Utility Tax Guide

Transcription

1 Depend on our people. Count on our advice. SM Member - American Institute of Certified Public Accountants

2 UTILITY TAX GUIDE Olsen Thielen & Co., Ltd. Certified Public Accountants & Consultants 2675 Long Lake Road 300 Prairie Center Drive #300 St. Paul, MN Minneapolis, MN (651) (952) FAX (651) FAX (952) Copyright 1992 Latest Revision 2015 All Rights Reserved Printed in the United States of America This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the information is presented in general terms and is not intended to be used as a basis for specific action without obtaining the services of a competent tax professional. Copyright is not claimed in any material secured from official U.S. Government sources.

3 UTILITY TAX GUIDE TABLE OF CONTENTS CHAPTER PAGE 1 Employee vs. Independent Contractor Payments to Employees, Form W Fringe Benefits Payroll Taxes and Deposit Requirements Qualified and Nonqualified Deferred Compensation (Retirement Plans) Information Returns Payments to Directors Expense Accounts Travel, Entertainment, Business Gifts and Club Dues Lobbying Expenses Recordkeeping for Business Vehicles Personal Use of a Company Auto Business Use of a Personal Auto "Luxury" Auto Rules Taxation of Capital Credits Unclaimed Property Energy Conservation Subsidies Federal Heavy Vehicle Use Tax Heavy Vehicle Excise Tax Federal Telephone Excise Tax Gross Receipts Tax Provisions Sales and Use Tax Provisions Corporate Income Tax Amortization of Intangible Assets Minnesota Minimum Fee Form 990, Exempt Organization Return (Cooperatives) Form 990-T, Exempt Organization Income Tax Return (Cooperatives) Alternative Legal Structures for Nonutility Activity of Cooperatives Minnesota Limited Liability Companies General Partnerships, Limited Partnerships and Limited Liability Partnerships Electronic Filing and Payments Affordable Care Act Reporting

4 CHAPTER 1 - EMPLOYEE vs. INDEPENDENT CONTRACTOR Payroll Tax and Employee Benefit Differences Any worker who receives compensation for services is either an independent contractor or an employee. Depending on how a payee is classified, certain rules apply. The following chart summarizes the more significant differences between the treatment of an employee and an independent contractor: Independent Compensation Related Item Employee Contractor State and federal income tax Withheld from employee's wages Paid by worker State and federal unemployment tax Paid by employer None paid Social Security tax 6.20% paid by employer Self-employment 6.20% withheld from tax of 12.40% employee's wages Medicare Tax 1.45% paid by employer Self-employment 1.45% withheld from employee's wages; 2.35% withheld on wages over $200,000 tax of 2.90% paid by worker; 3.8% on wages over $200,000 Health insurance and other employee benefit plans Covered Not covered Pension or profit-sharing plans Covered Not covered Annual payment reports Form W-2 Form 1099-MISC How To Determine Who Is An Independent Contractor Or Employee Form SS-8 may be completed and submitted to the IRS for a determination of employee or independent contractor status. However, it is not required that you receive a determination. If you do request one, you would normally be bound by the decision. Formerly, the Internal Revenue Service published a standard list of 20 factors (commonly known as the common-law test or 20-factor test) for businesses to consider when determining whether a worker is an employee or an independent contractor. The table at the end of this chapter lists these factors and describes how they relate to an employee versus an independent contractor. In its official guidance the IRS has replaced this list with the categories-of-evidence methodology shown below. On the whole, the categories-of-evidence guidance is broader and less specific than the 20-factor test. Chapter 1 1

5 CATEGORIES OF EVIDENCE Behavioral Control: Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired including the type and degree of: 1. Instructions the business gives the worker. An employee is generally subject to the business instructions about when, where, and how to work. Even if no instructions are given, sufficient behavioral control may exist if the business has the right to control how the work results are achieved. 2. Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors normally use their own methods. Financial Control: Facts that show whether the business has a right to control the business aspects of the worker s job including: 1. The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their employer. 2. The extent of the worker s investment. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not required. 3. The extent to which the worker makes services available to the relevant market. 4. How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job. However, it is common in some professions, such as law, to pay independent contractors hourly. 5. The extent to which the worker can realize a profit or incur a loss. An independent contractor can make a profit or loss. Type of Relationship: Factors that show the parties type of relationship including: 1. Written contracts describing the relationship the parties intended to create. 2. Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. 3. The permanency of the relationship. If a worker is engaged with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that intent was to create an employer-employee relationship. 4. The extent to which services performed by workers is a key aspect of the regular business of the company. If workers provide services that are a key aspect of regular business activity, it is more likely that the business has the right to direct and control their activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship. Chapter 1 2

6 If You Have Independent Contractors Rather Than Employees If you decide that your payees are independent contractors, we recommend that you do the following: Draft and sign a formal written contract. Consider using language in the contract that would take into account the guidance provided by the Internal Revenue Service including factors such as right to discharge, right to terminate, payment of travel and business expense, and do not preclude these individuals from working for others. File Form 1099-MISC for all payments to individuals, even if the amount is less than $600, to minimize the potential tax liability in the event of independent contractors being reclassified as employees. Consequences of Having the IRS Reclassify Independent Contractors as Employees If the IRS is successful in reclassifying independent contractors as employees, the following could happen: If Forms 1099-MISC were filed and the IRS determines that the failure to comply is not due to intentional disregard the employer may be liable for the following: 1. the employer's share of FICA, FUTA and SUTA; 2. 20% of FICA that should have been withheld from employee's wages; and % of the total wages paid for income tax withholding purposes. If any Forms 1099-MISC were not filed due to willful neglect, the above liabilities are doubled to 40% and 3%, respectively. If no Forms 1099-MISC were filed and the IRS determines that the failure to comply is due to intentional disregard the employer may be liable for the following: 1. the employer's share of FICA, FUTA and SUTA; 2. FICA that should have been withheld from employee's wages; and % of the federal income tax that should have been withheld from the employee s wages. Employer's withholding liability can be offset by payments of income tax and self-employment tax made by the employee. Employer must submit proof of payments obtained from worker. Penalties can range from a 5% negligence penalty to a 100% penalty for willfully failing to collect and pay the tax. Interest at the applicable rate is assessed on the tax liability and the penalty. Employee retirement, health and other benefit plans may be adversely affected because of failure to meet minimum coverage requirements. The financial consequences of a reclassification can be disastrous. Therefore, extreme care should be taken in your initial classification. Chapter 1 3

7 Provisions For Relief From Employment Taxes If your business is selected for an employment tax examination to determine whether you correctly treated certain workers as independent contractors you will not owe employment taxes for these workers if you meet the following relief requirements: Reasonable Basis. You must have a reasonable basis for not treating the workers as employees. To establish that you have a reasonable basis for not treating the workers as employees you can show that: 1. You reasonably relied on a court case about Federal taxes or a ruling issued to you by the IRS; 2. Your business was audited by the IRS at a time when you treated similar workers as independent contractors and the IRS did not reclassify those workers as employees; 3. You treated the workers as independent contractors because you knew that was how a significant segment of your industry treated similar workers; or 4. You relied on some other reasonable basis. Example: you relied on the advice of a business lawyer or accountant who knew the facts about your business. Substantive Consistency. You (and any predecessor business) must have treated the workers and any similar workers as independent contractors. Reporting Consistency. You must have filed Form 1099-MISC for each worker unless the worker earned less than $600. If you do not meet all three of these relief requirements you will be required to pay employment taxes on any independent contractors who are reclassified by IRS as employees. Voluntary Worker Classification Settlement Program (VCSP) The VCSP is available for employers that want to voluntarily change the prospective classification of their workers. The program applies to employers that are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. To be eligible, an employer: Must have consistently treated the workers as nonemployees; Must have filed all required Forms 1099 for the workers for the previous three years; Cannot currently be under audit by the IRS; and Cannot currently be under audit concerning the classification of the workers by the Department of Labor (DOL) or by a state government agency. An employer that was previously audited by the IRS or the DOL concerning the classification of the workers will only be eligible if it has complied with the results of that audit. Chapter 1 4

8 Effect of VCSP An employer that participates in the VCSP will agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the employer: Will pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year; Will not be liable for any interest and penalties on the liability; and Will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years. Chapter 1 5

9 COMPARATIVE APPROACH OF 20 COMMON LAW FACTORS Employee 1. Instructions Required to comply with instructions about when, where, and how work is to be performed. 2. Training Receives training which can include supervision, correspondence, meetings, etc. to ensure completion of job in a particular method or manner. 3. Integration If success or continuation of the business depends upon the performance of certain services, the worker performing these services is deemed to be subject to some control by the business. Employer coordinates the work with that of other workers. 4. Service Rendered Personally Must render services personally. Not able to engage other people to do the work. 5. Hiring, Supervising, and Paying Assistance Hires, supervises, and pays workers at the direction of the employer (acts as a representative of the employer). 6. Continuing Relationship Provides services of a recurring type and kind over an extended period. 7. Set Hours Of Work Hours and days of work are set by the employer. 8. Full Time Required Works substantially full time for the business of the employer. Possibly restricted from doing other gainful work. 9. Doing Work On Employer's Premises Requiring a worker's physical presence at a certain time and place indicates that the employer has control. Control over the place of work is also indicated if employer designates route to travel or territory to canvas within a certain time. 10. Order Of Sequence Set Performs services in the order or sequence set by the employer or sales. Salesperson reports at the office at specified times, follows up on leads and performs certain tasks at certain times. Independent Contractor May work own schedule and do job in own way. Receives no training. Uses own method. Success and continuation of business are not dependent upon services of the worker. Able to assign other workers to do or assist in the job. Hires, supervises, and pays other workers as the result of a contract under which there is an agreement to provide materials and labor, and is responsible for the results. Hired to do one job. No continuous relationship. Hours and days determined by worker. Free to choose when and for whom work is done. Works away from employer's premises. Uses own office, desk and telephone. Performs services at own pace. Chapter 1 6

10 Employee 11. Oral Or Written Reports Must submit regular oral or written reports to the employer. 12. Payment By Hour, Week, Or Month Paid by the employer in regular amounts for stated periods. 13. Payment Of Business And/Or Traveling Expenses The employer pays and reports the employee's business and/or traveling expenses. 14. Furnishing Of Tools And Materials Employer furnishes tools, materials, etc. 15. Significant Investment Has a lack of investment and depends on the employer for facilities needed for doing work. 16. Realization Of Profit Or Loss Cannot realize a profit or loss by making good or bad decisions. 17. Working For More Than One Firm At A Time Usually works for one employer. 18. Making Service Available To General Public Does not make services available to general public except through company or business of employer. 19. Right To Discharge Can be discharged at any time. 20. Right To Terminate Can quit at any time. Independent Contractor May submit progress reports. Paid by the job or on commission. Pays own expenses. Furnishes own tools. Has a real, essential and adequate investment in facilities needed for doing work. Can realize a profit or suffer a loss as a result of own services. Works for a number of unrelated persons or firms at the same time. Makes services available to general public on a regular and consistent basis. Could include having own: office, assistants, business licenses, listings in business directories, business telephone and advertising. Cannot be fired so long as worker produces results which meet contract specifications. Cannot quit until specific job is done. Responsible for satisfactory completion of job or legally obligated to make good for failure to complete. * * * * * Chapter 1 7

11 CHAPTER 2 - PAYMENTS TO EMPLOYEES, FORM W-2 Compensation All compensation for services performed by an employee must be included in wages on Form W-2 unless specifically excluded by law. For this purpose, compensation includes cash, insurance premiums, goods, services, etc. Items Excluded From Federal Wages on Form W-2 Certain types of compensation provided to employees may be excluded from wages. The most common items are: employer contributions to an Employee Health Savings Account (HSA) up to $6,650 for 2015 ($6,750 for 2016) for family coverage and $3,350 for 2015 and 2016 for single coverage. A maximum additional contribution of $1,000 for 2015 and 2016 is allowed for individuals age 55 and over; employer contributions to pension and profit sharing plans; payments made under a cafeteria plan; deductions from compensation under an elective deferral plan; payments up to $5,250 per year for both graduate and undergraduate classes; life insurance premiums on up to $50,000 of group term life insurance (except for more than 2% shareholder employees of S corporations); life insurance premiums on group term life insurance for spouse and/or dependents if individual coverage does not exceed $2,000 (except for more than 2% shareholder employees of S corporations); accident, health, and disability insurance premiums (except for more than 2% shareholder employees of S corporations); advance or reimbursement for travel and other ordinary and necessary expenses incurred or reasonably expected to be incurred and accounted for by the employee while performing the business of the employer (see Expense Accounts chapter for details); personal use of employer's vehicle to the extent that the employer is reimbursed by the employee for the value of the personal use (see Personal Use of a Company Auto chapter for details); employer provided cell phone for a sales or service representative who spends a substantial amount of time traveling for company business and requires a telephone to communicate with clients and/or with the employer; benefits provided to the employee at no additional cost to the employer, such as free local telephone service for telephone company employees; employee parking on or near the business premises limited to $250 per month for 2015 ($255 for 2016); and $250 per month in 2015 ($130 for 2016) for commuter transit passes; employer payments up to $5,000 ($2,500 for a married taxpayer filing a separate return) for dependent care assistance (report in Box 10 on Form W-2); employer contributions to an employee s medical savings account; Chapter 2 8

