MEMORANDUM No. 99-49

TO: Chief Fiscal Officers/Vice Chancellors

FROM: Edward Renfrow

State Controller

SUBJECT:

1. CENTRAL PAYROLL PRE-TAX PARKING PLAN

Employees can now choose between compensation and employer-provided parking up to $175 per month. The choice of the benefit is made in the same manner as elections under the State's Section 125 Cafeteria Plan. However, this benefit is not part of the Section 125 plan. Section 125 specifically forbids fringe benefits available under Code Section 132 from being offered as part of a 125 cafeteria plan. Since this benefit is not part of Section 125, the rules requiring written plan documents, non-discriminatory application, and annual plan return filing do not apply.

Since this type benefit is not covered by the above mentioned rules, it is not being offered to employees paying to park in any manner other than by payroll deduction. Also, since payment by payroll deduction is required, it cannot be offered to employees that are paying to park in privately owned lots. We cannot offer these employees the benefit because the administrative cost to handle the paperwork would be more than the potential savings to the State of the employer's portion of social security and Medicare. We are also using a "negative confirmation" method for the employee to decline the benefit if for any reason he/she does not wish to have the parking made pre-tax. Again, the negative confirmation results in less paper shuffling and expense for the payroll staff.

IRC 132(f) requires the employer to offer the employee a choice of whether or not to receive the benefit. To meet this requirement, we have attached a copy of the Information Notification (Attachment 1) and Election Form (Attachment 2) that are being sent by Central Payroll to the units to be distributed with the April 30, 1999 pay stubs. The attached document contains an explanation of how the pre-tax parking plan works. Providing the employee accepts the benefit, the cost to the State to provide this benefit will be restricted to the programming necessary to have the parking payroll deduction come out of gross wages on a pre-tax basis.

MEMORANDUM NO. 99-49

March 19, 1999

Page 2

II. NCAS FORM 1099 YEAR-END PROCESSING PROBLEMS

The 1998 Form 1099 Information Return processing resulted in a number of problems that need to be addressed by the OSC and the agencies in order to accomplish our required reporting objectives in a cost-effective and accurate manner. Some of the problems noted and our recommended solutions are as follows:

1. The print quality of many of the 1099 forms generated by the NCAS was not satisfactory resulting in complaints to the agencies and the OSC. Print tests were conducted by OSC staff after the situation came to our attention. These tests indicate that there was a problem of ink smearing during the printing, bursting and metering process resulting in many forms being illegible by the time they reached the vendors.


The OSC has contacted Purchase and Contract about the quality of the forms purchased from the vendor on State contract for 1998. This same vendor supplied W-2 forms for Central Payroll that were not completely perforated as required by the contract.

2. A number of 1099 forms with Courier Service Mail Box numbers were sent through the U.S. mail resulting in non-deliverable forms, waste of postage, and in some cases the forms were unnecessary since the vendor was a State agency or institution.


Agency personnel should be assigned to review the 1099 forms prior to being run through the postage meter; Courier mail should be re-routed through the Courier System, and State agencies, institutions, their divisions, and non-profit organizations should be "un-flagged" for future reporting. Any forms generated for these entities should be held by the agency instead of being mailed by any method. Should the system still be open for corrections to the magnetic tape, corrections should be made to the tape.

3. Some agency personnel have been coding all transactions or "no" transactions for 1099 reporting. This has resulted in forms being sent that are incorrect and sometimes unnecessary, or necessary forms not being sent at all.


The OSC has 1099 information return training material on the State Information Guide that is available for review by employees preparing these returns for the first time. The OSC may offer a training course on 1099-information return filing soon. Please make sure your staff has a thorough understanding of what the 1099 reporting rules require.

4. There appeared to be a number of incorrect or invalid vendor addresses. Some vendors have been set up on the VSU Screen with the address line 1 being used as a continuation of the vendor's name. Address line 2 was being used as the street address or PO box, and address line 3 was correctly used for the name of the city. When the 1099 forms were printed out, the NCAS was programmed to ignore address line 2 for printing purposes so if the street address was on address line 2, the form printed out with a nondeliverable address.


Since the 1099 program only prints out address line 1 and 3, address line 1 cannot be used as a vendor name continuation line. The street address or PO box must be entered on line 1. If for any reason a name continuation is needed address line 2 must be used. The first four characters of the name of the business or the first four characters of the surname of an individual must be on the name line and not on address line 2 for IRS matching purposes. Attachment 3 is an example of this problem.

5. Several agencies have waited until the end of the calendar year to review the 1099 monthly reports. This resulted in many errors not being corrected in a timely manner. In fact, there was not time to correct all the errors noted before the forms were printed and the tapes generated to meet IRS deadlines.

March 19, 1999

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The OSCOP* 1099-1 AP 1099 REPORTS should be reviewed monthly as part of the normal report review job stream. Corrections should be made each month to correct errors noted.
 
