by: Jana B. Bacon, CPA

Transcription

1 Community Bank Auditors Group IRS Requirements Impacting Employee and Customer Tax Filings June 4, 2014 by: Jana B. Bacon, CPA MEMBER OF PKF NORTH AMERICA, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS 2013 Wolf & Company, P.C.

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3 Today s Agenda IRS requirements related to: Health Savings Accounts Other fringe benefits Individual Retirement Arrangements (IRAs) Foreclosures and debt forgiveness Backup withholding 3

4 Health Savings Accounts What is a Health Savings Account (HSA)? An HSA is a tax-exempt savings account set up with a qualified HSA trustee to pay or reimburse certain medical expenses Individuals must meet certain eligibility requirements to contribute to an HSA Money deposited into an HSA, as well as earnings are tax-deferred HSAs can be established by employees through an employer s cafeteria plan 4

5 Health Savings Accounts Knowledge Check: Can you open up your own personal checking account and pay medical expenses out of it and have it qualify as an HSA? Answer: No HSA accounts must be set up with a qualified HSA trustee such as a bank, insurance company or anyone already approved by the IRS to be a trustee of individual retirements arrangements (IRAs) 5

6 Health Savings Accounts To be eligible for an HSA, employees: Must be covered under a high deductible health plan (HDHP) on the first day of the month Must have no other health coverage except what is permitted May not be enrolled in Medicare May not be claimed as a dependent on someone else s tax return 6

7 Health Savings Accounts What is a High Deductible Health Plan (HDHP)? A plan with a higher annual deductible than typical health plans A plan with a maximum limit on the sum of the annual deductible and out of pocket medical expenses IRS Annual limits for 2014: Coverage Type Deductible Out of Pocket Costs Self- Only Minimum of $1,250 Maximum of $6,350 Family Minimum of $2,500 Maximum of $12,700 Note: These limits are subject to change by the IRS on an annual basis 7

8 Health Savings Accounts What types of other health coverage are employees permitted with an HSA: Employees are permitted to have additional insurance that provides benefits only for the following items: Liabilities incurred under workers compensation laws, tort liabilities, or liabilities related to ownership or use of property A specific disease or illness A fixed amount per day (or other period) of hospitalization 8

9 Other Insurance Continued: Health Savings Accounts Employees may have coverage for the following items: Accidents Disability Vision Care Long-term Care Employees may have a prescription drug plan if the plan does not provided benefits until the minimum annual deductible under the HDHP has been met Employees covered by an HDHP and a flexible spending account (FSA) or Health Reimbursement Account (HRA) generally cannot contribute to an HSA unless certain conditions are met 9

10 Health Savings Accounts Who can contribute to an HSA? Eligible employees subject to statutory limits, can make deductible contributions Employers as well as other persons (e.g. family members) may contribute on behalf of an eligible employee Contributions to an HSA must be made in cash, contributions of stock or property are not allowed 10

11 Health Savings Accounts How much can an eligible employee contribute to an HSA: The amount depends on the following: Type of HDHP coverage Age Date of eligibility for an HSA Date the individual is no longer eligible for an HSA For calendar year 2014: Self-Only Coverage: $3,300 Family Coverage: $6,550 Eligible employees who are age 55 at the end of the tax year may contribute an additional $1,000 11

12 Health Savings Accounts Additional Contribution Limitation Considerations: Beginning with the first month an eligible individual is enrolled in Medicare, contributions no longer allowed The amount an employee may contribute to their HSA must be reduced by any employer contributions to that individual s HSA that are excluded from their income For married spouses covered under separate family HDHP plans, their combined contributions are limited to the maximum allowed for individuals covered under a family plan ($6,550 for 2014) 12

13 Health Savings Accounts Knowledge Check: An individual with self-only HDHP coverage has an HSA to which their employer contributes $1,000 a year. The employer contributions are not included in the employee s income. How much can this individual contribute to their HSA in 2014? Answer: $2,300 The IRS contribution limit for 2014 is $3,300 for individuals with self-only coverage. Because this individual s employer is contributing to their HSA and the employer contributions are not included in their income, the total this individual may contribute to their HSA must be reduced by the employer s contribution of $1,