12 qualified adoption assistance benefits up to $13,400 in 2015 ($13,460 in 2016) over all taxable years related to a particular adoption provided by employer under an adoption assistance program. Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to, and whose principal purpose is for the legal adoption of an eligible child. A $13,400 ($13,460 in 2016) exclusion is allowed for the adoption of a child with special needs regardless of whether the employee has qualified adoption expenses; meals furnished to the employee on the employer's business premises for the employer's convenience; meals provided to the employee on an occasional basis to enable the employee to work overtime; qualified moving expense reimbursement (see Rules for Reporting Moving Expenses later in this chapter); achievement awards consisting of tangible personal property (not cash) given for length of service or for a safety achievement in a meaningful presentation and not exceeding $1,600 (qualified plan) or $400 (nonqualified plan) per employee per year. Average cost of all such awards may not exceed $400 per year. To be considered a qualified plan, the Employee Achievement Award Plan must be in writing and may not discriminate in favor of highly compensated employees; and gifts of hams, turkeys and other merchandise of nominal value distributed to all employees at Christmas or a comparable holiday. Items Included in Federal Wages on Form W-2 Certain types of compensation provided to employees must be included in wages. The most common items are: value of group term life insurance coverage over $50,000 for employees (see table at the end of this chapter); entire value of each group term life insurance policy over $2,000 for spouse and/or dependents (see table at the end of this chapter); all nonqualified moving expense reimbursements (see Rules for Reporting Moving Expenses later in this chapter); personal use of employer's vehicle to the extent that the employer is not reimbursed by the employee for the value of the personal use (see Personal Use of a Company Auto chapter for details); accident, health and disability insurance premiums paid by S corporations for more than 2% shareholder-employees; entire value of group term life insurance coverage paid by S corporations for more than 2% shareholder-employees and their spouse and/or their dependents; gifts of cash, gift certificates or similar items of readily convertible cash value; and prizes and awards. Chapter 2 9

13 Certain information only items must also be reported on Form W-2: cost of employer-sponsored health care coverage (see pages 24 and 25 of this guide for more information); dependent care benefits; employee contributions to elective deferral plans; sick pay not includable in income; SEP (Simplified Employee Pension) contributions by employer (if not separately reported to employee); distributions from nonqualified deferred compensation plans if included in Boxes 1, 3 or 5; qualified moving expenses (except direct payments to a third party and services furnished in kind); income from the exercise of nonstatutory stock options; and employer contributions to an HSA (Health Savings Account). Rules for Reporting Moving Expenses The following rules apply to the treatment of moving expense reimbursements (including payments made directly to a third party and services furnished in kind). Qualified Moving Expenses: Moving expense reimbursements are treated as a fringe benefit excludable from employee's wages if: the expenses would be deductible by employee if directly paid or incurred by employee (see Deductible Moving Expenses); and employee did not deduct the expenses in a prior year. Qualified moving expenses paid directly to an employee must be reported in Box 12 of Form W-2 and coded "P." Qualified moving expenses an employer pays to a third party, such as a moving company, on behalf of an employee, and services that an employer furnishes in kind are not reported on Form W-2. Nonqualified Moving Expenses: Moving expense reimbursements that do not qualify as an excludable fringe benefit are included in wages and subject to all payroll taxes including withholding. Deductible Moving Expenses: The following rules apply to determine if moving expenses are deductible: the move must be job related; an employee must work full time for at least 39 weeks in the first 12 months at the new job location; a self-employed person must work full time for at least 39 weeks in the first 12 months and at least 78 weeks in the first 24 months at the new job location; and the distance from the old residence to the new job location must be at least 50 miles more than the distance from the old residence to the old job location. Chapter 2 10

14 The following expenses (with no dollar limit) are deductible: the cost of moving furniture and household goods including: 1. packing; 2. crating; 3. transporting; 4. storing and insuring (for any consecutive 30 day period after the move); 5. connecting and disconnecting utilities; 6. shipping the car; and 7. shipping household pets. the cost of traveling (one trip per individual) of the employee and other members of the household including: Overtime Pay 1. actual transportation expenses such as airline tickets, gas and oil or 23 per mile for 2015 (19 in 2016) for car plus parking fees and tolls (family members need not travel together at the same time, but only one trip per individual is allowed); 2. lodging on the road; 3. lodging for the first day in the new area; 4. lodging in area of old home for one day before move; and 5. no meals. The basic concept of overtime pay is a fairly simple idea. For hours worked over forty in the workweek, employees are paid time and one-half of their regular rate of pay. However, each of these concepts has its own unique meaning under the Fair Labor Standards Act (FLSA). Workweek: The workweek is defined as a period comprised of seven consecutive twenty-four hour days. The employer may select any seven day period. However, once a workweek is chosen it becomes standard and may not be changed unless it is replaced by a new permanent workweek. Regular Rate: The regular rate of pay for any workweek is derived by dividing the employee s total compensation by the total number of hours worked in a particular workweek. Compensation includes: hourly rate; salary; piece rate; shift differential; Chapter 2 11

15 commissions; and bonuses. Example 1: An hourly employee works 40 hours and is paid $10.00 per hour. The hourly employee receives a bonus of $ The regular rate for overtime is $11.50 per hour. Total pay = (40 x $10.00) + $60.00 = $ = $11.50 Total hours Example 2: A piece-rate worker prepares 100 pieces at $4.00 per piece in 40 hours. The regular rate for overtime is $10.00 per hour. Total pay = (100 x $4.00) = $ = $10.00 Total hours Exclusions from Regular Rate: A few very limited forms of payment may be excluded from the regular rate: gifts (such as Christmas bonuses); reimbursement for employer expenses incurred by the employee; discretionary bonuses (amounts paid in recognition of services performed during a given period when the fact that they are to be given at all as well as the amount to be given is determined at or near the end of the period in question). There can be no contract, promise, agreement or indication to employees that they will or might receive a bonus; payments made for periods when no work is performed because of: 1. vacation; 2. holidays; 3. sickness; or 4. failure of employer to provide work; contributions to bona fide profit-sharing plans or trusts or a bona fide thrift or savings plan; talent fees paid to radio or television personalities; contributions made irrevocably to a third party pursuant to a bona fide plan for providing: 1. retirement benefits; 2. life, accident or health insurance; or 3. similar fringe benefits; premium pay: 1. for working more than eight hours per day or beyond the employee s normal hours or beyond forty hours in a week. These premiums need not be paid at time and one-half to be excluded. 2. for working on Saturday, Sunday, a holiday, a regular day of rest, or the sixth or seventh day of the workweek. These premiums must be paid at time and one-half or more to be excluded. 3. paid to an employee pursuant to an employment contract or collective bargaining agreement for work outside what the contract or agreement has established as the basic, normal or regular Chapter 2 12

16 workday (not exceeding eight hours), or basic, normal or regular workweek (not exceeding forty hours). This refers to contracts calling for a premium over, for example, a 37½ hour work week, in which 37½ has been bargained as the basic or normal workweek. These premiums must be at time and one-half to be excluded. Note that the premium payments in these categories are not only excludable from the regular rate, they may be credited toward overtime due under the Fair Labor Standards Act. Time and One-Half: Time and one-half under different pay plans is calculated as follows: Hourly employees: If an employee is paid solely on an hourly rate, the hourly rate is multiplied by 1.5, and he/she is paid the resulting overtime rate for hours over forty. Example: Employee gets $10.00 per hour and works fifty hours: 40 x $10.00 = $ $10.00 x 1.5 = $ x $15.00 = $ Gross Pay Due: $ A better way to look at overtime for the same hourly employee is: 50 x $10.00 = $ straight time pay 10 x $ 5.00 = $ overtime pay Gross Pay Due: $ Hourly employees with a bonus: If an hourly employee receives a nondiscretionary bonus overtime pay is calculated as follows: Example: Employee gets $10.00 per hour, works fifty hours and receives a $100 bonus: Regular Rate = (50 x $10.00) + $ = $12.00 per hour x $10.00 = $ straight time pay Bonus $ bonus 10 x $ 6.00 = $ overtime pay Gross Pay Due: $ This example assumes a bonus paid weekly. If a bonus is paid less frequently, such as monthly, quarterly, or annually, the bonus is simply allocated back across the period in which it was earned. Employees paid entirely by the piece, by commission, etc.: The law does not require that employees be paid hourly. It permits any method or any combination of methods of payment. However, when overtime is worked, it is based on the regular rate, which is a rate per hour. Example: A piece-rate worker is paid $6.00 per piece, prepares 100 pieces and works for 50 hours: Regular Rate = 100 pieces x $6.00 = = $12.00 per hour x $6.00 = $ piece rate pay 10 x $6.00 = $ overtime pay Gross Pay Due: $ Chapter 2 13

17 Salaried employees: Many employers believe that when they put an employee on salary they do not have to pay overtime. This is not true. The only salaried employees who are exempt from overtime are those employees who are functioning as executive, administrative, or professional employees as those terms are defined by federal regulations. Merely being on salary does not exempt an employee from overtime. Many non-exempt salaried employees must be paid overtime. There are two different methods to compute overtime for salaried employees: 1. Salary designed to pay for a specific number of hours: If the salary is designed to compensate the employee for a specific number of hours, then the employee s regular rate is the amount of the salary divided by the number of hours the salary is intended to compensate. This is an exception to the general regular rate rule, which divides total compensation by all hours worked. Example: A salaried employee is paid $ per week. It is clearly established that this salary is intended as compensation for forty hours of work. If such an employee works 50 hours, overtime is due for the ten overtime hours which have not been paid for at all (not even at straight time). Consequently, the employer must pay full time and one-half of the employee s regular rate for the ten overtime hours: Regular Rate = $ = $15.00 per hour Weekly Pay = $ salary 10 x $15.00 = $ regular pay for overtime 10 x $ 7.50 = $ overtime pay Gross Pay Due: $ This is the way most salaried employees wish to be paid overtime, and it is the only way many employers know of to pay overtime to salaried employees. This method is, of course, perfectly legal. It is, however, extremely expensive, in that full time and one-half is due for every overtime hour. This method even has one advantage for an employer; if a salaried employee paid this way misses some time, his pay may be docked accordingly. This is not, however, the only way to pay overtime to salaried employees. The second method is far cheaper, but it has some drawbacks as well. 2. Salary designed to pay for all hours (the Fluctuating Workweek Method): It is possible to pay a salaried employee a fixed salary with the clear mutual understanding that the salary is intended to be the employee s straight time compensation for all hours worked, many or few. If this is the case, then the employee s regular rate is the salary divided by the hours actually worked. Example: An employee is paid a salary of $ per week with the understanding that the salary is intended as compensation for all hours worked. The employee works fifty hours in a week. Regular Rate = $ = $12.00 per hour Weekly Pay = $ salary 10 x $ 6.00 = $ overtime pay Gross Pay Due: $ Chapter 2 14

18 Reporting Items on Form W-2 This method is called fixed salary for fluctuating hours by the government, or just fluctuating workweek. Its most striking feature is how cheap it makes overtime. The same salary and the same number of hours yields $ in one case and only $60.00 in the other. The fluctuating workweek method may not be used unless the employee s salary is guaranteed. Guaranteed means that even if employees work fewer than 40 hours, they must be paid their full salary. All compensation to employees should be reported on the employee's Form W-2. The W-2 should include taxable employee fringe benefits, even if they are not subject to federal income tax withholding. (See the table later in this chapter for additional information on treatment of items other than wages on Form W-2). Some common items to consider when preparing Form W-2 are: Gross Wages - Box 1 - FICA withholding is required on some fringe benefits. The employee's share of FICA paid by the employer rather than withheld from the employee is additional wages to the employee. The benefit is divided by.9235 (for 2015) if the employee is subject to social security and Medicare tax, or.9855 (for 2015) if the employee is only subject to Medicare tax. For workers with wages in excess of $200,000, the benefit is divided by This gross amount is reported in Boxes 1, 3 and 5. The net amount may be reported in Box 14 (required if 100% of the annual lease value is included in Box 1). The employee's share of social security tax is reported in Box 4 and Medicare tax in Box 6. Example: Employee has $50, of wages in 2015 and must include $ for personal use of the company auto. ($ = $541.42). $50, of wages is reported in Boxes 1, 3, and 5. Auto - $ is reported in Box 14. $3, of social security tax is reported in Box 4 and $ of Medicare tax in Box 6. Social Security Wages - Box 3 - Maximum amount is $118,500 for 2015 and Do not include noncash wages not subject to social security tax. Social Security Tax Withheld - Box % of the social security wages reported in Box 3 (maximum $7,347). For 2016, 6.20% of wages reported in Box 3 (maximum $7,347). Medicare Wages - Box 5 - There is no limit on the amount of wages subject to Medicare tax. Medicare Tax Withheld - Box 6 - Report aggregate Medicare tax of 1.45% on Medicare wages up to $200,000 and 2.35% on Medicare wages in excess of $200,000. There is no limit on the amount of Medicare tax that must be paid. Dependent Care Benefits - Box 10 - Total dependent care benefits paid under a cafeteria plan. Also report the amount in excess of $5,000 in Boxes 1, 3 and 5 as additional compensation. Information Required by IRS - Box 12 - Do not enter more than four items in this Box. Use an additional Form W-2 if more than four items need to be reported. Enter IRS code, one space, and the amount without dollar signs or commas for the following items: Chapter 2 15

19 Code Description of Item A social security tax not withheld on tips B Medicare tax not withheld on tips C cost of group term life insurance coverage in excess of $50,000 D employee contribution to 401(k) plan E employee contribution to 403(b) annuity plan F employee contribution to 408(k)(6) salary reduction SEP plan G employee contribution and employer contribution to 457(b) state or local government plan H employee contribution to 501(c)(18)(D) tax exempt organization plan J nontaxable sick pay K 20% excise tax on excess golden parachute payments to certain key corporate employees, if the excess payments are wages, report the 20% as withholding in Box 2. L substantiated employee business expense (Federal rate) if reimbursement is at more than Federal rate. M social security tax not withheld on cost of group term life insurance in excess of $50,000 provided to former employee N P Q R S T V W Y Z AA BB Medicare tax not withheld on cost of group term life insurance in excess of $50,000 provided to former employee excludable moving expense reimbursements paid directly to employee nontaxable combat pay employer contributions to a medical savings account employee salary reduction contributions to 408(p) SIMPLE plan employer provided adoption benefits. Includes payments made under a cafeteria plan income from the exercise of nonstatutory stock options employer contributions to an HSA current year deferrals (including earnings) under a Section 409A nonqualified deferred compensation plan income under a nonqualified deferred compensation plan designated Roth contributions to a Section 401(k) plan designated Roth contributions under a Section 403(b) program DD cost of employer-sponsored health coverage (reporting optional for 2011) EE Designated Roth contributions to a Section 457(b) plan USERRA Makeup Contributions Box 12 Makeup contributions under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) to a pension plan for a prior year must be reported separately and identified by year. For example: $2, contributed for 2014 to a 401k plan is reported as D Report the code and the year to the left of the vertical line in Box 12a through 12d. A 2015 contribution does not require a year designation. Chapter 2 16

