A08:
PROVIDE SIMPLIFIED EMPLOYER TAX FILING AND REPORTING

Imagine this: The year 2000 -- It's payday today, so as the payroll department manager, I pull up the employee payroll records on my computer. The employee wages and exemptions are the same for federal and state reports -- it doesn't matter what state. All the taxes and deductions are also displayed. Now the part that makes me feel powerful. I hit "enter" and the employee paychecks and deposits are generated, along with one combined report that satisfies both the federal and state quarterly reporting requirements. This report is sent electronically to the agencies along with my payments. It's easy!

On June 9, 1995, President Clinton endorsed the Simplified Tax and Wage Reporting System (STAWRS).¹ The STAWRS mission is to reduce the huge reporting burden on employers, while improving the efficiency and effectiveness of federal and state government revenue operations. The STAWRS program covers federal and state withholding taxes, employment tax, federal and state unemployment insurance, and wage information.

The Department of the Treasury, Internal Revenue Service (IRS), Department of Labor, and the Social Security Administration are partners in STAWRS. Treasury's Assistant Secretary for Management chairs its Executive Steering Committee. The program has three aims: Single Point Filing, Streamlined Customer Service, and Simplified Requirements. STAWRS is attacking core problems in the current system, but much remains to be done.

The federal tax, state tax, and unemployment insurance systems depend on accurate reporting by employers. All employers must withhold taxes from their employees' paychecks, keep specific wage-related records, report payroll information, and make periodic deposits of withheld money to a variety of federal and state agencies.

To do the job right, employers are required to understand and keep abreast of a bewildering array of wage and unemployment insurance rules, regulations, tax forms, filing procedures, and payment requirements. Complex in a single state because federal and state requirements differ, the task is really daunting for multi-state employers who must keep current with federal rules and with perhaps as many as 50 different state wage and unemployment insurance requirements. Every employer also needs to know local, municipal, and territorial requirements. Small and start-up companies often go to outside payroll services because they cannot handle the task internally.

Government revenue agencies also struggle with the current system. Federal, state, and local governments often lack adequate resources to process the mountains of paper the system generates, issue timely regulations implementing legislative changes, provide customer assistance, and effectively manage compliance programs. Although many federal and state agencies require almost the same information, little has been done to share data. There have been both technical and legal barriers. State and federal governments store and process data differently. Legal issues involve disclosure practices having states act as agents for the federal government, and differing definitions of "wages." The STAWRS Program Office has formed partnerships with federal, state, and local revenue offices to improve tax operations in the three STAWRS focus areas.

Simplified Filing

The Oregon/STAWRS partnership was formed in May 1996, to reduce employers' quarterly tax filing burden. Oregon had already combined five wage reporting forms. Employers file one form, with the employment department, covering state income tax withholding, state unemployment tax, workers' compensation assessment, and two local transit taxes. Through that single form, called OQ, all the state agencies' requirements are met.

The Oregon/STAWRS partnership, with help from an employers advisory group, created a new form that combines the Oregon OQ with the federal Form 941, the quarterly federal tax return for employers. The new Form OQ/941 will be filed by employers with Oregon, and Oregon will send the IRS the data it needs. The new form will be evaluated in a larger survey of businesses in 1997. Remaining legal and procedural issues will be wrapped up in 1997 as well.

A Montana/STAWRS partnership also started work in 1996 on joint filing and is addressing the issue of differences in definitions among federal and state tax statutes and regulations.

Simplified Requirements

Employers usually need separate records for federal income tax withholding, state income tax withholding, federal unemployment taxes, state unemployment insurance contributions, and deductions for Social Security/Medicare taxes. Reports must be filed with government agencies at different times, in different formats, and on different forms. Among those forms there are subtle differences in definitions, so record keeping is confounded. And, of course, definitions differ from state to state.

STAWRS's goal is to develop a national, "harmonized" wage code that greatly reduces or eliminates the employer's burden of maintaining multiple wage and employment files. To reach that goal, legislators will need to change statutes, but a great deal can also be done by making changes to administrative procedures and regulations.

The first task is done. Approximately 25,000 federal and state elements of information were assessed to determine where harmonization would be possible. Based on that assessment, a draft Blueprint for a Harmonized Wage Code was written and presented at a September 1996, STAWRS Stakeholder Conference.² Feedback from conference attendees is being used to shape an action plan.

Simplified Form W-2 Reporting

Annually, employers are required to report individual employee wages, taxes withheld, and other information to both the Social Security Administration (SSA) and state tax agencies.

STAWRS partners, the IRS and the SSA, conducted a Single Point Filing initiative in which employers filed both federal and state wage and tax information -- Form W-2 and Form W-3 -- to one organization. In 1996, approximately 49 million records were filed with SSA for processing. SSA forwarded the data to the IRS for appending of additional data, sorting, and distribution to the 36 participating states.³

Electronic Data Interchange Pilot Project

The STAWRS Electronic Data Interchange (EDI) Pilot Project for Form W-2 is evaluating the technical feasibility and economic benefits of electronically transmitting Form W-2 Wage and Tax Statements to the SSA. There is no current process that uses EDI for W-2s. This STAWRS project has several phases.