14 Health Savings Accounts Contributions Additional Considerations: Eligible individuals can make contributions to their HSA for 2014 until April 15, 2015 Contributions made by eligible individuals to their HSA are reported on IRS Form 8889 filed with an individual s Form 1040 Form 8889 must be filed if an individual had any activity on their HSA account during the tax year (contributions or distributions) Contributions greater than the maximum amounts are taxable and subject to a 6% penalty 14

15 Health Savings Accounts Qualified HSA Funding Distribution: May be made from a traditional IRA or Roth IRA to an HSA The amount of the distribution is limited to the individuals contribution limitation for that year, if the maximum amount is utilized then no other contributions can be made by that individual to their HSA in that calendar year Only one qualified distribution can be made during an individual s lifetime unless they switch from a selfonly plan to a family plan, in this instance an additional distribution can be made up to the family contribution limitation 15

16 Health Savings Accounts Distributions from an HSA: Employees may receive tax-free distributions from their HSA to pay or be reimbursed for qualified medical expenses incurred after establishing an HSA Distributions received for reasons other than qualified medical expenses are subject to income tax and may be subject to an additional 20% penalty Employees do not have to make distributions from their HSA each year Employees who receive HSA distributions will receive a Form 1099-SA from their HSA trustee 16

17 Health Savings Accounts What are qualified medical expenses? Expenses that would generally qualify for the medical and dental expense deduction A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug: Requires a prescription Is available without a prescription but you get a prescription for it Is Insulin 17

18 Health Savings Accounts Qualified Medical Expenses (Cont d): Insurance cannot be treated as qualified medical expenses unless the premiums are for: Long-term care insurance Health care continuation coverage (such as COBRA coverage) Health care coverage while receiving unemployment compensation Medicare and other health care coverage if 65 or older Note: It is not the employer s responsibility to determine if medical expenses paid for with an HSA are qualified. Employees who establish HSAs must make the determination and maintain sufficient records of their medical expenses. 18

19 Health Savings Accounts Knowledge Check: John Smith has an HSA account. John uses his HSA account to pay for a non-prescription drug that has been prescribed by his doctor due to an ongoing medical condition. Would this purchase be considered a qualifying medical expense by the IRS? Answer: Yes A non-prescription drug will be considered a qualifying medical expense if the medicine or drug is available without a prescription and the individuals gets a prescription for it from their doctor 19

20 Health Savings Accounts What happens to an HSA upon the death of the HSA holder? Spouse is the designated beneficiary: The HSA will be treated as the spouse s HSA Spouse is not the designated beneficiary: The account stops being an HSA, and The fair market value of the HSA becomes taxable to the beneficiary in the year in which the HSA holder dies 20

21 Health Savings Accounts Employer Contributions to an HSA: If an employer decides to make contributions, they must make comparable contributions to all comparable participating employees' HSAs. Contributions are comparable if they are either: The same amount, or The same percentage of the annual deductible limit under the HDHP covering the employees 21

22 Health Savings Accounts Employer Contributions (Cont d): Comparable Participating Employees: Are covered by an employers HDHP and are eligible to establish an HSA Have the same category of coverage (either self-only or family) Have the same category of employment (part-time, fulltime or former employee) 22

23 Health Savings Accounts Questions? 23

24 Fringe Benefits What is a fringe benefit? Form of compensation for performance of services Examples of fringe benefits Health insurance Profit sharing plans Group-term life insurance Dependent care assistance Stock based compensation Flexible spending accounts Company vehicles Meals Educational assistance 24

25 Fringe Benefits Are fringe benefits taxable? Yes. Unless the law specifically excludes it. The amount to be included is the value in excess of the amount the law excludes and/or the amount the recipient paid. Does the person who performs services need to be an employee? No Independent contractor reportable on Form 1099-MISC, box 7 Partner reportable on Schedule K-1 (Form 1065) Director reportable on Form 1099-MISC, box 7 Benefits for non-employees are not subject to employment taxes but are subject to self-employment taxes 25