20 Lease Value and Other - Box 14 Personal use of company car must be reported here if 100% of annual lease value is included in Box 1. This Box also may be used for any other information you want to provide to your employees. Label each item. Some examples of items are: 1. educational assistance payments; 2. health insurance premiums deducted; 3. moving expense reimbursements not reported in Box 12; 4. personal use of company auto; 5. union dues; 6. uniform payments; 7. parsonage allowance and utilities for a member of the clergy; 8. nonelective employer contributions to a pension plan; 9. voluntary after-tax employee contributions to a pension plan; 10. required employee contributions to a pension plan; 11. employer matching contributions to a pension plan; and 12. employee contributions to an HSA. Filing Requirements The due dates for Forms W-2 are: Employee s Copies of Form W-2 must be postmarked on or before February 1, Terminated employee W-2 due date: Minnesota - within 30 days of request if employee requests in writing Idaho - within 30 days of termination if an employee requests Illinois - within 30 days of termination Iowa - within 30 or after the last payment of wages if an employee requests Wisconsin - with the last payment of wages Federal - Copies A with Form W-3 must be mailed to the Social Security Administration Data Operations Center, Wilkes-Barre, PA , on or before February 29, 2016 or March 31, 2016 (if filing electronically). Laser-printed black and white Forms W-2 and W-3 may be submitted to the Social Security Administration. They must contain a four-digit vendor code which identifies the software producer of the forms for the Social Security Administration. Minnesota - Copies No. 1 must be mailed to Minnesota Revenue, Mail Station 1173, St. Paul, MN , on or before February 29, Idaho - Copy 1 of Form W-2 and Idaho Form 967, Idaho Annual Withholding Report, must be filled with the Idaho State Tax Commission no later than the last day of February either in electronic or paper form. Forms can be submitted electronically at or by mail to Idaho State Tax Commission, PO Box 76, Boise, ID Illinois - Employers with less than 250 W-2 s are not required to send state copies of W-2 s to Illinois. State copies must be retained by the employer for three years. Employers with 250 or more W-2 s are required to electronically file by February 16, Chapter 2 17

21 Iowa - Form VSP must be filed electronically by February 29, 2016 (see for details). Employers are not required to send state copies of W-2 s to Iowa. State copies must be retained by the employer for four years. North Dakota - Copies No. 1 with Form 307 must be mailed to Office of State Tax Commissioner, PO Box 5624, Bismarck, ND on or before February 29, Wisconsin - Copies No. 1 must be mailed to Wisconsin Department of Revenue, P.O. Box 8981, Madison, WI Form WT-7 must be filed electronically by February 1, Businesses terminating operations must file Forms W-2 by: Employee s Copies - Employee s copies (B, C and 2) must be postmarked no later than the due date of the final Form 941 or within 30 days of termination if employee requests. Federal - File Copies A with Form W-3 with the Social Security Administration by the last day of the month that follows the due date of your final Form 941. Minnesota - Copies No. 1 must be mailed to the Minnesota Department of Revenue on or before February 29, North Dakota - Copies No. 1 with Form F-307 must be mailed to Office of State Tax Commissioner by the last day of the month that follows the due date of the final Form 941. Wisconsin - Copies No. 1 must be mailed to Wisconsin Department of Revenue within 30 days after termination of business or permanently ceasing to pay wages. Electronic Reporting Employers who prepare 250 or more Federal Forms W-2 are required to file the information electronically. A waiver from filing electronically for undue hardship is available by filing Federal Form It is difficult to receive a waiver. Minnesota requires electronic filing when 10 or more state forms W-2 are filed. Idaho requires electronic filing for employer who meet the IRS requirements for electronic filing and file 50 or more state Forms W-2. Illinois requires electronic filing when 250 or more state Forms W-2 s are filed. Iowa does not require state filing of Forms W-2. North Dakota require electronic filing when 250 or more state Forms W-2 are filed. South Dakota has no income tax therefore no state Forms W-2 are required. Wisconsin requires electronic filing when 50 or more state Forms W-2 are filed. Chapter 2 18

22 TREATMENT OF INCOME OTHER THAN WAGES Include on W-2 Subject to Box 1&16 Box 3&5 Box 10, 11, FICA (Gross (FICA 12,or 14 (5) FUTA Wages) Wages) (Other) SUTA 401(k), 403(b), 408(k)(6), 408(p), 457(b), 501(c)(18) or 409A (Elective Deferrals) (1) No Yes 12-D,E,F,S, G, H, Y Yes Designated Roth Contributions to 401(k) Plan or 403(b) Program Yes Yes 12-AA, BB Yes Group Term Life in Excess of $50,000 Yes Yes 12-C (2) FICA only Employee Business Expenses Substantiated (Accountable Plan) No No 14-EBE No Unsubstantiated (Nonaccountable Plan) or Unreturned Excess Under Accountable Plan) Yes Yes No Yes Mileage Reimbursement At More than the Federal Rate Yes (3) Yes (3) 12-L (4) Yes (3) At or less than the Federal Rate No No 14-EBE No Per Diem Reimbursement for Meals and/or Lodging: At More than the Federal Rate Yes (3) Yes (3) 12-L (4) Yes (3) At or Less than the Federal Rate No No 14-EBE No PS-58 (Life Insurance) Costs (11) Yes No 14-PS-58 No Simplified Employee Pension (SEP) (6) No No 14-SEP No Moving Expenses Qualified No No 12-P (10) No Nonqualified Yes Yes 14-Moving Yes Personal Use of Company Car (7) Yes Yes 14-Auto Yes Dependent Care Benefits No No 10 SUTA only Cafeteria Plan (Section 125) No No No SUTA only Chapter 2 19

23 TREATMENT OF INCOME OTHER THAN WAGES Include on W-2 Subject to Box 1&16 (15) Box 3&5 Box 10, 11, FICA (Gross (FICA 12,or 14 (5) FUTA Wages) Wages) (Other) SUTA Sick Pay (12) Taxable Yes Yes 14-sick Yes (16) Nontaxable No No 12-J No Nonqualified Deferred Compensation Subject to FICA but Not Yet Paid No Yes 11 Yes Subject to FICA & Paid Now Yes Yes 11 Yes Paid Now but Previously Subject to FICA Yes No 11 No Medical Savings Account No No 12-R Yes (8) Adoption Assistance Benefits No Yes 12-T Yes Exercise of Nonstatutory Stock Options (9) Yes Yes 12-V Yes Employer Contributions to Health Savings Account (HSA) and Employee Contributions through a Cafeteria Plan No No 12-W No Directors Fees Paid to Employees (13) No No No SUTA only Premiums and Contributions Paid by S Corps for 2% Shareholder-Employees (14) Long Term Care Insurance Yes No 14-LTC No Contributions to Health Savings Accounts (HSA) Yes No 14-HSA No Long Term Disability Yes Yes 14-LTD No Short Term Disability Yes Yes 14-STD Group Term Life Insurance $50,000 and less Yes Yes 14-GTL FICA only Over $50,000 Yes Yes 12-C FICA only Health Insurance Yes No 14-HLTH No (1) Retirement plan in Box 13 must be checked. (2) Report uncollected social security tax (M) and uncollected Medicare tax (N) on group term life in excess of $50,000 provided to former employee. (3) Amount in excess of federal rate (the taxable portion). (4) Amount equal to federal rate (the non-taxable portion). (5) Reporting in Box 14 is optional except for 100% of annual lease value. (6) Retirement plan in Box 13 must be checked. This does not include Elective Deferrals under SARSEP s(408(k)(6)) (7) Required in Box 14 if 100% of annual lease value is in the employee's income. (8) Not subject to FICA. (9) Spread between exercise price and fair market value at time of exercise. (10) Not reported on W-2 if paid directly to third party. (11) If not reported on Form 1099R. See table at end of chapter. (12) Third party sick pay in Box 13 must be checked. (13) Report on Form 1099-MISC. (14) Includes owner s spouse, children, grandchildren and parents. (15) Box 16 state wages vary based on the benefit and the state. (16) SUTA reporting of sick pay paid by a third party varies by state. Chapter 2 20

24 Chapter 2 21

25 UNIFORM PREMIUMS FOR $1,000 OF GROUP TERM LIFE INSURANCE PROTECTION Coverage on to $50,000 of employer provided group term life insurance is excluded from employee compensation. The taxable value of coverage provided in excess of $50,000 is included as additional compensation on the employee's W-2. The amount is determined based on the IRS rate from the table below. Age Bracket Cost Per $1,000 of Protection For 1-Month Period Under 25 $ to to to to to to to to to and above 2.06 Chapter 2 22

26 PS-58 RATES (TABLE 2001) One-Year Term Insurance Premium for $1,000 of Life Insurance Protection In Qualified Retirement Plans and Split Dollar Life Insurance Policies Age Premium Age Premium Age Premium Age Premium 0 $ $ $ $ The lower of the insurance company s rates or the IRS s rates from the above table can be used. Chapter 2 23

27 Form W-2 Reporting of Employer-Sponsored Health Coverage The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable. The value of the employer s excludable contribution to health coverage continues to be excludable from an employee s income, and it is not taxable. The reporting is for informational purposes only and will provide employees useful and comparable consumer information on the cost of their health care coverage. Transition Relief Employers filing fewer than 250 Forms W-2 in 2014 will not be required to report the cost of coverage on the 2015 Forms W-2. The transition relief will apply to future calendar years until the IRS publishes additional guidance. Reporting on the Form W-2 The value of the health care coverage will be reported in Box 12, with Code DD. In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee. The chart below illustrates the types of coverage that employers must report on the Form W-2. Form W-2 Reporting of Employer-Sponsored Health Coverage Coverage Type Form W-2, Box 12, Code DD Report Do Not Report Optional Major medical X Dental or vision plan not integrated into another X medical or health plan Dental or vision plan which gives the choice of X declining or electing and paying an additional premium Health Flexible Spending Arrangement (FSA) funded X solely by salary-reduction amounts Health FSA value for the plan year in excess of X employee s cafeteria plan salary reductions for all qualified benefits Health Reimbursement Arrangement (HRA) X contributions Health Savings Arrangement (HSA) contributions X (employer or employee) Archer Medical Savings Account (Archer MSA) X contributions (employer or employee) Hospital indemnity or specified illness (insured or X self-funded), paid on an after-tax basis Hospital indemnity or specified illness (insured or X self-funded), paid through salary reduction (pre-tax) or by employer Employee Assistance Plan (EAP) providing applicable employer-sponsored healthcare coverage Required if employer charges a COBRA premium Optional if employer does not charge a COBRA premium Chapter 2 24

28 Form W-2 Reporting of Employer-Sponsored Health Coverage (continued) Coverage Type Form W-2, Box 12, Code DD Report Do Not Report Optional On-site medical clinics providing applicable employer-sponsored healthcare coverage Wellness programs providing applicable employersponsored healthcare coverage Required if employer charges a COBRA premium Required if employer charges a COBRA premium Multi-employer plans Domestic partner coverage included in gross income X Governmental plans providing coverage primarily for X members of the military and their families Federally recognized Indian tribal government plans X and plans of tribally charted corporations wholly owned by a federally recognized Indian tribal government Self-funded plans not subject to Federal COBRA Accident or disability income X Long-term care X Liability insurance X Supplemental liability insurance X Workers compensation X Automobile medical payment insurance X Credit-only insurance X Excess reimbursement to highly compensated X individual, included in gross income Payment/reimbursement of health insurance X premiums for 2% shareholder-employee, included in gross income Other Situations Report Do Not Report Employers required to file fewer than 250 Forms W-2 for the preceding calendar year (determined without application of any entity aggregation rules for related employers) Forms W-2 furnished to employees who terminate before the end of a calendar year and request, in writing, a Form W-2 before the end of that year Forms W-2 provided to third-party sick-pay provider to employees of other employers Optional if employer does not charge a COBRA premium Optional if employer does not charge a COBRA premium X X Optional X X x * * * * * Chapter 2 25

29 CHAPTER 3 - FRINGE BENEFITS Fringe Benefits Excluded From Employee Compensation The following fringe benefits are excludable from employee compensation. Some of these benefits must be offered to employees on a nondiscriminatory basis: accident and health plans; health reimbursement arrangements; disability income plans; group term life insurance; cafeteria plans; qualified transportation; adoption assistance programs; employer-provided cell phone; Chapter 3 26 educational assistance programs*; dependent care assistance plans*; no-additional-cost fringe benefits*; de minimis fringe benefits*; qualified employee discounts*; working condition fringes*; and health savings accounts. *These fringe benefits are also eligible for exclusion by partners who perform services for a partnership and by a more than 2% shareholder of an S-corporation. State wage exclusion may vary based on the benefit and the state. The discrimination rules are different for each fringe benefit. Accident and Health Plans An employer can provide unlimited accident and health coverage (including long-term care insurance) for an employee, and the employee's spouse and dependents both before and after retirement. Insured Plans - Premiums paid to insurance companies for health insurance are deductible by the employer. Benefits received by employees are not taxable as compensation. A group health plan may not establish rules for eligibility based upon an employee s health status. Employers who establish health plans that base eligibility on health status are subject to a penalty of $100 for each day of noncompliance. Insured Plans The Affordable Care Act (ACA) requires non grandfathered fully insured health plans to satisfy nondiscrimination rules regarding eligibility to participate in the plan and eligibility for benefits. This requirement was originally set to take effect for plans years beginning on or after September 23, However in late 2010, the IRS announced that the nondiscrimination requirement for non-grandfathered plans is delayed indefinitely, pending the issuance of regulations or guidance on how to comply with the requirement. Premiums paid to insurance companies by the employer and benefits paid by the insurance company to the employee for personal injury or sickness are not taxable to the employee. This exclusion does not include payments received in lieu of wages. Self-insured Plans - These medical reimbursement plans are subject to discrimination rules. Failure to meet the tests results in additional compensation for highly compensated individuals. 1. Eligibility tests a. one of the following three tests must be met: i. the plan must cover 70% or more of all employees; ii. iii. at least 70% of all employees must be eligible, and 80% or more of all eligible employees must be included; or participants must constitute a classification of employees that the IRS determines is nondiscriminatory.

