United States General Accounting Office

GAO Testimony

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

G O A

years

1921 - 1996

GAO/T-GGD-97-21

Statement 

Tax System: Employment Taxes and Small

Business

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).

Page 1 GAO/T-GGD-97-21
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Tax System: Employment Taxes and Small

Business

Background on

Employment Taxes

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

Page 2 GAO/T-GGD-97-21
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Tax System: Employment Taxes and Small

Business

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

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

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Tax System: Employment Taxes and Small

Business

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?

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;

Page 4 GAO/T-GGD-97-21
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Tax System: Employment Taxes and Small

Business

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”?

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.

Page 5 GAO/T-GGD-97-21
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Tax System: Employment Taxes and Small

Business

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?

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,

Page 6 GAO/T-GGD-97-21
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Tax System: Employment Taxes and Small

Business

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?

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.

Page 7 GAO/T-GGD-97-21
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Tax System: Employment Taxes and Small

Business

Solutions 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

Page 8 GAO/T-GGD-97-21
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Tax System: Employment Taxes and Small

Business

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.

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.

Page 9 GAO/T-GGD-97-21
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Tax System: Employment Taxes and Small

Business

Messrs. Chairmen, Members of the Commission, this ends our prepared

statement. We would be pleased to answer any questions.

Page 10 GAO/T-GGD-97-21
Page 11 GAO/T-GGD-97-21
Appendix I 

1995 Tax Deposit and Filing Requirements

for Small Business Located in Cleveland,

Ohio

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

Filing date Tax assessment

Deposit

requirement Form requirementa

January 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

January 20 City income tax Prior month

withholding

Form CCA-102

January 31 Federal income

tax/FICA

None Form W-2s to all

employees

Federal income

tax/FICA

None Form 941

FUTA Prior quarter amount Form 8109

FUTA None Form 940

State income tax None Form IT-941

State unemployment Prior quarter amount Form UCO-2QR

February 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

February 20 City income tax Prior month

withholding

Form CCA102

February 28 Federal income

tax/FICA

None Form W-3, W-2s to

SSA

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

state

City income tax None Form CCA-W3

March 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

March 20 City income tax Prior month

withholding

Form CCA-102

(continued)

Page 12 GAO/T-GGD-97-21
Appendix I 

1995 Tax Deposit and Filing Requirements

for Small Business Located in Cleveland,

Ohio

Filing date Tax assessment

Deposit

requirement Form requirementa

April 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

April 20 City income tax Prior month

withholding

Form CCA-102

April 30 Federal income

tax/FICA

None Form 941

FUTA Prior quarter

withholding

Form 8109

State unemployment Prior quarter

withholding

Form UCO-2QR

May 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

May 20 City income tax Prior month

withholding

Form CCA-102

June 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

June 20 City income tax Prior month

withholding

Form CCA-102

July 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

July 20 City income tax Prior month

withholding

Form CCA-102

July 31 Federal income

tax/FICA

None Form 941

FUTA Prior quarter

withholding

Form 8109

State unemployment Prior quarter

withholding

Form UCO-2QR

(continued)

Page 13 GAO/T-GGD-97-21
Appendix I 

1995 Tax Deposit and Filing Requirements

for Small Business Located in Cleveland,

Ohio

Filing date Tax assessment

Deposit

requirement Form requirementa

August 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

August 20 City income tax Prior month

withholding

Form CCA-102

September 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

September 20 City income tax Prior month

withholding

Form CCA-102

October 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

October 20 City income tax Prior month

withholding

Form CCA-102

November 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

November 20 City income tax Prior month

withholding

Form CCA-102

November 30 Federal income

tax/FICA

None Form 941

FUTA Prior quarter

withholding

Form 8109

State unemployment Prior quarter

withholding

Form UCO-2QR

December 15 Federal income

tax/FICA

Prior month

withholding

Form 8109

State income tax Prior month

withholding

Form IT-501

School district

income tax

Prior month

withholding

Form SD-101

(continued)

Page 14 GAO/T-GGD-97-21
Appendix I 

1995 Tax Deposit and Filing Requirements

for Small Business Located in Cleveland,

Ohio

Filing date Tax assessment

Deposit

requirement Form requirementa

December 20 City income tax Prior month

withholding

Form CCA-102

Source: GAO analysis of federal and state laws and regulations.

aThe 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.

Page 15 GAO/T-GGD-97-21
Appendix II 

Simplified Tax and Wage Reporting System

(STAWRS) Project Initiatives

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-Stop

Electronic Tax Information

Has developed “Employer 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 

Service: One-Stop Social Security Number

Validation

Has designed procedures whereby

employers can check 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

Filing—Employer’s Quarterly Returns

Recently completed limited 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:

Electronic Filing—Annual Forms W-2

Phase I demonstrated the 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—Magnetic Filing

Current proposal being 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—Employer’s Quarterly Returns

STAWRS working with the 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.

(continued)

Page 16 GAO/T-GGD-97-21
Appendix II 

Simplified Tax and Wage Reporting System

(STAWRS) Project Initiatives

STAWRS initiative Status of initiative

7. Single-Point Filing:

Paper Filing—Annual Forms W-2

SSA currently putting state 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

Wage Code

Has completed research of existing federal

and state statutes and regulations. In

September 1996, completed a

“Harmonized Wage Code Blueprint.”

9. Simplified Requirements: Payment and

Filing Dates

Has completed research of 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.

Page 17 GAO/T-GGD-97-21
Appendix III 

GAO Employment Taxes and Small Business

Page 18 GAO/T-GGD-97-21
Appendix III 

GAO Employment Taxes and Small Business

Page 19 GAO/T-GGD-97-21
Appendix III 

GAO Employment Taxes and Small Business

(268764) Page 20 GAO/T-GGD-97-21
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