The Colorado Office of the State Auditor conducted an investigation concerning how the state manages the use of employer provided vehicles. They discovered that the state's policies and rules did not align with IRS regulations for determining how commuters should be taxed.
The IRS initiated an examination of the State of Colorado's employment taxes for 2015, 2016, and 2017. The IRS determined that the State was not in compliance with IRS regulations regarding commuting, uniform/clothing allowances, Medicare qualified government employees, and settlements.
The Office of the State Controller has been working with the IRS on a plan to move forward, ensuring employees are being properly taxed. A letter has gone out to employees affected by this change. The State will pay Medicare and federal back taxes due for employees affected, so they will not have to refile previous years' taxes. However, beginning December 1, 2018, employees may notice a slight decrease in their net pay, due to adjustments in their tax withholdings. The state is required to make these changes to comply with IRS regulations.
- Is this going to affect me?
If you are affected by this change, you will see an increase in Medicare and federal tax withholding and a decrease in net pay going forward.
- Who does this affect?
- Employees who have an assigned vehicle and use the vehicle for commuting.
- Employees who receive a clothing or uniform allowance.
- Who is exempt?
Some employees are exempt from these IRS rules. These employees include:
- Employees who do not use an assigned vehicle for commuting
- Employees in departments that have an accountable plan for clothing/uniform allowances
- Employees hired before April 1, 1986, without a break in service
- Employees who do not receive supplemental wages
- How do I know if the state owned vehicle I use is taxable or tax exempt?
Consult with your payroll department. The Office of the State Controller will be issuing technical guidance to assist state agencies in making this determination.
- Will this be reflected in my W-2?
Yes. This will be reflected in Medicare gross wages.
- Will there be a new line item in my paystub?
No, the amount of Medicare taxes and Federal taxes will increase to comply with IRS regulations.
- When will I see the effect in my paystub?
In December 2018, the State will true-up any Medicare and federal taxes not withheld from January to November 2018.
- How much more should I expect to be taxed?
Commuter: This depends on your individual situation. Consult with your payroll department for more information.
Uniform/Clothing allowances: In December, these employees will have a deduction of up to 1.45% multiplied by the uniform/clothing allowance for your department for all of calendar year 2018. Going forward, an additional 1.45% for the employee's share of Medicare tax will be withheld for employees in departments with clothing and uniform allowances. Federal taxes will also be withheld each month, and the amount will depend on the federal withholding percentage for each employee.
- How long is this going to affect my paystub?
There will be a one-time adjustment in December 2018 to reflect the true-up for Medicare and federal taxes from January to November 2018. Going forward, Medicare and federal taxes will be withheld in each pay period to comply with IRS regulations. You will see a slight decrease in you take home pay of 1.45% for employees affected only by Medicare tax and a higher reduction for employees who are affected by both Medicare and federal tax withholding.
- Will I be responsible for any back taxes?
No, the State has agreed to pay all Medicare and federal taxes due for 2015, 2016, and 2017. Employees will receive credit for Medicare wages and taxes paid for these three years.
- Should I worry about being audited from the IRS?
No, the State is in the process of settling with the IRS, and there should not be an audit risk to individual employees for 2015, 2016, and 2017 for employment taxes from the State of Colorado.
- Will this affect my HAS?
PERA salary does not include uniform/clothing or commuting. This will have no effect on HAS.
- What is a true-up?
A true-up is a tool used to ensure the State complies with IRS regulations and you don't have any unanticipated tax liabilities at the end of the year. A true-up will occur in December 2018 and will include adjusting the Medicare and federal tax withholding for January to November 2018, plus December, so that the employees' tax withholdings are in compliance with IRS regulations. Employees will not be liable for back taxes owed, but they will see a slight decrease in net pay due to adjustments in their withholdings in December 2018 and going forward.
- Who do I go to if I have questions?
Technical Guidance Documents
Taxability of State-Owned Vehicles Flow Chart
Use of State Owned Vehicles Policy
Technical Guidance on Taxability of State-Owned Vehicles
Technical Guidance on Work Clothes, Uniform Allowances, Reimbursements
Technical Guidance on Supplemental Wages
Technical Guidance on Medicare Qualified Governmental Employees