As we approach the end of 2016, following are items you should consider with regard to year-end reporting for your business.
Forms 1099
Businesses often make payments to individuals and unincorporated businesses, such as partnerships, LLCs and sole-proprietorships that are not considered wages and therefore 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.
All 1099 forms and the accompanying Form 1096 are required to be filed with the Internal Revenue Service on paper by February 28 or electronically March 31. If you are filing Form 1099-MISC and reporting Nonemployee Compensation, be aware that the form is required to be filed by January 31. Generally, 1099 forms must be provided to the recipient by January 31, but there are some exceptions. Forms 1099-B and 1099-S must be provided by February 15. Also, Form 1099-MISC, when using only boxes 8 or 14, must be provided by February 15 as well. For additional information please visit irs.gov.
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 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.
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 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 Internal Revenue Service (IRS) have recently issued joint FAQs 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 more than 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 fewer 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.
Due Date & Penalties
Please note the due date for filing form W-2 has changed. Form W-2 is now required to be filed with the Social Security Administration by January 31st whether filing using paper forms or electronically. Extensions of time to file are also no longer automatic. For filings due after January 1, 2017, a 30-day extension to file Form W-2 can be submitted by completing Form 8809.
The penalties for not complying with the aforementioned year-end reporting requirements increased 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.
Personal Property Statement
Form 632 Personal Property Statement is required to be filed annually to report any business personal property located in an assessment jurisdiction. The property located within the jurisdiction must be assessed as of December 31 each year and reported on Form 632 to arrive at a personal property tax assessment. If a taxpayer receives a personal property statement from the jurisdiction, they should complete the form and file by the due date even if no property is reportable.
The due date for filing Form 632 is February 20th following the end of the tax year and there is no extension of time to file. However, if the true cash value of the assessable personal property is less than $80,000 Form 5076, Affidavit to Claim Small Business Tax Exemption, may be filed. This exemption form is due by February 10th following the end of the tax year and must be filed timely to claim the exemption.
Failure to file a personal property statement received or Form 5076 will result in the assessor estimating the assessment for the year. If a taxpayer does not agree with the estimated assessment, they may appear at the March Board of Review in their local jurisdiction and can further appeal to the Michigan Tax Tribunal. The time between the estimated assessment and the March Board of Review meeting can be only 10 days. Promptly reviewing the assessment is important.
Furthermore, businesses may file an exemption for Eligible Manufacturing Personal Property. This specifically includes all personal property which is used more than 50% of the time in industrial processing or in supporting industrial processes. If the property was purchased by its first owner after 2012, or before 2006, the property is 100% exempt. If the property was purchased by the first owner in 2006-2012, the property is 100% exempt when the equipment becomes 10 years old. Businesses looking to claim this exemption must file Form 5278 by February 20th to receive the exemption.
Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons)
Every United States person that makes payments of fixed or determinable annual or period (FDAP) income such as dividends, interest, royalties and certain payments for personal services to a foreign payee (including nonresident aliens, foreign partnerships, foreign corporations, and nonresident aliens or foreign fiduciaries of estates or trusts) is required to withhold U.S. income taxes. Taxes withheld must be remitted to the IRS via electronic funds transfer (EFTPS) on a timely basis. Specific guidelines vary based on the frequency and amount of withholding.
Withholding on FDAP income is generally at a statutory rate of 30%; however, if the payee is a resident of a country that has a tax treaty with the United States, the rate may be reduced. Payors should procure a form W-8BEN (individuals) or W-8BEN-E (entities) from the payee to certify the payee is a resident of a country and is claiming a reduced treaty rate. Form W-8BEN-E has been revised and now requires additional information to be provided when claiming a treaty position that reduces withholding. The form requires the payee to indicate how they qualify for treaty benefits under the limitation of benefits article of the applicable income tax treaty. Withholding agents will not be required to obtain new documentation if the documentation they currently have on file has not expired. Generally, a Form W-8BEN-E is valid as long as there have been no change in circumstances for a period starting on the day the form is signed and ending on the last day of the third succeeding calendar year. For example, a form signed on September 30, 2014 remains valid until December 31, 2017, assuming no change in circumstances.
Payors of FDAP to foreign payees are required to prepare Form 1042-S and Form 1042-T and provide the information to each payee and the IRS no later than March 15 of the year following the payment. In addition, the payor must complete Form 1042, which is a reconciliation of the withholding taxes due and paid for the year. Form 1042 is also due no later than March 15. These forms are required even if no tax is required to be withheld under a treaty.
Due Date & Penalties
Form 1042-S must be filed either by paper or electronically by March 15. It is important to note that a traditional income tax extension does not extend the time to file the Forms 1042-S and 1042-T. By filing Form 8809, there is an automatic 30-day extension available.
A penalty will be imposed for failure to file each correct and complete form unless the failure was due to reasonable cause and not willful neglect. The penalties for filing late range from $50 per form if you file within 30 days of the due date to $260 per form if you file by August 1 with a maximum penalty of $3,193,000 per year ($1,064,000 for a small business). Intentionally disregarding the requirement to report correct information, causes a penalty per form increase to the greater of $530 or 10% of the total amount of items required to be reported with no maximum penalty. For more information regarding Form 1042-S please visit irs.gov.
