Federal Agency FAQs - Updated
Federal Agency Frequently Asked Questions (FAQs)
The questions and answers below address some of the common situations federal agencies may encounter in dealing with various payments and information reporting requirements.
Q-1. Can FSLG provide written guidance to federal agencies?
A-1. FSLG Specialists may respond to questions in a general format with reference to published information. You must submit a written request for a “Private Letter Ruling” (PLR) to receive an IRS determination in writing on a specific issue. The instructions for requesting a PLR are issued in the first Revenue Procedure published each calendar year. There is no cost for a PLR for federal agencies. Federal agency PLR requests should be mailed to following address.
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Q-2. Can the IRS provide my agency with our taxpayer identification number (TIN) if we have misplaced it?
A-2. An authorized person can ask the IRS to search for your EIN by calling the Business & Specialty Tax Line at (800) 829-4933.
Q-3. How do I change my address with the Internal Revenue Service?
A-3. The IRS typically has only one address per entity and all tax-related notices go to that address. We update that address each time a tax return is filed (i.e. Forms 941, 945, 1042, etc.), but not when an informational return is filed (Forms 1099, 1042-S, W-2, etc.). If you do not file a tax return, or need to change your address in between return filings, you must complete Form 8322-B, Change of Address – Business, and mail to the applicable address shown in the Form’s instructions.
Form W-2/Wage Reporting
Q-4. Is my federal agency required to provide paper Forms W-2 to employees if we provide access to electronic Forms W-2?
A-4. Form W-2 may be furnished to an employee in an electronic format in lieu of a paper format if the employee affirmatively consents to receive the Form W-2 in an electronic format. Regulation section 31.6051-1 details the requirement to issue Forms W-2. See section 31.6051-1(j) for the requirements of electronically furnishing the statements.
Q-5. Are employee contributions to a Health Savings Account (HSA) reported in Box 12 of Form W-2 using code W?
A-5. Employee contributions to an HSA that are untaxed (pre-taxed contributions) should be reported on Form W-2 box 12 with code W. They are treated the same as employer contributions. The key to reporting employee HSA contributions in box 12 is determined by whether or not the contributions are made pre-tax. Therefore, if the contributions are not made pre-tax, they would not be reported in box 12.
Q-6. Can a repayment of prior-year wages received in error be offset against current-year wages?
A-6. If an employee repays you for wages received in error, do not offset the repayments against current-year wages unless the repayments are for amounts received in error in the current year. If you receive repayments for wages paid during a prior year, report an adjustment on Form 941-X or Form 944-X to recover the social security and Medicare taxes. You may not make an adjustment for income tax withholding because the wages were income to the employee for the prior year.
You also must file Forms W-2c and W-3c with the SSA to correct social security and Medicare wages and taxes. Do not correct wages (box 1) Form W-2c for the amount paid in error. Give a copy of Form W-2c to the employee. See Publication 15 for additional information.
Q-7. Are reimbursed entertainment and recreational membership dues taxable to the employee?
A-7. The payment of entertainment and recreational membership/club dues by the employer is a taxable fringe benefit. If an employer pays or reimburses an employee for club dues, the amount is taxable to the employee and subject to income tax withholding, social security and Medicare taxes.
Q-8. Are reimbursements of employee expenses while teleworking taxable to the employee?
A-8. Reimbursement of employee business expenses while teleworking must meet the requirements of Regulation section 1.62-2 in order to be exempt from the withholding of employment taxes. Expense reimbursements paid under a nonaccountable plan are included in the employee's gross income, must be reported as wages or other compensation on the employee's Form W–2, and are subject to withholding and payment of employment taxes.
Q-9. What are the accountable plan rules?
A-9. To be an accountable plan, your employer's reimbursement arrangement must require you to meet all three of the following rules.
- Your expenses must have a business connection - that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
- You must adequately account to your employer for these expenses within a reasonable period of time.
- You must return any excess reimbursement or allowance within a reasonable period of time.
Q-10. What are the tax implications of the executive order that allows for same sex domestic partners to be reimbursed for relocation benefits as a member of the relocating employees’ family?
