Year-End Information Reporting Requirement: Reminders and Updates
FORM 1099s
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. This form is currently required for each payee that received:
- At least $10 in royalties or broker payments in lieu of dividends or tax exempt interest
- 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 notional principal contract to an individual, partnership, or estate, or
- Any sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
Also, a 1099-MISC is 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 (including capital gain dividends) or other distributions on stock
- 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, or
- 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, or
- 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 that are frequently missed in the process of year-end preparation of form W-2 are noted below:
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
Health Insurance Premiums paid for a 2% Shareholder
An individual who owns 2% or more of an S Corporation can claim a deduction on their individual tax return for insurance premiums paid on their behalf by the S Corporation. The S Corporation must report the accident and health insurance premiums that are paid as wages on the 2% shareholders Form W-2. If reported property, 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.
RECENT LAW CHANGES
Form W-2
The Hiring Incentive to Restore Employment (HIRE) Act provides a 6.2% payroll tax incentive for qualified employers that hire certain unemployed workers during the period February 4, 2010 through December 31, 2010. The employer is entitled to an exemption for its share of the social security taxes on wages and tips paid to qualified employees from March 19, 2010 through December 31, 2010. The 2010 Form W-2 has a new box that is used to identify the amount of exempt wages and tips paid which the employer claimed the payroll tax exemption for its share of Social Security taxes.
The Patient Protection Act requires employers to disclose on each employee's annual Form W-2 the value of the employee's health insurance coverage sponsored by the employer, effective for tax years beginning after December 31, 2010. However, the IRS released Notice 2010-69 on October 12, 2010, granting relief from this provision and pushing the effective date to tax years beginning after December 31, 2011. This is a disclosure only and is not included in the taxable wages of the employee.
Form 1099
The Patient Protection Act also requires businesses to file an information return (a Form 1099 for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation). While the provision is not effective for several years (i.e., payments made after December 31, 2011) we strongly recommend that businesses begin collecting Form W-9 from all payees to assure the appropriate information is available in the year reporting begins.