30 b. The following employees may be excluded from the eligibility test: i. employees with less than three years of service; ii. employees under age 25; iii. iv. 2. Benefits test part-time (generally less than 25 hours per week) or seasonal employees (generally less than seven months per year); union members; and v. nonresident aliens. a. A plan will be discriminatory unless all benefits and features provided for highly compensated participants and their dependents are also provided for all other participants and their dependents on the same basis. b. Highly compensated participants include: i. the five highest paid officers; ii. iii. 3. Taxable amount more than 10% shareholders; and the highest paid 25% of all nonexcludable employees. a. discriminatory eligibility - If the plan discriminates in eligibility to participate, only a portion of the benefit is taxable. The taxable amount for each highly-compensated participant is the benefit paid to that person times the total amount paid to all highly compensated individuals divided by the amount paid to all plan participants. b. discriminatory benefit - If the benefit is available to highly compensated participants, but not other participants, the entire value of the benefit is taxable. For example, if only officers are reimbursed for dental expenses, the amount of dental expenses claimed by each officer is taxable to them (assuming there are less than six officers). Affordable Care Act (ACA) Impact on Employer Health Plans Pre-tax reimbursement of employees individual policy premiums not permissible under ACA will subject employer to $100 per employee, per day penalty for noncompliance. Post-tax reimbursement of employees individual policy premium not permissible under ACA will subject employer to $100 per employee, per day penalty for noncompliance. Health Reimbursement Arrangements (HRAs) An HRA is a type of employee benefit plan reimbursing employees for medical expenses not covered by other forms of insurance. Benefits are paid up to a specific dollar amount from funds provided exclusively by the employer. HRA s are not subject to the strict requirements of health flexible spending arrangements. The plans: must be funded solely by the employer; may only provide benefits for substantiated medical expenses; may allow the carryover of unused amounts to a later year; and must be integrated with an ACA compliant group health plan. Chapter 3 27

31 Disability Income Plans A disability income plan is an employer-sponsored program to provide income to employees who are disabled. This can apply to short or long term situations. Uninsured Plan 1. employer paid benefits are deductible as compensation by the employer; and 2. benefit payments are fully taxable to the employee as compensation. Insured Plan 1. employer paid premiums are deductible as compensation; 2. these premiums are not taxable to the employee; and 3. benefits received from the insurance company while disabled are taxable to the employee. These plans are not subject to any discrimination rules by IRS unless funded through a voluntary employees' beneficiary association (VEBA). NOTE: If employees pay the premiums themselves with after-tax dollars, the benefit payments are not taxable when received. Group Term Life Insurance Coverage on up to $50,000 of employer provided group term life insurance is excluded from an employee s wages. In certain circumstances, tax-free coverage is still available to retired employees. The taxable value of coverage provided in excess of $50,000 is included as additional wages on the employee's W-2. The amount is determined based on the IRS rate from the following table: UNIFORM PREMIUMS FOR $1,000 OF GROUP TERM LIFE INSURANCE PROTECTION Age Bracket Cost Per $1,000 of Protection For 1-Month Period Under 25 $ to to to to to to to to to and above 2.06 Chapter 3 28

32 Discrimination rules - The plan must not discriminate in favor of key employees. Key employees cannot receive more benefits than other employees. If they do, the entire amount of group term life insurance coverage provided to all key employees is a taxable fringe benefit. Key employees are: 1. officers whose salary exceeds $170,000 for 2015 or 2016; 2. more than 5% owners; or 3. more than 1% owners whose salary exceeds $150,000. Discrimination test - There are two discrimination tests that must be met. These are applied separately to active and former employees. 1. Test for benefits - benefits must be provided to all employees on a uniform basis. This basis may be in relation to compensation. 2. Test for eligibility - one of the following four tests must be met: a. at least 70% of all employees must benefit from the plan; b. at least 85% of participants are not key employees; c. participants constitute a classification of employees that the IRS determines is not discriminatory; or d. the plan is part of a cafeteria plan and meets those requirements (discussed later in this chapter). 3. For the eligibility test, the following employees may be excluded: a. employees with less than three years of service; b. part-time (less than 20 hours per week) and seasonal employees (less than five months per year); c. nonresident aliens; and d. union employees. Dependent coverage - Up to $2,000 of group term life insurance may also be provided for an employee's spouse or dependent as a "de minimis" fringe benefit. If more than $2,000 of coverage is provided, the entire cost of the dependent insurance is additional compensation for the employee. Any amount the employee reimburses the company is excluded from the W-2. The cost of this insurance is determined using the preceding table. Cafeteria Plans A cafeteria plan, or "flexible benefit plan", is a plan in which choices can be made among several types of nontaxable fringe benefits or cash. The fringe benefits that can be offered include: medical and dental benefits; insurance premiums through an employer sponsored group plan (excluding long term care insurance premiums); disability insurance; dependent care expenses; extra vacation time; group term life insurance; 401(k) plans; and health savings accounts. Chapter 3 29

33 Benefits provided to the highly compensated are additional compensation if the plan is discriminatory due to the eligibility or contributions and benefits tests. Eligibility Test - A plan will not be discriminatory if: 1. the plan benefits a nondiscriminatory classification of employees and passes a safe harbor or facts and circumstances test; 2. the employment requirement for each eligible employee is the same and does not exceed three years; 3. participation in the plan begins by the first day of the plan year after the employment requirement is met; and 4. employees who may be excluded from the tests are: a. employees with less than one year of service or under age 21; b. union employees; and c. nonresident aliens. Contributions and Benefit Test - A plan will be considered discriminatory if the total benefits or nontaxable benefits provided to the highly compensated are significantly greater than the total of nontaxable benefits provided to other employees. A highly compensated employee for cafeteria plan discrimination rules is an employee who is: 1. an officer of the employer; 2. a shareholder who owns more than 5% of the voting stock of the employer; 3. an employee who was a 5% owner during the current or preceding year; or 4. an employee who had compensation greater than $120,000 for 2015 or A separate nondiscrimination test applies to key employees. If key employees receive more than 25% of the nontaxable benefits provided to all participants under the plan, benefits received by the key employees will be taxed to them. Key employees are: officers with pay greater than $170,000 for 2015 or 2016; more than 5% owners; and more than 1% owners with a salary greater than $150,000. In addition to these tests, each benefit offered under the plan is subject to the discrimination rules applicable to that benefit. Qualified Transportation A qualified transportation fringe benefit generally is: transportation in a commuter highway vehicle if the transportation is in connection with travel between the employee's residence and place of employment; a transit pass; tokens; or qualified parking. The maximum amount of qualified parking excludable from an employee's gross income is $250 per month for 2015 ($255 for 2016). The maximum aggregate amount of other qualified transportation fringe benefits (commuter vehicle and transit pass transportation) excludable from gross income is $250 for 2015 ($130 for 2016). The nondiscrimination rules do not apply to these benefits. Chapter 3 30

34 Educational Assistance Programs An employer can exclude from gross income amounts paid by the employer for educational expenses provided under a written plan. Amount Excludable - Up to $5,250 per year may be excluded. Educational Expenses - Excludable expenses include tuition, fees, books, supplies, equipment and similar expenditures for the education of the employee. It does not include tools or supplies which may be retained after completion of the course or meals, lodging or transportation. It also does not include expenses for any courses involving sports, games or hobbies. Nondiscrimination Rules - No more than 5% of the benefits paid under the program can benefit employees who own more than 5% of the employer. This exclusion is available for both graduate and undergraduate courses. Adoption Assistance Programs An employee gets an exclusion from income for amounts paid by the employer for qualified adoption expenses provided under a written plan of the employer. Amount Excludable - The amount excludable is $13,400 in 2015 ($13,460 in 2016) per qualifying child. The amount excludable is ratably phased out for employees with adjusted gross income over $201,010 ($201,920 in 2016) and completely eliminated if adjusted gross income exceeds $241,010 ($241,920 in 2016). A $13,400 ($13,460 in 2016) exclusion is allowed for the adoption of a child with special needs regardless of whether the employee has qualified adoption expenses. Qualified Adoption Expenses - Qualified adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees and other expenses that are directly related to the adoption of the child. Eligible Child - An eligible child is either a person under 18 or a person physically or mentally incapable of taking care of himself or herself. A child with special needs is a child who the state determines cannot be returned to the child's parents and who, because of a specific condition or factor, cannot be reasonably placed with adoptive parents. Discrimination Rules - No more than 5% of the benefits paid under the program can benefit employees who own more than 5% of the employer. Dependent Care Assistance Programs Employers adopting a written plan may pay employees up to $5,000 annually for dependent care costs. Notice of benefits available and terms of the program must be communicated to the eligible employees. Discrimination Tests - Neither contributions nor benefits under the plan can discriminate in favor of highly compensated employees, who are considered highly compensated employees under the cafeteria plan rules, (see earlier in this chapter). 55% Average Benefits Test - The average benefit provided to non-highly compensated employees must be at least 55% of the average benefits provided to highly compensated employees. Chapter 3 31

35 Excluded Employees - The following employees may be excluded for the above purposes: 1. employees under age 21 or with less than one year of service; and 2. certain union members. Limit on Benefits for Owners - The total paid to more-than-5% owners cannot be more than 25% of the total dependent care assistance paid for the year. Notification The plan must provide eligible employees with reasonable notification of the availability and terms of the arrangement. Annual Statement The plan must furnish a written statement by January 31 of each year to each participant of the amount of expenses incurred in the prior calendar year (may be reported on Form W-2). No Additional Cost Fringe Benefits The entire value of any no additional cost service provided to an employee (including retired or disabled, and spouses and dependents) is excludable from wages. No additional cost service is a service provided by an employer which: is offered for sale to customers in the ordinary course of the line of business in which the employee is performing services; and the employer does not incur any substantial additional cost (including foregone income and labor costs) in providing the service to the employee. excess capacity services are included in no additional cost services. These are services available that would remain unused if the employees did not use them. Examples are: 1. hotel rooms for hotel employees; 2. airline tickets for airline employees; and 3. telephone services for telephone company employees. Discrimination - Highly compensated employees cannot exclude these benefits from wages unless the services are offered to employees on substantially equal terms. De Minimis Fringe Benefits De minimis fringe benefits are those whose value is so small that accounting for them is unreasonable or administratively impractical. Examples are: personal typing; occasional company parties; non-cash holiday gifts of nominal value; coffee, rolls and soft drinks; use of photocopy machine; local phone calls; Chapter 3 32

36 occasional tickets for theater or sporting events (not season tickets); employer-provided group term life insurance payable on the death of a spouse or dependent not exceeding $2,000; meals provided on an occasional basis to enable the employee to work overtime; and meals provided at an employer-operated cafeteria if: 1. the facility is on or near the business premises of the employer; 2. the facility's annual revenue exceeds the direct operating costs; and 3. the benefit is offered in a nondiscriminatory manner. All de minimis fringe benefits, except meals provided at an employer operated cafeteria, are not subject to any discrimination rules. Qualified Employee Discounts The value of certain property offered to employees (including retired or disabled and spouses and dependents) at a reduced price is excludable from wages. Qualified employee discounts are excludable only for qualified property or services provided to the employee for personal use. Qualified property or services are property or services that the employer offers to the general public in the ordinary course of the line of business in which the employee performs services. Excluded property is: 1. real property; and 2. personal property normally held for investment. Limitation on amount excludable: 1. merchandise discounts - The amount that can be excluded from the employee's income is limited to the gross profit percentage based on all sales by the employer. For example, if the gross profit percentage is 25% and each item is regularly priced at $100, the excludable amount would be $25. If the employee purchases the item at $75 or higher, nothing is included in income. However, if the employee purchases the item at $50, $25 will be included in income; and 2. service discounts - The excludable discount is limited to 20% of the price offered to the general public. Nondiscrimination rules - This fringe benefit must be available to all employees on a substantially equal basis or the benefit will be taxable to highly compensated employees. Working Condition Fringes A working condition fringe benefit is an amount paid by the employer for the employee which, if the employee had paid personally, would have been deductible as a business expense on the employee's individual tax return. Examples are: dues and subscriptions for professional organizations and periodicals; business travel for employees; use of company car for business purposes; Chapter 3 33

37 use of a demonstrator car by full-time car salesmen (if there are substantial restrictions on personal use); certain product testing programs; and certain club dues and spousal travel not deductible by the employer and not treated as compensation. The nondiscrimination rules do not apply to these benefits, except for the product testing fringe benefit. The testing goods must be offered to all employees on substantially the same basis in order for the benefit to be nontaxable to the highly compensated. Health Savings Accounts (HSA) HSAs are private tax-free savings accounts that can be used to pay for medical expenses incurred by individuals, their spouses or their dependents. The contributions are tax deductible even if the account beneficiary does not itemize. Amounts contributed to an HSA belong to the individual and are completely portable. Unused money is available for later years and earnings in the account accrue free of tax. Money withdrawn for purposes other than qualified medical expenses is subject to income tax plus a 10% penalty (penalty does not apply for distributions after retirement age or due to disability or death). To be eligible to open an HSA, participants must be enrolled in a high deductible health insurance plan. Other details which affect employers include: Up to 100% of the health plan deductible may be contributed, from all sources, to an HSA annually. The limit is $3,350 for 2015 and 2016 for self-only coverage; $6,550 for 2015 ($6,750 for 2016) for family coverage. A maximum additional contribution of $1,000 for 2015 and 2016 is allowed for individuals age 55 and older. Employer contributions are made on a pre-tax basis and are not taxable to the employee. Employer contributions are not subject to FICA or FUTA taxes. HSAs may be offered under a cafeteria plan. Nondiscrimination rules apply to employer contributions to HSAs. Filing Requirements Forms 5500 must be filed annually for the following fringe benefit plans: welfare benefit plans such as medical, life insurance, disability, etc. However, welfare plans are exempt from filing if they: 1. have fewer than 100 participants at the beginning of the year; and 2. are fully insured, unfunded or a combination of insured and unfunded. * * * * * Chapter 3 34

