Controllers face many tasks at the end of the calendar year. This guide provides advice, reminders, and tips about certain responsibilities that require your attention in the next few weeks, and includes an update of rates and limits for 2018. Items covered include:
I. THE NEW YEAR
II. W-2s AND YEAR-END PAYROLL ADJUSTMENTS
III. INFORMATION RETURNS
IV. WITHHOLDING ON NON-EMPLOYEE PAYMENTS
V. AFFORDABLE CARE ACT (OBAMACARE)
VII. STATE ISSUES
The members of Mazars USA LLP’s Entrepreneurial Services Group are available to assist you in meeting your year-end compliance and reporting requirements.
I. THE NEW YEAR
TAX RELIEF TO VICTIMS OF HURRICANE HARVEY, IRMA AND MARIA
Hurricane victims in Florida, Georgia, Puerto Rico and the Virgin Islands, as well as parts of Texas have until January 31, 2018 to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for taxpayers with already valid extensions. In addition, the IRS is waiving late deposit penalties for federal payroll and excise tax deposits normally due during the first 15 days of the disaster period. The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. See the disaster relief page on www.IRS.gov for information as it updates.
Have your employees complete all appropriate election forms for 401(k) deferrals, flex plan contributions, etc., for 2018 in writing, in accordance with each plan’s provisions, before January 1, 2018.
If you have any employees who are claiming exemption from taxes, you must get a Form W-4 signed by them by February 15, 2018 to continue exemption from withholding for 2018. IRS regulations require employers to notify their employees to file a new Form W-4 for any changes to their withholding status. It is also advisable to verify that you have a valid Form W-4 for each employee, and that your payroll service is withholding based on the proper exemptions.
The Social Security Administration will continue to send letters when employee social security numbers on Forms W-2 do not match its records. Employers can verify social security numbers of employees at www.ssa.gov/bso.
Employers are required to verify eligibility for employment of all employees hired after 1986. Form I-9 is used for this purpose. Review your personnel files to determine that you have Form I-9 for all required employees, including business owners. USCIS released a revised version of Form I-9 on July 17, 2017 that must be used by all employers. This form can be obtained at www.uscis.gov/i-9, or by calling 1-800-870-3676. Penalties for noncompliance range from $110 to $1,100 for each violation. U. S. Immigration and Customs Enforcement (ICE) continues to conduct inspections of the Form I-9 for compliance, and will hold employers accountable for failure to comply.
Employers should take care not to use an Individual Taxpayer Identification Number (ITIN) that may have been assigned to certain nonresident and resident aliens. Only a social security number can be used for employment purposes.
ELECTRONIC DEPOSIT OF TAXES [EFTPS]
All Federal tax payments must be made through the Electronic Federal Tax Payment System. To enroll in EFTPS, go to www.EFTPS.gov or call 800-555-4477.
Confirm that your state disability and workers’ compensation policies are in force. States impose high daily penalties if policies have not been purchased or have lapsed.
On routine audits of workers’ compensation policies, the carrier will ask for certificates of coverage for independent contractors. If none can be produced, payments made to independent contractors will be included in your premium base. Make it a practice to obtain certificates of coverage before independent contractors are hired and retain them on file.
SOCIAL SECURITY & MEDICARE TAX BASE
The tax rates have remained the same as 2017, but the 2018 wage base increased to $128,400. The rates and the taxable wage base for FICA are shown below. There is no limit on the amount of wages subject to the Medicare tax:
Employers are required to withhold the 0.9% additional Medicare Tax on an individual’s wages and compensation paid in excess of $200,000 in a calendar year. The actual additional Medicare Tax liability is determined when you file your individual tax return depending on your filing status and applicable threshold amount. Based on this, any over-withholding or shortage will be adjusted on the individual tax return. There is no employer match for the additional Medicare Tax.
Monthly Social Security and Supplemental Security Income benefits for more than 66 million Americans will increase by 2% in 2018. COLA (cost-of-living adjustment) will begin with benefits payable to 61 million social security beneficiaries in January 2018, and increased payments to more than 8 million SSI beneficiaries will begin on December 29, 2017. The purpose of COLA is to ensure that the purchasing power of Social Security and SSI benefits is not eroded by inflation.
The earnings limit for workers under age 66 will increase to $17,040, and the limit for people turning 66 in 2018 will increase to $45,360. There is no limit on earnings for workers who are at retirement age or older.
401K MAXIMUM DEFERRAL
For 2018, the maximum deferral amount increases to $18,500 from $18,000 for those 49 years of age and younger, or $24,500 for those 50 years of age and older. In order for those 50 and older to make a catch-up contribution amount of $6,000, the Plan Sponsor must amend the plan (if not previously amended) to permit catch-up contributions, notify the plan participants that they can make catch-up contributions, and revise the plan election forms. In addition, since the catch-up contribution is not included in nondiscrimination testing, it has to be accounted for separately from other 401(k) contributions. The limit on annual contributions to an IRA remains unchanged from 2017, at $5,500. The catch up contribution limit for individuals aged 50 and over is not subject to the cost of living adjustment and remains $1,000.
Taxpayers are able to deduct contributions to a traditional IRA if they meet certain requirements. If the taxpayer or spouse was covered by a retirement plan at work during the year, the deduction can be reduced or phased out depending on certain conditions. The modified AGI phase out rates are as follows:
Single taxpayers: $63,000-$73,000
Married filing jointly: $101,000-$121,000
Married filing separately: $0-$10,000
Married taxpayer filing a separate return who’s covered by a retirement plan at work: $0-$10,000
SIMPLE IRA & SIMPLE 401K
For 2018 the maximum contribution remains $12,500 for those 49 years of age and younger, or $15,500 for those 50 years of age and older.
AUTO MILEAGE REIMBURSEMENT AND TRANSPORTATION FRINGE BENEFITS
The 2018 auto mileage rate increased, by one penny, to 54.5 cents per mile. The 2017 mileage rate is 53.5 cents per mile for business miles driven. For tax year 2017, the monthly limitation for the qualified transportation fringe benefit is $255, as is the monthly limitation for qualified parking. The 2018 limitation is not yet available.