 

III. N.C. NONRESIDENT WITHHOLDING TAX UPDATE

In 1997, the General Assembly enacted legislation requiring the withholding of N.C. income tax from non-wage payments made for personal services performed by nonresident contractors or entertainers. The 1998 General Assembly partially repealed this legislation effective retroactive to January 1, 1998.

Presently, withholding is only required for payments made for services performed in N.C. by a nonresident contractor in connection with a performance, an entertainment or athletic event, a speech, or the creation of a film, radio, or television program.

Tax is not required to be withheld from compensation paid to a corporation or limited liability company that has obtained a certificate of authority from the Secretary of State, or from compensation paid to a partnership that has a permanent place of business in N.C. The law also exempts from withholding any tax-exempt organization that provides documentation of its tax exemption to the payer.

Withholding is only required if the personal service provider is paid or is expecting to be paid $1,500 or more. Also, the "catch-up provision" that was in the original law was repealed so that the payer is not required to withhold additional tax to make up for the compensation from which no tax was withheld.

Given the changes in the law, many agencies and institutions will no longer be liable for the withholding of tax. The Department of Revenue has asked payers to complete an Out of Business Notification so that the withholding tax booklets will not be sent to you in the future. This will save the State the expense of mailing withholding forms and other administrative costs.

IV. BACKUP WITHHOLDING OF FEDERAL INCOME TAX

Several NCAS agencies received 1997's CP 2100 notices from the IRS in January 1999. These notices are usually sent to filers in October for the prior year's 1099 returns. Due to a processing delay, the IRS did not send the CP 2100s soon enough to allow the filers to correct the on-line data. As a result of this delay, several agencies may have to amend their 1998 1099 forms for incorrect TIN and name combinations that were cited on the 1997 CP 2100 notices.

In addition to correcting 1998 Forms 1099-MISC, INT and G, any agency receiving a CP 2100 notice is required by law to go through the process set forth by the IRS in Code Section 3406(a). This process requires the payer to withhold 31% of vendor payments for backup withheld federal income tax in certain circumstances. These three circumstances are as follows:

1. Backup withholding is required when the agency requests a Taxpayer Identification Number (TIN) from a vendor and one is not provided. The agency must backup withhold on any payments made to this vendor. Once backup withholding begins, the agency must continue to withhold until the vendor provides his/her TIN.
2. The IRS sends the agency a first B Notice (CP2100) and the vendor does not respond within 30 days to the agency's request for certification of the TIN. The agency must begin to backup withhold on any payment made to this vendor. Backup withholding continues until the vendor provides a TIN certified on IRS Form W-9.
3. The IRS sends the agency a second B Notice within a three-year period. The agency must begin backup withholding immediately. Backup withholding continues until the IRS notifies the agency to stop withholding. This notification may be an IRS Letter 147C or SSA Form 7028.

March 19, 1999

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A complete discussion of backup withholding and how to apply it is set forth in the State Information Guide (SIG) under Policies and Procedures - Tax Compliance. Sample first and second B-Notices and Form W-9 are also on the SIG under the 1099 Step-by-Step Procedures. Review of the statewide vendor file maintenance indicates that the Federal tax requirement that backup withholding occur in the above circumstances is being ignored by the agencies. We have noticed that vendors are showing up on successive years' CP2100 notices under the same wrong name TIN combination. If correct procedures were being followed, this could not occur. Also, we have noticed that name and TIN combinations that were known to be incorrect are still in the system and have not been "flagged" to backup withhold federal income tax.

Each agency should have someone assigned to review the CP2100 notices. IRS procedure for notifying the vendors of the incorrect name/TIN combination should be followed, and if required, backup withholding should occur. The agency should maintain a file with the three previous years CP2100 notices for comparison purposes.

Should you have questions about how to backup withhold and remit the tax to the IRS, please refer to the policy on the SIG or call the OSC. Special procedures have been developed to electronically transmit the withheld tax for agencies that are both on Central Payroll and the NCAS.

V. 1999 IRS AUTO MILEAGE RATE

Revenue Procedure 98-64 established a new business standard mileage rate of 31 cents per mile for 1999. This is a reduction of 1.5 cents per mile from 1998's rate. However, the IRS delayed the implementation of the new rate until April 1, 1999. Since the State reimbursement rate is tied to the IRS stated rate, OSBM has adjusted the State reimbursement effective April 1, 1999.

Should your agency/university inadvertently reimburse post April 1 expenses at the old 32.5 cents per mile rate after April 1st, it will be necessary to obtain a refund from the employee/contractor or put the excess 1.5 cents in the employee's Form W-2. The excess 1.5 cents paid from January 1 through March 31 is not put in the Form W-2.

When the expense occurred and not when the employee is reimbursed determines the appropriate reimbursement rate for both Budget and Employment Tax purposes.
 
 

Should you have any questions concerning the above, please call Randy Thomas at (919) 981-5488.

