IMPORTANT YEAR-END CHECKLIST FOR BUSINESS OWNERS
Please take a moment to look over these important year-end items. We have put in red if this applies to your entity type or not. Please call our office at (951)296-0785 if clarification is needed on any item.
S-Corporation Paid Health Insurance Premium - (APPLIES TO S-CORPS ONLY)
Health insurance is a fringe benefit often provided to Sub S-Corporation owners. The owner’s premiums can be paid as part of a company sponsored health plan or as a reimbursement of an owner’s personal plan. Either way, to be deductible, the insurance must be paid by the S-Corporation.
As required by the IRS, company paid health insurance premiums are a part of an owner’s compensation and must be added to his or her W-2 for 2017. The premiums are to be added to “box 1” of the W-2 as taxable wages. They are not subject to social security, Medicare, or state disability. So, while W-2 wages of the owner must be increased, he or she is also allowed an “above the line” deduction on line 29 of form 1040. This results in a zero effect on personal taxable income while making the S-Corporation in compliance IRS corporate rules.
If done correctly, you will not pay any additional income or payroll tax. You may question the need; however the rules were decreed by the IRS. Please note, not following the procedures correctly may result in the loss of the health insurance deduction on your personal tax return. They are designed to ensure that each owner deducts only his portion of corporate paid health insurance.
Compliance is a simple matter, so we suggest you make the adjustment when preparing your 2017 W-2. If you have any questions, please call or email our office.
Form 1099 filing information -(APPLIES TO SOLE PROPIETORS, PARTNERSHIPS, LLCs, CORPORATIONS, S-CORPORATIONS AND NON-PROFITS)
The IRS asks two questions when you file your income tax returns regarding filing Form 1099. They are, “Did you make any payments that would require you to file Form(s) 1099?” and “If ‘Yes’, did you or will you file all required forms 1099?” It is very important that these are answered correctly or you may be subject to IRS inquiry and the IRS may attempt to classify some of your vendors as employees.
If your business paid any person/vendor at least $600 or more for services provided in 2017, you must prepare and send them a 1099. Services provided include non-employee compensation, payments for outside services and rent paid. Sole proprietors, partnerships and limited liability companies receive 1099’s. Only corporations do not receive a 1099 unless it is for legal services. The purchase of goods, such as office supplies, does not apply.
Each form 1099 must be mailed directly to the Recipient by January 31, 2018. THE DEADLINE FOR FILING WITH THE IRS IS ALSO JANUARY 31, 2018. Please make sure to pass this information on to whomever in your company is responsible for preparing 1099s. Our firm uses the IRS e-file system to file 1099s. Please call our office if you would like us to file 1099s for your company. (951-296-0785)
Personal Use of Corporate Owned Automobiles -(APPLIES TO CORPORATIONS AND S-CORPORATIONS)
Employers often provide employees with a company owned vehicle. The IRS requires that if there is any personal use of the vehicle (i.e. commuting or weekend use), then the value of that personal use must be added to the employees W-2.
There are a variety of methods for determining the dollar amount to add to employee compensation. The “automobile lease valuation method” is the simplest to compute. If you choose to use this method, you must notify each employee of your intention by January 31. The notification must include: the method used, company recordkeeping requirements and the effects of failing to maintain records. Please contact us if you are interested in the details of other methods.
Each employee must keep adequate records so that his employer can compute the personal use value. Business and personal use is determined from automobile odometer readings. Amounts reimbursed by an employee can be excluded from income.
Following is a worksheet to help you compute the fringe benefit. As you are completing the worksheet, you should be aware of the following:
Line 1: The annual lease value is established after you have determined the fair market value (FMV) of the automobile. FMV is calculated on the date the employee first started using the automobile.
For a new car, the FMV is its purchase price. For a used car, use the blue book value. The following Table 1 lists FMV's. Your annual lease value follows to the right.
Once the FMV has been determined, use it for the next three years. If an automobile is provided for part of the year, calculate a prorated annual lease value.
Line 7: Typically, the calculated personal use value is added to each employee’s last paycheck of the year. All payroll tax deductions must also be computed.
A Corporation that ignores computing this employee “fringe benefit” is at risk for incurring IRS and State penalties. If we prepare your payroll tax returns and W-2’s, please let us know the details regarding each employee. Do not hesitate to phone us if you need additional information.
PERSONAL USE VALUE
1. Annual lease value determined from Table 1 (follows this worksheet)
2. Personal use percentage
(Personal use miles divided by total yearly miles) %
3. Personal use annual lease value
(Multiply line 1 x line 2)
4. Gasoline provided by employer
Personal use miles x 5.5 cents per mile
5. Gross personal use value
Add lines 3 and 4
6. Reimbursement made by employee
(The IRS accepts 53.5 cents/mile for 2017)
7. Net personal use value to report on employee's W2
(Line 5 minus Line 6) $
Table 3-1. Annual Lease Value Table
For automobiles with an FMV of more than $59,999, the annual lease value equals (0.25 × the FMV of the automobile) + $500.
Employee Automobile and Expense Reimbursement - (APPLIES TO SOLE PROPRIETORS, PARTNERSHIPS, LLCs, CORPORATIONS, S-CORPORATIONS AND NON-PROFITS)
Each year we send the following letter by email. It is important that the concepts are understood. The IRS is looking to make sure that tax laws are applied correctly. The following describes two methods of reimbursing employees for their business expenses.
There are significant tax consequences depending on whether your method of reimbursement is “accountable” or “non-accountable”. As the following explains, an accountable plan is preferred. It needs to be formally adopted by the organization’s management.
Of particular importance is the term, “accountable reimbursement”. A reimbursement arrangement will be “accountable” if three requirements are met:
1. Each employee must substantiate their actual out of pocket business expenses to the employer. Examples of evidence are receipts, credit card bills, or canceled checks.
Automobile, travel and meals require expanded substantiation including: the amount of expense, the business use percent (part of the expense may be personal), the time of business use and the purpose of the business expense.
2. Each reimbursement to an employee must be for an expense that has a business connection. In other words, it must be an expense which is deductible by the employer.
3. The employee must pay back any reimbursements which are in excess of actual substantiated expenses.
The consequence of expense reimbursements being non-accountable (any of the above conditions have not been met) are severe. All non-accountable reimbursements are added to payroll and included in the employee’s W-2. In addition, payroll taxes must be withheld from reimbursements.
For example: Say an employee receives $1,000 per month, which the employer believes will cover the employee’s business expenses. However, the actual expenses are only $800 per month and the employee provides adequate substantiation. However, the employee has not agreed to repay the excess reimbursements ($200 per month).
This plan is non-accountable because all three of the above requirements have not been met. As a result, the reimbursements are included as wages on the employee’s W-2 and are subject to employer and employee payroll taxes (withholding, social security and unemployment).
When the employee completes his tax return, he will have additional W-2 wages of $12,000 ($1,000 x 12). He will deduct $9,600 ($800 x 12) as a miscellaneous itemized deduction, but it is subject to a floor of 2% of adjusted gross income.
If the employee had returned the excess $200 per month, the $9,600 would not be included as W-2 wages and there would be no miscellaneous itemized deduction.
There are two exceptions to the above rules which may simplify recordkeeping:
IRS specified rates for lodging, meals and incidentals vary by location. Please call us if you have questions about the rates. Reimbursements above the IRS rates will be included in wages.
As you can see, the rules for treating employee expense reimbursements can be very confusing. However, with planning, these rules should not be difficult to implement. If you have further questions or would like help applying these rules to your business, please do not hesitate to contact us.