Payroll Tax Update
Posted on Friday, November 30, 2012
Once again, it is nearly the time when employers will be preparing W-2’s and 1099’s. We would like to take this opportunity to remind you of the reporting requirements that may be applicable to your business.
2012 W-2 Preparation Guide
Attached is a general description of the boxes on the Form W-2 and what should be included in each. Some of the more unusual items are discussed in more detail later in this letter.
During 2012, the employee portion of Social Security taxes withheld was reduced from 6.2% to 4.2%. The employer portion remained at 6.2%. Provided there are no additional changes in 2012, the employee rate will return to 6.2% beginning January 1, 2013.
The cost of employer sponsored health coverage can be disclosed on Form W-2. The information is to be provided in box 12 with code DD. The cost disclosure is purely informational and is not taxable to the employee. Effective January 1, 2012, the disclosure becomes a requirement. However, the IRS has provided some taxpayer relief. If the employer filed fewer than 250 forms W-2 in the preceding calendar year, the employer is not required to report the cost of employer sponsored health coverage on Form W-2 for the current year.
The state of Indiana has made some changes with regard to how it will accept forms W-2 and WH-3. Effective July 1, 2010, any employer that files more than 25 withholding statements in a calendar year is required to file the annual WH-3 and their employees’ W-2’s electronically. The employer can comply with these requirements by submitting the forms manually or thru a file upload on Indiana’s website www.intaxpay.in.gov.
Effective January 1, 2013, the state of Indiana has set a mandate that numerous returns be submitted and paid electronically rather than by paper. Form WH-1 and ST-103 are just two of many. If you have not already registered with Indiana INtax you need to do so. The website site is www.intax.in.gov. Follow the instructions on the sight to register.
Although this does not pertain to your 2012 W-2s, there is an additional tax that employers need to know about which is effective on January 1, 2013. The employer is required to withhold an additional 0.9% in Medicare tax on Medicare wages greater than $200,000.
2012 940 Preparation
The calculation for federal unemployment taxes on Form 940 has two considerations for 2012.
Credit Reduction – During 2011, twenty-one states had not repaid funds borrowed from the federal government to pay state unemployment benefits. When this occurs, states with outstanding borrowed funds will have the credit reduced by 0.3% each year the loan have been unpaid. Reducing the credit will increase the FUTA rate by the same percent. Indiana’s reduction was 0.6% and Michigan’s was 0.9%.
For 2012, there are nineteen states or territories which have not repaid funds borrowed from the federal government for state unemployment benefits. Indiana remains on the list. Therefore, Indiana’s reduction will be 0.9% for 2012. Michigan is no longer on the list so this state has no reduction for 2012. For the complete list of states, contact your accountant.
Rate Reduction – Effective July 1, 2011, the federal unemployment rate was reduced from 0.8% to 0.6%. The rate remains constant at 0.6% for the year.
As a general rule, if an employer provides an auto to an employee and there is some personal use of that auto, the employer must include the value of that personal use in the employee’s wages for income tax and employment tax purposes. Now is the time that you should begin assembling the data necessary to make these computations so that when you are ready to prepare the 2012 W-2’s, the computations can be completed.
The cost of a cell phone substantially used for business is 100% deductible to the business.
If you had employees who received sick pay from a third-party payer (such as an insurance company) you should confirm with the third-party payer the responsibilities each of you will assume. Sick pay is taxable for income tax, FICA tax, and Medicare tax purposes and is reportable on Form W-2. Many times the third-party payer will withhold income taxes, FICA taxes, and Medicare taxes and inform you of the matching FICA and Medicare that you are responsible for depositing. Also, the third-party payer may issue a W-2 to the employee reporting only the sick pay it has paid to the employee. Other times, the third-party payer of the sick pay will send you a report of the sick pay which it paid during the year and you will be responsible for reporting it on the employee’s W-2. As you can see, there are many variations as to the handling of sick pay and it is your responsibility to coordinate the reporting and payment of income tax, FICA tax, and Medicare tax with the third-party payer.
Health Insurance for Shareholders of S Corporations
Accident and health insurance premiums paid by an S Corporation for a more than 2% shareholder-employee are includable in that individual’s gross wages for income tax purposes. It is generally not includable for FICA or Medicare tax purposes.
