Federal Unemployment Taxes be included.

Form 941: The form is expected to go through a second revision due to the creation of a Form 941 X for amending quarterly employment tax reports. By creating a separate form for amendments, a number of line items will no longer be needed on the Form 941. The inclusion of an indicator for the exclusion of certain wages from withholding of income taxes, or for computing social security and Medicare taxes will be considered as part of the new redesign effort.

Form W-4: The recommendation for creation of a Form W-4 NR has been made by a number of stakeholders. The recommendation has been included in the Withholding Compliance Task Force Report and in the Burden Reduction Initiative Inventory. The Office of Burden Reduction hopes to identify resources with the appropriate expertise to move this initiative forward in the near future