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FL Reemployment Tax: An Employer's Perspective, Part II

An Employer’s Perspective: Florida “Reemployment Tax” aka, Unemployment Tax, Part II

By James F. McAuley, Esq. BCS.

Introduction

Part I of this article focused on how an employer can distinguish between employees and independent contractors. Part II initially elaborates on the elements used under Florida common law for employment and then shifts focus to analyze key statutory issues surrounding wages and reporting as a Florida employer.

Breaking down the elements used in common law for an employment relationship

Florida statutes define an employment relationship through reference to statutory definitions (sec. 443.036 Fla. Stat.) and for individuals common law rules. See: sec. 443.1216(1)(a) 2. F.S. Under common law rules, the elements of employment are often described as: 1) the extent of control over the work; (2) whether the person employed is engaged in a distinct occupation or business; (3) the kind of occupation involved, and whether the work is done under the direction of the employer or by a specialist without supervision; (4) the skill required in the particular occupation; (5) whether the employer supplies the instrumentalities, tools, and the place of work; (6) the length of time the person is employed; and (7) whether the work is part of the employer’s regular business. A discussion of these common law elements follows:

Control over work.

When the employer decides how the work should be done, the worker is an employee. Likewise, the consensus under common law is that when the employer decides what the worker will do and how it should be accomplished the worker is an employee. We know, in contrast, that an independent contractor decides how to accomplish the job without the control imposed in an employment relationship.

Occupation and skill needed for the work

Generally, the common law indicates that the greater the skill required for carrying out the work, the more likely the worker is an independent contractor. However, an officer of a corporation performing services for the corporation is considered an employee. An undertaking for manual labor with little education or skill necessary to perform the work is indicia of an employment relationship. In contrast, hiring of a doctor or lawyer or other professionally licensed individual is much more likely to be considered the hiring of an independent contractor because of the level of skill. Another key is whether the work done is distinct from the employer’s normal business. If it not the same undertaking as the normal business activity and involves a particular skill or occupational status, the worker is much more likely viewed as an independent contractor.

Instrumentalities of work and length of working relationship

An employee is generally not expected to supply his own tools. In contrast, Independent contractors are generally expected to provide all necessary tools and materials to do the job. Generally, the longer and more continuous the work and the more exclusive the work relationship, the more likely the agreement will be viewed as an employment relationship.

Statutory designated employers and statutorily excluded workers

The term “employing unit “is defined in section 443.1215, F.S. and includes “employing units” for which services in employment, as defined in section 443. 1216, F.S. are met. Certain types of labor are statutorily excluded such as employees of a church or association of churches or organizations organized for religious purposes. Also excluded are non-resident aliens who are temporarily present in the U.S. as non-immigrants under U.S. immigration laws. Another example of excluded wages is those paid for “services performed on a fishing vessel that weighs ten net tons or less”. As one might expect compensation to someone under 18 who delivers papers (“the paper boy”) are excluded as are services performed for the government by elected officials, members of the legislature and by members of the judiciary. Also, those serving on a temporary basis in cases of floods and storms and similar emergencies are excluded. See: Section 443.1216, F.S. In sum, what is excluded is generally not intuitive and therefore must be evaluated through statutory evaluation.

ISSUES THAT FOLLOW FROM THE EXISTENCE OF AN EMPLOYMENT CONTRACT:

Registration to pay Reemployment tax:

The Florida Business Tax Application, Form DR-1 is to be used. Detailed instructions concerning registration are downloadable as a pdf and available with this article. Registration should be done before beginning business activity to avoid possible penalties. DOR Form RT-6 is the Quarterly Report used calculating payment of Reemployment tax, a sample form is included with this article. Instructions for completion of the Quarterly Report are also available.

Understanding calculation of reportable wages is important

Wages in Florida are defined in Section 443.1217 Florida Statutes. Wages are very broadly defined and includes “remuneration (payment, salary, or compensation) for employment, including commissions, bonuses, back pay awards, and the cash value of all remuneration paid in any medium other than cash.” Not all earnings are reportable wages under Florida law. The tax is imposed on the first $7,000 of wages earned for the year. Dollars earned by employees above $7000.00 in wages paid, per employee, are statutorily excluded wages and therefore not subject to Florida Reemployment tax. Generally, tips are wages when received while performing service in employment. However, payments made under a workers' compensation law are not wages. sec. 443.1217(2)(b)1 F.S. Accident and health benefits are excluded from wages. See: sec. 443.1217(2)(b) Florida Statutes (F.S.) Certain commissions are not wages. Cash value of lodging or other payments in kind are also considered wages. See rule 73B-10.022 (3) F.A.C. Payments made to corporate officers are treated as wages for Reemployment tax. Compensation, dividends and distributions made to a shareholder- employee of a Subchapter S corporation are “Wages”, as are bonuses and perks such as club memberships. Notably, a pre-tax contribution to a 401 (k) is not considered wages subject to tax unless the employers administers the trust fund. Close evaluation of includable wages is necessary. Generally, review of section 443.1217, F.S., and rule 73B-10.022 F.A.C. is advised.