PER DIEM RATES FOR BUSINESS TRAVEL
The per diem rate for travel can now be found at the U.S. General Services Administration Website www.GSA.gov. The rates are effective October 1 of each year. Traveler reimbursement is based on the location of the work activities and not the accommodations, unless lodging is not available at the work activity; in that case, the agency may authorize the rate where lodging is obtained.
VOLUNTARY CLASSIFICATION SETTLEMENT PROGRAM (VCSP)
The Internal Revenue Service (IRS) has a voluntary program that provides an opportunity for employers to resolve past worker classification issues by reclassifying their workers as employees for employment tax purposes for future tax periods. It allows employers the opportunity to be in compliance by making a minimal payment covering past payroll tax obligations, rather than waiting for an IRS audit.
This provides an eligible employer with substantial relief from federal payroll taxes that they may have owed in the past. If they prospectively treat workers as employees to participate in this new voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP using Form 8952, and enter into a closing agreement with the IRS.
REPORT OF FOREIGN ACCOUNTS
FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR) for the year 2017, is due on or before April 15, 2018, consistent with the Federal income tax due date. As part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Congress advanced the FBAR filing deadline from June 30 to April 15, beginning with forms filed in 2017 for the 2016 reporting year. The legislation also provides for an automatic extension period of six months (until October 15) for FBARs, in contrast to the prior statutory rules, which allowed for no extensions. In addition, the legislation provides for waiver of any late filing penalty for first-time filers who fail to submit a timely extension request or file an extension (but who presumably file by October 15). File the FBAR electronically through the BSA E-File System. If you are unable to e-file, you may contact the FinCEN Regulatory Helpline at 800-949-2732 to request an exemption.
A US person who has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. The type of accounts and filing requirements have been expanded to include certain types of investments, bank accounts, and those who are authorized to initiate transactions and sign on foreign accounts. There are significant penalties for failure to file. Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. If your violation is found to be willful, the penalty is the greater of $100,000 or 50 percent of the amount in the account for each violation—and each year you didn’t file is a separate violation.
You also may be required to file Form 8938 along with your individual tax return to report the ownership of specified foreign assets if the total exceeds an applicable threshold amount.
Please contact us for further information regarding your filing obligations.
PAYMENT CARD REPORTING REQUIREMENTS
Information reporting for credit card payments and third- party network transactions are to be reported on Form 1099-K by January 31, 2018 to businesses for the gross amount of transactions they process.
You should make sure that you provide your credit card processors with the correct Federal identification number and a description of your business so that they properly assign you the applicable merchant category code.
II. W-2’S AND YEAR-END PAYROLL ADJUSTMENTS
W-2 forms must be distributed to your employees by January 31, 2018. Before processing W-2s, the following steps should be taken:
- Notify your payroll service in writing to keep your 2017 payroll file open for adjustments, including manual checks and voids, taxable fringe benefits, and third-party sick pay.
- Many payroll services can provide a W-2 draft report, which should be reviewed before the W-2s are finalized. This step will eliminate the need to incur expenses for revising incorrect Forms W-2, and/or filing amended Forms W-2.
- Report any manual payroll checks, voided checks, third party sick pay, etc. to your payroll service before your last December payroll, or before the closing date for adjustments as agreed to by your service. Unreported adjustments will result in the need for Forms W-2C, extra charges from your payroll service, and, probably, penalties for late payment of taxes.
- Review your bank reconciliations and your general ledger net payroll account to make sure that all adjustments have been reported.
- If you have a 401(k) plan, premium-only plan, or other plans administered by your payroll service, review the coding of your employees so that the payroll service can do appropriate testing to avoid disqualification of the plan.
- Before distributing Forms W-2 to employees, reconcile the totals to your general ledger and to the quarterly 941 returns that were filed for the year.
Please be aware of these filing deadlines. Have all employees review their Form W-2, and make necessary corrections prior to filing to alleviate having to file corrected W-2s. Forms W-2 can be filed electronically with the Social Security Administration at www.socialsecurity.gov/employer. They are required for all employees that were paid $600 or more in wages, even if no taxes were withheld.
EXTENSIONS OF TIME
Extension of Time to File with the SSA
Extensions of time to file Form W-2 with the SSA are no longer automatic. For filings due on or after January 1, 2018, a 30-day extension must be requested by submitting a completed Form 8809. A detailed explanation is required, and the IRS will only grant the extension in extraordinary circumstances or catastrophe, such as a national disaster that destroys a company’s books and records. If the IRS grants the extension, then the Forms W-2 must still be furnished to employees by January 31, 2018, unless the due date to furnish forms to recipients has also been granted an extension.
Extension of Time to Furnish Form W-2 to Recipients
You may request an extension of time to furnish the statements to employees by sending a letter to Internal Revenue Service, Attn: Extension of Time Coordinator, 240 Murall Drive, Mail Stop 4360, Kearneysville, WV 25430. The request must be postmarked by January 31, 2018 and include (a) payer name and address, (b) payer TIN, (c) a statement that you are requesting an extension to furnish “Forms W-2” to employees, (d) the reason for the delay, (e) signature of the payer or authorized agent. Requests are not automatically granted. If approved, an extension will generally be for no more than 15 days from the due date, unless the need for up to a total of 30 days is clearly shown.
Penalties and exceptions are based on when you file the correct Form W-2. Please see the Information Returns section for specific penalty information.
HEALTH CARE BENEFIT REPORTING
The reporting of the cost of employer-sponsored group health coverage is mandatory for the year 2017 for all employers under the Affordable Care Act, for informational purposes. It is reported on the Form W-2 in Box 12 using Code DD (full premium payment). There is no transition relief in 2017 for health care benefit reporting, please see the Affordable Care Act Section.
QUALIFIED SMALL EMPLOYER HEALTH REIMBURSEMENT ARRANGEMENT (QSEHRA)
A new box 12 Code FF has been added to report the total amount of permitted benefits under a QSEHRA. QSEHRAS allow eligible employers to pay or reimburse medical care expenses of eligible employees after employees provide proof of coverage. Reimbursements are capped at $4,950, ($10,000 if also providing for family members), before indexing for inflation.