38 CHAPTER 4 - PAYROLL TAXES AND DEPOSIT REQUIREMENTS Withholding Requirements Income Tax Withholding at the Source - By law an employer is required to withhold both federal and state income taxes from all employees' gross paychecks or gross cash payments for employee services. The amount to be withheld from a payroll can be determined by use of the Form W-4 or State Withholding Allowance Certificate information in conjunction with the federal and state income tax withholding tables. These tables can be obtained from the appropriate government agencies at no cost to the employer. Once you have started making withholding tax remittances to the government you will receive updated tables automatically. Social Security and Medicare Tax (FICA) - All employers are required to withhold FICA tax from employees' wages. In addition, the employer must pay an amount equal to the amount withheld from the employees' wages. The FICA tax is composed of two elements: Old Age, Survivors and Disability Insurance (OASDI) and Medicare Hospital Insurance (HI). The IRS refers to the OASDI element as social security and the HI element as Medicare. For 2015, the amount to be withheld for social security is 6.20% of the first $118,500 in earnings and the amount to be withheld for Medicare is 1.45% on wages up to $200,000 and 2.35% on Medicare wages in excess of $200,000. For 2016, the amount to be withheld for social security is 6.20% of the first $118,500 in earnings, and the amount to be withheld for Medicare is 1.45% on wages up to $200,000 and 2.35% on Medicare wages in excess of $200,000. For 2015 and 2016, the employer s share is 6.20% for social security and 1.45% for Medicare, making the total social security tax 12.40% for individual wages up to $200,000 and 13.30% for individual wages in excess of $200,000. Federal Unemployment Tax (FUTA) For 2015, the FUTA tax rate is 6.0% on the first $7,000 of each employee s wages with a tax credit, generally of 5.4%. Employers who are entitled to the maximum 5.4% credit would pay 0.6% on the first $7,000 of wages, or $42 per employee. Employers are entitled to the maximum credit if their state unemployment taxes are paid in full, on time, and on all the same wages as are subject to FUTA tax, as long as their state is not determined to be a credit reduction state. Federal law permits a reduction to the 5.4% credit when a state has an outstanding federal loan for two years, thereby increasing the employer s FUTA tax. The credit reduction starts at 0.3% and increases 0.3% each year the state has not repaid their federal loan. State Unemployment Tax (SUTA) - State unemployment taxes are based on wage bases set by each individual state with the tax rates varying depending on the employer's claims record. These taxes are also computed and paid quarterly. (See Payroll Rates and Earnings later in this chapter). Deposit Requirements Federal - You can determine your deposit status by use of a lookback rule. Lookback Rule - If your total employment taxes reported for the one-year lookback period ending the preceding June 30 th are $50,000 or less, you are a monthly depositor for the entire year. Chapter 4 35

39 If your total employment taxes reported for the one-year lookback period ending the preceding June 30 th are more than $50,000, you are a semi-weekly depositor for the entire year. Deposit Rules - If your federal payroll taxes (federal withholding, employer's and employees' share of FICA taxes) at the end of any calendar quarter are less than $2,500, you may pay your taxes with your quarterly report Form 941, on or before the last day of the month following the close of the calendar quarter. If you qualify as a monthly depositor, your deposit must be made monthly by the 15 th day of the following month. If you qualify as a semi-weekly depositor, your taxes must be deposited within three banking days after payday or according to the following schedule: FEDERAL SEMI-WEEKLY DEPOSIT SCHEDULE Wages Paid On Wednesday, Thursday and/or Friday Saturday, Sunday, Monday and/or Tuesday Deposit By The following Wednesday The following Friday If the undeposited liability at the end of any day is $100,000 or more, your taxes must be deposited within one banking day after such day and a monthly depositor becomes a semi-weekly depositor for the rest of the calendar year and the following calendar year. AT LEAST 98% OF THE TAXES MUST BE DEPOSITED TO AVOID PENALTIES. Electronic Deposits - See the Electronic Filing and Payments chapter. FUTA - The tax is computed on a quarterly basis. If the liability is $500 or more, the amount due must be paid by electronic funds transfer on or before the last day of the month following the close of the calendar quarter. If the liability is less than $500 you may carry it forward to the next quarter. State Unemployment Tax - The tax is computed on a quarterly basis. The liability must be paid by the end of the month following the close of the calendar quarter regardless of the amount due. State Withholding 1. Minnesota - If you are a federal semi-weekly depositor, you must deposit your Minnesota withholding according to the "Federal Semi-Weekly Deposit Schedule". See above. Use a payment voucher or e-services Minnesota to make the deposit (see the Electronic Filing and Payments chapter). If you are a federal monthly depositor, you must deposit your Minnesota withholding by the 15 th day of the following month. If your liability at the end of the previous quarter was less than $1,500, you may pay your withholding taxes with a payment voucher or via e-services Minnesota on or before the last day of the month following the close of the calendar quarter. Chapter 4 36

40 If your previous year's liability was $500 or less and you have been notified by the Department of Revenue that you are eligible for annual reporting, you may make payment with a payment voucher or via e-services Minnesota on or before the last day of January of the following year. If your year-to-date liability at the end of any month, other than December, exceeds $500, you must deposit on or before the last day of the following month. 2. Idaho - Based on their filing frequency, every employer is required to file for each applicable period during the calendar year, even if tax was not withheld during a period. If no tax was withheld, the employer will file a zero payment report with the Tax Commission on Form 910. Filing frequencies - Monthly if you do not fit in any of the frequencies listed below. Payment must be made on or before the 20 th of the month following the payment period and any payments must be reconciled on Form Semimonthly if you withhold $240,000 or more in a twelve month period or if withholding exceeds $20,000 per month. Each month contains two periods. The first period begins on the 1 st of the month and ends on the 15 th of the month, with payment due by the 20 th of the same month. The second period begins on the 16 th of the month and ends on the last day of the month with payment due by the 5 th of the following month. Payments made throughout the year must be reconciled on Form Quarterly if you withhold $750 or less each quarter. Deposits must be made on the last day of the month following the end of the quarter. Payments made throughout the year must be reconciled on Form Annually if you withhold less than $750 during the year. Payment must be made on or before January 31 and any payments must be reconciled on Form Illinois - All taxpayers will be assigned to one of three due date schedules: semi-weekly, monthly, or annual. Return due dates remain quarterly and annually. Taxpayers must use the due date schedule assigned. The payment and return dates are determined by the total tax withheld during the look-back period, which is the one-year period ending on June 30 of the immediately preceding calendar year. Semi-weekly: If you reported more than $12,000 during the look-back period, you are assigned to the semi-weekly due date. You must deposit your Illinois withholding according to the Federal Semi-Weekly Deposit Schedule (see page 36). Form IL-941 is due by the last day of the month following the end of the quarter. Payments must be made electronically. Monthly: If you reported more than $1,000 but less than $12,000, you are assigned to the monthly due date schedule. You must deposit your Illinois withholding by the 15th of each month for amounts withheld the preceding month. Form IL-941 is due by the last day of the month following the end of the quarter. Pay electronically or use Form IL-501. Chapter 4 37

41 Annually: If you reported less than $1,000, and you are assigned to the annual due date schedule. File and pay electronically or use Form IL-941 by January Iowa - Based on their filing frequency, every employer is required to file for each applicable period during the calendar year, even if compensation was not paid during a period, the employer will enter zeroes on the return/deposit for that period. Filing frequencies - Quarterly if you remit less than $6,000 of tax per year (less than $1,500 per quarter; less than $500 per month). File quarterly return at the end of each calendar quarter. Due by the last day of the month following each calendar year. - Monthly if you remit $6,000-$120,000 of tax per year ($500-$10,000 per month). File tax deposits for the first two months of each quarter by the 15 th of the following month. - Semi-monthly if you remit more than $120,000 of tax per year (more than $10,000 per month; more than $5,000 semi-monthly). File tax deposits twice each month electronically. Due by the 25 th of the month for the period from the 1 st through the 15 th, and by the 10 th day of the following month for the period of the 16 th through the end of the month. 5. North Dakota Make payment with the quarterly report Form F-306 on or before the last day of the month following the close of the calendar quarter. If your total liability during the previous calendar year was less than $500, you may file and pay annually by the last day of January of the following year. 6. South Dakota No income tax. 7. Wisconsin Reporting periods for depositing taxes withheld are quarterly, unless otherwise notified by the Department to file semi-monthly, monthly, or annually. The initial filing status is based on the estimated amount of tax to be withheld from employees. If your withholding liability changes, the Department may change your filing status effective January 1 of the next calendar year. Employers are notified in writing of new deposit frequency. Minnesota, Idaho, Illinois, Iowa and Wisconsin require reporting even if no taxes were withheld during the reporting period. How to Determine Liabilities to be Deposited on Less Than a Quarterly Basis Federal Tax Liability The federal liability at the end of any period is the total of all employees wages subject to social security tax multiplied by 12.4% plus the total of all employees wages subject to Medicare tax multiplied by 2.9%, plus an additional employee Medicare tax of 0.9% on Medicare taxable wages in excess of $200,000, plus the amount of federal income tax withheld from all employees. State Liability This is the amount of income tax withheld from all employees. Quarterly Payroll Reports to be Filed The year is divided into four quarters as follows: 1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter January April July October February May August November March June September December Chapter 4 38

42 Federal Form 941 Employer s Quarterly Federal Tax Return. Schedule B - Employer s Record of Federal Tax Liability must be included if you are required to deposit on a semi-weekly basis or if your total undeposited federal tax liability at the end of any day is $100,000 or more. Minnesota 1. Minnesota Employer s Quarterly Withholding Tax Return must be filed by Internet or by telephone using e-services Minnesota. 2. Minnesota Department of Employment and Economic Development - Employer s Unemployment Quarterly Wage Detail Report must be filed using the DEED Self-Service System. Idaho All Minnesota Unemployment Insurance quarterly reporting must be done electronically on the Minnesota UI website at or by automated telephone at (651) No paper reports, diskettes, tapes or CD s will be accepted. Only the gross wages for each employee are to be reported. Nontaxable and taxable wages and the amount of tax due will be calculated by the system. Electronic payments are mandatory for employers reporting 50 or more employees. Your total tax can be estimated by multiplying your taxable wages by the Total Due Estimator percentage at the bottom of your Unemployment Insurance (UI) Tax Rate Notice. Wages paid to corporate officers who own 25% or more of the corporation are not subject to Minnesota Unemployment Tax unless the employer files an election with the Minnesota Department of Employment and Economic Development (DEED) to elect coverage for the affected officers. The timeliness of electronic payments is determined by the electronic receipt date. Likewise, the timeliness of paper deposits is determined by the receipt date (not the postmark date). 1. There is no required quarterly withholding report. Use Form 910, Idaho Withholding Voucher, when making withholding tax deposit by check or money order. 2. Form TX20/TX26 Idaho Employer Quarterly Unemployment Insurance Tax Report. Illinois 1. Form IL-941 Illinois Quarterly Withholding Income Tax Return. 2. Form UI-3/40 Employers Quarterly Contribution and Wage Report. Employers with 25 or more employees in prior calendar year are required to submit monthly wage reports electronically. Chapter 4 39

43 Iowa 1. The Iowa Department of Revenue no longer provides forms to file withholding tax. Returns must be filed through the e-file & pay system at or by touch-tone telephone. Call (515) or (800) for assistance. 2. Employer s Contribution & Payroll Report must be electronically submitted each calendar quarter using North Dakota 1. Form 306 North Dakota Income Tax Withholding Return. 2. Form SFN Employer s Contribution and Wage Report may be filed online through UIEASY at Employers with 25 or more employees must file electronically. South Dakota 1. No withholding. 2. Form DOL-UID-21 Employer s Quarterly Contribution, Investment Fee, and Wage Report. Wage reports may be submitted online at Wisconsin 1. Form WT-6 Withholding Tax Deposit Report, must be submitted electronically. 2. UCT-101 and UC-7823 Quarterly Contribution and Quarterly Wage Report. Employers with 25 or more employees who file their own reports must file electronically. Chapter 4 40

44 Annual Payroll Reports to be Filed Federal 1. Form Employer's Annual Federal Unemployment Tax Return. 2. Form Annual Return of Withheld Income Tax (report nonpayroll withholding). 3. Form W-2 - Wage and Tax Statement. 4. Form W-3 - Transmittal of Wage and Tax Statements. Idaho - Form Idaho Annual Withholding Report The Idaho State Tax Commission issues pre-printed forms containing the employers Federal EIN and other information. These forms cannot be accessed online. Forms can be requested by calling (800) Employers can elect to have forms sent to their tax preparer by sending written notification to the Tax Commission. This form can also be filed electronically by visiting Illinois - IL-941-A for taxpayers who are assigned to annual due date schedule. Iowa - All withholding forms are filed through the e-file & pay system at North Dakota - Form F-307 North Dakota Transmittal of Wage and Tax Statements. South Dakota - None. Wisconsin - Form WT-7 - Employer's Annual Reconciliation of Wisconsin Income Tax Withheld From Wages. Making Deposits Federal Taxpayers are required to use electronic funds transfer to make federal tax deposits. All taxpayers not currently depositing taxes via electronic funds transfer will be required to enroll in the Electronic Federal Tax Payment System (EFTPS). (See the Electronic Filing and Payments chapter.) If an employer identification number (EIN) has not yet been issued to you and a payment is due, do not deposit. Mail the payment to the IRS. Include your name, address, kind of tax, period covered and the date you applied for an EIN. Minnesota - The Minnesota tax liability deposit is mailed to the Department of Revenue along with a Minnesota payment voucher or paid using e-services Minnesota. Payment vouchers can be created via the Department of Revenue website at withholding/pages/forms.aspx. For monthly depositors the last day of the deposit period is the last day of the month. For semi-weekly depositors the last day of the deposit period is Tuesday for payrolls paid on Saturday, Sunday, Monday and/or Tuesday and Friday for payrolls paid on Wednesday, Thursday, and/or Friday. Minnesota requires businesses filing monthly withholding taxes with annual tax payments of at least $10,000 to make their payments via MN e-services. Also, employers who are required to pay any type of Minnesota tax via e-services are required to pay withholding taxes via e- Services regardless of their withholding threshold (see the Electronic Filing and Payments chapter). Chapter 4 41