A-10. Federal agencies are authorized to reimburse relocation benefits of same sex domestic partners. The Internal Revenue Code (IRC) has not changed the definition of “member of household” for moving expense deductibility. The IRS defines a member of household as a person who is related to you or lives with you for the entire year as a member of your household. However, a person is not a member of your household if at any time during your tax year the relationship between you and that person violates local law. Reimbursement of relocation expenses of persons who do not meet the definition of “member of household” would result in wages to the employee.
Q-11. What is the IRS definition of a personal service contract? When is a personal service contract subject to the employer tax withholdings?
A-11. Personal services contract means a contract that, by its express terms or as administered, makes the contractor personnel appear to be, in effect, Government employees. Federal Acquisition Regulation (FAR) section 37.104(d) details descriptive elements that should be used as a guide in assessing whether or not a proposed contract is personal in nature. IRS applies the common-law standards to determine if an employer-employee relationship exists. Withholding tax requirements are applicable when an employer-employee relationship is identified.
Q-12. What is long-term taxable travel?
A-12. Long-term taxable travel is travel which lasts for more than one year, or for which there is a realistic expectation that such travel will last for more than one year, or for which there is no realistic expectation that such travel will end within one year. It includes local (daily) travel between a residence and a non-temporary work location and overnight travel away from the residence to a single location.
The realistic expectation for long-term travel is based on the current facts and circumstances. However, prior work at a work location is considered if there has not been a break of least seven continuous months since the employee’s last visit to the location while on official duty.
Q-13. Is the payment of a flat rate for employee parking expenses excludable from their wages if it does not exceed the maximum amount of parking expense reimbursement allowed to be excluded from wages by the Internal Revenue Code?
A-13. Cash reimbursements for parking expenses can be excludable if the employer establishes a bona fide reimbursement plan. This means there must be reasonable procedures to verify reimbursements and the employees must substantiate the expense (an accountable plan). A flat-rate parking expense reimbursement without substantiation is a taxable fringe benefit to the employee.
Q-14. Are reimbursed transit expenses excludable from wages if an employee receives three months worth of transit benefits in one month?
A-14. The applicable statutory monthly limit applies to transit passes provided by the employer to the employee in a month for that month or for any previous month in the calendar year. If the reimbursed amount for each month does not exceed the statutory limit, then the total reimbursement is excludable from income. However, monthly exclusion amounts may not be combined to provide a benefit in any one month greater than the applicable statutory limit. See Treasury Regulation §1.132-9, QA-9.
Q-15. How do we report a settlement payment of back wages and interest to a former employee’s bankruptcy estate?
A-15. The back wages should be reported on a Form W-2 issued directly to the employee, not to the bankruptcy estate. (This assumes that the back wages are being paid for services performed by employee before he/she filed for bankruptcy.) Interest should be reported on a 1099-INT. The Form 1099-INT should be issued to the bankruptcy estate because the interest is being paid after the employee filed for bankruptcy.
Information Return Reporting
Q-16. Does interest income paid to a vendor get included in Form 1099-MISC compensation?
A-16. Interest paid in the course of governmental operations (including Prompt Payment Act interest) in the amount of $600 or more should be reported on Form 1099-INT.
Q-17. If we pay vendors in services rather than monetary payments, are these in-kind services reportable? If so, on which information return would they be reported (i.e. 1099-B, 1099-MISC, etc.)?
A-17. Persons who are not a barter exchange but who trade services are not required to file Form 1099-B; rather, they must file Form 1099-MISC, Statement of Recipients of Miscellaneous Income, and report the fair market value of the services performed if the transaction occurs in the course of a trade or business and the services bartered had a fair market value of $600, or more.
Q-18. Are federal agencies required to furnish Forms W-9 to payers even though they are generally exempt payees for information reporting purposes?
A-18. Form W-9 (or an acceptable substitute) is used by persons required to file information returns with the IRS to get the payee’s correct name and TIN. It is also used to certify that the payee is exempt from backup withholding tax. The United States and any of its agencies or instrumentalities are exempt from backup withholding tax. Complete Form W-9 by entering the agency’s name, address, employer identification number, check the “other” box for federal tax classification, and write in “federal agency.” Also, check the “exempt payee” box. You must also sign and date Form W-9.
