With the end of the calendar year approaching, don’t overlook important tax filing requirements for your business. The information below highlights several issues, including payroll and Forms W-2, shareholder expense, Form 1099 reporting requirements and other special requirements applicable to S Corporation shareholders:
- Group-term Life Insurance – If the company paid for group-term life insurance over $50,000 for an employee or a former employee, you must report the taxable cost of excess coverage (>$50,000 per person) on the employee’s Form W-2. The cost of the excess coverage is subject to both Social Security and Medicare taxes. Please contact your Elliott Davis Decosimo advisor if you require any assistance in performing this calculation or have any questions on how to record this benefit on the Form W-2.
- Personal Use of Company Vehicle – If you or an employee used a car for both business and personal purposes, you must divide the expenses between business and personal use. Personal use of a company vehicle is considered a taxable fringe benefit and must be included in Box 1 wages on Form W-2. This taxable fringe benefit is subject to both Social Security and Medicare taxes. Please contact your Elliott Davis Decosimo advisor if you require any assistance in performing this calculation or have any questions on how to record this benefit on the Form W-2.
- Stock Options – Please contact your Elliott Davis Decosimo advisor if you have had any stock option transactions during the year or anticipate having any stock option transactions during the year to determine if there will be any reporting requirements.
- Non-qualified Deferred Compensation Plans –If you have any amounts paid or allocated to employees under a non-qualified retirement plan, contact your Elliott Davis Decosimo advisor.
- Employee business expense reimbursements – Amounts paid to employees under an accountable plan (substantiation for expenses is documented) are excluded from wages. Any amounts paid as an undocumented allowance are required to be treated as wages. Per diem or mileage paid in excess of IRS approved rates is required to be treated as wages.
- Sick pay – If you have employees who received sick pay from an insurance company, you will be required to report this. The third party will notify you of the amounts to be reported.
- Form 1099 Reporting – Please start gathering your list of businesses and individuals to whom you made payments in the course of your trade or business, and to whom you will be issuing Form 1099s for 2015. You will need the legal name, address, and federal identification number for each business or individual that must be issued a Form 1099. We encourage you to use Form W-9 for your vendors that meet the Form 1099 filing requirements on an ongoing basis and update the Form W-9 as needed. Please click here for a blank Form W-9 and related instructions.
Form 1099 MISC, Miscellaneous Income – filing requirements:
- Payments of $10 or more in royalties.
- Payments of $600 or more in rent, services (including parts and materials), prizes and awards and other income payments.
- Exceptions – Some payments are not required to be reported on Form 1099-MISC. These include:
- Payments to corporations (with the exception of lawyers or law firms).
- Payments for merchandise, telegrams, telephone, freight, storage and similar items.
Please click here for additional requirements and examples or contact your Elliott Davis Decosimo advisor.
Timely filing is required and penalties can be imposed for late filing, incorrect filing or non-filing of required Forms 1099. Generally, penalties are $30, $60 or $100 per information return filed within 30 days of the due date, by August 1 or filed (or not filed) after August 1, respectively. Penalties can reach maximums of $250,000, $500,000 or $1,500,000, respectively for most business or they can reach maximums of $75,000, $200,000 or $500,000, respectively for certain small businesses. Minimal exceptions to the penalty may apply. Typically, these exceptions include reasonable cause rather than willful neglect, inconsequential errors or omissions and certain de minimis rules for corrections.
Special Requirements Applicable to S Corporation Shareholders
1. Reasonable Compensation – Generally, an officer of a corporation is an employee of the corporation. The fact that an officer is also a shareholder does not change the requirement that payments to the corporate officer be treated as wages. Courts have consistently held that S corporation officer/shareholders who provide more than minor services to their corporation and receive or are entitled to receive payment are employees whose compensation is subject to federal employment taxes. The Treasury Regulations provide an exception for an officer of a corporation who does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration. Such an officer would not be considered an employee.
There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case. The following are factors considered by the courts in determining reasonable compensation:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements
The use of a formula to determine compensationThe IRS has the authority to re-characterize distributions to officer/shareholders who do not receive adequate compensation for services rendered. Re-characterized distributions are treated as taxable wages, and the IRS will assess employment taxes on these deemed wages.
2. Health Benefits Paid for a 2% Shareholder – The health and accident insurance premiums paid on behalf of a greater than 2% S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employee’s Form W-2. They are not subject to Social Security, Medicare or, in most states, Unemployment taxes. Therefore, this additional compensation should be included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2. Be sure to clearly identify this amount on the Form W-2 for the shareholder as the cost of these benefits will be included in income by the employee-shareholder on their Form 1040 with an offsetting adjustment to gross income on the bottom of page one of their Form 1040. If a shareholder-employee directly pays the premiums for an individual policy and is reimbursed by the company during the year, the reimbursement would also need to be reported as outlined above. Failure to include these benefits on Form W-2 will result in full taxation of the benefits and a disallowance of the deduction for these benefits. Please note that related party rules may also apply to some family members/related parties that also are employees of the company even if they do not have any (or less than 2%) ownership of the company. Please contact us if you require any assistance in performing this calculation or have any questions on how to record this benefit on the Form W-2.
3. Distributions – Remember that cash and/or property distributions to S Corporation shareholders must be proportionate to the shareholders’ respective stock ownership. Failure to observe this rule could potentially result in the revocation of the Corporation’s S election. Also, distributions of depreciated and/or appreciated property may result in a taxable event.
4. Expenses Paid by Shareholders – In general, for expenses to be deductible by a cash-basis S Corporation, all expenses should be recorded on the books of the corporation and be paid by the corporation. All business related expenses paid or incurred by shareholders (including mileage, cell phone, meals, etc.) should be submitted to and reimbursed by the corporation during the calendar year in which they are incurred. In so doing, the deduction is preserved at the corporate level and the reimbursement is not included in the shareholder’s income. An employee/shareholder may deduct certain unreimbursed reasonable employee business expenses as a miscellaneous itemized deduction on Schedule A, but that deduction is subject to a floor of 2% of adjusted gross income and is not deductible in computing alternative minimum tax. A much better result is achieved by having the employee/shareholder be reimbursed by the corporation for employee business expenses. Further, a shareholder may not directly offset his business income on Schedule E with these expenses. They must be reported on Schedule A and are subject to limitations.
Should you have any questions on the above reporting requirements or want to know more about tax planning ideas, please do not hesitate to contact your Elliott Davis Decosimo advisor or you can reach us at firstname.lastname@example.org.