26 Fringe Benefits Cafeteria Plan (aka Sec 125 Plan) Written plan allowing the employee to choose between cash/taxable benefits or qualified tax-free benefits Qualified benefits chosen are excluded from gross income Deferred compensation plans do not qualify Section 125 provides two exceptions Cannot favor highly compensated employees Nontaxable benefits provided to key employees cannot exceed 25% of the aggregate of such benefits provided for all employees under the plan Typically pre-tax deductions Generally not considered wages or subject to FICA and FUTA 26

27 Fringe Benefits Cafeteria Plan (cont d) Examples of benefit choices within cafeteria plans Health insurance Voluntary supplemental insurance (e.g. dental, vision) Flexible spending accounts Group term life insurance Adoption assistance Dependent care assistance Note: fringe benefits including cafeteria plans have many exceptions when it comes to highly compensated employees. Refer to Publication 15-B, Employer s Tax Guide to Fringe Benefits for more information. 27

28 Fringe Benefits Type of Fringe Benefit Income Tax Withholding FICA FUTA Accident and health benefits Exempt, except for long-term care benefits provided through a flexible spending or similar arrangement Exempt, except for certain payments to S corporation employees who are 2% shareholders. Exempt Achievement awards Exempt up to $1,600 for qualified plan awards ($400 for nonqualified plan awards). Adoption assistance Exempt Taxable Taxable Athletic facilities Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent children and the facility is operated by the employer on premises owned or leased by the employer. De minimis (minimal) benefits Exempt Exempt Exempt Dependent care assistance Exempt up to $5,000 ($2,500 for married employee filing separate return). Educational assistance Exempt up to $5,250 of benefits each year. Employee discounts Exempt up to certain limits Employer-provided cell phones Exempt if provided primarily for noncompensatory business purposes. Group-term life insurance coverage Exempt Exempt up to cost of $50,000 of coverage Exempt Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. Meals Exempt if furnished on your business premises for your convenience. Exempt if de minimis. 28

29 Fringe Benefits Type of Fringe Benefit Income Tax Withholding FICA FUTA Moving expense reimbursements Exempt if expenses would be deductible if the employee had paid them. Retirement planning services Exempt Exempt Exempt Transportation (commuting) benefits Exempt up to certain limits for rides in a commuter highway vehicle and/or transit passes ($130), qualified parking ($250), or qualified bicycle commuting reimbursement ($20). Tuition reduction Exempt if for undergraduate education (or graduate education if the employee performs teaching or research). 29

30 Fringe Benefits Items to note regarding fringe benefits Achievement Awards applies to tangible personal property given to an employee as an award for either length of service or safety achievement. The exclusion does not apply to cash, cash equivalents, gift certificates, or other intangible property. De Minimis (Minimal) Benefits you can exclude the value of a de minimis benefit you provide to an employee. A de minimis benefit is any property or service that has so little value that accounting for it would be unreasonable or administratively impracticable. Cash or cash equivalent fringe benefits (including gift cards), no matter how little, are never excludable. Educational Assistance must have a reasonable relationship to your business or be required as part of a degree program. 30

31 Fringe Benefits Employer-Provided Cell Phones value of a cell phone for business purposes is excludable from an employee s income as a working condition fringe benefit. Personal use is excludable as a de minimis fringe benefit. Incentive stock options - exercise exempt from federal income tax withholdings, FICA and FUTA. Employee stock purchase plan options - exercise exempt from federal income tax withholdings, FICA and FUTA. Nonstatutory (nonqualified) stock options - excess of the FMV of stock received over amount paid at exercise is taxable subject to withholding and payroll taxes and reported on Form W-2 in boxes 1, 3 (if not over limit), 5 and in box 12 using the code V if an employee and on Form 1099 MISC, box 7, if a director. 31

32 Fringe Benefits Restricted stock FMV taxable at vesting subject to withholding and payroll taxes and reported on Form W-2 in boxes 1, 3 (if not over limit) and 5 Company Vehicles if provided by the employer, the amount you can exclude as a working condition benefit is the amount allowable as a deductible business expense if the employee paid for its use. If used for both business and personal, then only the value of the business use portion is excludable. The other option is for the employer to include the entire annual lease value of the car in the employee s wages and have the employee claim any deductible business expenses on the employee s schedule A, Form

