MEMORANDUM NO. 99-28
 

TO:	Chief Fiscal Officers/ Vice Chancellors
FROM:	Edward Renfrow State Controller
SUBJECT:	Year-end Tax Update

The following are issues that may impact your agency or university:
 

I.	Pre-tax Parking Benefit
II.	Educational Expenses
III.	Moving Expense Reporting Changes
IV.	Exemption From North Carolina Income Tax Withholding for Severance Wages
V.	NCAS 1998 1099 Processing
VI.	Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business

I.  Pre-tax Parking Benefit
The 1997 Taxpayer Relief Act amended Internal Revenue Code Section 132(f)(4) to allow the parking expenses of electing employees to be treated as a pre-tax salary reduction item regardless of whether it is payroll deducted or directly reimbursed to the employee. This tax treatment is similar to the way Section 125 cafeteria benefits are presently handled under the N.C. Flex Plan. The change will allow employees presently paying to park and the State, as employer, to save money on payroll taxes (FICA).

We will notify Central Payroll agencies and universities on what must be done to take advantage of this benefit as soon as possible. Some of the state university payroll systems are beginning to offer this benefit now or will do so in the near future. While we are certain this benefit can be offered there are several administrative and technical questions that must be answered before we can be confident this fringe benefit plan will meet be the requirements of the IRS and be administratively feasible for the State.


II.  Educational Expenses
Code Section 127 excludes up to $5,250 per year for employer-provided non-job related undergraduate educational assistance. For 1998, reimbursement of non-job related graduate level education is generally taxable income and must be run through the payroll system. Job-related graduate level assistance must maintain or improve skills required for the employee’s current job or satisfies certain express employer-imposed conditions for continuing employment to meet Code section 132(d) requirement as a non-taxable working condition fringe.

1998 taxable educational assistance (graduate level) should be entered into Central Payroll no later than December 4, 1998. FICA and income taxes must be withheld from taxable educational assistance. These payments are exempt from State retirement.


III.  Moving Expense Reporting Changes
Beginning with 1998 personal income tax returns filed in 1999, employees will report on Form 3903, Moving Expenses only the qualified moving expenses paid directly by them, and they will reduce these expenses by the amounts reimbursed by their employers and reported on Form W-2, in Box 13. See OSC Memo 98-40, dated March 9, 1998, for discussion of qualified v. non-qualified moving expenses.

Form 4782, Employee Moving Expense Information has been eliminated for employer payments and reimbursements made during 1998. However, employers may supply similar information to employees if they find it helpful to do so.

1998 Form W-2 reporting requirements are as follows:

-do not report qualified moving expenses you pay directly to a third party on behalf of an employee;
-report in box 13, code P, qualified moving expenses you have directly reimbursed to the employee;
-report nonqualified moving expenses, whether paid to a third party or directly to the employee, as wages in boxes 1, 3, and 5. These amounts are subject to federal income tax withholding and social security and Medicare taxes.

Central Payroll used OSC Form 325 to accumulate the non-taxable moving expenses you have directly reimbursed to the employee. Taxable moving expenses are entered directly into Central Payroll with FICA and income taxes withheld. There is no withholding of State retirement on moving expense reimbursements.

Effective January 1, 1998, N.C. income tax should not have been withheld from the first $35,000 in severance wages, including severance salary wage continuation payments made during a reduction in force. In addition to not withholding N.C. income tax from these payments, the employees Form W-2, N.C. Wage Block should be net of the qualified severance wage. For example:

V. NCAS 1998 1099 Processing

OSC-Financial Systems Division will issue detailed instructions on the schedule that will be observed for 1998 calendar year Form 1099 processing. However, the following are some of the general procedures that will be observed by NCAS agencies.

For all NCAS agencies, amounts paid through the AP System will be reported on a system generated 1099-MISC or 1099-G form. Agencies no longer have the option of preparing paper 1099 forms if the number of forms do not exceed 250. This year, like last, will have all NCAS information returns transmitted under the transmitter control code of the OSC regardless of the number of forms. Therefore, the processing dates must be strictly followed and all information in the NCAS must be corrected on-line prior to processing. Since these functions are now centralized it is important that the reports be reviewed and data corrected prior to the deadlines so that the files may be created.

Some agencies will need to prepare NC1099PS forms for withheld NC income tax. These forms will not be system generated, which means they will have to be hand-typed. Forms may be obtained from the NC Department of Revenue or you may call (919)981-5488 and have forms sent inter-office to you. In addition to the preparation of the NC1099PS’s, you will also need to prepare the NC-3, Annual Reconciliation which requires that copies of the NC1099PS be attached to the NC-3.

For individuals, you may use an IRS Form 1099 MISC, in lieu of the NC1099PS. However, you will still need to handtype these forms and attach them with any NC1099PS forms to the NC-3. After reviewing the volume of vendors that were subject to NC income tax withholding, we did not feel that we could justify the expense of programming the system to accommodate this reporting need.

The OSC has ordered forms for W-2 and 1099 processing. The order was based on prior year usage. The 1099-MISC, -G, and INT forms are two-part, selfmailer, peel-a-part forms that are acceptable for magnetic reporting. We have also ordered a quantity of 4-part 1099 MISC forms that are suitable for corrections, reissuances, and off-line reporting.

Should your agency need 1099 forms for off-line reporting, it is your agency’s responsibility to obtain its own forms unless prior arraignments have been made with the OSC to place your order. For agencies placing their own orders, the 1998 State contract for W-2 and 1099 forms is with Safeguard Business Systems in Wilmington. They can be reached at (800)438-5507 or on-line at sfgrd@aol.com.

VI. Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business

The general rule for reporting cash transactions is that any person engaged in a trade or business who, in the course of that trade or business receives more than $10,000 in cash in one transaction or two or more related transactions, must file Form 8300. Form 8300 is also required for suspicious transactions.

There are a number of rules that describe the types of reportable transactions and what constitutes cash for purposes of this reporting requirement. While these rules have not changed in several years, the IRS North/South Carolina District has notified the OSC that these reporting rules do not apply to educational institutions that are a part of a State government. However, these rules do apply to institutions that are private Section 501(a) organizations (i.e. Duke, Elon College, etc.).

Therefore, if your university is presently preparing Form 8300 for cash tuition and fees received from students, you can cease preparing this Form. The Form 8300 filing requirement and other rules imposed upon the State’s court system are still applicable.

Should you have any questions or need further clarification concerning the above, please call Randy Thomas at (919) 981-5488. Thank you for your attention to these matters.

Click here to view Memorandum No. 990003 - North Carolina Accounting System (NCAS) 1998 1099 Processing.