Every year brings a list of information filing requirements necessary to make sure payees have the information needed to file their taxes. To assist with year-end business reporting, here are some items for you to consider.
Form 1099s
Businesses often make payments to individuals and unincorporated businesses (i.e., partnerships, LLCs, and sole proprietorships) which are not wages and potentially might not be subject to income, Social Security, or Medicare tax withholding. These payments are required to be reported on various forms, depending on the character of the payment. Below is a summary of the most common forms.
Form 1099-MISC (Miscellaneous Income)
This form relates to services rendered which do not constitute wages reportable on Form W-2, and is currently required for each payee receiving:
- At least $600 in rents, prizes & awards, crop insurance proceeds and any fishing boat proceeds, medical and health care payments, nonqualified deferred compensation, Section 409A deferrals, and cash paid from a notional principal contract to an individual, partnership, or estate
- At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
- Any sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (Can also be filed with Form 1099-NEC – see below)
- Gross proceeds paid to an attorney or law firm in connection with legal services, but not for the attorney’s services (e.g., as in a settlement agreement), that are not reportable on Form 1099-NEC
- A 1099-MISC is also required for each person from whom you have withheld any federal income tax under the backup withholding rules regardless of the amount of the payment
- The due date of the form Forms 1099-MISC are now due on February 28, 2022 if paper-filing, and March 31, 2022 if e-filing
- The due date for furnishing statements to recipients for 1099-MISC if an amount is reported box 8 or 10 is February 15, 2022
Form 1099-NEC (Non-employee Compensation)
This form was new in 2020 and was brought about to separate the reporting of Non-employee Compensation (NEC) from other types of income. This was done due to the acceleration of the due date for forms reporting NEC. The Form 1099-NEC is required for each person to whom, in the course of your business, you have paid any of the following during the year:
- Services performed by someone who is not your employee (including parts and materials)
- Payments to an attorney
- Sales totaling $5,000 or more of consumer products to a person on a buy-sell, a deposit-commission, or other commission basis for resale
- A 1099-NEC is also required for each payee subject to federal income tax withholding under the backup withholding rules regardless of the amount of the payment
- This form is due on January 31, 2022, whether it is filed by paper or electronically
Form 1099-DIV (Dividends and Distributions)
This form is required to be filed for each payee:
- To whom you have paid dividends (including capital gain dividends and exempt-interest dividends) and other distributions valued at $10 or more in money or other property
- For whom you have withheld and paid any foreign tax on dividends and other distributions on stock
- For whom you have withheld any federal income tax on dividends under the backup withholding rules
- To whom you have paid $600 or more in money or other property as part of a liquidation
- The due date of the form Forms 1099-DIV is now due on February 28,2022 if paper-filing, and March 31, 2022 if e-filing
Form 1099-INT (Interest Income)
This form is required to be filed for each payee who:
- Received at least $10 in interest (or for certain payees at least $600)
- Had any foreign tax withheld and paid on interest regardless of the amount of the payment
- Had any federal income tax withheld under the backup withholding rules regardless of the amount of payment
- The due date of the form Forms 1099-DIV is now due on February 28,2022 if paper-filing, and March 31, 2022 if e-filing
Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, etc.)
This form relates to services rendered which do not constitute wages reportable on Form W-2 and is currently required for each payee matching the criteria below:
- Required for each payee receiving at least $10 from profit sharing or retirement plans, any IRAs, annuities, pensions, insurance contracts, survivor income benefit plans, permanent and total disability payments under life insurance contracts, charitable gift annuities, etc. The form also reports death benefit payments made by employers which are not part of a pension, profit sharing, or retirement plan, and reportable disability payments made from a retirement plan.
