Tax Administration: Employment Taxes and Small Business (Testimony,
11/08/96, GAO/T-GGD-97-21).

This testimony discusses the complexity of tax laws and the compliance
burden this complexity places on taxpayers. GAO focuses on employment
taxes--federal income tax withholding, federal Social Security and
Medicare taxes, federal unemployment tax, and state and local employment
taxes. GAO examines the impact that these employment tax laws and
regulations have on small businesses hiring their first employees and
all employees thereafter. GAO notes that employment tax compliance can
be particularly burdensome to employers because of multiple federal,
state, and local taxes. Each tax generally requires its own unique set
of rules and regulations, and each has its own exceptions to these rules
and regulations, making compliance difficult for employers. These
complexities were not a product of happenstance but rather reflect the
various trade-offs that have been made to address a host of tax policy
issues. These trade-offs include considerations as to the type of tax
imposed, the types of compensation to be socially encouraged, and the
fiscal requirements of individual government units. Respondents to an
earlier GAO survey described characteristics of especially troublesome
tax provisions--ambiguity, frequent changes, expiration clauses, and
layers of federal and state regulation. Because various employment tax
provisions include some or all of these same characteristics, they
present a microcosm of the most burdensome aspects of tax regulation
reported by those businesses.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD-97-21
     TITLE:  Tax Administration: Employment Taxes and Small Business
      DATE:  11/08/96
   SUBJECT:  Personal income taxes
             Social security taxes
             Unemployment insurance
             State taxes
             Federal taxes
             Voluntary compliance
             Non-government enterprises
             Tax law
             Tax administration
             Reporting requirements
IDENTIFIER:  Oregon
             New York (NY)
             Nebraska
             Ohio
             Old Age Survivors and Disability Insurance Program
             Medicare Program
             Oklahoma
             Maine
             Montana
             Maryland
             IRS Simplified Tax and Wage Reporting System Harmonized 
             Wage Code Blueprint
             IRS Simplified Tax and Wage Reporting System
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Before the National Commission on
Restructuring the Internal Revenue Service

For Release on Delivery
Expected at
10:00 a.m.  EDT
Friday
November 8, 1996

TAX ADMINISTRATION - EMPLOYMENT
TAXES AND SMALL BUSINESS

Statement of Lynda D.  Willis, Director, Tax Policy and
Administration Issues, General Government Division

GAO/T-GGD-97-21

GAO/GGD-97-21T


(268764)


Abbreviations
=============================================================== ABBREV

  FICA - Federal Insurance Contributions Act
  FUTA - Federal Unemployment Tax Act
  IRS - Internal Revenue Service
  SSA - Social Security Administration
  STAWRS - Simplified Tax and Wage Reporting System

TAX SYSTEM:  EMPLOYMENT TAXES AND
SMALL BUSINESS
==================================================== Chapter STATEMENT

Messrs.  Chairmen, Members of the Commission: 

We appreciate the opportunity to assist you with your review of the
complexity of tax laws and the compliance burden this complexity
places on taxpayers.  As an example of this complexity, we will be
discussing employment taxes--federal income tax withholding; federal
Social Security and Medicare taxes (FICA); federal unemployment tax
(FUTA); and, to a degree, state and local employment taxes.  We will
focus on the impact of these varied employment tax laws and
regulations on small businesses hiring their first employees and all
employees thereafter.  On the basis of our review of laws and
regulations and discussions with knowledgeable federal officials, we
identify some general issues relating to employment taxes that add
complexity to business tax regulation.  We also describe several
projects currently under way to alleviate employer compliance burden. 

Our statement today makes the following points: 

First, employment tax compliance can be particularly burdensome to
employers because of multiple federal, state, and local taxes.  Each
tax generally requires its own unique set of rules and regulations,
and each has its own exceptions to these rules and regulations,
thereby making compliance difficult for employers. 

Second, the complexities we discuss were not created by happenstance,
but rather reflect the various trade-offs that have been made to
address assorted tax policy issues.  These trade-offs include
considerations as to the type of tax imposed, the types of
compensation to be socially encouraged, and the fiscal requirements
of individual governmental units.  Consequently, they will not be
easy to simplify. 