Q-19. Is a forgiven debt reportable? If so, on which form is it reported?
A-19. Section 6050P of the Internal Revenue Code requires that an applicable entity report any discharges (in whole or in part) of indebtedness of any person in excess of $600. Discharge of indebtedness is reported on Form 1099-C.
Q-20. Are payments made to a corporation for services in the amount of $600 or more required to be reported on Forms 1099-MISC?
A-20. Generally, payments made to corporations for services are not reportable on Form 1099-MISC. However, Forms 1099-MISC are required to report payments made to corporations for medical and health care services, legal services, gross proceeds paid to an attorney, and cash fish purchases.
In addition, Internal Revenue Code IRC § 6041A(d)(3) provides that payments made for services performed by a corporation are subject to information reporting on Form 1099-MISC when the remuneration was paid to the corporation by a Federal executive agency.
Q-21. Is there guidance available regarding what types of payments to report and not report on Forms 1099-MISC?
A-21. The annual instructions for Form 1099-MISC provide information on the types of payments that are required to be reported along with the exceptions. Also, see Revenue Procedure 2004-43, 2004-31 IRB 124, for merchant categories and whether reporting is required under Internal Revenue Code sections 6041/6041A. You will find the Rev. Proc. on page 124 of the Internal Revenue Bulletin 2004-31.
Q-22. What is the IRS TIN Matching Program? Is it available to federal agencies?
A-22. TIN Matching allows a payer or authorized agent (including federal agencies) who is required to file Forms 1099-B, 1099-DIV, 1099-INT, 1099-K, 1099-MISC, 1099-OID, and/or 1099-PATR to match TIN and name combinations with IRS records before submitting the forms to the IRS. The TIN may be an Employer Identification Number (EIN), a Social Security Number (SSN), or an Internal Revenue Service Individual Taxpayer Identification Number (ITIN). You must register for e-services to use this service. Additional information can be found in Publication 2108A.
Q-23. Are Forms 1099-MISC required to be filed by a federal agency for credit card purchases?
A-23. Effective for payments after 12/31/2010, the credit card issuer is required to file Forms 1099-K for reportable purchases made by credit card.
Q-24. Is a federal agency required to issue Forms 1099-MISC for payments of services using convenience checks?
A-24. If a convenience check is issued for a service then it will be reportable on Form 1099-MISC under the rules set forth in Code Sec. 6041A and the corresponding regulations. A convenience check does not meet the definition of a purchase card transaction, and therefore, is not reportable by the third party on Form 1099-K.
Q-25. How do we get a refund of erroneous backup withholding tax?
A-25. Federal agencies are exempt from backup withholding. You must file Form 990T for each year the trustee erroneously withheld backup withholding tax.
Q-26. Are Forms 1099-MISC required to be filed electronically?
A-26. If you are required to file 250 or more information returns of any one type, you must file that type electronically. Electronic Forms 1099-MISC are due by March 31st. If you file less than 250 Forms 1099-MISC, you may file paper forms. However, you must order the printed forms from the IRS. The online form does not meet the scanning specifications required by the IRS. Paper Forms 1099-MISC are due by February 28th.
Q-27. Can we combine the payments amounts required to be reported on Forms 1099-MISC and 1099-G to the same vendor/individual instead of issuing two separate 1099 forms?
A-27. Each Form 1099 has a specific reporting purpose. You should not combine amounts paid to the same person on one form. The instructions for each type of information return identify the types of payments that are required to be reported on that specific form.
Q-28. Are independent contractor reimbursed expenses reportable on Form 1099-MISC?
A-28. The reporting of reimbursements for independent contractors will generally follow the same rules as an employee. If the reimbursement of these expenses is subject to the employer’s accountable plan, then the employer is not required to include the reimbursement on the Form 1099-MISC. If the independent contractor’s reimbursement is not subject to an employer’s accountable plan, then the reimbursement should be included on Forms 1099-MISC.
International - Payments to Foreign Persons
Q-29. Who is a foreign person, according to the Internal Revenue Code?
A-29. A foreign person includes a nonresident alien individual (NRA); a corporation created or organized in a foreign country or under the laws of a foreign country; a partnership created or organized in a foreign country or under the laws of a foreign country; a foreign trust; a foreign estate; or any other person that is not a U.S. person (Treasury Regulation § 1.1441-1(c)(2)).