LEAVE-BASED DONATION PROGRAMS – SEVERE STORMS AND FLOODING IN LOUISIANA, VICTIMS OF HURRICANE MATTHEW
These programs allowed employees to donate their vacation, sick, or personal leave in exchange for employer cash payments made before January 1, 2018, to qualified tax-exempt organizations providing relief for the victims of the events listed above. The donated leave will not be included in income or wages of the employee. The employer may deduct the cash payments as business expenses or charitable contributions.
FEDERAL EMPLOYERS IN THE CNMI
There are special income tax withholding requirements for certain federal agencies that have employees who work in the Commonwealth of the Northern Mariana Islands (CNMI) or Puerto Rico. Rather than U.S. federal income taxes, all federal employers (including the Department of Defense) are required to withhold and deposit CNMI taxes with the CNMI Treasury for those employees whose regular place of federal employment is in the CNMI.
LIMIT ON HEALTH FLEXIBLE SPENDING ARRANGEMENT (FSA)
For 2017, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $2,600. The salary reduction contribution limitation of $2,600 does not include any amount (up to $500) carried over from a previous year. In 2018 the limit will increase to $2,650.
In addition to withholding Medicare tax at 1.45%, an employer is required to withhold a 0.9% Additional Medicare Tax on any FICA wages or RRTA compensation it pays to an employee in excess of $200,000 in a calendar year. Additional Medicare Tax is only imposed on the employee, not the employer. An employer begins withholding in the pay period where wages or compensation exceeds $200,000, and continues to withhold it until the end of the calendar year.
EMPLOYEE’S FICA PAID BY EMPLOYER
If you paid your employee’s share of social security and Medicare taxes rather than deducting them from the employee’s wages, you must include these payments as wages subject to federal income tax withholding, and social security, Medicare and federal unemployment (FUTA) taxes. This does not apply to household and agricultural employers, who must only include these payments in employee wages for income tax withholding purposes. The wage increase is not subject to social security, Medicare, or FUTA taxes.
Paper Forms W-2 must be filed with the Social Security Administration by January 31, 2018. Forms W-2 can be filed electronically with the Social Security Administration at www.socialsecurity.gov/employer. If you are filing 250 or more returns, they must be filed electronically using specialized software. The due date for electronically filed returns is January 31, 2018. If you e-file, do not file the same returns using paper forms.
COMMON PAYROLL ADJUSTMENTS
The following is a brief summary of some of the items that are taxable to employees in addition to wages and salaries.
THIRD-PARTY SICK PAY
Sick pay or disability payments made to your employees by your insurance carrier are includible as compensation on the W-2. Such payments, particularly those made in the 4th quarter, will not be reported to you by the insurance carrier until sometime in January. You should determine if your disability insurance carrier is responsible for filing a separate Form W-2 for sick pay. If the insurance company or other third-party payer did not notify you in a timely manner about the sick pay payments, it must prepare Forms W-2 and W-3 for your employees showing the sick pay. If not, it is important that you inform your payroll service to keep 2017 open for adjustments.
EMPLOYEE BUSINESS EXPENSE REIMBURSEMENTS
If you have an accountable plan (in which your employees must give an accounting to you and substantiate their expenses), do not report any reimbursement to your payroll service. However, if you make payments for expenses to your employees and they do not account to you or substantiate their expenses, then you must include those payments as wages, subject to all taxes. In addition, any excess reimbursements must be returned in a reasonable time so as not to be treated as wages.
TAXABLE PREMIUMS ON EXCESS GROUP LIFE INSURANCE
Each employee who is covered for more than $50,000 of group term insurance must be taxed on the value of the excess coverage. Report the cost as wages in boxes 1, 3, and 5 of Form W-2, and in Box 12 with “Code C.” This benefit is subject to FICA and Medicare tax, but not income tax withholding. The amount to be included is calculated based on the age of the employee, the amount of coverage, and the cost in accordance with this table published by the IRS:
To calculate the amount to be included in wages, multiply
Monthly Cost * Full Month’s Coverage * Months Covered.
Remember to reduce the full month’s coverage by $50,000 before plugging it into the equation, and also to reduce the result by any amount the employee paid toward the insurance.
If the full month’s coverage was $150,000, the employee was 47 years old, and the employee contributed $80 towards life insurance, then the following calculation would be made to determine the amount reported on the employee’s Form
$150,000 – $50,000 = $100,000
$0.15 * 100 * 12 months = $180
$180 – $80 = $100
YEAR-END BONUS PAYMENT
Notify your payroll service if you want an additional bonus payroll set up. Advise your employees that taxes must be withheld. Several of our clients have had withholding tax audits, and bonus payments are one area being audited. You could be subject to penalties and/or interest if the proper taxes are not withheld. This applies to State, City and Federal withholding.
For 2017, the optional flat rates for withholding on supplemental payments including bonuses are:
FUTA TAX RATE
The FUTA tax rate is 6.0%. This results in a net FUTA tax rate of 0.6% if you are entitled to the maximum 5.4% credit for payment of state UI taxes.
Some states take Federal unemployment trust fund loans from the Federal government. The United States Department of Labor determines which states have not repaid money borrowed from the Federal government to pay unemployment benefits. These states are considered “credit reduction states”, and are required to pay additional Federal unemployment tax when filing an annual Form 940 return.
For 2017, the following states have been determined to be credit reduction states. The Form 940 Schedule A will list all the states subject to this additional tax, which can vary from year to year. In years when there are credit reduction states, you must include liabilities owed for credit reduction with your fourth quarter deposit. Employers in states with a credit reduction will incur a FUTA tax rate of .6% + FUTA credit reduction + BCR (Benefit Cost Rate) add-on.
These states are also potentially subject to the Benefit Cost Rate (BCR) additional credit reduction. Both states have applied for FUTA Credit Reduction Relief.
The Children’s Health Insurance Program Reauthorization Act of 2009 requires that employers must notify individuals of their rights to obtain premium assistance for coverage for children. A model notice is available at www.dol.gov/ebsa/pdf/chipmodelnotice.pdf.
Employer-provided education assistance program payments up to $5,250 are not subject to tax (IRS Code Sec 127). Amounts in excess of $5,250 per year must be included as taxable wages, unless the expenses are considered to be working condition benefits, i.e., the employee would have been able to deduct the cost had he or she paid for it. Payments for business training under an accountable plan are not required to be reported on Form W-2.