Our office has previously done work to identify aspects of the tax
compliance burden on business.\1 Respondents to a survey conducted in
that study described characteristics of especially troublesome tax
provisions--ambiguity, frequent changes, expiration clauses, and
layers of federal and state regulation.  As varied employment tax
provisions include some or all of these same characteristics, they
present a microcosm of the most burdensome aspects of tax regulation
reported by those businesses. 


--------------------
\1 See Tax Systems:  Issues in Tax Compliance Burden
(GAO/T-GGD-96-100; Apr.  3, 1996). 


   BACKGROUND ON EMPLOYMENT TAXES
-------------------------------------------------- Chapter STATEMENT:1

When a business hires an employee, the business generally becomes
responsible for collecting and paying three federal taxes--the
personal income tax (withholding), FICA, and FUTA.  It also becomes
liable for state and local employment taxes:  in most states, these
include a state income tax and a state unemployment tax. 

For businesses, each tax presents, in turn, its own set of rules and
regulations with its own particular exceptions and unique regulatory
requirements.  For the small business owner just starting up, these
employment tax rules make compliance with the taxes both complex and
confusing. 

Many apparent inconsistencies among the various tax code provisions
can be explained, to some degree, by reference to an actual purpose
of the individual tax.  Broadly speaking, employment taxes can be
broken into two large groups--those whose primary purpose is to raise
general revenues (e.g., the federal income tax) and those that
provide social welfare insurance (e.g., FICA and FUTA). 

Accomplishing the different goals of the various taxes and the policy
trade-offs made in their design requires different regulatory
schemes.  For example, in the interest of fairness and to reflect the
ability of different individuals to pay, the federal income tax
applies progressive rates to employee wages, taxing higher wages more
than lower wages and exempting some lower wage earners from taxation. 
FUTA, on the other hand, ensures that employers contribute to state
unemployment funds by taxing employers at a flat rate for all wages
paid to employees (up to $7,000 per employee), but reducing the tax
owed by amounts paid to state unemployment insurance funds (down to a
federal tax rate of 0.8 percent). 

The differences among federal employment taxes are magnified when
state and local taxes are considered.  In fact, local political and
economic concerns can lead to variances among taxes with the same
general purposes.  As an example, even where states actually
"piggyback" on the federal income tax code--i.e., state taxable
income (or adjustable gross income) is based on federal taxable
income (or adjustable gross income)--there may be state exceptions to
the federal tax code.  Oregon, for instance, is a piggyback state;
however, it also has a constitutional requirement for a balanced
budget.  Therefore, before it can accept a federal tax provision, it
must scrutinize the individual provision for its likely effect on
state revenues and make its decision accordingly.  If the Oregon
state legislature believes that a federal provision may have an
adverse affect on the state budget, it can choose to reject the
provision as part of its state income tax code. 

The number and type of state and local tax assessments also vary.  In
New York City, for instance, an area with large amounts of commercial
activity, a business may face as many as eight federal, state, and
local employment taxes. 

Today we have brought along a chart to help illustrate the complexity
of current employment taxes.  Appendix III of this report is a copy
of this chart.  The chart is divided into two main parts:  the left
half of the chart covers federal taxes, and the other half covers
state and local taxes.  Along the bottom of the chart we list the
different types of employment taxes, and in the middle of the chart
we present the four major decision points an employer must come to
before making actual tax payments. 

For state taxes, we have used as our examples those applied in
Nebraska and Ohio.  Aside from the fact that these are the home
states of the Chairmen of this Commission, these states make a useful
comparison for our purposes.  Both states piggyback on federal income
taxes.  However, Nebraska has a primarily rural economy based mainly
on agriculture and livestock.  Ohio, on the other hand, has a more
urban economy that includes over five times the number of businesses
as Nebraska.  Ohio law provides for more extensive business
regulation than Nebraska--for example, three additional local
employment taxes:  city and village income taxes, school district
tax, and workers' compensation payroll tax. 


   EMPLOYMENT TAX COMPLIANCE
-------------------------------------------------- Chapter STATEMENT:2

Once an employer has made taxable wage payments to an employee, the
employer is most likely liable for three federal taxes: 

1.  Federal Income Tax Withholding:  The employer must collect the
estimated tax due from employees on the wages paid to them.  The
employer must deduct the proper amount of withholding from the
employee's paycheck and pay it to the federal government. 

