Must a self-directing participant who employs personal care workers withhold Kansas income tax?

Plain-English summary

Kansas Notice 16-03 (April 11, 2016) explains Kansas income tax withholding on payments to personal care service (PCS) providers -- guidance for individuals and financial management service providers.

The setup. Under Kansas Department for Aging and Disability Services policy, a participant authorized for PCS can "self-direct" their services -- exercising employer authority to select, train, manage, pay, and dismiss their own direct-care workers (K.S.A. 39-7,100).

The withholding rule. A self-directing participant who employs one or more PCS providers is considered an employer for Kansas withholding tax. As a result, the participant must register with the Department, withhold tax from the wages paid to their worker(s), and remit it to the Department.

Using an FMS provider. Rather than handle these duties alone, many self-directing participants use a financial management service (FMS) provider, which -- on behalf of its client -- must register, withhold, and remit the Kansas withholding tax.

How it works. The notice outlines:

• Registration through the KDOR Customer Service Center (create a user ID, then "New Tax Registration").
• Electronic payment of withholding via ACH Credit or the Customer Service Center (each withholding payment needs an associated KW-5 return).
• Year-end reporting -- the KW-3 Annual Withholding Tax Return (then due the last day of February) and W-2 wage reports, both of which can be filed in bulk.

What this means for you

Self-directing PCS participants who employ care workers

• You are an employer for Kansas withholding tax: register with the Department, withhold from wages, and remit -- or engage an FMS provider to do it for you.

Financial management service (FMS) providers

• On your client's behalf, register, withhold, and remit the Kansas withholding tax, and handle KW-5 payments and KW-3/W-2 year-end reporting.

Common questions

Does a self-directing participant have to withhold tax? Yes -- employing PCS workers makes the participant an employer who must register, withhold, and remit.

Can someone else handle it? Yes -- an FMS provider can register, withhold, and remit on the client's behalf.

How are withholding payments made? Electronically, via ACH Credit or the KDOR Customer Service Center, with an associated KW-5 return.

What year-end forms apply? The KW-3 annual return and W-2 wage reports.

Citations and references

• K.S.A. 39-7,100 -- defines "self-direction," under which a participant employs and directs their own direct-care workers.
• A self-directing participant employing PCS workers is an employer for Kansas withholding tax (register, withhold, remit); an FMS provider may do so on the client's behalf.
• Payments via ACH Credit or the Customer Service Center with a KW-5 return; year-end KW-3 and W-2 reporting.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 16-03

Original ruling text

Tax Policy Group
Division of Taxation Phone: 785-296-3081
915 SW Harrison St FAX: 785-296-7928
Topeka KS 66612-1588 www.ksrevenue.org
Nick Jordan, Secretary Department of Revenue Sam Brownback, Governor
Steve Stotts, Director

                                         NOTICE 16-03

      WITHHOLDING ON PAYMENTS MADE TO PERSONAL CARE SERVICE PROVIDERS
           BY SELF-DIRECTING PARTICIPANTS AUTHORIZED FOR SERVICES

INFORMATION FOR INDIVIDUALS AND FINANCIAL MANAGEMENT SERVICE PROVIDERS

                                         (APRIL 11, 2016)

  Advice has been requested regarding Kansas withholding on payments made to personal care

service providers. This Notice addresses that topic.

 The Kansas Department for Aging and Disability Services has established Policy and

published information that defines Personal Care Services (PCS) and specific limitations that
apply. The General policy statement provides, in part:

 I.     General

        A.    PCS is designed to assist elderly and disabled participants in their home and
              community settings that comply with the HCBS Settings Final Rule. PCS
              focuses on assistance with Activities of Daily Living (ADLS) such as
              bathing, grooming, toileting, transferring, and eating and Instrumental
              Activities of Daily Living (IADL) such as shopping, laundry, housekeeping,
              and meal preparation.

              1.      PCS services are authorized, provided and reimbursed based on the
                      assessed needs of the participant. The participant's needs are assessed
                      by the selected Managed Care Organization (MCO) and identified on
                      the Integrated Service Plan (ISP). The ISP must document the
                      participant's authorized service in hours/units and the participant's
                      selected provider.

              .......

        B.    Participants authorized for PCS services have the option to agency-direct or
              self-direct their authorized services as provided for in each waiver.

              1.      Agency-directed and self-directing participants employing PCS
                      workers shall comply with all applicable state and federal employment
                      laws;

            2.    If available, a participant, a parent, or legal guardian may elect to self-
                  direct PCS.

                  a.    Self-directing participants employing PCS workers are subject
                        to the same quality assurance standards as other PCS providers
                        including, but not limited to, completion of the tasks identified
                        on the ISP; and

                  b.    For self-direct PCS for the TA Program, the HCBS TA Waiver
                        PCS Training Checklist must be completed prior to providing
                        PCS.

            3.    If a participant or legal guardian no longer wants to self-direct his or
                  her PCS, the participant or legal guardian shall have the option to
                  transition to agency-directed PCS without penalty. Conversely, if a
                  participant or legal guardian no longer wants agency-directed PCS and
                  has not been determined unable to self-direct his or her services, the
                  participant or legal guardian shall have the option to transition to self-
                  directed PCS, authorized in accordance with this policy.