45 Idaho If payments are made via check or money order they must be accompanied by Form 910, Idaho Withholding Payment Voucher, and mailed to Idaho State Tax Commission, PO Box 76, Boise, ID , Payment can also be made electronically by visiting (electronic filing is not required) or by phone at (800) Illinois - The Illinois tax liability deposit is mailed to the Illinois Department of Revenue along with Form IL-501 payment coupon, or paid electronically. Illinois requires electronic payments if withholding exceeds $12,000 during a quarter (see the Electronic Filing and Payments chapter). Iowa - The Iowa tax liability deposit may be paid through e-file & pay system, mailed with an official voucher (not for semi-monthly filers), or paid by credit card. Iowa requires employers who remit more than $120,000 per tax year (more than $10,000 per month) to deposit twice each month by electronic funds transfer. No paper forms are required to be filed (see the Electronic Filing and Payments chapter). North Dakota - The North Dakota tax liability deposit is mailed to the Office of State Tax Commissioner along with Form F-306 (North Dakota State Income Tax Withholding Return). North Dakota employers may deposit electronically through Withholding WebFile or Withholding E-File easily, but electronic deposits are not required (see the Electronic Filing and Payments chapter). Wisconsin - Wisconsin requires employers to remit taxes due using electronic funds transfer, unless they have been granted a department waiver for electronic filing (see the Electronic Filing and Payments chapter). Payroll Tax Deposits May Be Required On Salary and Wage Advances Payments to employees in return for services rendered are generally considered wages for income tax withholding purposes regardless of whether the performance of the services has been completed. For FICA purposes, advance payments for work to be done in the future will be considered wages if: the individual to whom the advance is made does all or part of the work; and the employer considered the work as satisfaction for the advances. The advances will be treated as wages whether made directly to the employee in cash or indirectly by being credited to an account against which he can draw. Example 1 - M Company makes advance payments to its sales employees, the advances are handled as charges to an account set up for each employee. The advances are made against the future salary or commissions that the employee earns. Any advance in excess of these earnings is carried as an account due from the employee. However, if the employment relationship is terminated, the excess is charged to the company's profit and loss. If the only obligation of the employee in return for the advances is to perform services, the IRS has ruled the advances constitute wages for employment tax purposes. Example 2 - Although employer R appears to pay wages once every four weeks, it advances payments to its employees at the end of each second week. The payments are approximately onehalf of the wages due each employee for the four-week period. These advance payments, the IRS has said, are to be treated as an ordinary payment of wages for purposes of federal income tax withholding and social security withholding. When computing the amount of income tax to withhold, use a bi-weekly pay period. Consequently, the employer is required to withhold the applicable payroll taxes on all advances of this nature. This may significantly affect the amounts and due dates of payroll deposits. Chapter 4 42

46 Common Paymaster A common paymaster is any member of a group of corporations that pays wages to an employee who works for more than one of the corporations. Because all of the wages to an employee from the related corporations are paid by one employer (the common paymaster), only one FICA wage base, one FUTA wage base and one SUTA wage base are used in computing payroll taxes. Only related corporations can take advantage of a common paymaster. Corporations are related if any one of the following tests is met at any time during the calendar quarter: the corporations are members of a group of corporations where 50% of the stock of one corporation is owned by one or more of the other corporations; if a corporation does not issue stock, either 50% or more of the members of one corporation's board of directors are members of the other corporation's board of directors or the holders of 50% or more of the voting power to select such members are concurrently the holders of more than 50% of the power with respect to the other corporation; 50% or more of one corporation's officers are concurrently officers of the other corporation; or 30% or more of one corporation s employees are also employees of the other corporation. Any member of a group of related corporations can be set up as a common paymaster. The common paymaster must: concurrently employ the same employee as another one or more of the related corporations; pay all the salary from all related corporations to common employees; keep all books and payroll records for common employees; file payroll reports and pay all payroll taxes for common employees; and bill and receive reimbursement from the other corporations for their share of the salary and payroll taxes. Making all wage payments to common employees out of a common paymaster saves payroll taxes because only one Social Security wage base, one FUTA wage base and one SUTA wage base (Illinois, Iowa, Minnesota and Wisconsin) is used in computing payroll taxes. Idaho, North Dakota, South Dakota do not recognize common paymaster. Each corporation is still responsible for the wages and government reporting for any employees who cannot be paid by the common paymaster. Predecessor/Successor Employers When one employer acquires all or most of the property used in the trade or business of another employer, or a unit of that employer s trade or business, a predecessor/successor relationship exists. Predecessor - the employing company that is acquired; Successor - the employing company that acquires the prior employing company. Chapter 4 43

47 Taxes and Wage Bases The successor employer will receive credit for the FICA wage base, the FUTA wage base, and the state unemployment wage base for wages paid to employees by the predecessor employer if: the successor employer has acquired all or most of the property used in the trade or business of the predecessor employer or a unit of that employer s trade or business; the employee in question was employed immediately before and continued working immediately after the transfer of business; and the wages were paid by the predecessor during the calendar year in which the acquisition occurred. State Unemployment Experience Rate To determine if a predecessor/successor relationship exists for employment experience transfer, the acquiring company should notify the State Department of Employment. A new rate will be assigned based on the experience records of the predecessor and the successor. For Minnesota, there must be 25% common ownership between the predecessor and the successor for transfer of employment experience. Continuation of the essential character of the predecessor s business will no longer be a factor. The total Minnesota Unemployment Tax includes: Additional Assessment If the balance in the Minnesota UI Trust Fund falls below certain levels, an additional assessment on quarterly taxes takes effect for the following year. Federal Loan Interest Assessment When the Minnesota UI Trust Fund needs to borrow Federal funds to pay unemployment benefits, a special assessment to pay interest on the loan is incorporated into the tax rate calculation. Workforce Development Fee The Workforce Development Fee is assessed in addition to unemployment tax due and is deposited in the Workforce Development Fund. The actual tax as calculated by the Minnesota Department of Employment and Economic Development (DEED) on their website is what you must pay. You can estimate your tax by using the following steps: 1. Multiply your taxable wages (rounded down) by your UI Tax Rate. 2. Multiply the number calculated in Step 1 by the Additional Assessment (0% in 2015 and 2016). 3. Multiply your taxable wages by the Workforce Development Fee (.10% in 2015 and 2016). 4. Your total estimated unemployment tax is the sum of the amounts calculated in Steps 1, 2 and 3. Chapter 4 44

48 PAYROLL RATES AND EARNINGS Social Security Rate - Employer 6.20% 6.20% Social Security Rate - Employee 6.20% 6.20% Social Security Wage Base $ 118, $ 118, Maximum Social Security Tax - Employee $ 7, $ 7, Medicare Rate - Employer 1.45% 1.45% Medicare Rate - Employee 1.45% 1.45% Medicare Rate - Employee (on wages in excess of $200,000) 2.35% 2.35% Medicare Wage Base No Limit No Limit Maximum Medicare Tax - Employee No Limit No Limit Self-Employment Social Security Rate 12.40% 12.40% Self-Employment Social Security Wage Base $ 118, $ 118, Maximum Self-Employment Social Security Tax $ 14, $ 14, Self-Employment Medicare Rate 2.90% 2.90% Self-Employment Medicare Rate (wages in excess of $200,000) 3.80% 3.80% Self-Employment Medicare Wage Base No Limit No Limit Maximum Self-Employment Medicare Tax No Limit No Limit Federal Unemployment Wage Base $ 7, $ 7, Minnesota Unemployment Rates (5) % % Minnesota New Employer Rate (non-construction) (5) 1.59% 1.76% Minnesota Unemployment Wage Base $ 31, $ 30, Idaho Unemployment Rates % % Idaho New Employer Rate 1.488% 1.585% Idaho Unemployment Wage Base $ 37, $ 36, Illinois Unemployment Rates % % Illinois New Employer Rate 3.55% 3.75% Illinois Unemployment Wage Base $ 12, $ 12, Iowa Unemployment Rates % % Iowa New Employer Rate (non-construction) 1.00% 1.00% Iowa Unemployment Wage Base $ 28,300 $ 27,300 North Dakota Unemployment Rates % % North Dakota New Employer Rate (non-construction) 1.62% 1.07% North Dakota Unemployment Wage Base $ 37, $ 35, South Dakota Unemployment Rates % % South Dakota New Employer Rate (non-construction) 1.75% 1.75% South Dakota Unemployment Wage Base $ 15, $ 15, Wisconsin Unemployment Rates % % Wisconsin New Employer Rate (non-construction) 3.25% 3.60% payroll<$500,000 Wisconsin New Employer Rate (non-construction) 3.40% 4.10% payroll>$500,000 Wisconsin Unemployment Wage Base $ 14, $ 14, Chapter 4 45

49 PAYROLL RATES AND EARNINGS Minimum Wage Hourly Rates Federal Regular wage $ 7.25 $ 7.25 Federal Opportunity wage (1) $ 4.25 $ 4.25 Minnesota large employers (gross at least $500,000) $ 9.00 (7) $ 8.00 Minnesota small employers (gross less than $500,000) $ 7.25 (8) $ 6.50 Minnesota Opportunity wage (1) $ 7.25 (8) $ 6.50 Idaho Regular Wage $ 7.25 $ 7.25 Idaho Opportunity Wage (1) $ 4.25 $ 4.25 Illinois $ 8.25 $ 8.25 Iowa employees with 90 days of service $ 7.25 $ 7.25 Iowa employees with less than 90 days of service $ 6.35 $ 6.35 North Dakota all employees (unless specifically exempt) $ 7.25 $ 7.25 South Dakota all employees except babysitters and outside salespeople $ 8.55 $ 8.50 South Dakota Opportunity wage (1) $ 4.25 $ 4.25 Wisconsin all Industries (1) Wisconsin Regular wage $ 7.25 $ 7.25 Wisconsin Opportunity wage (1) $ 5.90 $ 5.90 Wisconsin Agriculture Adults $ 7.25 $ 7.25 Minors $ 7.25 $ (k) Exclusion Maximum Contribution $ 18, $ 18, Catch-up Contribution (2) $ 6, $ 6, IRA Contribution Maximum Contribution $ 5, $ 5, Catch-up Contribution (2) $ 1, $ 1, Percentage Withholding from Supplemental Wages Federal 25.00% (6) 25.00% (6) Minnesota 6.25% 6.25% Idaho 7.40% 7.40% Illinois 3.75% 3.75% Iowa 6.00% 6.00% North Dakota 2.05% 2.28% Wisconsin - Annual Gross Salary: less than $10, % 4.00% $10,910 21, % 5.84% $21, , % 6.27% $240,190 and over 7.65% 7.65% Federal Backup Withholding 28.00% 28.00% MN Backup Withholding 9.85% 9.85% Maximum Earnings Under Social Security Before Loss of Benefits Under full retirement age (4) ($1 lost for every $2 over limit) $ 15, $ 15, $ 1,310/mo (3) $ 1,310/mo (3) Full retirement age No Limit No Limit (1) Special wage for first 90 days of employment for opportunity employees under 20 years of age. (2) Maximum additional exclusion for age 50 and over. (3) Applies in year of full retirement age. (4) 66 years in 2015 and (5) Before additional assessments. (6) 39.6% on excess of $1,000,000 total supplemental wages. (7) Effective August 1, (8) Effective August 1, * * * * * Chapter 4 46

50 CHAPTER 5 - QUALIFIED AND NONQUALIFIED DEFERRED COMPENSATION (RETIREMENT PLANS) There are many choices of retirement plans available for employers. Generally, plans fall into three categories: qualified plans, small employer plans and nonqualified plans. Qualified plans include regular retirement plans such as 401(k), pension, and profit sharing plans. Small employer plans include the simplified employer plan (SEP) and savings incentive match plan for employees (SIMPLE). Nonqualified plans are commonly referred to as deferred compensation and supplemental executive retirement plans (SERPS). The advantage of qualified plans is that employees are allowed to defer taxation on the benefits and earnings in the plan until they are distributed while the employer receives an immediate tax deduction. Employers maintaining nonqualified plans do not get a tax deduction until the employees report the benefits in their taxable income. The disadvantage of qualified plans is that you cannot discriminate in favor of higher paid employees with respect to participation or benefits. Following is a brief description of the qualified and small employer plans. Nonqualified deferred compensation will be discussed later in this chapter. Qualified Plans Profit sharing plans allow the employer to contribute a discretionary amount to the plan annually on behalf of the employee. The contribution can range from 0 to 25 percent of total compensation. The money is set aside in an account for the employee and accumulates with tax deferred earnings until the employee withdraws the account. 401(k) plans are a form of profit sharing plan which allows employees to elect to contribute a part of their salary to the plan. The employer may choose to match a portion of the elective deferral of the employee and, in addition, contribute a discretionary amount as a profit sharing contribution. Roth 401(k) is similar to a 401(k) in features and design. The difference is employee contributions to the plan are made on an after-tax basis, contributions grow tax-free and generally are distributed without triggering any future income tax liability. Money purchase plans are similar to profit sharing plans except the percent of compensation the employer contributes is determined by the plan document. The contribution must be made each year regardless of the profitability of the employer. Defined benefit plans provide benefits as determined in the plan document. The benefit is a set amount of pay receivable monthly or annually after retirement. Employer contributions are actuarially determined based on factors such as salary, age, and years of service. Small Employer Plans Simplified Employee Pension (SEP) is basically a profit sharing plan specifically designed for small employers. The contributions are placed in a SEP-IRA account. The employer may contribute up to 25 percent of compensation. After the contribution is made, the account works the same as an IRA. Savings incentive match plan for employees 401(k) (SIMPLE 401(k)) plans are a type of 401(k) plan which simplify the administration of the plan and require either an employer matching contribution or profit sharing contribution. Chapter 5 47

