[ Audit System Manual- TOC ] [ Ch 1 - Introduction ] [ Ch 2 - Preparing for an Audit ] [ Ch 3 - Conducting the Audit ] [ Ch 4 - Completing the Audit Forms and Schedules ] [ Ch 5 - Audit System Screens ] [ Ch 6 - Miscellaneous ] [ Ch 7 - USDOL - Tax Performance System ] [ Ch 8 - Computer Fundamentals & Hardware ] [ Appendix ]
[ 6.1 - Blank Audit Forms ] [ 6.2 - Other Documents] [ 6.3 - Questions from Field Offices ]
Chapter 6: Miscellaneous	comments to: Tax Department

Ownership Verified (5 pts)

Business License
Professional License
Partnership Agreement
Corporate Charter
Income Tax Return - Year of return required

Form 1120 = Corporation
Form 1120S = S Corporation
Form 1040, Sch. C = Individual, business expenses
Form 1040, Sch. H = Individual, household
Form 1040, Sch. F = Individual, farm or ranch
Form 1041 = Estates and Trusts
Form 1065 = Partnership
Form 990 = Entity exempt from income (non-profit)

State Sales Tax License
Comptroller Franchise Tax Report
Secretary of State

Audit Scope Explained (5 pts)

Pre-Audit Discussion W/Owner, Partner, Officer (10 pts)

Name, Title, Phone Number

OR Designated Representative

Name, Title, and Phone Number of Person who Designated Representative

Existence of Business Verified (5 pts)

Conduct Audit on Premises
Personal visit
Business telephone Listing /Display Ad in Yellow Pages (list city of telephone book)
Visible Signs
Newspaper Ads, Magazine Ads, Internet Website
Licensing Agreements
Business Card
Review of books and records = domestic employers, farm & ranch employers, or trusts

Payroll Records Test (25 pts - Schedules 1 & 2)

Verify Payroll Posting System Used by Employer
Reconciliation of Employer’s Total Payroll with Total Wages Reported to TWC
Computation of Total Taxable Payroll
Reconciliation of the computed Total Taxable Payroll with Total Taxable Wages Reported to TWC

Search for Misclassified Wages (25 pts - Schedule 3)

Records of Contract Labor
Cash Disbursements
General Ledger
Miscellaneous Reports and Accounts

Post-Audit Conference (10 pts)

Name of Person Who Attended
Title
Phone

Adjustment Reports (10 pts)

C-1 or C-1AM = Corporation (always necessary)
C-5’s
C-7’s = Include C-7's outside the base period in work papers, even if not submitted for processing.
C-3’s and C-4’s required as a result of the audit

Monies Collected (or explanation on when will be paid) (5 pts)

Assembly Sequence
C-51	Schedule 2
Pre-Audit Letter	Schedule 3
C-102 Questionnaire	Audit Detail Summary Reports
Post-Audit Letter	Copies of C-1 or C-1AM, C-5, C-7, C-3, and C-4
Schedule 1	Other workpapers, exhibits, and documents to support audit results

6.2.2 How Certain Types of Payments are Treated for TUCA, FICA, And FUTA

TYPE

TUCA

FICA

FUTA

401 Plan:

Employee contributions

Taxable

Employer contributions
(may be exempt if plan meets req of 401(a) and is exempt from FICA)

Taxable

Reference:

Section 3306(r) of I.R.S. Code. The T.U.C.A. does not specifically exempt payment to a 401K Plan, therefore, such contribution is taxable.

Advanced Earned Income Credit:

Credit taken on an individual’s federal tax return. The employer may give an advance payment to the worker in anticipation of the worker using the credit on Form 1040.

Exempt

Automobile Usage:

Company car used by employee for business use

Exempt

Company car used by employee for personal use

Taxable

References:

Prentice-Hall Bulletin 2, 1-16-87, IRS Publication 463 Travel, Entertainment, Gift & Car Expenses & IRS, Section 6 Vehicle Provided by Your Employer; Publication 15-B Employer’s tax Guide to Fringe Benefits, Section 3, Lease Value Rule.