TAXABLE FRINGE BENEFITS
Be sure to report to your payroll processor any includible amounts, such as the value of personal expenses advanced by the company, including personal auto usage, travel for family members, meals and entertainment, and professional fees. Employees who use company vehicles are required to keep records that substantiate their business usage of such vehicles. Expenses reimbursed under a non-accountable plan must be included in the employee’s income.
NONQUALIFIED DEFERRED COMPENSATION PLANS
All amounts deferred under a nonqualified deferred compensation plan are currently includible in gross income unless certain requirements are satisfied (Code Section 409A). Such deferrals are reported on Form W-2 in box 1 and in box 12 using Code Z (income amount). This income is also subject to an additional tax of 20% that is reported on Form 1040. Code Y (deferral amount) is not required to be reported on Form W-2. Nonqualified deferred compensation may also be reported as income on Form 1099-Misc box 7, including all deferrals reported in box 15b.
OTHER REPORTABLE AMOUNTS
If you have any special situations, including adoption benefits, Medical Savings Accounts, moving expenses, outplacement benefits, or employee business expense reimbursements under a non-accountable plan, contact us to discuss proper treatments.
III. INFORMATION RETURNS
Many payments made in the ordinary course of business must be reported to the IRS, generally on 1099 series forms. Not-for-profit organizations are also considered to be engaged in a trade or business, and are subject to reporting requirements. Form W-9 (or one of the Form W-8 series for foreign persons) should be used for obtaining taxpayer identification numbers. You should request to have this completed prior to issuing payment.
The following tables list key information returns and their due dates:
* If reporting payments in Box 7 (Non-employee compensation)
** If reporting payments in Box 8 or 14
*** If reporting by trustees and middlemen of WHFITs (Widely Held Fixed Investment Trust)
If you are filing 250 or more returns, they must be filed electronically using specialized software. File Form 4419 at least 30 days before the due date of the returns to obtain approval to file electronically. Failure to file electronically when required to do so may lead to a penalty of up to $260 per return, unless reasonable cause can be established. The first 249 returns can be filed on paper, not subject to the electronic filing penalty.
Penalties are indexed for inflation, and are as follows:
Failure to File Correct Information Returns by the Due Date
- $50 per Information Return if filed correctly within 30 days of the due date; maximum penalty of $536,000 per year ($187,500 for small businesses).
- $100 per Information Return if filed correctly more than 30 days after the due date, but by August 1; maximum penalty of $1,609,000 per year ($536,000 for small businesses).
- $260 per Information Return if filed after August 1, no corrections are filed, or if the required Information Return is not filed; maximum penalty of $3,218,500 per year ($1,072,500 for small businesses).
- At least $530 per Information Return with no maximum penalty if failure to file is due to intentional disregard of the filing requirements.
Failure to Furnish Correct Statement to Recipients by the Due Date
- It is a separate penalty, but is applied the same as failure to file (listed above).
In order to claim a safe harbor exemption regarding independent contractors, Form 1099-MISC must have been filed; in IRS audits, the agents typically ask to see 1099-MISC forms.
Payee identification numbers can be truncated on certain paper payee statements, but not on any forms filed with the IRS or state and local governments, nor on any payee statement furnished electronically.
An inconsequential error or omission is not considered a failure to include correct information. Errors and omissions that are never inconsequential are those related to (a) a TIN, (b) a payee’s surname, and (c) any money amount except as provided, later, with respect to the safe harbor for de minimis dollar amount errors.
If you meet the following de minimis rule for corrections, even though you cannot show reasonable cause, the penalty for failure to file correct information returns will not apply to a certain number of returns if:
- You filed the forms on or before the required filing date,
- You either failed to include all of the information required on the form or included incorrect information, and
- You filed corrections of these forms by August 1.
If you meet all of the de minimis rule conditions, the penalty for filing incorrect information returns (including Form W-2) will not apply to the greater of 10 information returns (including Form W-2) or ½ of 1% of the total number of information returns (including Form W-2) that you are required to file for the calendar year.
No correction need be filed, and a Safe Harbor will apply, if an information return (including Form W-2) is issued with incorrect dollar amounts, and the corrected dollar amount is off by $100 or less, and tax withheld is off by $25 or less. The de minimis error safe harbor does not apply for failures to file or furnish an information return or payee statement outright, even if it would report dollar amounts of $100 or less (or $25 or less with respect to any amount of tax withheld).
EXTENSIONS OF TIME
Extension of Time to File with the IRS
You can get an automatic 30-day extension of time to file by completing Form 8809 and filing by the due date of the returns. It may be submitted on paper, or through the FIRE System. No signature or explanation is required. The IRS encourages electronic submission. Under certain hardship conditions, you may apply for an additional 30-day extension.
Extension of Time to Furnish to Recipients
You may request an extension of time to furnish the statements to recipients by sending a letter to Internal Revenue Service, Attn: Extension of Time Coordinator, 240 Murall Drive, Mail Stop 4360, Kearneysville, WV 25430. The letter must include (a) payer name, (b) payer TIN, (c) payer address, (d) type of return, (e) a statement that extension request is for providing statements to recipients, (f) reason for delay, and (g) the signature of the payer or authorized agent. The request must be postmarked by the date on which the statements are due to the recipients. Generally, you will be granted a maximum of 30 extra days to furnish the recipient statements.
The following list of reporting items is not all-inclusive:
Payments of $600 or more made to individuals, partnerships (including LLPs and LLCs), physicians, physicians’ corporations, other suppliers of health and medical services, and all attorneys, are reportable. Payments for merchandise and payments to real estate agents for rents are not reportable, but payments of rent to landlords are reportable. Payments for royalties of $10 or more are reportable (Box 2). Broker payments in lieu of dividends or tax-exempt interest of $10 or more are reportable (Box 8).
Rental income recipients are required to report payments they made for expenses that they deducted from rental income using the form 1099-MISC reporting requirements. Paying vendors by credit card would reduce 1099-MISC filing requirements.
While payments to corporations are typically not required to be reported on Form 1099-Misc, certain payments to corporations must be reported. Such as payments to attorney’s, medical corporations, etc.
