Big and small companies employing workers from the Philippines under the transitional Commonwealth-only worker program are now preparing to claim refund of federal taxes paid as early as October 2011 up to December 2012 to the U.S. Internal Revenue Service, based on interviews in yesterday's Society for Human Resources Management-CNMI Chapter general membership meeting on the topic of recent tax decisions affecting CNMI employers and employees.
This comes over a month after IRS announced that Filipinos working in the CNMI need not pay federal taxes up to Dec. 31, 2014, when the immigration transition period ends.
At the time, it wasn't clear whether Filipino employees and their employers could refund their Federal Insurance Contribution Act, or FICA, tax contributions.
FICA covers Social Security and Medicare taxes.
David J. Burger, CPA, of Burger and Comer P.C., the guest speaker in yesterday's SHRM-CNMI Chapter general membership meeting at Hyatt Regency Saipan's SandCastle, said the IRS notice in December didn't cover refund but he said this is the time to “test” the system.
Burger and other SHRM members said there is no harm in trying to file refund with IRS. The SHRM meeting was well attended.
“As far as I know, it has not been tested yet. It's time to test it. We don't know if they're going to cut the check yet,” Burger said when asked whether there's indication from IRS that it will refund these Filipino CW workers and their employers.
He said some of their firm's clients have started preparing refund filing.
Burger said one construction firm, for example, is looking at claiming refunds of over $100,000 in employee and employer contributions.
“The logic that we're applying here is that these people that paid into the system will never get a benefit. It's like [returning] a premium on an insurance policy. They're not covered by the insurance so return the premium,” he said.
The Fitial administration sued the IRS/U.S. Treasury over the FICA tax deductions but withdrew the lawsuit to facilitate direct settlement discussions.
It has said the federal taxes on Filipino and Korean workers could result in $24 million in annual “illegal taxes” that could have been circulating in the local economy.
A 30-year-old accountant for a retail store said their company has been planning on filing for refund with IRS “but we have been waiting for clarity or guidance on how to go about it.”
After hearing Burger's presentation at the SHRM meeting, she said her company is now more prepared to go through the process.
Burger guided members and guests of SHRM on filling out Form 941-X, for example, to claim their refund.
“We might be filing for refund by the second week of February,” the accountant said.
Burger, during his presentation and in an interview later, recommends that employers file refund for themselves and their employees for efficiency.
“I think that's the more efficient way to do it. Let's say you have 30 employees and you're the employer. You can file one 941-X for the quarter to get the employer share and employee share, or you could file one 941-X and get back the employer share and then each one of the 30 people has to file their own form. It's just more efficient for one form to go in, money comes back from IRS, the employer distributes,” he told reporters.
In his presentation, Burger said the wording in IRS' Announcement 2012-43 “is less clear than one would like, but it accomplishes the purpose.”
The announcement reports that the IRS will not say that a taxpayer has understated liability for FICA taxes prior to Jan. 1, 2015 by failing to treat services performed prior to Jan. 1, 2015 in the CNMI by a resident of the Philippines as employment.
“Employers who withheld FICA taxes from their CW workers, and also paid the employer's share, must file form 194-X to claim the refund,” he said in his presentation.
A 37-year-old accounting associate from the Philippines said it is welcome news that there is a mechanism to claim tax refund.
“As a CW worker, there is no guarantee that we will benefit from these tax deductions,” she told Saipan Tribune.
She said an average of $27.84 is being deducted from her payroll for FICA tax per pay period, and is expecting a refund of about $ 723.84.
Another accountant said Burger's presentation at the SHRM meeting “confirmed” the process of claiming refund with IRS.
“We were ready to apply for refund but we were waiting for this presentation. We should be able to file refund soon,” she said. “There's no harm in trying.”
In December, Fitial said he welcomed the IRS announcement about tax exemptions for Filipino CWs but he said he is “not fully satisfied with this proposed settlement” because “it does not agree to refund the illegal taxes already collected, exempt similarly situated Korean nationals and their employers, or resolve long-term exemption from this taxation.”