Benefit experience of each employer and its benefit ratio directly impact tax rates

Not all tax rates for employers are the same. The rates are set based upon benefit experience. The term “Benefits” is defined in section 443.036 (8), F.S., to mean the money payable to an individual for his or her unemployment. Employers whose employment record demonstrates low benefit claims/ payments from the Reemployment Trust Fund will maintain a lower contribution rate. Florida law specifies that the term “contributions” means “… all indebtedness to the tax collection service provider, including, but not limited to, interest, penalty, collection fee, and service fee.” Sec. 443.131(3), F.S.

The initial rate of contribution by an employer is set statutorily at 2.7 percent (.0270%) with the maximum rate set at 5.4%. See sec. 443.131 (2) and (3) F.S. The initial or minimum rate is statutorily fixed until the employer has reported for 10 quarters. Florida law explicitly authorizes DOR to evaluate the employer’s employment record in terms of “benefit” history in adjusting rates. The contributions provision states in part: “The tax collection service provider shall assign a variation from the standard rate of contributions for each calendar year to each eligible employer.” See sec. 443.131 (3)(e)2a. F.S. Hence, DOR is statutorily authorized to analyze and assign an employer specific tax rate using benefit history. This is somewhat unusual (relative to other types of state taxes) in that most tax rates, such as sales tax, are fixed and do not fluctuate between individual taxpayers.

The employer’s account will be rated by dividing the total benefits charged to the account by the taxable payroll reported for the first 7 of the last 9 quarters immediately preceding the quarter for which the rate is effective. Put another way, rates will vary based upon historical benefit experience, as identified in section 443.131(3) Fla. Stat. Each employer’s contribution rate will also be based upon a benefit ratio. An employer's benefit ratio is the quotient obtained by dividing the total benefits charged to the employer's employment record during the 3-year period ending June 30 of the preceding calendar year by the total of the employer's annual payroll for the 3-year period ending June 30 of the preceding calendar year. Sec. 443.131 (3)(b), F.S.

Government entities and Non-profit organizations

Public employers subject to Reemployment tax are entitled to participate through a Reimbursement method. This works like the phrase would suggest, e.g. reimbursement of the Fund for claims made by employees against it. Public employer defined in sec. 443.036(35), F.S. A public employer can elect to use the Tax Rate method. See Form RT-28G. Employees of nonprofit organizations (such as religious, charitable, scientific, literary, or education groups) that employ four or more workers for any portion of a day in 20 different calendar weeks during the current or preceding calendar year are subject to Reemployment tax. Florida law allows an election by Nonprofit employers just as described above for Public employers.

A word of caution about common payrolls by corporate employers

DOR requires that each employer must report only their own payroll, unless they are an employee leasing company (sec. 443.036(18) F.S.) or have been approved as a Common Paymaster. A Common Paymaster is applicable to certain situations involving LLC’s or corporations that are members of a “controlled group of corporations” under IRC s. 1563 and certain other limited circumstances. All corporations must be employers and related corporations. See: sec. 443.1216(1)(d)2, F.S. The DOR Form for application and qualification is RTS-70. Also applicable is the Office of Economic Opportunity (DEO formally known as Agency for Workforce Innovation (AWI) rule 73B-10.037. F.A.C. The concept of “Common Paymaster” is distinguished by DOR from the concept of” Payrolling”. The latter is a term described as the consolidation for tax purposes of payrolls by two or more employers with one employer reporting for both employers when none of the employers is an employee leasing company nor has been approved as a “common paymaster” by DBPR. “Payrolling” is prohibited according to DOR. See: rule 73B-10.022 (7) F.A.C.

How can a merger effect an employer’s Reemployment tax rates?

A consolidation or merger of corporate entities can result in an unfavorable attribution of higher tax rates of the successor corporate entity when common management is involved. One important and overlooked factor is the “transfer of employment records” under Florida law. See: sec. 443.131 (3)(f), F.S. As described therein: “…. two or more employers who are parties to a transfer of business or the subject of a merger, consolidation, or other form of reorganization, effecting a change in legal identity or form, are deemed a single employer and are considered to be one employer with a continuous employment record if the tax collection service provider finds that the successor employer continues to carry on the employing enterprises of all of the predecessor employers and that the successor employer has paid all contributions required of and due from all of the predecessor employers. “Florida law then specifies that “ … If an employer transfers its trade or business, or a portion thereof, to another employer and, at the time of the transfer, there is any common ownership, management, or control of the two employers, the unemployment experience attributable to the transferred trade or business shall be transferred to the employer to whom the business is so transferred.” See: Fla. Stat. Ann. § 443.131 (3)(g). In simpler terms, a successor corporate entity or corporation which shares common ownership or management may inherit the predecessor’s tax rate for Reemployment tax reporting. A real-life example of this circumstance playing out is found in U.S. Blood Bank Inc. v. Agency for Workforce Innovation, 85 So.3d 1139 (Fla.3rd DCA (2012). The U.S. Blood Bank case involved the transfer of 66 employees between two corporations with common management. The 3RD DCA upheld the determination of an assessment of tax because of the presence of common management under an AWI rule. From this determination of common management DOR made an assessment based upon the attribution of the predecessor employer’s tax rate to the successor corporation. The important take away from this is the very real danger of attribution of potentially much higher tax rate to a successor corporation in reporting and paying for employees under the Reemployment tax statutes in Florida.

