Deferred Comp Payroll Tax Scenario Clarified

February 15, 2007 (PLANSPONSOR.com) - Changing its prior holdings, the Internal Revenue Service (IRS) on Thursday said that an accrual basis taxpayer-employer may treat its payroll tax liability as incurred in the first tax year - even if the related compensation is deferred under §404 that is deductible in the second year.

IRS officials said the new holding would be true if a n accrual method taxpayer met the all-events test and recurring item exception of §461, according to Revenue Ruling 2007-12 .

According to the new ruling, the deferred compensation scenario would be allowed if the employer pays the payroll taxes either in Year One or before the earlier of September 15 of Year Two or the date the company files a timely federal income tax return for Year One, which would mean that the payroll taxes generally would be treated as incurred by the employer in Year One.

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However, the compensation to which the payroll taxes relate is deferred compensation that is properly deductible under §404 in Year Two, the IRS said.

The IRS said Thursday’s holding amplifies Revenue Ruling 96-51 and revokes Revenue Ruling 69-587.

Tax officials said that because of the rule change, a taxpayer that wants to change its treatment of payroll taxes associated with deferred compensation has to get IRS permission.

Is There a "Bad Apple" in Your Bunch?

February 14, 2007 (PLANSPONSOR.com) - This time of year we tend to fret about sick co-workers dragging themselves into work and spreading their germs.

But what if the disease that’s being spread IS the co-worker? Researchers at the University of Washington have just published a new study that claims that “bad apples” at work – people who don’t do their fair share of the work, who are chronically unhappy and emotionally unstable, or who bully or attack others – actually create a toxic work environment that truly does spoil the whole bunch.

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The researchers’ paper, appearing in the current issue of Research in Organizational Behavior, examines how, when and why the behaviors of one negative member can have powerful and often detrimental influence on teams and groups.

Wife Experiences

It was inspired by the experience of the wife of William Felps, a doctoral student at the UW Business School and the study’s lead author. Felps’ wife was unhappy at work and characterized the environment as cold and unfriendly. Then, she said, a funny thing happened. One of her co-workers who was particularly caustic and was always making fun of other people at the office came down with an illness that caused him to be away for several days.

“And when he was gone, my wife said that the atmosphere of the office changed dramatically,” Felps said. “People started helping each other, playing classical music on their radios, and going out for drinks after work. But when he returned to the office, things returned to the unpleasant way they were. She hadn’t noticed this employee as being a very important person in the office before he came down with this illness but, upon observing the social atmosphere when he was gone, she came to believe that he had a profound and negative impact. He truly was the “bad apple” that spoiled the barrel.”

Following that realization, Felps, together with Terence Mitchell, a professor of management and organization in the Business School and UW psychology professor, analyzed about two dozen published studies that focused on how teams and groups of employees interact, and specifically how having bad teammates can destroy a good team. They found that a single “toxic” or negative team member can be the catalyst for downward spirals in organizations. In a follow-up study, the researchers found the vast majority of the people they surveyed could identify at least one “bad apple” that had produced organizational dysfunction.

In one study of about 50 manufacturing teams, they found that teams that had a member who was disagreeable or irresponsible were much more likely to have conflict, have poor communication within the team and refuse to cooperate with one another. Consequently, the teams performed poorly.

According to Felps, group members will react to a negative member in one of three ways:

  • motivational intervention,
  • rejection or
  • defensiveness.

In the first scenario, members will express their concerns and ask the individual to change his behavior and, if unsuccessful, the negative member can be removed or rejected. If either the motivation intervention or rejection is successful, the negative member never becomes a "bad apple" and the "barrel" of employees is spared. These two options, however, require that the teammates have some power: when underpowered, teammates become frustrated, distracted and defensive, according to a press release.

Defense Mechanisms

Common defensive mechanisms employees use to cope with these "bad apples" include:

  • denial,
  • social withdrawal,
  • anger,
  • anxiety and
  • fear.

Trust in the team deteriorates and as the group loses its positive culture, members physically and psychologically disengage themselves from the team.

Negative Outweighs Positive

Felps and Mitchell also found that negative behavior outweighs positive behavior -- that is, a "bad apple" can spoil the barrel but one or two good workers can't cure the situation. "People do not expect negative events and behaviors, so when we see them we pay attention to them, ruminate over them and generally attempt to marshal all our resources to cope with the negativity in some way," Mitchell said. "Good behavior is not put into the spotlight as much as negative behavior is."

The authors caution there's a difference between "bad apples" and employees who think outside the box and challenge the status quo. Since these "positive deviants" rock the boat, they may not always be appreciated. And, as Felps and Mitchell argue, unlike "bad apples," "positive deviants" actually help spark organizational innovation.

The researchers note that managers at companies, particularly those in which employees often work in teams, should take special care when hiring new employees.

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