Q-30. When is a foreign person providing services subject to U.S. tax?
A-30. A foreign person providing services is subject to U.S. tax law when income is paid for services performed in the United States.
Q-31. Is the income paid to a foreign person service provider subject to income tax withholding?
A-31. Yes. The withholding of tax is based on “cash method” payments (despite what a contract may state).The maximum statutory rate of tax withheld on gross amount of income is 30%.
Q-32. Can a foreign person service provider have a reduced rate of withholding?
A-32. Yes. A reduced rate of withholding may be used only if the following applies:
- When a foreign person engages in a trade or business in the United States, all income from sources in the United States connected with the conduct of that trade or business is considered effectively connected with a U.S. business (IRC §1441(c)) and a valid Form W-8ECI is provided.
- An Income Tax Treaty specifies a lower rate and valid withholding certificate (Form 8233 or W-8BEN) is provided by the beneficial owner.
- The payment is made to a foreign organization that is a tax exempt organization under IRC § 501(c) or private foundation under IRC § 509 and a valid Form W-8EXP is provided.
- The payment is made to a foreign government and a valid Form W-8EXP is provided.
- The payment is made to a international organization and the name of the payee is one that is designated as an international organization by executive order.
- A Centralized Withholding Agreement (CWA) is entered into by the beneficial owner.
Q-33. What return does a payer use to report the withholding to the Internal Revenue Service?
A-33. The payer of income to a foreign person is called a withholding agent. A withholding agent is any person, U.S. or foreign, that has control, receipt, or custody of an amount subject to withholding or who can disburse or make payments of an amount subject to withholding.
The withholding agent files the tax return that reports the withholding of income tax from a foreign person’s U.S. source. The income tax return is Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. The normal due date for Form 1042 is March 15th.
Q-34. What return does a payer use to report the withholding to the recipient of the income?
A-34. Form 1042-S is an information return substantially equivalent to a Form W-2. A withholding agent must file and furnish to report the gross income payments, withholding, the basis for withholding exemption and recipient name, address and TIN to the foreign person and Internal Revenue Service.
Forms 1042-S, whether filed on paper or electronically, must be filed with the Internal Revenue Service generally by March 15th. A payer is required to furnish Form 1042-S to the recipient of the income generally by March 15th.
Q-35. How long are withholding certificates valid?
A-35. Form 8233 –Valid for a specific tax year and the income and dollar amount listed on the form.
Form W-8BEN - Generally, a Form W-8BEN provided without a U.S. taxpayer identification number (TIN) will remain in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. A Form W-8BEN furnished with a U.S. TIN will remain in effect until a change in circumstances makes any information on the form incorrect, provided that the withholding agent reports on Form 1042-S at least one payment annually to the beneficial owner who provided the Form W-8BEN.
Form W-8ECI - Generally, a Form W-8ECI will remain in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect.
Form W-8EXP - Generally, a Form W-8EXP filed without a U.S. taxpayer identification number (TIN) will remain in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year. However, in the case of an integral part of a foreign government (within the meaning of Temporary Regulations section 1.892-2T(a)(2)) or a foreign central bank of issue, a Form W-8EXP filed without a U.S. TIN will remain in effect until a change in circumstances makes any of the information on the form incorrect. A Form W-8EXP furnished with a U.S. TIN will remain in effect until a change in circumstances makes any information on the form incorrect provided that the withholding agent reports on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, at least one payment annually to the beneficial owner.
U.S. Citizens Traveling Abroad
Q-36. Do employees of the federal government qualify for the foreign income and housing exclusion and foreign housing deduction?
A-36. No. Income earned as an U.S. Government employee doesn’t qualify for the foreign income and housing exclusion and foreign housing deduction (IRC § 911(b)(1)(B)(ii)).
Q-37. Are pay differentials taxable as wages?
A-37. Pay differentials are incentives for employment and are taxable. These allowances are designed to recruit employees to posts where living conditions may be difficult or dangerous. Post Hardship Differential, Danger Pay, and Difficult-to-Staff Incentive Differential (also known as Service-Needs Differential) are all considered recruitment and retention allowances.