In order for the shareholder to deduct the premium on his or her return, the policy must be paid for by the company. If the shareholder pays the premium, the company should reimburse the shareholder for the premium payment and include the reimbursement on a W-2.
For shareholders that have Medicare premiums, the premiums are considered shareholder health insurance premiums provided the company reimburses the shareholder the amount of those premiums.
Health Savings Accounts (HSA) Contributions
Employer contributions to eligible employee’s HSA are treated as employer-provided coverage for medical expenses under an accident or health plan. The contributions are excludable from the employee’s income and are exempt from FICA and FUTA taxes because they are considered an employer provided accident or health plan. The employee cannot deduct employer contributions even though the employer contributions must be reported on the W-2.
An HSA contribution paid by an S Corporation for a more than 2% shareholder-employee is includable in that individual’s gross wages for income tax purposes but excluded for FICA or Medicare tax purposes.
An HSA contribution paid by a partnership can be treated two ways. The contributions are excluded from that individual’s adjusted gross income for tax purposes if treated as a distribution. The contributions are includable in that individual’s adjusted gross income for tax purposes if treated as a guaranteed payment.
An individual’s HSA contributions can be made any time prior to the tax return filing deadline for a year excluding extensions. For those individuals on a calendar-year, the deadline for making HSA contributions is April 15, 2013. An employer contribution must be made by December 31, 2012.
Reimbursement of Employee Expenses
If an employee is reimbursed for his or her business expenses, the tax treatment depends on whether or not the reimbursements are made under an “accountable plan” or a “nonaccountable plan.”
Accountable Plan – Reimbursements made under an accountable plan are not included on the employee W-2. To be considered an accountable plan, the following three requirements must be met:
(1) The reimbursements must be for deductible business expenses of the employer that are paid by the employee in fulfilling his duties as an employee.
(2) The employee must be required to substantiate the expenses to the employer. Amount, time, and business purpose must be shown by the employee. He may do this with logs, account books, diaries, or similar records. The employee should also supply supporting documentation to the employer.
(3) The employee must be required to return to the employer any excess of reimbursements over substantiated expenses within a reasonable period of time.
Nonaccountable Plan – If the reimbursements are made under a nonaccountable plan, they are includable as wages on the employee’s W-2 for income tax, FICA tax and Medicare tax purposes. A nonaccountable plan is one that does not meet one or more of the three requirements listed above. An employee may generally deduct the reimbursed expenses on Schedule A of his Form 1040 as a miscellaneous itemized deduction subject to the 2% of adjusted gross income limitation.
There are many different types of Forms 1099 upon which certain types of payments to others are reported. If filing forms 1099-B, 1099-S or 1099-MISC with amounts in box 8 or 14, those returns must be submitted to the Internal Revenue Service no later than February 15, 2013. Any other 2012 1099’s are due to the recipients no later than January 31, 2013, and must be submitted to the Internal Revenue Service no later than February 28, 2013 (March 31, 2013 if electronically filing). There is no requirement that copies of Forms 1099 be submitted to the State of Indiana. In general, there is no requirement to file 1099’s for payments made to corporations. If you are in doubt as to whether a payment you made is to a corporation or not and cannot find out, the safe approach would be to issue a 1099.
A few of the more commonly used Forms 1099 are listed below with a brief description of the filing requirements:
1099-Div This form should be issued to each person to whom you paid gross dividends of $10 or more. (If you are an S Corporation, you will report as dividends only distributions made out of earnings and profits.) If the distribution is liquidating, the filing requirement is for amounts in excess of $600 instead of $10. If you have any questions about this, contact us.
1099-Int This form should be issued to each person to whom you paid interest of $10 or more. In some instances, the filing requirement is for amounts in excess of $600, instead of the $10 limit for other interest paid.
1099-Misc This form should be issued to each person to whom you paid at least $600 in rents, services, prizes, awards, or other income payments. The filing requirement is for amounts in excess of $10 for royalty payments. Any payment made to an attorney regardless of the amount paid should be shown on this form. Payments of this type should be reported only if you are engaged in a trade or business. Therefore, personal payments are not reportable.
We have tried to cover items that might be of interest to you regarding your year-end reporting requirements. However, if you have questions that we did not answer, please do not hesitate to contact us.
Treasury Regulations require us to inform you that any federal tax advice contained herein (including in any attachments and enclosures) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service.
Posted in Tax And Accounting Topics For Business
Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.