51 Savings incentive match plan for employees (SIMPLE IRA) is a plan for small employers which allows both employer and employee contributions. Employees may elect to defer part of their salary and the employer must either make a matching contribution or a profit sharing contribution. An employer contribution is required. It is not discretionary. Variations in Contribution Formulas Certain plans are allowed to have formulas that allow for different percentages to be contributed for different employees. Permitted Disparity - Permitted disparity allows an employer to integrate Social Security benefits into the plan formula. In other words, it is permissible to contribute a lesser amount on compensation up to the Social Security wage base and a higher percentage on compensation in excess of this base. All plans except SIMPLEs can use this feature. Age-Based Formula - This type of formula allows an employer to contribute an amount based not only on compensation, but also on age. It results in higher contributions for older employees. Profit sharing plans may use this variation. New Comparability - This term applies to a contribution formula that allows different percentages to be contributed for different groups of employees. It is permissible in profit sharing plans. The above variations provide additional flexibility for employers. However, adding these features complicates the plan and increases administrative costs. Filing Requirements An administrator or employer who maintains a retirement plan must file an annual return with the Department of Labor (DOL) giving information regarding qualification, financial condition and operations of the plan (exception: SEP or SIMPLE IRA). If the retirement plan is a defined benefit pension plan, additional forms must be completed for the Pension Benefit Guaranty Corporation (PBGC). This agency provides plan termination insurance designed to guarantee the payment of certain nonforfeitable benefits by pension plans that terminate with insufficient assets. Forms to File Retirement plans must electronically file Form 5500 or Form 5500-SF annually with the DOL using the EFAST2 Electronic Filing System. Electronic filing can be done on the DOL s website (using IFILE) or by using DOL approved third party filing software. Depending on the type of plan, number of participants, and type of investments held in the plan, there are numerous schedules that may need to be attached to Form Some of them are: Schedule A, Insurance Information Must complete if plan has insurance contracts; Schedule SB, Actuarial Statement Must complete if single-employer or multiple-employer defined benefit plan and subject to minimum funding standards. Schedule C, Service Provider Information Must complete Part I if service provider was paid $5,000 or more, Part II if a service provider failed to provide information necessary for the completion of Part I, and Part III if an accountant or actuary was terminated; Chapter 5 48

52 Schedule H, Financial Information - Financial statements and related information for large plans (100 or more participants); and Schedule I, Financial Information - Financial statements and related information for small plans (fewer than 100 participants). Form 8955-SSA - Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits This form is filed with the IRS to report participants who separated from service and are entitled to a deferred vested benefit under the plan. Filing Dates Form 5500 and required schedules as well as Form 8955-SSA must be filed by the last day of the 7th month after the plan year ends. An automatic 2 1/2 month extension can be obtained by filing Form 5558 with the IRS. Penalties Penalty of up to $1,100 a day for each day a plan administrator fails or refuses to file a complete report; Penalty of $25 a day (up to $15,000) for not filing returns for certain plans of deferred compensation, trusts and annuities, and bond purchase plans by the due date(s); Penalty of $1 a day (up to $5,000) for each participant for whom a registration statement (Schedule 8955-SSA) is required but not filed; and Penalty of $1,000 for not filing an actuarial statement. The Department of Labor (DOL) has a Delinquent Filer Voluntary Compliance Program (DFVC) that, through the assessment of reduced civil penalties, is designed to encourage delinquent plan administrators to comply with their plans annual reporting obligations. Pension Benefit Guaranty Corporation (PBGC) filings (Defined Benefit Plans Only): There are two types of annual premiums: Flat-rate Premium, which applies to all plans, and Variable-rate Premium which applies only to single-employer plans. For 2015 the flat rate portion of the premium is $57.00 per participant for single employer plans ($64 for 2016) and $26.00 per participant for multi-employer plans ($27 for 2016). Electronic filing is mandatory. PBGC filings are due the 15 th day of the 10 th full calendar month in the plan year. The 2016 due date for a calendar year plan is October 15, 2016 Chapter 5 49

53 Plan Information For Plan Participants and Beneficiaries Summary Plan Description - Copy must be given to new participants within 90 days after becoming a participant. Also, participants should complete beneficiary forms; Summary Annual Report - Copy must be given to all participants within 2 months after the Form 5500 is due (taking into consideration the extension of the original due date); Participant statements are required to be distributed to all participants (including terminated) after the plan year end or when a participant requests a copy. Under the Pension Protection Act of 2006, specific data must be included on these statements; and Various forms must be completed by a participant prior to any plan distribution, including whether to withhold taxes and how the distribution will be made. Fiduciary Responsibility General Rule - Fiduciaries are liable for losses incurred by a plan. They must: 1. Act for the exclusive benefit of plan participants; 2. Perform their duties with the care and skill of a prudent person; 3. Diversify investments to minimize losses; 4. Follow plan documents and ERISA; and 5. Pay only reasonable expenses. Exception - Self-Directed Accounts 1. Participants must be offered a broad range of investment alternatives -- at least three categories, each with materially different risk/reward ratios (e.g., money market fund, stock fund and a bond fund). 2. Participants must be able to diversify investments generally and within each category of the broad range (e.g., mutual funds). 3. Participants must be able to make transfers among the funds at least quarterly. 4. Participants must have access to sufficient information to allow for informed investment decisions. 5. Qualified Default Investment Alternatives (QDIAs) give a fiduciary protection for certain investments if the plan allows participants to direct their investments and the participant chooses not to do so. The 2007 regulations allow three main types of QDIAs: life-cycle or target-date funds, balanced funds, and professionally managed accounts. Any investment which follows the key principles of these arrangements will qualify, even if the investment is included within an annuity. Chapter 5 50

54 6. Fiduciaries are still responsible if they: a. improperly influence a participant's investment decision; b. fail to disclose certain material non-public information; c. fail to prudently select or monitor the fund options available to participants; or d. fail to properly execute a transaction selected by the participant. 7. Plan fiduciaries must continue to: a. watch out for prohibited transactions; and b. administer loans and distributions (if allowed by plan). Retirement Plans Distributions - Withholding and Rollovers All "eligible rollover distributions" are subject to mandatory Federal income tax withholding of 20% of the amount paid. In order to avoid the withholding, a direct transfer to an IRA or another qualified plan must be made. A direct transfer means direct payment into an IRA or qualified plan instead of a check payable to an individual. This means that a participant must decide whether or not to make a rollover before the check is written to avoid withholding. An eligible rollover is any distribution from a qualified plan except: an installment or annuity distribution that is paid over the life of the participant, the joint lives of the participant and his/her beneficiary, or a specified period of ten years or more; a required distribution at age 70-1/2 or later; corrective distributions, such as excess deferrals and excess contributions; loans in default treated as deemed distributions; employer stock ownership plan (ESOP) dividends; cost of current life insurance protection; and hardship distributions. payments to non-spouse beneficiaries. Other distributions not subject to withholding include distributions of less than $200. The IRS has issued two separate 402(f) notices: one notice for distributions from a Roth account and another notice for distributions not from a Roth account. The IRS has updated the notices for the automatic IRA rollover rules, Roth contributions, the Pension Protection Act of 2006 (PPA), PPA Technical Corrections Act and the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). The new notices reflect the mandatory non-spouse rollover rule change and the change in the Roth conversion rules. Code 402(f) requires a qualified plan to provide a participant receiving an eligible rollover distribution with a written explanation of the direct rollover rules, plans eligible for rollover, mandatory income tax withholding rules and the tax consequences if the participant does not roll over the distribution. The regulations permit the participant to waive the minimum 30-day period and receive the distribution earlier. Chapter 5 51

55 The IRS guidance indicates that a plan should provide the non-roth notice to a participant who does not have a Roth account and the Roth notice to a participant with a Roth account. If a participant has both a Roth and a pre-tax account, the plan should provide both notices. The IRS considers a plan which uses its notices to be in compliance with the notice requirement. However, a plan may modify the notices to reflect information relevant to the plan. For example, the plan may eliminate language regarding aftertax contributions or employer securities if the plan does not include such contributions or investments. The guidance also points out that if law changes affect the notices, the plan should no longer use the notices (IRS Notice ). NONQUALIFIED DEFERRED COMPENSATION Nonqualified deferred compensation is an agreement whereby employees defer part of their compensation to a future period. There are many variations of plans including Supplemental Executive Retirement Plans (SERPS), Top Hat Plans, Excess Benefit Plans, Stock Appreciation Rights, Phantom Stock, and more. Section 409A of the Internal Revenue Code governs nonqualified deferred compensation arrangements, including written document requirements, the timing and form of deferrals and payment of such amounts. Advantages/Disadvantages There are two distinct advantages to nonqualified plans -vs- qualified plans. First, an employer can establish a nonqualified plan for a select employee or group of employees. There are no discrimination rules. Second, nonqualified plans do not require annual reporting as long as the plans are established for executives, managers or highly compensated employees and a one-time statement is filed with the Department of Labor. The disadvantages to these plans is that the employer does not get a tax deduction until amounts are actually paid out to the employee(s) and, in order to receive the benefits discussed above, the plan cannot be funded. Therefore, the employee takes the risk that the employer may not have the assets available to pay the benefits when they become due. An employer may, however, set aside funds for later payment as long as the funds remain an asset of the employer and subject to the claims of the employer's creditors. Types of Plans Any plan, fund, or program that provides retirement income or results in the deferral of income to some future date may be a nonqualified deferred compensation plan. Most plans are individually designed for one or more employees. Generally, they provide for an amount determined now and increased for earnings to be paid in the future; or they provide for an annual amount to be paid in the future for a certain number of years or until death. Supplemental executive retirement plans are set up to provide benefits for select employees in excess of those provided by the employer's qualified retirement plan. Excess benefit plans provide benefits in excess of specific dollar limitations imposed on qualified plans. Chapter 5 52

56 The Following are not Considered Deferred Compensation: amounts paid within 2½ months after the employer s year-end; certain welfare benefits such as vacation, sick pay, compensatory time off, disability pay, severance pay and death benefits; certain early retirement pay; benefits established after or within 12 months of termination of employment; excess golden parachute payments; and compensation that, based on the facts and circumstances, is actually wages paid for current services. Compensation, which is not considered deferred compensation, is subject to FICA, FUTA, state unemployment tax and income taxes under general compensation rules. Income Tax The general rule for taxation of deferred compensation is that the compensation is taxable in the year received. An employee is not currently taxable on income properly deferred to a future date. There are two exceptions to the general rule: Economic Benefit - If an employee receives a current economic benefit the income is currently taxable. Example: A life insurance policy is owned and paid for by the employer, but the employee has the right to choose the beneficiary. Example: A fund has been set up in the employee's name, the fund is irrevocable or nonforfeitable and the employee is fully vested in the fund. Constructive Receipt - Constructive receipt occurs when an employee has a right to receive income even though the employee may not actually have received the income yet. If an employee has the right to determine when the income is paid, the employee has constructive receipt. Participant Elections Participants must make an election to defer compensation before the services to which the compensation relates are performed. This means that the election with respect to the next year s compensation must be made before the end of the current calendar year. For elections with respect to formula-based performance compensation based on services performed over at least 12 months, the election must be made no later than 6 months before the end of the service period. Distributions The time and form of distribution of deferred compensation must be specified either in the plan or by the participant at the time the deferral election is made. The plan can only provide for distributions upon the occurrence of one or more of a limited number of permissible distribution events: separation from service, death, disability, at a specified time or pursuant to a fixed schedule, upon corporate change in control, or on account of an unforeseeable financial emergency. The distributions may not be accelerated. Chapter 5 53

57 Subsequent Changes of the Time and Form of Distribution Many plans permit participants to make a subsequent election to further defer distributions. Under the new law, such an election can only become effective 12 months after the date the election is made. In addition, if the participant is further deferring a payment that was to be made at a specified time, the participant must make the subsequent election at least 12 months in advance of the scheduled payment date. Finally, the new election must defer the payment for at least five years from the time the payment was originally scheduled to be made (except in the case of death, disability, or unforeseeable emergency). The penalties for noncompliance are immediate income taxation of all amounts deferred under the agreement (even if not yet payable), and a 20% penalty tax, both of which are assessed on the employee who has earned the compensation. Interest is assessed at a nonpayer rate (which is higher than that imposed for other violations) plus 1%. If the employer tax-protects the employee on the taxes and penalty, then interest and an additional 20% penalty is assessed on any tax-protection payments, and the tax-protection payment is not deductible by the employer. Example: An employee receives a bonus at year-end, but may elect to defer receipt until January. The employee has constructive receipt in December and the income is taxable in December. To avoid constructive receipt, the employee must defer the income before it is earned. An employer may set aside funds for future payment of the deferred compensation liability without current taxation to the employee provided the funds remain an asset of the employer which is subject to the claims of the employer's creditors. The employer receives a deduction at the time the income is taxable to the employee. FICA and FUTA Taxation Deferred compensation is generally taxable under FICA and FUTA at the later of when the income is earned or when there is no longer a substantial risk of forfeiture with respect to the employee's right to receive the deferred amount. This is called the special timing rule. A substantial risk of forfeiture exists if the right to receive the income is contingent on: the performance of substantial future services; or the occurrence of a condition related to a purpose of the compensation, and the possibility of forfeiture is substantial if the condition is not satisfied. Account Balance Plan - A plan is an account balance plan if: principal amounts are credited to an individual account for an employee; the income attributable to the principal amount is credited (or debited) to the account; and the benefits payable to the employee are based solely on the balance in the account. The amount taxable under an account balance plan is the amount credited to the employee's account for the period plus (or minus) any income attributable to that amount up to the date the principal amount is includable in income. Income on the principal amount earned after it is reported in income is not subject to FICA or FUTA. Chapter 5 54