Q-38. Are foreign area allowances taxable?
A-38. Foreign area allowances are a group of allowances that are intended to be reimbursements for goods and services that are more expensive in a foreign area than in Washington D.C., and they tend to be non-taxable. We typically refer to the Department of State Standard Regulations (DSSR) regarding taxability.
Foreign area allowance include certain repairs to a leased home; education of dependents in special situations; motor vehicle shipment; separate maintenance for dependents; temporary quarters; and transportation for medical treatment.
Typically a “foreign area" means any area situated outside the United States, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the possessions of the United States. With respect to teachers "foreign area" also includes the Midway Islands.
Q-39. I received a cost living allowance while I was in a foreign area. Is it taxable?
A-39. The cost-of-living allowance is also known as “Post Allowance,” and is paid outside the continental U.S. or in Alaska and it is non-taxable. The post allowance is a balancing factor designed to permit employees to spend the same portion of their basic compensation for current living as they would in Washington, D.C., without incurring a reduction in their standard of living because of higher costs of goods and services at the post.
Q-40. I received a per diem for meals and incidental expenses and lodging expenses while I was on a temporary assignment for 8 months in Germany. Are those payments taxable?
A-40. Since the assignment is one year or less, we consider it temporary. All expense reimbursements that meet the accountable plan rules, meaning the reimbursements are for substantiated ordinary and necessary expenses, and you return any excess. If the assignment is for greater than a year, it is considered indefinite, and all reimbursement of expenses is taxable.
Q-41. Is the reimbursement of moving and storage of household goods while in a foreign area taxable?
A-41. A significant difference between the reimbursement of a domestic relocation and a foreign relocation is that the cost of storing household goods and personal effects is non-taxable. Typically, domestic relocation storage of household goods allows the first 30 days storage to be tax-free. The following moving expenses are considered non-taxable for an international move:
- Moving household goods and personal effects from former home to new home.
- Cost of traveling including lodging.
- Moving household goods and personal effects to and from storage.
- Cost of storing household goods and personal effects while at new location.
International/Payments to Foreign Persons
Q-42. Are Forms 1042-S required to be filed when there was no tax withheld on the payment?
A-42. You must file a Form 1042-S even if you did not withhold tax because the income was exempt from tax under a U.S. tax treaty or the Code, including the exemption for income that is effectively connected with the conduct of a trade or business in the United States, or you released the tax withheld to the recipient.
Q-43. What type of withholding certificate can be filed by a foreign person to elect a reduced rate of tax withholding?
A-43. A vendor, who is a foreign person, must file the proper withholding certificate to be exempt from withholding or be entitled to a reduced rate of withholding. For example:
- Form 8233 - Exemption from Withholding on Compensation for Independent (& Certain Dependent) Personal Service of a Nonresident Alien Individual. An individual files Form 8233 with the withholding agent to claim a tax treaty exemption and/or personal exemption on any personal service income (i.e. sole proprietor). It must be completed accurately.
- W-8BEN - Beneficial Owner's Certificate of Foreign Status for U.S. Tax Withholding. This is used for non-personal service income or a recipient that is not an individual to claim a tax treaty exemption benefit. For example, a corporation would file this certificate to claim a tax treaty exemption from nonresident alien (NRA) withholding.
- W-8ECI - Foreign Person's Claim of Income Effectively Connected with the Conduct of a Trade or Business in US. This is used to assert that the payee is a Foreign Person; income is connected with a trade or business in the United States; and exempt from NRA withholding.
- W-8EXP - Foreign Organization's Certificate for United States Tax Withholding. This is used to assert Payee is a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or a government of a U.S. possession and exempt from withholding.
Q-44. Are rents/leases reportable to foreign corporations?
A-44. Rent paid to a foreign corporation on real property located in the United States is reportable on Form 1042-S and you must withhold tax of 30-percent on the income from real property located in the United States and held for the production of income, unless the foreign payee elects to treat this income as effectively connected with a U.S. trade or business. If the foreign payee chooses to treat this income as effectively connected, the payee must give you Form W-8ECI. This real property income includes royalties from mines, wells, or other natural deposits, as well as ordinary rents for the use of real property.