As you begin to wrap up your year-end accounting over the next couple of weeks, there are a few tasks to make sure you check off your list regarding payroll and Forms 1099.
If you haven’t already, you will want to include the following items in your year-end payroll and Forms W-2. These can be included on your regular payroll run or called in as a special payroll.
- Personal use of a company vehicle is considered a benefit to the shareholder or employee and is grossed up for taxes and reported as wages. This includes those that have use of a company vehicle outside of business hours. The calculation requires both personal and total mileage, the fair market value of the vehicle being driven, the number of months it is driven, and the lease inclusion value.
- Shareholders owning greater than 2% of an S-corporation must report their health insurance on their Form W-2. The amount reported in boxes 1 and 14 on Form W-2 is equal to the amount the company paid on their behalf. This amount is not taxable because it is reported as both income and a deduction for self-employed health insurance on the shareholder’s individual income tax return.
- Group-term life insurance provided to the employee in excess of $50,000 is taxable to the employee and should be included in their payroll at year-end. The benefit is calculated on the excess over $50,000 and the employee’s age. This benefit is reported as box 1 gross wages on Form W-2 and is subject to Social Security and Medicare taxes only.
- Bonuses are a great way to incentivize and reward employees. Keep in mind that while 2020 bonuses can be accrued at year-end, they must be paid by March 15, 2021, in order to be deductible on the 2020 business income tax return. You will need to know what type of bonus was paid in order to correctly calculate overtime for non-exempt employees. For help determining if a bonus is discretionary or non-discretionary and determining the proper calculation, see our article on Proper Payroll Reporting and Employee Payments for Bonuses. Discretionary bonuses are excluded from a non-exempt employee’s regular rate of pay when calculating overtime. Non-discretionary bonuses are included in a non-exempt employee’s regular rate of pay when calculating overtime.
- Forms W-2 and W-3 and Forms 1094-C and 1095-C report employee related information. Be sure to update employee records for current and prior employees to confirm addresses are correct. Penalties exist for failure to file, failure to furnish, and intentional disregard of filing. These increase each year for inflation. Forms W-2 and W-3 are due to employees and to the Social Security Administration by January 31, 2021, regardless of whether filing on paper or electronically. Many of the state agencies have also moved their deadlines to this earlier date. Please check with your specific revenue departments for verification. Forms 1094-C and 1095-C are due to employees by March 2, 2021, and to the Internal Revenue Service by March 1, 2021, if filing on paper, and by March 31, 2021, if filing electronically. A penalty may also be assessed if you are required to file more than 250 information returns and do not file them electronically.
Forms 1099-INT and 1099-DIV should be issued for payments of interest and dividends to individuals, partnerships, and disregarded entities. For 2020, there has been a change in form 1099-MISC. In prior years, payments for non-employee compensation of $600 or more during the year were reported in box 7 on the 1099-MISC. Beginning in 2020, those payments will now be reported on form 1099-NEC. Other payments will continue to be filed on form 1099-MISC. Below is a break-down on payment types included on forms 1099-MISC and 1099-NEC:
- Other Income
- Medical and health care payments
- Crop Insurance Proceeds
- Gross proceeds paid to an attorney, even if they are an S or C Corporation
- Services performed in the course of trade or business, including subcontractors, independent contractors, or directors
- CPA Services
- Consulting Services
- Repair/Maintenance Services
A best practice in preparation for year-end is to review vendor and employee files. Every vendor file should include Form W-9 signed by the vendor verifying its address, taxpayer identification number, and federal tax classification. This form will help to determine whether the recipient is required to receive a 1099, as well as verify the legal name, address, and identification number. If the above information is reported incorrectly, a notice will be issued by the IRS. These forms should be updated at least every three years to allow for updates to addresses and ownership.
Forms 1099-NEC are due to the recipients and to the IRS by February 1, 2021. Forms 1099-MISC, 1099-DIV, and 1099-INT are due by March 1, 2021, if filing by paper and by March 31, 2021, if filing electronically. Penalties will be assessed for the failure to file correct information returns by the due dates and for the failure to furnish correct payee statements. A penalty may also be assessed if you are required to file more than 250 information returns and do not file them electronically.
A few other reminders to prepare for 2021:
- The social security wage base that is taxed at 6.2% will increase to $142,800, up from $137,700 for 2020.
- The annual maximum that can be contributed to 401(k) and 403(b) will remain at $19,500. The maximum catch-up contribution for participants age 50 or over also remains unchanged at $6,500.
- The annual maximum that can be contributed to an IRA is $6,000. The maximum catch-up contribution for participants age 50 or over remains unchanged at $1,000.
- The dollar limitation for contributions to §125 flexible health spending arrangements is $2,750.
Please contact your MarksNelson advisor if you have any questions or need assistance as you close out 2020 and prepare for 2021.