State and local governments should maintain awareness of tax information managed by the Office of Federal, State and Local Governments (FSLG) of the IRS. Following are highlights of some recent IRS activities that state and local governments may want to consider.
Withholding on Remuneration Paid to Certain Foreign Employees
Governmental entities may employ foreign employees, who are students, scholars, teachers, researchers, or trainees, in a variety of positions. The Internal Revenue Code (IRC) provides rules that apply to employers, including governmental entities, regarding their foreign employees. The rules include considerations for the FICA tax liability of a governmental entity and federal income tax withholding on remuneration for employment paid to foreign students, scholars, teachers, researchers and trainees. There are also specific considerations for the determination of tax residency status by a foreign student and reporting that status to the employer.
The IRC provides a “student FICA exception” that can apply to any student, American or foreign. See Revenue Procedure 2005-11 for instructions on eligibility for the student FICA exemption. Publication 519 provides information about other tax ramifications on foreign students, such as the Green Card Test, the Substantial Presence Test and the First-Year Election.
Government employers may provide meals or meal reimbursement at their main place of business. In certain circumstances, the IRC allows an exclusion from income for the value of meals provided by the employer; however, cash, or a cash equivalent, provided for meal purchases is not excludable. Additionally, if employees have an option to receive additional wages instead of actual meals, the meals are taxable. To be excludable from employee wages, employer-provided meals must meet the following requirements and related tests:
- Provided on the business premises of the employer.
- Provided for the convenience of the employer.
Governmental entities may also need to consider the following meal-related rules:
- Meals furnished with a charge may result in a reduction or addition of an employee’s regular taxable wages.
- De minimis meals should be infrequent and of a minimal value to be excludable as a de minimis fringe benefit.
- Meals while traveling are excludable from wages if the employee is traveling away from their tax home on their employer’s business.
Publication 963 Update
In November 2014, the FSLG provided a new revision of IRS Publication 963, Federal-State Reference Guide, on the IRS website ( www.irs.gov ). The publication focuses on federal tax issues that governmental entities regularly encounter. The publication provides coverage of social security issues, including voluntary Section 218 Agreements, and information on employment taxes, information returns, fringe benefits, retirement systems, the legal status of government entities and many other issues.