CREDIT CARD PAYMENTS
Payments made with a credit card that are reported on Form 1099-K by your credit card company that otherwise would be reportable on a Form 1099-MISC are not subject to reporting by the payer.
Attorneys’ fees and gross proceeds made to attorneys of $600 or more must be reported, even if the attorney is a corporation. Legal fees are reportable in box 7. If a payment is made to an attorney and the portion that is a legal fee cannot be determined, the total amount paid to the attorney must be reported (box 14). These rules apply even if the attorney is not the exclusive payee.
Punitive damages, damages for non-physical injuries or sickness, and any other taxable damages must be reported on form 1099-MISC. Certain damages are not required to be reported. Please call our office for further information regarding taxable and non-taxable damages.
Any interest payments of $10 or more (or at least $600 of interest paid in the course of a trade or business) to individuals, partnerships, and LLCs must be reported. If interest has been imputed on a loan, this should be reported to avoid the below-market interest rules.
Original issue discount of $10 or more on notes, including installment sale notes, must be reported on an accrual basis each year.
File Form 1099-DIV, Dividends and Distributions, for each person to whom you have paid dividends (including capital gain dividends and exempt-interest dividends) and other distributions on stock of $10 or more; 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; or to whom you have paid $600 or more as part of liquidation.
Distributions to participants of $10 or more from your pension plan, 401(k) etc., must be reported with the appropriate codes. Coordinate with your actuary or plan administrator to determine who will be responsible for filing 1099-Rs. Cost of current life insurance protection provided by a pension plan, 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 must also be reported on form 1099-R.
For 2017, late rollover contributions to an IRA certified by the participant are reportable in boxes 13a and 13b on Form 5498. The self-certification code is reportable in box 13c.
Mortgage interest of $600 or more received by you from an individual, including a sole proprietor, must be reported if you are engaged in a trade or business of lending. File a separate Form 1098 for each mortgage. The $600 threshold applies separately to each mortgage, so you are not required to file Form 1098 for a mortgage on which you have received less than $600 in interest, even if an individual paid you over $600 on multiple mortgages. For 2017, filers must report the number of properties in excess of one (1) that secure a single mortgage. Mortgage insurance premiums of $600 or more received by you are reportable in box 5, including prepaid premiums.
All employees receiving $20 or more a month in tips must report 100% of their tips to their employer. You must file Form 8027 if you’re an employer who operates a large food or beverage establishment, normally employing more than 10 full-time equivalent employees, not counting owners with more than 50% ownership. Form 8027 is due on paper by February 28, 2018 or by April 2, 2018 if filed electronically. If you need further information on tip reporting, please contact us.
There are several other situations that require reporting, such as payments to fish vendors, Archer Medical Savings Account payments, health savings accounts, real estate transactions, barter transactions, and cancellation of debt. Contact us for further information on these types of reporting.
IV. WITHHOLDING ON NON-EMPLOYEE PAYMENTS
Form 945 to report other withholding tax must be filed by January 31, 2018. Taxes reported on Form 945 must be deposited separately from other withheld taxes. If you made deposits on time in full payment of the taxes for the year, you may file the return by February 12, 2018. Your return will be considered timely filed if it is properly addressed and mailed First-Class, or sent by an IRS-designated private delivery service on or before the due date.
All lump-sum retirement plan distributions paid directly to employees (as distinguished from rollovers) are subject to an automatic 20% Federal withholding tax. This applies whether the distribution is due to changing jobs, retirement, termination, or early withdrawals. Minimum distributions (for beneficiaries over 70 ½) are subject to 10% withholding only if the beneficiary so desires.
If the lump-sum distribution is paid directly to a trustee of a rollover account, the 20% withholding tax will not apply. However, the distribution must be paid directly to the rollover IRA, and must not be payable to the employee. Tax withheld on pension distributions is reportable on Form 945.
Payments that are subject to 1099 reporting are subject to backup withholding at a rate of 24% if the payee fails to provide his or her correct taxpayer identification number. The IRS enforces the collection of such withholding where a Form 1099 reports a missing taxpayer identification number or an incorrect number. You will be liable for uncollected tax, penalties, and interest on such payments. Therefore, it is extremely important that payments subject to 1099 reporting not be made until the payee’s taxpayer identification number is obtained. The IRS provides validation of tax identification numbers and names through its website. Please contact our office if you need further information on this service.
If you receive a notice from the IRS that a number is incorrect, you will have to begin withholding taxes from future payments for that payee. Backup withholding (reported on Forms 1099 and Form W-2G, Certain Gambling Winnings) is reportable on Form 945, Annual Return of Withheld Federal Income Tax.
Separate deposits are required for payroll (Form 941 or Form 944) and non-payroll (Form 945) withholding. Deposit all withheld Federal income tax by EFT. There are two deposit schedules – monthly or semiweekly – for determining when you must deposit Federal income tax withheld. For 2017, you’re a monthly schedule depositor for Form 945 if the total tax reported on your 2015 Form 945 (Line 3) was $50,000 or less. If the total tax reported for 2015 was more than $50,000 you’re a semiweekly schedule depositor.
If you’re a monthly schedule depositor and accumulate a $100,000 liability or more on any day during a calendar month, your deposit schedule changes on the next day to semiweekly for the remainder of the year and for the following year.
There are penalties for filing Form 945 late and for paying or depositing taxes late, unless there is a reasonable cause.
Amounts Not Properly or Timely Deposited
Interest is charged on taxes paid late at a rate set by law.
Form 1042 is used to report tax withheld from foreign persons or entities. Form 1042 must be filed and furnished to recipients by March 15, 2018.
FOREIGN PARTNERS OR PAYEES
Three forms are required for reporting and paying tax withheld on effectively connected taxable income allocable to foreign partners; Form 8804, Form 8805, and Form 8813.