Take Aways:

  1. If you are an employer in Florida and have quarterly payroll of $1500 or more in a calendar year or if you are liable for under the Federal Unemployment Tax Act (FUTA) you meet the Florida statutory criteria for liability for Reemployment Tax. This is done via Form RT-6.
  2. Generally, employers who meet the definition of an employing unit are subject to Chapter 443, Florida Statutes (2003), and are required to contribute to the Reemployment Trust Fund. See: sec. 443.1215, F.S.
  3. DEO has promulgated Rule 73B-10.025, F.A.C., entitled:” Reports Required of Liable Employers.” Timing of paying tax is also always important. These reports are required on a calendar year quarterly basis. Reemployment tax reports along with related payments must be submitted by the end of the month following the calendar quarter for which the report is due. Form RT-6 is the designation for it.
  4. The initial rate of contribution by an employer is set statutorily at 2.7 percent with the maximum rate set at 5.4%.
  5. Reemployment tax is based upon wages of employees. Wages are defined in sec. 443.1217 Florida Statutes. Wages are very broadly defined and includes “remuneration (payment, salary, or compensation) for employment, including commissions, bonuses, back pay awards, and the cash value of all remuneration paid in any medium other than cash.” However, a statutory ceiling exists for reportable taxable wages. The cap is currently $7,000.00 per employee, per year.
  6. DOR requires that each employer must report only their own payroll, unless they are an employee leasing company or have been approved as a Common Paymaster. A Common Paymaster is applicable to certain situations involving LLC’s or corporations that are members of a “controlled group of corporations” under IRC s. 1563 and certain other limited circumstances. “Payrolling,” the consolidation for tax purposes of payrolls by two or more, usually related, employers, is not authorized by law. Payrolling is prohibited.
  7. A consolidation or merger of corporate entities can result in an unfavorable attribution of higher tax rates of the successor corporate entity when common management is involved.
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About the Author: James (Jim) F. McAuley is an experienced attorney, joining the firm in 2015 after an exemplary career with the state of Florida. Holding the Florida Bar board certification as a specialist in State and Federal Administrative Law, Mr. McAuley represented the State of Florida for more than 20 years in the area of state and local taxation and administrative law with an emphasis on litigation. Mr. McAuley is Board Certified by the Florida Bar in the area of State and Federal Government Administrative Practice. Mr. McAuley holds the highest rating given to lawyers by Martindale Hubbell (Av) and has maintained that rating for more than 15 years. He is also a published legal author in both State taxation and Administrative law. He is an alumni & author of the Nova Law Review (Fall 2007). You can read more about Mr. McAuley in his firm bio.

About the Firm: Formed in 1991, the Law Offices of Moffa, Sutton, & Donnini, P.A. is a law firm with a primary practice area of Florida tax controversy. With offices in Fort Lauderdale, Tampa, and Tallahassee, the firm defends business owners against the Florida Department of Revenue from the initial audit notice through administrative protest and litigation as well as collections, revocations, and criminal investigations.

AUTHORITY

Sec. 443.131, F.S. (Contributions)

Sec. 443.036, F.S. (Definitions)

Sec. 443.1215, F.S. (Employers)

Sec. 443.1216, F.S. (Employment)

Sec. 443.1217, F.S. (Wages)

Rule 73B-10.022, F.A.C. (Definitions)

Rule 73B-10.025, F.A.C. (Reports Required of Liable Employers)

Rule 73B-10.037, F.A.C. (Public Use Forms)

U.S. Blood Bank Inc. v. Agency for Workforce Innovation, 85 So.3d 1139 (Fla.3rd DCA (2012)

Florida Quarterly Report RT-6

Florida Form DR-1

ADDITIONAL RESOURCES

An Employer’s Perspective: Florida “Reemployment Tax, aka, Unemployment Tax, Part I, published March 1, 2018, by James F. McAuley, Esq., BCS

Tax Assessment Unenforceable Under Florida Law?, published April 4, 2017, by James F. McAuley, Esq, BCS

Debtor’s Prisons and Double Jeopardy in State Tax Prosecutions, published April 19, 2017, by Amanda Levine, Esq.

Florida Sales Tax Audit Help, published July 14, 2013, by James Sutton, CPA, Esq.

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