Phase I was conducted with South Carolina and two private sector employers trading data in 1995. The test showed the technical feasibility of sending and receiving the data in proper formats.

Phase II of the pilot project, using tax year 1996 data, will estimate the market for various W-2 filing options, address open technical issues, run more tests, and include additional employers. Next year, Phase III will expand the test to include the Internet and more employers.

Single Point Electronic Filing of Forms

In July 1996, STAWRS conducted its first operational field test for single point electronic filing of Employer's Quarterly Federal Tax Return (Form 941) in an EDI format. The test covered single point electronic filing of Forms 941, state revenue returns for Minnesota, and state unemployment insurance returns for California and Texas. Four companies participated in the test. The July test identified some problems that were then solved and a successful filing was carried out in October 1996. More partners will be added this year.

NEED FOR CHANGE

Collectively, the STAWRS projects have made a significant start toward establishing a simplified reporting system. However, building on these accomplishments, more remains to be done.

The Oregon and Montana/STAWRS partnerships have shown that the potential exists to provide employers simplified filing of quarterly paper returns. However, this limited test needs to be expanded by the participation of more states with different legal requirements. This increased participation will help the states and STAWRS to refine the concepts and improve the processes.

Existing regulations and policies still require employers to maintain multiple data sets for federal and state tax withholding information. The initial work to develop the Harmonized Wage Code Blueprint showed where the different codes could be harmonized to reduce the employers' burden, but this work needs to be completed and tested.

Employers now submit paper reports of employee withholding separately to federal and state revenue officials. This double burden can be eliminated through the use of information technology, such as the Simplified Form W-2 Demonstration Projects initiated by STAWRS. Use of this concept, in which information is reported once and shared among tax offices, needs to be expanded on a wide basis by improving the combined processes and forming more partnerships with states and employers.

Even if reporting of withholding information once is expanded, employers are still required to submit paper reports. This manual process is inefficient and prone to providing inaccurate information, despite the best efforts of employers and revenue offices. Electronic data interchange offers the capability to submit electronic reports, and many businesses currently have active EDI programs, which can serve as the basis for automating this process.

Employers still need a single point where they can file their tax forms electronically. Even automating the processes will not relieve the burden of maintaining different data sets and submitting multiple reports. A system that lets employers electronically file one report, which is then shared among revenue agencies, needs to be developed, tested, and used. The different STAWRS components, when they are fully operational, will provide this system.

ACTIONS

The STAWRS Executive Steering Committee, with the support of the Government Information Technology Services (GITS) Board, should:

1. Simplify filing of employers' quarterly paper returns.

The STAWRS Executive Steering Committee should continue to work within the frameworks of the Oregon and Montana/STAWRS partnerships to simplify the filing of tax and wage reporting forms and should expand the STAWRS partnerships to five additional states by October 1998.

2. Simplify the requirements.

Using the Harmonized Wage Code Blueprint as a foundation, the STAWRS Executive Steering Committee should establish agreements with five state partners. These agreements should define the necessary regulatory and statutory changes needed to greatly reduce the multiple wage and employment data sets. Recommended changes should be reported by October 1998.

3. Simplify Form W-2 reporting.

In cooperation with the SSA, IRS should complete the evaluation of the Simplified Form W-2 Demonstration Projects by preparing and documenting recommendations on the feasibility and merits of this single wage reporting concept. Recommendations should be forwarded to agency heads by August 1997.

4. Increase cost effective electronic transmission of Forms W-2.

The STAWRS Executive Steering Committee and the Electronic Data Interchange Pilot Project participants should continue to conduct phases II and III of the project. By February 1998, ten additional employers should be recruited to take part in the project to further the goal of providing cost-effective electronic transmission of Form W-2 Wage and Tax Statements.

5. Provide for single point electronic filing of forms.

The STAWRS Executive Steering Committee should continue to expand the single point electronic filing tests and seek to institutionalize the concept of federal and state tax returns. The GITS Board should provide coordination and support as needed. Single Point Filing options should be made available to employers by Tax Year 2000.

ENDNOTES

^1. White House press release: "President Clinton Reduces Burden on Small Business," announced the creation of STAWRS, June 9, 1995.

^2. Technical Review Session, Harmonized Wage Code, Receive/Evaluate/Summarize Responses from Stakeholders, September 9, 1996.

^3. State participants are currently providing benefits received from this initiative. Assessment of the economic justification for full implementation is being conducted.

Cross References To Other NPR Accompanying Reports

Department of the Treasury, TRE05: Simplify Employer Wage Reporting.