Form 8804 and Form 8805 used to report income and tax withheld must be filed annually with the IRS by the 15th day of the 3rd month following the close of the partnership’s year (March 15th for calendar year partnerships). Certain payments to foreign payees for services performed in the United States require tax to be withheld and remitted on Form 1042 by March 15, 2018. Form 8804 is a transmittal form for Form(s) 8805. File a separate Form 8805 for each foreign partner, whether or not any withholding tax was paid, and attach Copy A of each Form 8805 to the Form 8804 filed with the IRS. Form 8805 must be sent to each foreign partner by the due date of the partnership return (including extensions). Although an extension of time to file Form 8804 is permitted by filing Form 7004, it does not extend the time to pay the tax.
Form 8813 must accompany each payment of section 1446 (partnership withholding) tax made during the partnership’s tax year. File on or before the 15th day of the 4th, 6th, 9th and 12th months of the partnership’s tax year.
Interest is charged on taxes not paid by the due date, even if an extension to file is granted. It is also charged on penalties imposed. Interest rates are determined under section 6621.
Late filing of Form 8804 results in a penalty of 5% of the unpaid tax for each month or portion of a month the return is late, up to a maximum of 25% of the unpaid tax, unless the partnership can show reasonable cause. If Form 8804 is filed more than 60 days late, the minimum penalty will be $205 or the amount of any tax owed, whichever is smaller.
Both late filings of Forms 8805 required to be filed and failure to furnish correct Forms 8805 to recipients when they are required to be furnished, result in a penalty of $260 per Form 8805, with a maximum penalty of $3,218,500 per year. The penalty can be reduced or eliminated if the partnership has average annual gross receipts of less than $5 million during a specific time period, corrects the failure to file during the specific time period, or has a de minimis number of failures to file correct forms.
V. AFFORDABLE CARE ACT (OBAMACARE)
The Affordable Care Act (“ACA”) imposes two major obligations on “Applicable Large Employers” (employers with 50 or more full-time equivalent employees):
- Offer Qualifying Health Insurance to Full-Time Employees (at least 30 hours of service per week) and their dependents up to age 26; and
- Comply with the ACA’s annual reporting requirements.
An employer that sponsors self-insured health coverage – whether or not the employer is an ALE – has information reporting responsibilities as a provider of minimum essential coverage.
FORM 1094-C & 1095-C
Form 1094-C is used to report summary information for each ALE Member and to transmit Forms 1095-C to the IRS. Form 1095-C is used to report information about each employee to the IRS and to the employee. The forms are used in determining whether an ALE Member owes a payment under the employer shared responsibility provisions under section 4980H. Form 1095-C is also used to determine the eligibility of employees for the premium tax credit. An ALE member must file Form 1094-C and Form 1095-C for each employee with the IRS on or before February 28, 2018 (April 2, 2018 if filed electronically) of the year immediately following the calendar year for which the offer of coverage information is reported, and must furnish to each full-time employee on or before January 31, 2018.
FORM 1094-B & 1095-B
Small employers and other providers of minimum essential coverage that aren’t subject to the employer shared responsibility provisions will use Forms 1094-B and 1095-B to report information about covered individuals. Form 1095-B is used to report certain information to the IRS and to taxpayers about individuals who are covered by minimum essential coverage and therefore aren’t liable for the individual shared responsibility payment. Small Employers that sponsor self-insured group health plans will also use Forms 1094-B and 1095-B. Forms 1094-B and 1095-B are required to be filed by February 28, 2018, or April 2, 2018, if filing electronically. You can get an automatic 30-day extension of time to file by completing Form 8809 and filing it with the IRS on or before the due date, which can be filed either by paper or electronically. No signature or explanation is required. Under certain hardship conditions, you may apply for an additional 30-day extension. Form 1095-B must be furnished to individuals by January 31, 2018.
While various forms of transition relief was available to employers under section 4980H for 2016, no section 4980H transition relief is available for 2017. Transition relief had exempted certain employers from the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year.
The IRS imposes significant penalties for each obligation not satisfied by the Applicable Large Employer and small employer or other provider of minimum essential coverage. The penalty for failure to file a correct information return is $260 for each return, with the total penalty not to exceed $3,218,500. The penalty for failure to furnish a correct payee statement is also $260 for each statement, with the total penalty not to exceed $3,218,500. Special rules apply that increase the per-statement and total penalties if there is intentional disregard of the requirement to file or furnish the required statements. Penalties may be waived if the failure was due to reasonable cause and not willful neglect.
See Flowchart on the Next Page
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) COVERAGE
The current standard maximum deposit amount remains at $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution, for each account ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank. For example, a revocable trust account with one owner naming three unique beneficiaries can be insured up to $750,000.
NANNY TAX THRESHOLD INCREASE
The Social Security Administration (SSA) has announced that cash wages paid by an employer for domestic service in the employer’s private household is subject to FICA tax (“nanny tax”) if the amount of wages paid during the year is more than $2,100 (increased for 2018 from $2,000 for 2017).
ANNUAL GIFT EXCLUSION
For 2018, the annual gift exclusion has increased to $15,000 from $14,000 in 2017.
CHANGES IN OVERTIME RULES
On May 18, 2016, President Barack Obama announced publication of the final Department of Labor (DOL) rule on overtime to be effective December 1, 2016. Before the final rule could go into effect, a number of business groups and state governments filed suits in district court, which later consolidated. Based on the decision of the Federal Court holding the DOL overtime exemption rules invalid it appears the final rule is unlikely to ever go in to effect. Employers impacted by the overtime rules should continue to follow future developments.
VII. STATE ISSUES
WITHHOLDING FROM EMPLOYEES
Many states permit employers to rely on the exemptions claimed on Federal Form W-4. However, some states do require that a separate withholding form be submitted if an employee is claiming excessive allowances. For example, New York State requires the submission of Form IT-2104 if more than 14 exemptions are claimed. Please contact our office for specific requirements for other states.
MINIMUM WAGE (NYS AND NYC)
On April 4, 2016 New York Governor Andrew Cuomo signed a law which will significantly increase the minimum wage in New York State, from the current rate of $9.00 to $15.00 by the end of 2018 for many businesses in New York City, and to $15.00 by the end of 2021 for Nassau, Suffolk and Westchester counties. The minimum wage for the remainder of the state will reach $12.50 by the end of 2020.
