As we approach the end of 2015, following are some items you should consider with regard to year-end reporting for your business.
Businesses often make payments to individuals and un-incorporated businesses (i.e., partnerships, LLCs, and sole-proprietorships) that are not considered 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 that do not constitute wages reportable on Form W-2 and is currently required for each payee that received:
- 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 who has any federal income tax withheld under the backup withholding rules.
Form 1099-DIV (Dividends and Distributions)
This form is required to be filed for each payee that:
- Received at least $10 in dividends and other distributions on stock – this does not generally apply 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.
Form 1099-INT (Interest Income)
This form is required to be filed for each payee that:
- 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, IRAs, Insurance Contracts, etc.)
This form is required to be filed for each payee who received 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. Also, the form is used to report death benefit payments made by employers that are not made as part of a pension, profit sharing, or retirement plan and reportable disability payments made from a retirement plan.
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:
The Affordable Care Act
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
Since the 1960s, employers have been allowed to put plans in place that reimburse employees for the purchase of individual health insurance policies. Under these plans, the reimbursements were nontaxable to the employee. With the recent changes to the healthcare landscape, the Department of Labor (“DOL); Health and Human Services (“HHS”); and the Internal Revenue Service (“IRS”) have recently issued joint FAQ’s that:
- Make it clear these arrangements are now required to be included in an employee’s compensation, and
- Make it clear that an arrangement where an employer provides cash reimbursement for the purchase of an individual market policy may not meet ACA market reforms and is potentially subject to Section 4980D penalties, whether treated as pretax or after-tax to the employee. The DOL/HHS/IRS are reinforcing the consequences 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.
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 (1) the cost of $50,000 of such insurance, plus (2) 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.
RECENT LAW CHANGES
Affordable Care Act
Effective with the 2015 reporting, the Affordable Care Act requires employers with over 50 full-time employees (applicable large employers) 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” that provides “minimum value” to their full-time employees and dependents, they may have 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 that sponsor 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.
The penalties for not complying with the aforementioned year-end reporting requirements are increasing beginning with the forms that are required to be filed after December 31, 2015. The penalty for each failure to report will be increased from $100 to $250 per form.