2.  Federal Social Security and Medicare Taxes (required by the
Federal Insurance Contributions Act [FICA]):  FICA imposes taxes on
both the employer and the employee.  These taxes provide funds for
two of the federal government's principal Social Security programs,
Old-Age, Survivor's, and Disability Insurance (OASDI); and hospital
insurance (Medicare).  The employer must deduct the employee's
portion from the employee's paycheck and pay it to the federal
government, along with a matching amount imposed on the employer. 

3.  Federal Unemployment Tax (required by the Federal Unemployment
Tax Act [FUTA]):  FUTA imposes a tax on most employers.  This tax, in
conjunction with state unemployment taxes, supplies the funds to
provide benefits for unemployed persons under the state law.  The tax
is imposed solely on the employer and is not deducted from the
employee's wages. 

In complying with federal, state, and local employment-related taxes,
the business person must answer four questions: 

  -- Is the worker an "employee" covered by the tax? 

  -- Are the compensation payments to the employee "wages"? 

  -- What is the employer's employment tax liability? 

  -- What are the deposit and filing requirements? 

Our chart provides detail on these issues for federal taxes and
provides general information on the application of these issues to
state and local taxes.  We will discuss each issue in turn, with
examples of application on hypothetical small businesses. 


      IS THE WORKER AN "EMPLOYEE"
      COVERED BY THE TAX? 
------------------------------------------------ Chapter STATEMENT:2.1

Once a business decides to hire a worker, the first issue to be
considered is whether the worker is an employee for the purpose of
each different employment tax.  Major factors affecting this issue
for federal taxes are outlined in our chart in the lower left corner. 

The pivotal question on this point is whether the worker is an
employee or an "independent contractor." The standard "common law"
test finds the worker to be an employee if the employer controls both
what work is done and how it is performed.  The

Internal Revenue Service (IRS) augments this test with guidelines on
the factors that can affect the final determination. 

As a general rule, if the worker is an employee, the business is
responsible for deducting and paying employment taxes; if the worker
is an independent contractor, the business has no responsibility for
employment taxes.  However, as can be seen from our chart, there are
various federal exceptions to this general rule:  exceptions where
businesses hiring employees are not subject to federal employment
taxes; and exceptions where businesses hiring employees not meeting
the common law test are responsible for either FICA and FUTA, or only
FICA.  In effect, the first set of exceptions shifts the burden for
tax compliance from the employer to the employee, while the second
set puts the burden on the employer. 

These exceptions to the general rules can affect various types of
workers:  for example, ministers, news vendors under age 18, certain
family members, and homeworkers in a cottage industry.  Depending on
conditions (as stated specifically by statute), these workers may be
exempt from income tax withholding, FICA, FUTA, or some combination
of the three taxes. 

As an example, consider a jeweler, operating from her basement as a
small manufacturing sole proprietor.  Pressed by the coming holiday
season, the jeweler would like to hire a neighbor to make small metal
pieces, working in his own home with his own tools using material
furnished by the jeweler.  Even though this person--termed a
"homeworker" in the federal tax code--will most likely not be
considered an a common law employee, the jeweler will still find
herself liable for FICA taxes, both deducted from the homeworker's
salary and matched by her business, if she pays the neighbor more
than $100 in cash.  Under the federal tax law, however, she will not
be liable for FUTA taxes. 


      ARE THE COMPENSATION
      PAYMENTS "WAGES"? 
------------------------------------------------ Chapter STATEMENT:2.2

Having determined that the worker is an employee covered by
employment taxes, the next issue confronted by the employer is what
compensation payments are taxable as wages.  Compensation to an
employee may take many forms--pension plans, health and life
insurance plans, travel and business expenses, educational
assistance, to list a few examples--as well as straight cash hourly
wages. 

Arguably, the most difficult aspect of this issue is determining
whether the compensation paid to the employee fits the category of
nontaxable compensation.  Certain employee benefits, such as pension
plan contributions, health and life insurance, commuting passes, and
educational assistance, can all be taxable or nontaxable
compensation, depending upon whether such benefits are paid out and
administered in compliance with complex tax regulations.  Compliance
with such regulations requires the employer to pay meticulous
attention to detailed legal provisions. 