33 Fringe Benefits How to value personal use of Bank auto Cents-per-mile rule Commuting rule Lease value rule most common in bank situations 33

34 Fringe Benefits Cents-Per-Mile Rule the value of a vehicle an employer provides to an employee is calculated by multiplying the standard mileage rate (56 cents per mile for 2014) by the total personal miles driven by the employee. This amount should be included in the employee s wages unless reimbursed by the employee. To qualify to use this method, either of the following requirements must be met The vehicle must be used for regular use in your trade or business The vehicle meets the mileage test 34

35 Fringe Benefits Cents-Per-Mile Rule (cont d) Cannot use cents-per-mile method if the value of the car when first made available to an employee exceeded $16,000 for passenger cars and $17,300 for trucks or vans for Regular use in your trade or business - one of the following must be met At least 50% total annual mileage is for your trade or business You sponsor a commuting pool to drive at least three employees to and from work The vehicle is regularly used in your trade or business on the basis of all the facts and circumstances 35

36 Fringe Benefits Cents-Per-Mile Rule (cont d) Mileage test must meet both requirements Vehicle is driven at least 10,000 miles during the year. Pro-rate it if owned less than a year. The vehicle is used during the year primarily by employees. 36

37 Fringe Benefits Commuting Rule The value of a vehicle provided to an employee is calculated by multiplying each one-way commute by $1.50. The amount must either be included in the employee s wages or reimbursed by the employee. Several criteria apply rarely seen Annual Lease Value (ALV) Rule Determine FMV first day of personal use Select ALV corresponding with FMV used for 5 yrs Add value of services, if any, except insurance and maintenance (gas is 5.5 cents/mile) Multiply ALV by personal use % (based on mileage) Business / personal use provided by employee 37

38 Fringe Benefits Annual Lease Value example On 7/1/2014, CEO is provided with a new vehicle costing $45,000. The ALV is $11,750. Total miles driven = 24,000; personal miles = 6,000 Personal use percentage = 25% (6,000/24,000) Value of personal use = $2,938 (25% X $11,750) Include on Form W-2 in box 1, 3 (if applicable) & 5 Federal income tax withholding optional if elect out but subject to payroll tax withholdings flexible as to timing of inclusion and withholding most clients include last payroll of the year 38

39 Fringe Benefits Withholding/Depositing/Reporting Fringe Benefits Must determine the value of noncash fringe benefits no later than January 31 of the following year. Prior to that you must reasonably estimate it for purposes of withholdings and depositing on time. For employment tax and withholding purposes, certain noncash fringe benefits can be treated as paid on a pay period, quarter, semiannual, annual or other. Cannot be treated less frequently than annually. Same period does not need to be chosen for all employees. The value of a single fringe benefit can be treated as paid on one or more dates in the same calendar year, even if received at one time. 39

40 Fringe Benefits Withholding/Depositing/Reporting Fringe Benefits (cont d) Value of fringe benefits can be added to regular wages or federal income tax withholding can be withheld at the flat 25% rate. 40

41 Fringe Benefits Applicable income, social security, and Medicare taxes must be withheld on the date or dates that you choose to treat the benefits as being paid. An additional 0.9% of Medicare Tax must be withheld from wages paid in excess of $200,000 in a calendar year. A reasonable estimate of the value of the fringe benefits must be made in order to determine the amount of income tax withholding and employment taxes to be withheld and deposited on time. If an employer chooses to pay the employee s social security and Medicare taxes on taxable fringe benefits without deducting them from their pay, the payments must be included in their income. 41

42 Questions? 42

43 IRAs Traditional IRA Roth IRA Simplified Employee Pension Savings Incentive Match Plan for Employees 43

44 Traditional IRA Age Limitation 70.5 years old Income Limitation No Limit Contribution Limit < Age 50 Lesser of $5,500 or taxable income Age 50 Lesser of $6,500 or taxable income * All amounts based on 2014 thresholds 44