  The Policy established Kansas Department for Aging and Disability Services also defines

certain terms. The term "Self-direction" is defined as:

 Self-direction – participants exercise employer authority over some or all of the home
 and community-based services they need to live in their community and accept the
 responsibility for taking a direct role in managing those services. Within the
 participant-directed model and Kansas state law, participants employ direct workers
 and "make decisions about and direct the provision of services which include, but not
 limited to selecting, training, managing, paying and dismissing of a direct service
 worker." (K.S.A. 39-7,100)

  A self-directing participant who employs one or more personal care service providers is

considered to be an employer for purposes of Kansas income tax withholding. As a result, the
participant is required to register with the Kansas Department of Revenue, withhold tax from the
wages they pay their employee(s), and remit the tax to the Department of Revenue.

  Instead of dealing with all of the requirements typically imposed on an employer, many self-

directing participants choose to use a financial management service (FMS) provider to handle these
duties, including the responsibilities associated with Kansas withholding tax. On behalf of their
client the FMS provider is required to register with the Kansas Department of Revenue, withhold
tax from the wages they pay their employee(s), and remit the tax to the Department of Revenue.

  Details of the withholding tax process are provided in the Department's publication KW-100

Kansas Withholding Tax Booklet which is available through the Department's website at:
http://www.ksrevenue.org/pdf/kw1002015.pdf#search=KW-100. An outline of the process, with
important contact information, is provided below.

Individual Account Registration

 •     In order to register business tax accounts or submit payments and file returns through
       online, you must have a User ID on the Kansas Department of Revenue (KDOR)
       Customer Service Center. To do this, go to www.ksrevenue.org and click the "Register
       Now" link on the top right corner of the page and follow the prompts to create a profile.
       If you already have a user ID, simply click the "Log In" button and provide your
       credentials.

 •     Once you have a valid user ID and have logged into the Customer Service Center, you
       will be presented with the main menu on the "Home" page. To register a business tax
       account, click the "New Tax Registration" button and follow the prompts. Information
       collected in the online registration is the same as the paper process, but processing
       generally occurs much faster.

Making Withholding Payments

All Withholding tax returns must be submitted electronically. Because a Withholding payment
cannot be remitted without an associated KW-5 return, all Withholding payments must be
submitted electronically. There are two options for electronically filing and paying Withholding
tax:

 •     ACH Credit – Using this payment method, the sender remits payment to the KDOR
       through the sender's bank, effectively "pushing" a payment and related information
       directly to the Department. This is the national standard "bulk payment" option. The
       KDOR follows the National Automated Clearing House Association (NACHA)
       guidelines for electronic payment processing. KDOR will provide addendum record
       formats needed by the sender's bank upon request. Contact the Electronic Services
       Technical Help Desk at 785-296-6993 for more information about submitting payment
       via ACH Credit.

 •     KDOR Customer Service Center – KW-5 returns with payment may be individually
       submitted through the KDOR Customer Service Center. Using the same user ID
       established under the "Individual Account Registration" section, a user can associate
       individual tax accounts to their ID, specify banking information for each tax account,
       and choose when an account is to be paid. KDOR then "pulls" funds from the identified
       account using the information provided.

       A user may associate multiple tax accounts to an individual user ID. To associate an
       account, the user must have the business Employer Identification Number (EIN) and
       account Access Code. An access code can be obtained from the Electronic Services
       Technical Help Desk at 785-296-6993. In cases where many accounts need to be
       associated with a single user ID, users are encouraged to contact the Help Desk for
       assistance.

End of Year Reports and Returns

 •     Annual Withholding Tax Return (KW-3) – All Withholding accounts have a KW-3
       return due the last day of February following the tax year. Filers have the option of
       using the KDOR Customer Service Center to individually send returns on account by
       following the menu options within the specific tax account. If you are working with a
       larger number of Withholding accounts, you are encouraged to contact the Electronic
       Services Technical Help Desk at 785-296-6993 to have your account configured to
       accept bulk KW-3 files. You then have the option to upload KW-3 data for multiple
       accounts in a single file.

 •     W-2 Wage Reports – Filers also have the option of submitting W-2 information in bulk
       through the Department's Customer Service Center. KDOR follows the Federal EFW2
       format outlined by the Social Security Administration. This file, with the addition of
       the State record, is the same file that is submitted to the Social Security Administration.
       Similar to the KW-3 bulk filing process, W-2s can be uploaded once the user account
       is configured to handle bulk files. Contact the Electronic Services Technical Help Desk
       at 785-296-6993 for assistance.

       Information about electronically filing bulk KW-3 and W-2 files is available at
       www.ksrevenue.org/eservw2.html.

                                 TAXPAYER ASSISTANCE

Additional copies of this notice, forms or publications are available from our web site,
www.ksrevenue.org. If you have questions about this Notice, please contact:

                              Taxpayer Assistance Center
                             Kansas Department of Revenue
                             915 SW Harrison St., 1st Floor
                               Topeka, KS 66612-1588
                                 Phone: 785-368-8222
                                  Fax: 785-291-3614