Because of the exceptions and preferences in the code, how an
employee is compensated can affect the tax liability of both the
employer and employee.  For example, suppose the owner of a beauty
salon hired a part-time hairstylist, a person who is also a full-time
undergraduate student at a local college.  To keep bookkeeping
simple, the new employer would most likely pay the hairstylist a cash
hourly wage.  However, she might also consider including "educational
assistance" as compensation to her employee as an offset to a higher
hourly rate.  Because a recent law (P.L.  104-188) reinstated a tax
break for employer-provided educational assistance, the employee may
be eligible for annual tax-free educational assistance up to $5,250. 
As the tax-free educational assistance payments are not subject to
FICA or FUTA, the payments would reduce the salon owner's overall
payroll costs, as well as reduce the employee's federal income tax
liability.  Including the educational assistance would, however, also
complicate the employer's recordkeeping. 


      WHAT IS THE EMPLOYER'S
      EMPLOYMENT TAX LIABILITY? 
------------------------------------------------ Chapter STATEMENT:2.3

Concluding that the worker is an employee with compensation payments
subject to employment taxes, the employer next must calculate his or
her periodic tax liability.  For the federal income tax, wages are
withheld for each payroll period, and the amount withheld is based on
the amount of wages and number of allowances claimed by the employee
on his or her federal Form W-4.  For FICA, the employer is to deduct
7.65 percent of the employee's wages (for wages up to $62,700; for
wages over that amount, the employer is to deduct 1.45 percent) for
the same payroll period and pay over the same amount as the business'
matching share.  FUTA is paid by the employer at a rate of 6.2
percent, but it can be reduced to as low as 0.8 percent with credit
for payments to state unemployment tax.  Similar calculations must be
made for state tax liabilities. 

All these taxes are calculated independently of one another.  For
example, suppose two partners in a small gift shop in Lincoln,
Nebraska, hire a part-time bookkeeper to work 10 hours a week at $10
an hour.  The bookkeeper is paid $200 in cash twice each month, is
single, and reports only 1 exemption on his Form W-4.  When the
partners consult the federal tax semimonthly withholding tables, they
will find that they do not owe any withholding of federal income
taxes for their employee.  However, they will still owe payments for
FICA, FUTA, Nebraska state income tax, and Nebraska state
unemployment tax. 

For FICA, they must collect 7.65 percent of the bookkeeper's salary;
they must also pay the same percentage as the employer's share.  For
FUTA, although they pay the bookkeeper less than $1,500 per quarter,
they still owe a flat percentage of 6.2 percent because the
bookkeeper works once a week for over 20 weeks per year.  However, as
they will also be liable for 3.5 percent in Nebraska unemployment tax
(as new employers), ultimately their federal FUTA liability will be
reduced by the amount of state payments.  As for state income tax,
the partners look to Nebraska withholding tables--this shows a tax
liability of $2.38 plus 3.65 percent of the excess wages over $179,
for a total of $3.15 for each semimonthly pay period. 


      WHAT ARE DEPOSIT AND FILING
      REQUIREMENTS? 
------------------------------------------------ Chapter STATEMENT:2.4

Finally, to remit the employment taxes owed, the employer must figure
out the deposit and filing requirements for each employment tax. 
Generally, employers must remit taxes at regular intervals, as the
year progresses.  They must also file statements on the amounts of
taxes deposited either annually or quarterly, depending on the tax. 
When the deposit and filing requirements for federal taxes are
combined with those for state tax assessments, these requirements can
become quite complicated. 

Consider, for instance, the requirements applicable to a hypothetical
construction company located in Cleveland, Ohio, doing most of its
work in the Cleveland area, with several of its six employees
residing in local counties where there are school district taxes.  To
fully comply with all federal and local requirements, the small
business owner must make at least 56 tax deposits (if the company
does business in other Ohio cities, the owner might have to make more
deposits), using five different federal, state, and local forms. 
These tax deposits cover the collection and payment of seven
different employment taxes. 

In addition to these tax deposits, the business must also file the
federal Form 941 quarterly, the federal Form 940 annually, the Ohio
Form IT-941 annually; send federal Form W-2 to each of his employees;
and file federal Forms W-3 and W-2 with both the Social Security
Administration (SSA) and the state of Ohio.  We set out the schedule
of deposit and filing requirements for this hypothetical Ohio company
in appendix I. 