45 Traditional IRA Deductions on Tax Returns Retirement Plan at Work Filing Status Phase - Out Single / HOH $ 60,000 to $ 70,000 MFJ (you have plan) / QW $ 96,000 to $116,000 MFJ (spouse has plan) $181,000 to $191,000 MFS $ 0 to $ 10,000 No Retirement Plan at Work 100% Deductible * All amounts based on 2014 thresholds 45

46 Traditional IRA Taxation on Contributions/Interest Contributions Deducted On Tax Return Contributions NOT Deducted On Tax Return Earnings on Contributions Taxed Tax - Free Taxed 46

47 Roth IRA Age Limitation No Restriction Contribution Limit < Age 50 Lesser of $5,500 or taxable income Age 50 Lesser of $6,500 or taxable income * All amounts based on 2014 thresholds 47

48 Roth IRA Income Limitation Filing Status Phase - Out Single / HOH / MFS (lived apart) $114,000 to $129,000 MFJ / QW $181,000 to $191,000 MFS (lived together) $ 0 to $ 10,000 * All amounts based on 2014 thresholds 48

49 Roth IRA Deductions on Tax Returns - Not Deductible Taxation on Contributions/Interest - Contributions Tax-Free - Interest Earned Tax-Free if qualified distribution 49

50 Simplified Employee Pension Age Limitation Self Employed No Requirement Employee 21 Years Employment Time Compensation Test Earn $550 Self Employed No Requirement Employee 3 out of 5 last years * All amounts based on 2014 thresholds 50

51 Simplified Employee Pension Employer Contribution Employee Contribution Allowed Contribution Lesser of: 25% of compensation $52,000 (self & each employee) N/A * All amounts based on 2014 thresholds 51

52 Savings Incentive Match Plan for Employees Age Limitation N/A Employment Time N/A Compensation Test $5,000 in Current Year and any two prior years. * All amounts based on 2014 thresholds 52

53 Savings Incentive Match Plan for Employees Employer Contribution Employee Contribution Allowed Contribution $12,000 Max Match up to 3% required can lower to 1% * All amounts based on 2014 thresholds 53

54 IRAs Penalties Excess Contributions 6% Early Withdrawal 10% 54

55 IRA Forms Form 5468 Contribution Information Filed by Institution that manages IRA Filed with IRS Due June 1 to IRS and account holder Form 8606 Nondeductible IRAs Filed by taxpayer with Form 1040 Every year you have non-deductible IRA contributions 55

56 IRA Forms Form 1099-R Distribution Information Distributions in excess of $10 from IRAs or qualified plans Copy to recipient by January 31 of subsequent year File with IRS by February 28 or March 31, 2015 if filing electronically 56

57 Form

58 Form 1099-R 58

59 IRAs Questions? 59

60 Form 1099 A & C Filing 60

61 When to File Form 1099-A A bank must file for each borrower if it acquires, in full or partial satisfaction of the debt: An interest in property that is security for the debt; or The bank has reason to believe that the property has been abandoned 61

62 When to File Form 1099-A When should you have reason to believe property has been abandoned? Objective facts indicate borrower intent to permanently discard property 62

63 Coordinating with Form 1099-C If, in the same calendar year, debt is cancelled in connection with a foreclosure or abandonment of secured property 1099-A 1099-C Do not need to file Form 1099-A. Requirement met by completing boxes 4,5, or 7 on Form 1099-C File Form 1099-C 63

64 When to File Form 1099-C For each debtor whom you cancelled debt of $600 or more Entity subject to filing requirement(domestic bank, trust company, etc.) Identifiable event has occurred 64

65 Form 1099-C Identifiable Event Discharge in Bankruptcy Cancellation or extinguishment making debt unenforceable Statute of limitations expires for collecting debt Creditor elects foreclosure remedies that by law extinguish or bar the creditor s ability to collect the debt Agreement to cancel the debt at less than full consideration Decision of the creditor to discontinue collection activity and cancel the debt 65

66 1099-C Exceptions Not required to report the following on Form 1099-C Debt discharged in bankruptcy unless you know the debt was incurred for business/investment purposes Non-principal amounts Foreign debtors Related parties Release of a debtor Guarantor or surety Seller financing 66