The minimum wage increases in New York State on December 31, 2017. The minimum wage rates for New York are as follows:
Under the fast food wage order, the minimum wage for workers in fast-food establishments will increase December 31, 2017 to $13.50 an hour for NYC employees and to $11.75 per hour for fast-food employees employed outside of the City of New York. After December 31, 2018, the minimum wage for fast-food establishments will increase to $15.00 in New York City and to $12.75 in the rest of New York State.
OTHER STATE MINIMUM WAGE RATES
* The ordinance provides that the minimum wage will not increase when the unemployment rate in Chicago for the preceding year, as calculated by the Illinois Department of Employment Security, was equal to or greater than 8.5 percent. The ordinance also provides that if the CPI increases by more than 2.5 percent in any year, the minimum wage increase shall be capped at 2.5 percent.
12-WEEK PAID FAMILY LEAVE POLICY
On April 4, 2016, Governor Cuomo signed into law the 12 Week Paid Family Leave Policy, which is the most comprehensive in the nation. When fully phased in, employees will be eligible for 12 weeks of paid family leave when caring for an infant, family member with a serious health condition, or to relieve family pressures when someone is called to active military service. Paid family leave is not available for pre-natal conditions. Beginning on January 1, 2018 benefits will be phased in at 50% of an employee’s average weekly wage, but capped to 50 percent of the statewide average weekly wage. It will be fully implemented in 2021 at 67% of the employee’s average weekly wage, but capped at 67% of the weekly statewide average. The Average Weekly Wage is set every year by the NYS DOL. For example, in 2018 an employee that makes $1,000 a week would receive a benefit of $500 a week, and the maximum amount of NY State’s Average Weekly Wage (NYSAWW) is $652.96. An employee that makes $2,000 a week in 2018 would only receive $652.96 because of the New York State cap. This program will be included under the disability policy all employers must carry, and the premium will be fully funded through a nominal payroll deduction for employees, so employers will incur no cost. Employees will be eligible to participate after having worked for their employer for six months.
NYC SICK LEAVE
Employers with five or more employees who are employed for hire more than 80 hours per calendar year in New York City must provide paid sick leave. Employers with fewer than five employees must provide unpaid sick leave. Employers with one or more domestic workers who have worked for the employer for at least one year and who work more than 80 hours a calendar year must provide paid sick leave. This law also applies to employees who do not live in New York City but work in New York City more than 80 hours per calendar year, and employers located outside of New York City that have employees that work in New York City more than 80 hours per calendar year. Nonprofit employers are covered by the Paid Sick Leave Law and must comply.
This law does not apply to employees who work 80 hours or less per calendar year in New York City; government agencies (U.S. Government, State of New York City, City of New York); participants in Federal work-study programs; employees whose work is compensated by qualified scholarship programs; physical therapists; occupational therapists; speech language pathologists and audiologists licensed by the New York State Department of Education; independent contractors who do not meet the definition of an “employee” defined in the New York State Labor law; participants in Work Experience Programs; and certain employees subject to a collective bargaining agreement.
Employees begin to accrue sick leave on their first day of employment at the rate of one hour for every 30 hours worked, up to a maximum of 40 hours per calendar year. An exception to this is a domestic worker, who has worked for the employer for at least one year, will earn two days of paid sick leave. When an employee uses paid sick leave, the employer must pay the employee what the employee would have earned for the amount of time and the type of work the employee was scheduled to perform at the time the paid sick leave is taken.
NEW HIRE NOTIFICATION
You must continue to provide information about newly hired employees within 20 calendar days from the hiring date or rehire date. If there is a newly hired nonresident alien visa employee, you have 20 calendar days to report the new hire starting from the date the employee receives a Social Security number. Failure to report newly hired employees will result in a $20 penalty for each employee not reported. Failure to file a report showing the required information also results in a $20 penalty for each false or incomplete report filed. Employers in New York State that report electronically must do so using two monthly transmissions (if needed) not less than twelve, or more than sixteen, days apart. The State of New Jersey requires employers that submit electronically to report every 12-16 days. Contact information is:
You can obtain a link to new hire reporting for all states at www.sba.gov/content/new-hire-reporting-your-state. Multi-state employers can designate one state in which any employee works, and transmit all new hire information to that state alone. You must notify the U. S. Department of Health & Human Services in writing if this option is selected. A multistate employer notification form is available on www.acf.hhs.gov.
Your payroll processing company may or may not report new hires as part of its service, so you should contact your provider to determine whether or not this is being reported for you.
NOTIFICATION TO NEWLY HIRED EMPLOYEES
New York State requires that newly hired employees be notified in writing at the time of hiring as to their rate of pay, their overtime rate of pay (if eligible for overtime), and the employer’s regular pay day. The employer must obtain and retain a written acknowledgement from the employee of the receipt of the written notices. The bill that was signed on December 29, 2014 eliminates the annual notice requirement as of 2015. There are significant civil penalties for failure to comply – $1,000 for the first violation, $2,000 for the second violation, and $3,000 for each subsequent violation. Under the new bill, the maximum penalty for damages in civil lawsuits filed by workers increases to $5,000. If the Labor Commissioner has issued an Order to Comply against an employer who does not pay the money owed, the DOL can require them to post a bond or provide a list of their assets. If an employer fails to do so 10 days after the appeal period, the Commissioner may bring a court case against them, and the failure to provide the list of assets can have a penalty imposed of $10,000. 15% in damages to a judgment can be added if the employer fails to pay in full within 90 days. The notification must be made using the official form published by the New York State Department of Labor. Form LS 54 is available at www.labor.ny.gov.
WITHHOLDING REQUIREMENTS FOR NON-RESIDENT PARTNERS
Many states require partnerships and limited liability companies to withhold estimated taxes from non-resident partners, but there are situations where certain partners may be exempt. Contact us for further information.
NEW JERSEY UNEMPLOYMENT AND DISABILITY MAXIMUM EARNINGS
New Jersey Unemployment and Disability Maximum Earnings was $33,500 in 2017. It will increase to $33,700 in 2018. The total withholding rate for employees in 2017 is .0765%. The maximum employee deduction for 2017 is $256.27. The withholding rate for employees in 2018 is .705%.