In summary, Messrs.  Chairmen, hiring employees or even a single
employee is a critical decision for businesses in terms of their tax
liabilities and the complexities of the tax administration process
they face. 


   SOLUTIONS
-------------------------------------------------- Chapter STATEMENT:3

With laws and regulations so complicated, it is not surprising that
working out feasible solutions to reduce complexity has been
difficult, at best.  Attempts to simplify provisions, or to make
different tax code provisions consistent with each other, inevitably
involve trade-offs and compromises in the administration of the tax
programs.  For instance, to consider eliminating a statutory
exception in an unemployment tax to ensure consistency between that
tax and, say, the federal income tax, one would need to weigh the
trade-offs between the economic and political rationale for the
particular exception and the need for simplification of the tax
system.  Moreover, legislative change by itself--even to simplify
provisions--can add to the uncertainty of the regulations, leaving
business owners unable to rely on long-term operating procedures. 

Since 1988, various federal and state groups have been trying to
simplify aspects of the employment taxes.  The current federal
working group, STAWRS (Simplified Tax and Wage Reporting System), is
operating under a memorandum of understanding among the Department of
the Treasury, IRS, SSA, and the Department of Labor.  STAWRS is
addressing the employer burden through three broad categories of
initiatives:  (1) Streamlined Customer Service, (2) Single-Point
Filing, and (3) Simplified Requirements.  We discuss several of these
initiatives today, and we include a list of all initiatives in
appendix II. 

The first simplification project involved the processing of federal
Wage and Tax Statements, Form W-2s.  All states currently accept Form
W-2 as a record of the wage payments paid to employees; however, the
employer generally must send the Form W-2s to both the state and SSA. 
Until this project, which aims at reducing burden by showing the
feasibility of requiring the employer to send Form W-2s only to SSA,
SSA received both the federal and state W-2 data, but did nothing
with the state data.  Under the current STAWRS demonstration project,
SSA scans both federal and state data onto computer tapes,
transmitting the state data to participating states through IRS. 
Thirty-four states are participating in this project.  Three
states--Oklahoma, Maine, and Oregon--have dropped the requirement for
Form W-2 state filing altogether. 

Another initiative aims to show the feasibility of combining federal
and state quarterly employment tax reporting on one form filed at one
location within each state.  STAWRS is working with Oregon, which
just recently combined (at extra cost to the state) all five of its
quarterly forms into one form.  The federal government would like to
add data needed for its quarterly Form 941 to the combined Oregon
form.  The employer would then send only one quarterly form to the
state, which, in turn, would forward the federal information to IRS. 
Montana has recently become a partner with STAWRS on a similar
project. 

A third initiative is attempting to reconcile and simplify the
numerous federal and state definitions of terms such as employee and
wages into one harmonized wage code.  The STAWRS group researched the
federal and state laws to identify hundreds of differences in how the
various tax codes defined their operative terms.  For example, the
Maryland tax code excepts yacht salesman for its definition of
employee, Ohio excepts part-time orchestra members; only one
exception--ministers--is found in every code.  Recently, STAWRS
developed a Harmonized Wage Code Blueprint, which was completed in
September 1996, but it does not expect to finalize any parts of this
work until 1998. 

Even though these initiatives are under way, the difficulty involved
in making choices given the context of the political, economic, and
administrative issues that must be considered continues to slow their
progress.  With the Form W-2 initiative, for example, one question
is:  Who pays the extra costs when SSA scans and delivers data to the
states?  With the combined quarterly form, privacy issues involving
the receipt and transfer of tax data between the federal and state
government must be resolved, as well as administrative issues such as
how taxpayers alert the government to business address changes. 
Political problems abound with the concept of a harmonized wage code
among all states and the federal government.  For example, as we
noted earlier, even among states that routinely piggyback on federal
tax law, there are political and economic reasons why states will not
accept federal changes to tax law. 


------------------------------------------------ Chapter STATEMENT:3.1

In summary, we believe that employment taxes present an instructive
example not only as to the complexity of the current tax code but
also as to the difficulties and potential pitfalls presented by
simplification endeavors.  Even the smallest change to the current
very complicated regulatory scheme can involve political and economic
trade-offs between types of taxes and between federal and state
jurisdictions.  Notwithstanding the enormity of the challenge,
however, we believe that efforts to simplify the tax code are
essential to reducing compliance burden, thereby making voluntary tax
compliance easier for all types of businesses, large and small. 