- There are special rules for reporting distributions to employees affected by natural disasters (employers should refer to Pub. 976, Disaster Relief, for more information)
- Rollovers to a Roth IRA cannot be re-characterized as having been made to a traditional IRA
- Payments made to any state unclaimed property funds
Form W-2
Employers must file Form W-2 for wages paid to each employee subject to income, Social Security, or Medicare tax withholding. Some items to consider in the process of year-end wage reporting for Form W-2 are noted below:
- Health Insurance Premiums paid for a 2% Shareholder – An S Corporation must report the accident and health insurance premiums paid on behalf of 2% shareholders as wages on Form W-2. An individual who owns 2% or more of an S Corporation can then claim a deduction on their individual tax return for insurance premiums paid on their behalf by the S Corporation. If reported properly, the net impact to the shareholder is zero. However, if the premiums are not included in the wages of the shareholder, the benefit of the deduction will be permanently lost.
- Personal Use of Employer-Provided Automobiles – The use of an employer-provided auto by an employee for business purposes is an excludable working condition fringe benefit. Conversely, personal use of this vehicle is a taxable fringe benefit and must be reported on the employee’s Form W-2 and included in lines 1, 3, and 5. The amount included in income is based on the allocation of the auto’s value between personal and business use based on certain leased vehicle tables published by the IRS.
- Group-term Life Insurance Coverage – The cost of employer-provided group-term life insurance coverage must be included in the employee’s gross income to the extent the cost of the policy coverage exceeds the cost of $50,000 of such insurance, less the after-tax amount (if any) paid by the employee toward the purchase of the insurance.
- Disability Insurance Coverage – The cost of employer-provided disability insurance coverage is not required to be included in the employee’s gross income. However, if it is included in the employee’s gross income and subjected to tax, the benefit (if ever claimed by the employee) will be non-taxable. Therefore, while not required, many employees prefer to pay tax on this benefit to increase the benefit they will receive in the event they go on disability. How this is treated should be in accordance with the written plan maintained by the employer.
- The Affordable Care Act (ACA) – Employers are required to report the total cost of health care coverage on the W-2 form. This reporting requirement became mandatory for all employers with more than 250 W-2 forms and will continue until further guidance is issued. Reporting does not affect tax liability and is for informational purposes only. Additionally, if an employee’s wages or compensation exceeds $200,000 employers must withhold and report an additional 0.9% Medicare tax on the excess income.
- Premium Reimbursement Plans – Employers are required to include reimbursed payments for the purchase of individual health insurance policies in employees’ compensation. Arrangements in which an employer provides cash reimbursement for the purchase of an individual market policy may not meet ACA market reforms, whether treated as pretax or after-tax to the employee. The consequence of an employer “dumping” employees on the health insurance exchange and then reimbursing its employees for the premiums the employee pays for health insurance (i.e., health insurance through a qualified health plan in the health insurance exchange or outside the exchange) rather than establishing a health insurance plan for its own employees is $100 a day in excise tax per applicable employee.
- Form 1095-C and 1095-B – Although the Tax Cuts and Jobs Act reduced the individual responsibility payment to zero as of January 1, 2019, it did not affect the reporting requirements of employers regarding health care eligibility and coverage for their employees. Employers with more than 50 full-time employees (applicable large employers) need to report information regarding the health care eligibility and coverage for their employees on Form 1095-C (Employer-Provided Health Insurance Offer and Coverage). If these applicable large employers do not offer affordable “minimum essential coverage” with “minimum value” to full-time employees and dependents, they may need to make an employer shared responsibility payment. In determining the requirements for reporting, the employer should consider if it is part of an affiliated group with other related parties in consideration of the 50 full-time employee threshold. Employers with less than 50 full-time employees sponsoring self-insured group health plans will be required to file Form 1095-B (Health Coverage) to report information regarding the health care coverage for their employees.
- Social Security Deferral – If you deferred the employee portion of Social Security tax under Notice 2020-65, as modified by Notice 2021-11, do not include the amount of Social Security tax withheld in 2020 on the 2021 Form W-2. The employee portion of the Social Security tax is reported on the 2020 Form W-2C.
- Employer-provided Educational Assistance – Up to a maximum of $5,250 is excludable from an employee’s wages only if assistance is provided under an educational assistance program under section 127
Contact Us
If you have questions or concerns about any of your year-end reporting requirements, please contact us. We look forward to speaking with you soon.