INFORMATION NOTIFICATION FOR 1999

A recent change in the Federal tax law now enables the State to structure the rental of parking spaces by employees as a "qualified transportation fringe benefit" on a pre-tax basis. This change will result in savings to individual employees by reducing the amount of Federal and State taxes withheld from pay. An employee's gross pay will not change, but the amount of pay subject to tax withholdings will be reduced. The effect is that participating employees will have fewer taxes withheld from their pay.

WHEN IS THIS BENEFIT AVAILABLE?

The pre-tax parking benefit is available for the rental of parking spaces beginning July 1, 1999. The pre-tax parking benefit is completely optional. Employees may choose not to participate. Should you choose not to participate, it will be necessary to complete the attached "negative" confirmation form and return it to your agency's payroll officer. Your parking fees will automatically be handled on a salary-reduction basis unless you actually decline the benefit by completing the attached election notice and returning it to your payroll officer.

WHO IS ELIGIBLE FOR THIS FRINGE BENEFIT?

For 1999, the pre-tax parking benefit is available to permanent full-time and permanent part-time employees who rent parking spaces from the State.

It should be noted that this benefit is not available to employees whose offices are located in leased office space and who currently rent parking spaces directly from the landlord or some other private parking lot. In other words, your parking fees must be handled as a payroll deduction item to be eligible for pre-tax treatment.

New employees or other employees who lease State parking spaces after July 1 will be offered an opportunity to sign-up for the pre-tax parking benefit at the time they complete their parking registration. Eligible employees who elect to participate in the pre-tax parking benefit will receive the benefit beginning with the next pay period after the sign-up date.

WHAT EXACTLY IS A QUALIFIED TRANSPORTATION FRINGE BENEFIT

The "qualified transportation fringe benefit" rules are set forth in Section 132(f) of the Internal Revenue Code (IRC) as amended by the Taxpayer Relief Act of 1997.

The amendment allows employees to choose between compensation and employer-provided parking up to $175 per month. The amount of pay that is excluded from tax is the lessor of the fair market value or the actual cost paid by the employee for the parking space. The actual cost of the rental of the space will be used to determine the pre-tax parking benefit.
 
 

HOW IS NET PAY AFFECTED?

Net pay will be increased since withholdings for Federal income tax, State income tax, and FICA tax will be reduced. For example, if you are paying $180 per year for parking in a State owned lot the taxes saved by participating in the plan will amount to $76.77 (assuming a 28% US, 7% NC marginal tax rate and 7.65% for FICA taxes). Also, this benefit will be handled programmatically by the payroll system without any action taken by the employee. Should you decline this benefit, it will be necessary to complete the attached Election Form.

It is important to note that the annual gross pay reduction of $180 in the sample calculation is used for tax calculation purposes only. The employee’s actual gross pay does not change. The taxable pay amount is reduced for each biweekly pay period or each monthly pay period that has parking fees coming out. The parking fringe will display separately on your payroll check stub or direct deposit notification for information purposes and will be based on the amount the employee pays for a parking space. A deduction for parking rent will be made each pay period as is currently done. Please note the amount withheld for State Retirement is not affected.

HOW WILL THE BENEFIT BE IMPLEMENTED?

Eligible employees who elect to decline their parking benefits on a pre-tax basis must complete the Election Form and return the form to the agency’s payroll officer in order to meet the requirement that an election be made before the benefit is received. Those eligible employees who return the form will be considered to have made an election to continue receiving parking benefits on an after-tax basis. Eligible employees who initially elect to decline and later decide to participate in the pre-tax parking benefit may change their election beginning with the next pay period after providing the payroll officer with a signed statement terminating their prior election.

SINCE THE BENEFIT IS ON A PRE-TAX BASIS, ARE TAX-DEFERRED CONTRIBUTIONS AFFECTED?

If an employee is contributing at or near the maximum amount to a supplemental retirement income plan (IRC 401K), a tax-sheltered annuity (IRC 403B), or a deferred compensation plan (IRC 457), the employee may need to decline the pre-tax parking benefit or adjust his or her tax-deferred contribution because participation in the pre-tax parking benefit reduces the income available for sheltering under those plans. Also, social security earnings upon retirement may be marginally affected due to the reduced social security contribution.

DUE DATE FOR RETURNING ELECTION FORM

The negative election form should be returned to your payroll officer no later than June 10, 1999.

Please print.
 
 
 

Agency Name:__________________________	Agency Number ___________________.
Payroll Officer Name: ______________________________________________________ .
Employee Name: _______________________________________________________ Last First Middle Initial
Social Security Number:_______________________________________________________
Department: ______________________________________________________________

 

I do not want my parking fees handled on a pre-tax basis. I have been provided the Information Notification about pre-tax parking, but I am not interested in participating in this benefit. I understand that my election is effective for any parking purchased after July 1, 1999.
 
 

I do not accept the parking benefit on a pre-tax basis.
 
 
 
 
 

___________________________.	_________________________________.
Employee’s Signature	Date