Messrs.  Chairmen, Members of the Commission, this ends our prepared
statement.  We would be pleased to answer any questions. 


1995 TAX DEPOSIT AND FILING
REQUIREMENTS FOR SMALL BUSINESS
LOCATED IN CLEVELAND, OHIO
=========================================================== Appendix I

Table I.1 shows the 1995 federal and state tax deposit and filing
requirements for a hypothetical business located in Cleveland, Ohio. 
The business was started December 1, 1994, and has six employees,
some of whom reside in Ohio school districts with an income tax
assessment. 



                               Table I.1
                
                 1995 Federal and State Tax Deposit and
                 Filing Requirements for a Hypothetical
                  Business Located in Cleveland, Ohio

                           Tax            Deposit        Form
Filing date                assessment     requirement    requirement\a
-------------------------  -------------  -------------  -------------
January 15                 Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

January 20                 City income    Prior month    Form CCA-102
                           tax            withholding

January 31                 Federal        None           Form W-2s to
                           income tax/                   all employees
                           FICA

                           Federal        None           Form 941
                           income tax/
                           FICA

                           FUTA           Prior quarter  Form 8109
                                          amount

                           FUTA           None           Form 940

                           State income   None           Form IT-941
                           tax

                           State          Prior quarter  Form UCO-2QR
                           unemployment   amount

February 15                Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

February 20                City income    Prior month    Form CCA102
                           tax            withholding

February 28                Federal        None           Form W-3, W-
                           income tax/                   2s to SSA
                           FICA

                           State income   None           Form IT-3, W-
                           tax                           2s to state

                           City income    None           Form CCA-W3
                           tax

March 15                   Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

March 20                   City income    Prior month    Form CCA-102
                           tax            withholding

April 15                   Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

April 20                   City income    Prior month    Form CCA-102
                           tax            withholding

April 30                   Federal        None           Form 941
                           income tax/
                           FICA

                           FUTA           Prior quarter  Form 8109
                                          withholding

                           State          Prior quarter  Form UCO-2QR
                           unemployment   withholding

May 15                     Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

May 20                     City income    Prior month    Form CCA-102
                           tax            withholding

June 15                    Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

June 20                    City income    Prior month    Form CCA-102
                           tax            withholding

July 15                    Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

July 20                    City income    Prior month    Form CCA-102
                           tax            withholding

July 31                    Federal        None           Form 941
                           income tax/
                           FICA

                           FUTA           Prior quarter  Form 8109
                                          withholding

                           State          Prior quarter  Form UCO-2QR
                           unemployment   withholding

August 15                  Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

August 20                  City income    Prior month    Form CCA-102
                           tax            withholding

September 15               Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

September 20               City income    Prior month    Form CCA-102
                           tax            withholding

October 15                 Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

October 20                 City income    Prior month    Form CCA-102
                           tax            withholding

November 15                Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

November 20                City income    Prior month    Form CCA-102
                           tax            withholding

November 30                Federal        None           Form 941
                           income tax/
                           FICA

                           FUTA           Prior quarter  Form 8109
                                          withholding

                           State          Prior quarter  Form UCO-2QR
                           unemployment   withholding

December 15                Federal        Prior month    Form 8109
                           income tax/    withholding
                           FICA

                           State income   Prior month    Form IT-501
                           tax            withholding

                           School         Prior month    Form SD-101
                           district       withholding
                           income tax

December 20                City income    Prior month    Form CCA-102
                           tax            withholding
----------------------------------------------------------------------
Source:  GAO analysis of federal and state laws and regulations. 

\a The forms included in this table are federal, state, and local
forms.  The federal forms include:

--Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return;
--Form 941, Employer's Quarterly Tax Return;
--Form 8109, Federal Tax Deposit Coupon;
--Form W-2, Wage and Tax Statement;
--Form W-3, Transmittal of Wage and Tax Statements.
The state forms include:
--IT-3, Transmittal of Wage and Tax Statements;
--IT-501, Ohio's Employer's Payment of Income Tax Withheld;
--IT-941, Ohio's Employer's Annual Reconciliation of Income
Tax Withheld;
--UCO-2QR, Employer's Contribution and Wage Report.
The local forms include:
--CCA-102, Municipal Depository Receipt;
--CCA-W-3, Reconciliation of City Income Tax Withheld and
Transmittal of Wage Statements;
--SD-101, Employer's Payment of School District Tax Withheld. 