NEW YORK STATE LIMITED LIABILITY ANNUAL REPORTS
Form IT-204-LL is required for each Limited Liability Partnership (LLP) and Limited Liability Company (LLC) organized and/or doing business in New York State, including disregarded entities. Also, every regular partnership that is required to file a New York State partnership return, doing business in New York State, and has New York source gross income for the preceding year of at least $1 million is required to file. The amount of the filing fee will be based on the New York source gross income for the tax year immediately preceding the tax year for which the fee is due.
Returns and payments must be filed and paid electronically, and no extensions are permitted. Beginning on or after January 1, 2016, Form IT-204-LL is due on the fifteenth day of the third month following the close of the tax year of the partnership, LLC, LLP, or single-member LLC that is a disregarded entity. Therefore, a calendar-year-end tax-payer must file and make payments by March 15.
NEW YORK STATE METROPOLITAN COMMUTER TRANSPORTATION MOBILITY TAX (MCTMT)
The New York State appellate court ruled the MCTMT payroll tax to be constitutional.
Beginning with tax year 2015, all self-employed individuals paying MCTMT must do so with their personal income tax returns. Estimated MCTMT payments must be made with their personal New York State estimated income tax payments.
The MCTMT payroll tax requires quarterly filing for employers in quarters in which the covered wages for employees exceed $312,500 for the calendar quarter, have made MCTMT payments during the calendar quarter, or have an MCTMT overpayment that is carried from a previous quarter. For the quarter ending December 31, 2017 payment is due by January 31, 2018. For the rest of 2018 due dates are April 30 2018, July 31 2018, October 31 2018, and January 31, 2019.
Effective April 1, 2012, employers are subject to MCTMT if the payroll expense for all covered employees exceeds $312,500 for the quarter. The rates are applicable to payroll expense over $312,500 to $375,000 at .11% and over $375,000 to $437,500 at .23%. The original tax rate of .34% still applies when any quarterly payroll exceeds $437,500.
SALES AND USE TAX ISSUES
States are increasing their audits relating to sales tax. They are including many businesses which do not typically collect sales tax, such as medical practices and law firms, and often assess tax, penalties, and interest for non-payment of compensating use tax. Since there is no statute of limitations when returns have not been filed, these audits often cover periods of six years. Review your procedures in terms of reporting such use tax, and evaluate whether your business should register and file use tax returns. Please call our office if you have any questions in this area.
NEW JERSEY SALES AND USE TAX RATE CHANGE
The New Jersey Sales and Use Tax was reduced on January 1, 2017 from 7% to 6.875%, and will decrease to 6.625% on and after January 1, 2018.
PENNSYLVANIA ACT 32
Act 32 simplifies and restructures the collection of local earned income taxes in the State of Pennsylvania. It requires all employers to withhold earned income taxes on behalf of all employees. The applicable tax rate is the greater of the nonresident tax rate where the employee is employed or the resident tax rate in effect where the employee lives. The Act applies to all Pennsylvania counties except Philadelphia, which is exempt from Act 32. Philadelphia city withholding supersedes the provisions of Act 32. Act 32 was mandatory for employers beginning January 1, 2013.
All employers are required to register with the appropriate Certified Tax Collector in the area where they are located. To determine the applicable tax collector for your place of business, go to www.munstatspa.dced.state.pa.us.com, and enter your county or municipality.
All employees need to complete a local earned income tax residency certification form which should be given to their employer so they can withhold the correct amount of earned income tax. This form, and withholding rates by address, can be obtained online at www.NewPA.com.
PENNSYLVANIA UNEMPLOYMENT EMPLOYER WAGE BASE AND EMPLOYEE CONTRIBUTIONS
The taxable wage base for employer contributions to the PA Unemployment Compensation Fund is $9,750 per employee in 2017 and $10,000 in 2018 & thereafter. The PA Department of Labor & Industry will mail Contribution Rate Notices to employers in December for calendar year 2018. The withholding rate for employee contributions is .0007 in 2017. The withholding rate for employee contributions is .0006% in 2018. There is no cap on the amount of wages from which employee contributions are withheld.
NEW JERSEY/PENNSYLVANIA RECIPROCAL TAX AGREEMENT
The NJ/PA Reciprocal Income Tax agreement stated that Pennsylvania residents who receive compensation from New Jersey sources are not subject to New Jersey income tax on those earnings. Under the State of New Jersey and the Commonwealth of Pennsylvania Reciprocal Personal Income Tax Agreement, a New Jersey employer is not required to withhold New Jersey income tax from compensation paid to its Pennsylvania resident employees who file Form NJ-165, Employee’s Certificate of Non-residence in New Jersey, with their employer. The reverse holds true for Pennsylvania employers with New Jersey resident employees. This agreement covers compensation only.
On September 2, 2016, Governor Christie withdrew New Jersey from its longstanding reciprocal tax agreement with Pennsylvania that allowed taxpayers residing in either state and working in the other to only file in their state of residence. The Governor’s action, which was to take effect January 1, 2017, was rescinded on November 22, 2016.
Pennsylvania has a flat 3.07% income tax rate, whereas New Jersey’s graduated income tax tops out at 8.97%.
New Jersey has six marginal income tax rates for individuals, ranging from 1.4% for those earning $20,000 or less to 8.97% for income greater than $500,000. There are seven rates for married couples filing joint returns. Without the reciprocity agreement, Pennsylvania residents would have had to pay higher taxes.
In 2018, individuals working outside their home state of NJ or PA in the other state must file income tax returns in both states. PA residents will get a credit for income tax paid to NJ on wages earned there. NJ will get the credit as well. If you are a Pennsylvania resident but work in New Jersey, to get the credit a PA Schedule G-L – Resident Credit for Taxes Paid to Other States form has to be filed, and included, a copy of the NJ return. The credit is the lesser of tax paid to NJ or the income subject to tax in both states multiplied by 3.07%. If your employer does not withhold PA tax, you may need to make estimated tax payments (certain exemptions apply). If you are a New Jersey resident but live in Pennsylvania, it should be indicated on the PA return that you are a nonresident. Wages earned in PA and withholdings should be reported.
This guide is intended to be informational and to advise you of some highlights. It is not all-inclusive.
Please contact your Engagement Partner if you have any questions on either these year-end procedures or any other reporting requirements.