58 Nonaccount Balance Plan - A nonaccount balance plan is any plan that is not defined as an account balance plan. Under a nonaccount balance plan, deferred compensation is not subject to FICA or FUTA until the amount deferred can be "reasonably ascertained". An amount deferred can be reasonably ascertained when there are no actuarial or other assumptions needed to determine the amount deferred, other than interest, mortality, or cost-of-living assumptions. If the amount of future pay or the time or form of payments is needed to determine the amount deferred, the taxation is deferred until these variables are known. The amount taxable under a nonaccount balance plan is the present value of the future benefits. The amount is taxable on the date credited to an account for an account balance plan and on the day it is reasonably ascertainable for a nonaccount balance plan. Reporting to the IRS can be deferred to the last day of the year. However, any income earned or change in present value from the date includable until the date reported must also be included in the amount taxable. If the amount deferred cannot be readily calculated by the end of the year, the employer has two choices: Reporting The employer can estimate the amount deferred. If the actual amount is more than the estimate, the employer may include the difference in the first quarter of the next year. Or, the employer may amend Form 941 for the fourth quarter and correct the Form W-2. If the actual amount is less than estimated, the employer may claim a refund. No additional income earned in the first quarter needs to be added to the amount taxable. The employer may choose instead to include all the income in the first quarter of the next year and the employee will treat it as received then. Any income added or change in present value to the date the amount is taken into account is included in the amount taxable. Nonqualified deferred compensation that is no longer subject to a substantial risk of forfeiture is reported in Box 11 of Form W-2. Also, include these amounts in Box 3 (up to the social security wage base) and Box 5. Chapter 5 55

59 Chapter 5 56

60 CHAPTER INFORMATION RETURNS Information Returns - Form 's are information returns which report payments made by a taxpayer engaged in a trade or business (a corporation, partnership, individual, etc.) to another taxpayer. Copies of these statements are sent to the IRS and the recipient of the payments. State filing requirements vary. Telephone Numbers Required Copy B (recipient copy) of the following forms must include a telephone number providing direct access to an individual who can answer questions about the statement: Form W-2G Form 1098 Form 1098-E Form 1098-T Form 1099-A Form 1099-B Form 1099-CAP Form 1099-DIV Form 1099-G Form 1099-H Form 1099-INT Form 1099-LTC Form 1099-MISC Form 1099-OID Form 1099-PATR Form 1099-Q Form 1099-S Statement for Certain Gambling Winnings; Mortgage Interest Statement; Student Loan Interest Statement; Tuition Statement; Acquisition or Abandonment of Secured Property; Proceeds from Broker and Barter Exchange Transactions; Changes in Corporate Control and Capital Structure; Dividends and Distributions; Certain Government Payments; Health Coverage Tax Credit (HCTC) Advance Payments; Interest Income; Long Term Care and Accelerated Death Benefits; Miscellaneous Income; Original Issue Discount; Taxable Distributions Received from Cooperatives; Payments from Qualified Education Programs (under Sections 529 & 530); and Proceeds from Real Estate Transactions. Voluntary Withholding States must allow unemployment compensation recipients to elect to have Federal income tax withheld at a 10% rate. A payee who receives any of the following government payments may elect to have federal income tax withheld (Form W-4V) at a rate of 7%, 10%, 15% or 25%. unemployment compensation (only 10% rate applies); social security benefits; social security equivalent Tier 1 railroad retirement benefits; certain crop disaster payments; or Commodity Credit Corporation loans. Forms can be obtained at your local Internal Revenue Service office or from our offices. See the Guide to Information Returns at the end of this chapter for the filing requirements for each type of return. Chapter 6 57

61 Payments to Attorneys All payments of $600 or more made by a trade or business to an attorney must be reported on Form 1099-MISC and filed with the Internal Revenue Service. This reporting requirement applies to any payment to an attorney in connection with legal services and lawsuit settlements unless the payment is for wages reportable on Form W-2. All payments of income to an attorney must be reported, whether or not the attorney is the exclusive payee. There is NO EXCEPTION for attorneys who are incorporated. If payments are made in the course of a trade or business to an attorney in connection with legal services and the attorney s fee is not reportable by the payer, the total amount paid to the attorney (gross proceeds) must be reported in box 14 on Form 1099-MISC. Payers need to obtain the attorney s Tax Identification Number (TIN). Payments made to a business entity require the business TIN. Payments made directly to an individual require the individual s social security number. Miscellaneous Income (Form 1099-MISC) This form must be filed for each person, other than corporations (except for attorneys), to whom you have paid $600 or more during the calendar year in the course of your trade or business for: all types of rents, including real estate, land, machinery, trucking, and entertainment facility rents (rent payments to real estate agents are not required to be reported); payments (including both cash and non-cash, such as parts and materials) for services by nonemployees; for example, fees paid to unincorporated accountants, lawyers, veterinarians, plumbers, roofers, subcontractors, commissions paid to independent sales representatives and excess golden parachute payments; director's fees of $600 or more (see Payments to Directors chapter for details); prizes and awards given to employees which are not for services, or prizes and awards given to nonemployees for services; taxable fringe benefits for nonemployees; commissions to nonemployee salespersons subject to repayment, but not repaid during calendar year; travel reimbursement paid to nonemployees for which they did not account to the payer; payments of capital credits by electric and telephone cooperatives (see Taxation of Capital Credits chapter); royalty payments of $10 or more; broker payments in lieu of dividends or tax-exempt interest; sales of $5,000 or more of consumer products on a buy-sell, deposit-commission, or other commission basis for resale anywhere other than in a permanent retail establishment; utility rebates and refunds of $600 or more (see Utility Rebates later in this chapter); payments to attorneys; or medical or healthcare payments, including payments to veterinarians except to tax-exempt providers. Chapter 6 58

62 Form 1099-MISC must also be filed for each person from whom you have withheld any federal income tax under the backup withholding rules regardless of the amount of the payment. Utility Rebates (Form 1099-MISC) Form 1099-MISC is used to report utility rebates and refunds of $600 or more. However, no requirement to report exists if the rebate or refund is not includable in the customer s gross income. Example: In Revenue Ruling 91-36, the IRS concludes that rate reductions and non-refundable credits provided by electric utility companies to customers that participate in energy conservation programs are not includable in the customer s gross income. No Form 1099 would be issued in this situation, regardless of the amount of reduction or credit. Form 1099-MISC should be issued for refunds or rebates of $600 or more unless it can be positively determined that the payments are not taxable to the recipient. Rent Payments (Form 1099-MISC) Form 1099-MISC must be filed for rent payments which total $600 or more for the calendar year. For example, Form 1099-MISC should be issued for payments of $600 or more to an LLC, partnership, or individual for the use of transport or transmission facilities. Other reportable types of payments include rental of buildings, towers and poles. Interest Income (Form 1099-INT) Form 1099-INT must be filed for interest payments of $600 or more ($10 or more for financial institutions) made in the course of your trade or business or if you withheld any federal income tax under the backup withholding rules regardless of the amount of the payment. Tax-exempt interest must be reported in Box 8. Dividend Income (Form 1099-DIV) Form 1099-DIV must be filed for dividend payments and other stock distributions of $10 or more. Also include payments of $600 or more in cash or noncash payments made as part of a liquidation. Generally, S Corporations are not required to issue 1099-DIV for distributions. If any recipient is subject to the backup withholding rules, a 1099-DIV should be issued regardless of the amount. Retirement Distribution (Form 1099-R) Form 1099-R must be filed for each person to whom you have made any distribution from pensions, annuities, profit-sharing and retirement plans, IRAs and insurance contracts. (See the last page of this chapter for additional reportable items). Chapter 6 59

63 Mortgage Interest Statement (Form 1098) Points paid on mortgages are to be reported in Box 2 of Form The points must meet the following qualifications: points are clearly designated; points are interest for the use of money; points are common practice in the area; points are paid directly by borrower; and points are for the purchase of principal residence. The following points are not reportable on Form points paid for loans to improve a principal residence; points paid for loans to purchase or improve a second home, vacation, investment, or trade or business property; points paid for refinancing, home equity, or line of credit; points paid in excess of the amount usually charged in the area; and points paid to acquire a principal residence to the extent the loan exceeds $1 million. Payments For Which 1099's Are Not Required The following are examples of payments that generally do not have to be reported on 1099's: payments to corporations (except for legal services and for-profit medical/healthcare providers); payments of income required to be reported on other federal forms, such as W-2's and K-1's; payments of common bills for items such as: merchandise, telegrams, telephone service by end users, freight or similar charges; payments which are advances, reimbursements or charges for traveling and other business expenses of an employee to the extent that the employee accounts to the employer for such expenses; less than $600 of interest paid to customers on security deposits; and payments of less than $600 of patronage capital to patrons of electric and telephone cooperatives. There is no 1099 reporting requirement for electric and telephone cooperatives when they allocate patronage capital. Chapter 6 60

64 Federal Filing Information FILING REQUIREMENTS Paper Forms 1099 must be accompanied by Form 1096 for each type of Form Form 1096 is not used to transmit electronically or magnetically. The due dates are: February 1, Recipient's copy must be postmarked on or before this date. February 16, Recipient copy of 1099-B and 1099-S and 1099-MISC if substitute payments are reported in Box 8 or gross proceeds paid to an attorney are reported in Box 14. February 29, 2016 (March 31, 2016 for electronic filers) - IRS's copy along with the 1096 transmittal form must be postmarked on or before this date. Send the forms to the applicable Internal Revenue Service Center. Extension Request - A payer may request an automatic 30-day extension of time to file by submitting Form One additional 30-day extension may be requested. A payer may also request, by letter, one 30-day extension of time to provide statements to recipients. State Filing Requirements Minnesota - Only Forms 1099 with Minnesota withholding should be filed with the Minnesota Department of Revenue. The forms must be postmarked by February 29, Idaho - State copies of Forms 1099 should be filed with the Idaho State Tax Commission. Forms are due by the last day of February. If withholding is due, you must also file Form 967. If no withholding is due, include Idaho Form 96 or a copy of Federal Form 1096 with your information returns. Forms 1099 and related reports may be filed electronically or mailed to Idaho State Tax Commission, PO Box 36, Boise ID If you chose to file under the Federal/State Combined Reporting Program and have no Idaho withholding to report, no separate reporting is required. If there is withholding to report, Form 967 must be filed and the Combined Federal/State box must be checked. If this situation applies, copies of Form 967 must be submitted in paper form to Idaho State Tax Commission, PO Box 76, Boise ID Illinois - No filing of information returns is required. Copies must be retained by payers for 3 years. Iowa - No filing of information returns is required. Copies must be retained by payers for 4 years. North Dakota - State copies of all Forms 1099-MISC, 1099-B, 1099-G, and 1099-S that are required to be filed for federal purposes are required to be filed with the Office of State Tax Commissioner of North Dakota. The following forms are not filed with North Dakota unless North Dakota income tax has been withheld: 1099-INT, 1099-OID, 1099-DIV, PATR and 1099-R. Forms 1099 along with Form 1096 must be postmarked by February 29, Forms 1099 showing North Dakota income tax withheld must be filed with North Dakota Form 307 by February 29, South Dakota - No filing of information returns is required. Wisconsin - State copies of Forms 1099-R and 1099-MISC (or Wisconsin Form 9b) reporting payments of $600 or more must be filed with the Wisconsin Department of Revenue. No transmittal form is required. Forms 1099 or 9b must be postmarked by February 29, Reports of rents or royalties must be postmarked by March 15, 2016 (corporations) or by February 29, 2016 (other than corporations). If you choose to file under the Federal/State Combined Reporting Program, no separate reporting is required. Chapter 6 61

65 Form W-9 and Form W-9S You, as a payer, are responsible for obtaining the payee's social security or employer identification number. Form W-9, Payer's Request for Taxpayer Identification Number, is the official form. Form W-9S, Request for Student s or Borrower s Social Security Number is the form to be used when filing Form 1098-E or 1098-T. If a taxpayer does not furnish the number, you are required to withhold 28%. If you receive two incorrect TIN notices from the IRS within three years for the same account, withholding is required until the IRS or Social Security Administration approves the identification number. Backup withholding is reported annually on Form 945 (Annual Return of Withheld Income Tax). Form 945 is filed only for calendar years when federal income tax was withheld from non-payroll payments. If withholding for the year is less than $2,500, the tax may be paid with Form 945, which is due February 1, Electronic Filing If you file 250 or more of any type of Form 1099, electronic filing is required. The 250 or more requirement applies separately to each type of Form For example, if 100 Forms 1099-MISC are to be filed, they need not be filed electronically since they do not meet the threshold. However, if you have 300 Forms 1099-R, they must be filed electronically since they meet the threshold. Taxpayers who transmit their own data are required to file an application for filing information returns electronically (Form 4419), at least 30 days before the due date of the returns. Olsen Thielen & Co., Ltd. will file electronically for any who desire the service. A waiver from filing electronically for undue hardship can be requested by filing Form Request a waiver for filing at least 45 days before the due date of the returns. It is difficult to receive a waiver. Minnesota requires electronic filing when 10 or more Forms 1099 that report state withholding are filed. Idaho requires electronic filing when 250 or more Forms 1099 are filed. North Dakota requires electronic filing when 250 or more Forms 1099 are filed. Wisconsin requires electronic filing when 50 or more Forms 1099 are filed. Penalties If you fail to file a correct information return by the due date and you cannot show reasonable cause, you may be subject to a penalty. The penalty generally is $250 for each information return that is not filed, or is not filed correctly, by the prescribed filing date, with a maximum penalty of $3,000,000 per year ($1,000,000 for certain small businesses). A penalty applies if you: fail to file timely; fail to include all information required to be shown on a return; include incorrect information on a return; file on paper when you are required to file on magnetic media; report an incorrect TIN or fail to report a TIN (TIN penalty); fail to file paper forms that are machine readable; or fail to prepare forms in accordance with directions. Chapter 6 62

66 Prompt correction of errors can reduce penalties to: $50 for each failure to comply if the failure is corrected within 30 days after the date the return was due, with a maximum penalty of $500,000 per year ($175,000 for certain small businesses). $100 for each failure to comply if the failure is corrected more than 30 days after the return was due, but on or before August 1 of the calendar year in which the return was due, with a maximum penalty of $1,500,000 per year ($500,000 for certain small businesses). If you fail to provide correct payee statements by January 31 st the penalty is: $50 if correction is made within 30 days of due date (January 31st), with a maximum penalty of $500,000 ($175,000 for certain small businesses). $100 if correction is made by August 1 st, with a maximum penalty of $1,500,000 ($500,000 for certain small businesses $250 if correction is made after August 1 st, with a maximum penalty of $3,000,000 ($1,000,000 for certain small businesses). Chapter 6 63

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