SIMPLIFIED TAX AND WAGE REPORTING
SYSTEM (STAWRS) PROJECT
INITIATIVES
========================================================== Appendix II

At the current time, the STAWRS Project Office is working on nine
initiatives to ease the compliance burden on employers dealing with
employment taxes.  Table II.1 describes these initiatives and their
present status. 



                               Table II.1
                
                      Status of STAWRS Initiatives

STAWRS initiative                         Status of initiative
----------------------------------------  ----------------------------
1. Streamlined Customer Service: One-     Has developed "Employer
Stop Electronic Tax Information           Assistance Kit" for use on
                                          new World Wide Web site;
                                          includes procedures for
                                          employers to apply for
                                          Employer Identification
                                          Number (EIN) on Internet.
                                          Needs STAWRS Executive
                                          Steering Board approval to
                                          set up Web site with the
                                          State of Illinois.

2. Streamlined Customer                   Has designed procedures
Service: One-Stop Social Security Number  whereby employers can check
Validation                                electronically with SSA on
                                          the validity of an
                                          employee's Social Security
                                          number. However, originally
                                          designed for small personal
                                          computer system; owing to
                                          statutory language in the
                                          Welfare Reform Act, SSA may
                                          need to use larger computer
                                          system.

3. Single-Point Filing: Electronic        Recently completed limited
Filing--Employer's Quarterly Returns      pilot project in which
                                          employers electronically
                                          sent data for quarterly Form
                                          941 simultaneously to IRS
                                          and a state using
                                          standardized format. Three
                                          states involved--
                                          California, Minnesota, and
                                          Texas.

4. Single-Point Filing:                   Phase I demonstrated the
Electronic Filing--Annual Forms W-2       ability of SSA to receive
                                          Form W-2s electronically
                                          with use of a "Value-Adding
                                          Network" (an intermediary
                                          computer "mailbox"). In
                                          Phase II, SSA has identified
                                          1,000 employers to use
                                          electronic personal
                                          identification numbers
                                          (PINs) to electronically
                                          transmit Forms W-3 and W-2.

5. Single-Point Filing: Magnetic Media-   Current proposal being
-Magnetic Filing                          developed by the Federation
                                          of Tax Administrators to
                                          have SSA capture all state
                                          data on Form W-2 and place
                                          data on magnetic media for
                                          distribution to
                                          participating states. Would
                                          eliminate dual W-2 filing
                                          for employers.

6. Single-Point Filing: Paper Filing--    STAWRS working with the
Employer's Quarterly Returns              state of Oregon to add the
                                          federal Form 941 to the
                                          state's already combined
                                          report the federal Form 941.
                                          In August 1996, developed
                                          combined form. The state of
                                          Montana has recently become
                                          a partner with the potential
                                          to add aspects of the
                                          Harmonized Wage Code.

7. Single-Point Filing:                   SSA currently putting state
Paper Filing--Annual Forms W-2            W-2 data on computer tape
                                          for use by states. Thirty-
                                          four states are now
                                          participating; 3 states have
                                          eliminated their requirement
                                          for employers to file Form
                                          W-2s with the state in
                                          anticipation of adoption of
                                          the concept.

8. Simplified Requirements: Harmonized    Has completed research of
Wage Code                                 existing federal and state
                                          statutes and regulations. In
                                          September 1996, completed a
                                          "Harmonized Wage Code
                                          Blueprint."

9. Simplified Requirements: Payment and   Has completed research of
Filing Dates                              existing federal and state
                                          statutes and regulations.
                                          Has identified common filing
                                          and payment dates and
                                          developed matrix of existing
                                          filing and payment dates.
----------------------------------------------------------------------
Source:  GAO analysis of STAWRS documents. 


GAO EMPLOYMENT TAXES AND SMALL
BUSINESS
========================================================= Appendix III



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


*** End of document. ***