67 Multiple Debtors Debt > $10k & after 1994 Debtors who are jointly and severally liable Must report entire amount of canceled debt on each Form 1099-C Debt < $10k OR before 1995 Must file Form 1099-C only for primary (or first named) debtor 67

68 Example File Form 1099-A Bank acquires property securing loan $100k Loan Jan Borrower defaults on loan Remaining balance $80k File Form 1099-C, instead of 1099-A Foreclosure of property FMV = $60k Sale of property File Form 1099-C Debt Forgiveness =$20k Short sale Mortgage company forgives remaining mortgage amount 68

69 Form 1099-A 69

70 Form 1099-C 70

71 Forms 1099-A and C Questions? 71

72 Backup Withholding What is Backup Withholding? - Internal Revenue Code Section Payer is required to withhold and pay to IRS (flat rate of 28%) if: 1) Payee fails to provide a valid (incorrect or does not match) TIN number (SSN, EIN, ITIN, ATIN) 2) Receive IRS Notice CP 2100 (large filer) or CP 2100A 3) There has been a notified payee underreporting with respect to interest and dividends. 72

73 Payments Subject to Backup Withholding Form 1099-MISC Form 1099-INT Form 1099-DIV Form 1099-B Form 1099-OID Form 1099-PATR Form 1099-K Excluded Payments: - Foreclosures/abandonment s - Real estate transactions - Cancelled debts - Archer MSAs distributions - Long term care benefits - Distributions from any retirement account - Distributions from an ESOP - Unemployment compensation 73

74 When to begin Backup Withholding? Within 15 days of receiving CP 2100 or CP 2100A Notice, required to send B Notice Within 30 days of receiving CP 2100 or CP 2100A Notice, required to begin withholding 74

75 Forms CP 2100 or CP 2100A Notice: IRS notifies payer of incorrect payee TIN CP 2100: large filer (250 or more error documents) CP 2100A: mid-size to small filer (less than 250 error documents) 75

76 Forms : CP 2100/CP 2100A Notice 76

77 Forms B Notice: Payer notifies payee of incorrect TIN and IRS notice. Payer must also request Form W-9 from payee with correct TIN. Payer can send first and second B Notice. Form W-9: Payee must complete with correct TIN and provide to payer. 77

78 Forms : First B Notice 78

79 Forms : Second B Notice 79

80 Forms : W-9 80

81 Forms & Reporting Form 1099-MISC : Report backup withholding in Box 4 Form 945: Report total withheld to IRS Without Payment: Ogden, Utah With Payment: PO Box , Dallas, TX

82 Forms : Form

83 Forms : Form 1099-MISC 83

84 When to stop backup withholding? Within 30 days after payee furnishes a correct TIN and certifies that it is correct 84

85 Online TIN Matching Program IRS resource available to payers who file information returns subject to backup withholding Free for registered users Fast and reliable verification of name and TIN combinations Additional Resource: IRS Publication

86 Effect on Backup Withholding Mismatch does not constitute a backup withholding notice (CP 2100 or CP 2100A) Does not affect backup withholding already in effect for a particular payee Payer may establish reasonable cause for penalty abatement 86

87 Common Errors Assuming payee is corporation Failure to obtain correct identifying information Failure to aggregate payments 87

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89 Disclaimers LEGAL DISCLOSURES - CIRCULAR 230 DISCLAIMER/DISCLOSURE This communication is not a tax opinion. To the extent that this presentation, includes any tax advice, it is not intended or written to be used by the recipient or any other party for the purpose of avoiding penalties that may be imposed by the Internal Revenue Code or any other tax authority. The State tax advice, if any, contained in this communication is not intended or written to be used, and cannot be used, for the purposes of determining the allowability of any deduction or credit; determining the excludability of any income; or securing any other tax benefit (including not filing a return). This communication may not be used to promote, market or recommend to another party any transaction or matter addressed herein. OTHER DISCLOSURES The views expressed do not necessarily represent those of Wolf and Company, P.C. This material is for informational purposes only and should not be construed as legal, tax, accounting or other professional advice. 89

90 Thank You Jana B. Bacon, CPA Director, Tax Services for Financial Institutions