Every year brings a list of information filing requirements to make sure that payees have the information needed to file their taxes. To assist with year-end business reporting, Clayton & McKervey has identified some items to consider:
Businesses often make payments to individuals and unincorporated businesses (i.e., partnerships, LLCs, and sole-proprietorships) which are not wages and are not 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. Following 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, services (including parts and materials), prizes, awards, other income payments, medical and health care payments, or cash paid from a national 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
- Any payment to an attorney or law firm
- A 1099-MISC is also required for each payee subject to federal income tax withholding under the backup withholding rules
Form 1099-DIV (Dividends and Distributions)
This form is required to be filed for each payee who:
- Received at least $10 in dividends and other distributions on stock—not generally applicable to S Corporation distributions
- Had any foreign tax withheld and paid on dividends and other distributions on stock regardless of the amount of the payment
- Had any federal income tax withheld under the backup withholding rules regardless of the amount of the payment
- Received at least $600 as part of a liquidation
- Also, there is a new category of dividends that qualify for the 20% pass-through deduction. Businesses should be sure to report these in the new box 5 section 199A dividends, as well as include the amount in box 1a.
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
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 recharacterized as having been made to a traditional IRA
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 in preparation 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. 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.
- 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 in regards to 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.
Tax Cuts and Jobs Act (TCJA)
- Qualified Moving Expense Reimbursements Exclusion
The income exclusion for qualified moving expense reimbursements has been temporarily suspended under the TCJA beginning in taxable years after December 31, 2017. As a result, any reimbursements for moving expenses paid to employees must be included in taxable wages and are subject to withholding taxes. This suspension does not apply to active duty Armed Forces members.
- Donated Leave
There is a new allowance for employees who wish to donate their personal, sick, or vacation leave days to qualified tax-exempt organizations helping victims of some specified, recent natural disasters. Employers make cash payments to the qualified organization on behalf of the employee, and are able to deduct these payments as a business expense or charitable contribution. Employees are not taxed on this donated leave and it is not required to be reported on the employees’ W-2.
The penalties for not complying with the year-end reporting requirements are increasing beginning with the forms that are required to be filed after December 31, 2018. The penalty for each failure to report will be increased from $250 to $270 per form.
- Qualified Equity Grants Reporting
Internal Revenue Code (IRC) Section 83(i) covers “qualified equity grants” and was added by the TCJA. It comes with increased reporting requirements for eligible corporations with qualified plans. Generally, when stock from an exercise of a stock option or a stock grant is substantially vested, employees are required to recognize taxable income and income tax withholding requirements apply. In the case of a start-up business, this withholding burden often falls on the employee, which counteracts any incentive of the initial stock option or grant. Sec. 83(i) allows qualified employees who receive qualified stock to elect to defer the inclusion of taxable income and the corresponding withholding tax for up to five years.There are complex rules that cover what companies are covered, employee notification requirements, and penalties if employees are not notified timely. If you have a stock plan, please contact us so that we can review the provisions further.
If you have questions or concerns about any of your year-end reporting requirements, contact Clayton & McKervey.