Bonuses:

(Push Money) paid by manufacturer to salesman to push sales

Exempt

Given to employee

Taxable

Cafeteria Plans:

Employer contributions used to fund benefits which are exempt under 201.082(2) (**insurance, medical/hospital, retirement, death benefits, sick pay)

Exempt

**See Explanation

Employer contributions, other

Taxable

Employee contributions – (benefits by salary reduction from employees base pay)

Taxable

Reference: Sec. 125 of the I.R.S. Code that deals with cafeteria plans is specifically exempted from F.I.C.A. and F.U.T.A. (Sec. 3306(b)(5)(G). Elective employee contributions into a Section 125(a) plan treated as deductions from gross income, are employee contributions and are wages for purposes of the TUCA. If all contributions to the plan are deducted from the employee’s salary, then all of the contributions are taxable.

TYPE

TUCA

FICA

FUTA

Commissions:

Paid by employer to employee

Taxable

Paid commissions to insurance agents or solicitors or direct sellers or real estate brokers, or real estate salesman compensated solely by commissions

Exempt

Reference: T.U.C.A. 201.070, 201.071 and 201.072 or I.R.S. (Circular E)

Director’s Fees:

If the only remuneration is directors’ fees plus incidental travel allowance, meals and/or lodging furnished while attending Director’s meetings, then

Director’s Fees

Exempt

If director also performs services for company and is paid wages and directors’ fees and a single accounting record is maintained

Director’s Fees

Taxable

Salary

Taxable

If separate accounting records are maintained for wages and directors’ fees

Directors’ Fees

Taxable

Exempt

Salary

Taxable

Reference:

T.U.C.A. 201.076(a): if service performed during one-half or more of pay period constitutes employment, all services shall be considered employment (since in most circumstances, wages are for continuous service, it is unlikely that directors’ meetings would represent the major service).

A director is not an employee under the federal payroll tax laws and most of the state unemployment insurance laws. But, if the director also works for the company and draws a salary, his or her salary is subject to social security, unemployment tax, and withholding of income taxes.

Since a corporate director’s fees are self-employment income, the director computes and pays the self-employment tax. Keep separate records of taxable and non-taxable income people draw. If you do this, you only pay social security tax on what’s paid as salary. Otherwise you may have to pay tax on the entire amount when you cannot show which payments are exempt [IRS Reg. §31.6001-2(a).

TYPE

TUCA

FICA

FUTA

Dismissal or Severance Pay:

Payment legally required to be made

Taxable

Voluntary dismissal payment

Taxable

Payments made by employer to employee are "wages" regardless of whether the employer is legally bound by contract, statute, or otherwise required to make the payment

Reference: I.R.S. (Circular E)

Election Poll Workers:

Election judges, associate judges, voting clerks and other "temporary" personnel who are employed directly with the primary or runoff elections

Exempt

Reference: Tax Letter Number 6-79

Expense Reimbursement:

Nonaccountable Plan

Taxable

Accountable Plan

Exempt

* Business Connection
* Substantiation of Expense
* Amounts in excess of allowable expenses are returned to employer

Reference: TWC Rule 815.5

I.R.C. reg §31.3401(a) – 1(b)(2)
Temp reg. §162-2T(d), eff. 7-1-90

Insurance Premium:

Payments by employer for group life insurance in excess of $50,000.

Exempt

Taxable

Exempt

T.U.C.A. exempts total group life insurance payments

Exempt

Reference: T.U.C.A. 201.082(2) – I.R.S. Circular E

Jury Pay:

Payments to Employee of Difference Between Regular Pay and Jury Pay

Taxable

TYPE

TUCA

FICA

FUTA

Leave Sharing:

Exempt

Taxable

Under an employer plan, employees who suffer medical emergencies and who have exhausted their paid leave, may qualify as recipients of leave surrendered by employees or deposited in an employer-sponsored leave bank. The plan defines medical emergencies as medical conditions of employees or members of their families that will require the employees’ prolonged absences and will result in a substantial loss of income. Potential recipients must apply to the employer describing the emergencies. After the applications are approved and the employees have exhausted all paid leave, they are eligible to receive additional paid leave at their normal rates of compensation. Restrictions on the amount of leave that may be surrendered or deposited in the leave bank and rules regarding the manner in which leave will be granted are provided in the plan. Held: The amounts paid to recipients must be included in their gross income and are considered wages for purposes of Federal income and social security taxes withholding and for payment of Federal unemployment tax. Employees who donate or surrender their time incur no deductible expense or loss either in surrendering or depositing their time, or its use by recipients.

Reference: T.U.C.A. 201.082(2) I.R.S. Rev. Rul. 90-29

Lump-Sum Payment under a "SUB" plan:

Taxable

Supplemental Unemployment Compensation benefit payments, made after 1-1-91 under a plan established by a private employer, must be linked to the receipt of state unemployment benefits and must not be received in a lump sum to be excluded from wages for F.I.C.A. and F.U.T.A. The IRS concluded that lump sum payments are not sufficiently tied to state unemployment benefits to qualify for an exclusion.

Reference: TWC Tax Department would support this logic. IRS Revenue Ruling 90-72

Meals or Lodging Furnished Employee by Employer: (Tax Ltr. 16-81)

Taxable

See Explanation

Meals are exempt for F.I.C.A. & F.U.T.A. Section 3306(b)(14) if furnished for convenience of the employer and are furnished on employers’ premises.

Lodging is exempt for F.I.C.A. & F.U.T.A. Section 3306(b)(14) if furnished for convenience of the employer and on the business premises of employer and employee must accept lodging as a condition of employment.

Moving Expenses:

Reimbursement by employer for moving expenses if it is reasonable to believe the expenses are deductible from gross income by employee

Exempt

Otherwise (i.e., preliminary trip, loss on sale, sales exp., connect utilities, new license & transfers, temp meal, temp lodging)

Taxable

Reference: Section 3306(b)(9) of I.R.S. Code

TYPE

TUCA

FICA

FUTA

On-call pay (payments to employee for time they are available to work if called):

Taxable

Payment to Partners (guaranteed or otherwise, are not "wages"):

Exempt

Exception: If the partnership elects to be taxed as a corporation, they would owe FUTA taxes on amounts paid to the partners, which would be considered corporate officers for FUTA purposes. Therefore these wages are subject under TUCA (201.025) in order for the employer to be eligible for the FUTA offset credit.

Payment Under Guaranteed Annual Wage or Work Plan:

Taxable

Per Diem:

Reimbursement of travel allowances (meals, lodging, mileage)

(See "Expense Reimbursement")

Expenses incurred or per diem amount reimbursed is not greater than the allowable U.S. Government rate for the area traveled

Exempt

Reimbursed expenses or per diem amount in the excess U.S. Government rate for the area traveled

Taxable

Prizes and awards (not a bonus or gift):

Taxable

(See Bonuses)

Royalties:

Paid to employee

Exempt

Paid to independent contractor

Exempt

School Superintendents:

Exempt

Reference: exempt under Subsection 201.063(a)(1)(E) of the T.U.C.A. (affirmed by Appeal Number 81-4204-CA-0981).

Service performed in the employ of a State or Political Subdivision is exempt from F.U.T.A. Section 3306(c)(7)

Sick pay (under a plan):

Under a plan as defined by IRS Publication 952, Sick Pay Reporting

Exempt

Payments based on a method allowing accrual of paid time off for illness are taxable

Taxable

TYPE

TUCA

FICA

FUTA

Social Security Tax, Payments by Employer:

Exempt

Ref. 1

Reference: exempt under 201.082(6) of the T.U.C.A.

Reference 1: exempt from definition of wages Section 3306(b)(6)(A) of I.R.S. Code with respect to remuneration paid to an employee for domestic service in a private home or for agricultural labor.

Supplemental Payments - difference between workers comp and employee’s salary.

Taxable

Supplemental Unemployment Benefit Plans - Auto type plan (contribution by employer) -employee draws from a plan as well as state benefits.

Exempt