2016 W2 Client Letter
As 2016 draws to a close, it is once again time to consider additional items to be reported on your 2016 W-2 forms. Examples include the value of group-term life insurance in excess of $50,000, company cars, which are used for personal purposes, or excess business expense reimbursements. This income is also subject to Social Security and Medicare taxes. Additional taxes may need to be withheld from the employee’s wages or salary before year-end.
Group-Term Life Insurance
The deemed “cost” of group-term life insurance in excess of $50,000 is treated as compensation for income tax, Social Security and Medicare purposes. This cost is to be computed from the IRS tables appearing below; the computed amount must be included in total wages, Social Security and Medicare wages (Boxes 1, 3, 5 and 16), and separately reported in Box 12. Code “C” should be entered in front of the dollar amount leaving one space between the code and the amount. Use the employee’s age on the last day of the year to compute the compensation.
A 51-year-old employee with an $80,000 group-term life policy in force for the full year will be taxed on $82.80 (30 x .23 x 12) = $82.80
Uniform Premiums for $1,000 per Month of Group-Term Life Insurance Protection
|25 to 29||$0.06|
|30 to 34||$0.08|
|35 to 39||$0.09|
|40 to 44||$0.10|
|45 to 49||$0.15|
|50 to 54||$0.23|
|55 to 59||$0.43|
|60 to 64||$0.66|
|65 to 69||$1.27|
|70 and above||$2.06|
Under Section 62(c) of the Internal Revenue Code, you must report amounts paid to your employee for business expenses as wages in Box 1 of Form W-2, Wage and Tax Statement, if: (1) your employee is not required to or does not substantiate those expenses to you (i.e., furnish receipts or other documentation), or (2) you advance an amount to your employee for business expenses and your employee is not required to or does not return any amount he or she does not use for business expenses.
If your employee substantiates all of his or her business expenses to you and returns any excess, do not include these amounts as wages on your employee’s Form W-2.
If you reimburse your employee using a per diem or other fixed allowance amount and the employee establishes the time, place and business purpose of the expense but the reimbursement exceeds standard government-specified rates (that is, the standard mileage rate for auto expenses and the government per diem rate for travel away from home), include as wages in Box 1, 3, 5 and 16 on Form W-2 only the amount that is more than the government- specified rates. The excess amounts are subject to income tax withholding, Social Security, Medicare tax and federal and state unemployment taxes.
The value of an employee’s personal use of a company car must also be included in total wages, Social Security and Medicare wages reported on the W-2. It must be added to compensation in Boxes 1, 3, 5 and 16 and also reported in Box 14. The fringe benefit rules provide for three “safe harbor” methods of determining personal use value:
- The annual lease value method calculates the personal use value based upon the personal use percentage of an annual lease cost determined by reference to the fair market value of the car when first made available to the employee.
- The 2016 mileage allowance method values personal use at $.54 for personal miles driven from January 1st through December 31st. This rule, however, is limited to company cars that are either regularly used in the employer’s business or driven at least 10,000 miles in a calendar year and where fair market value does not exceed $16,000 ($17,500 for trucks and vans).
- The commuting valuation method may be used when commuting is the sole personal use of a company car. The commuting use is valued at $1.50 per one-way commute or $3.00 per round trip. An IRS ruling indicates that this method may not be used by employees who own one percent or more of the company’s stock.
The choice of either the annual lease value method or mileage allowance method may be made on a car-by-car basis but, once made, is binding for that vehicle. However, in any year when the auto use qualifies for the commuting value method, a switch to that method may be made. An employer may elect a “safe harbor” valuation method by simply using it. Enclosed is an employee notice, which has been designed to enable you to obtain the required mileage information from your employee(s) for reporting purposes. Please review the employee notice for additional reporting and withholding information.
You must indicate whether the employee is an active participant in a company-sponsored retirement plan or union plan by checking “Retirement Plan” in Box 13. An active participant in a defined contribution plan (i.e., profit sharing and/or money purchase pension) is a participant who had either an employee or employer contribution, or a forfeiture, allocated to that participant’s account. A participant is not considered active if only earnings are allocated to that participant’s account. An active participant in a defined benefit plan is an individual not excluded under the eligibility provisions of the plan. Check the “Retirement Plan” box in Box 13 if you made contributions on behalf of the employee to a 401(k), 403(b), 408(k)(6), 457, 501(c)(18)(D) or 408(p) retirement plan.
- Code D – Section 401(k) cash or deferred arrangement, as well as federal agency contributions to Federal Thrift Savings Plan. Also show deferrals under a SIMPLE retirement account that is part of a section 401(k) arrangement;
- Code E – Section 403(b) salary-reduction agreement to purchase an annuity contract;
- Code F – Section 408(k)(6) salary-reduction simplified employee pension plan (SEP);
- Code G – Contribution to a Section 457(b) deferred compensation plan;
- Code H – Section 501(c)(18)(D) tax-exempt organization plan;
- Code S – Section 408(p) Simple plan unless the SIMPLE is part of a section 401(k) arrangement;
- Code AA – Designated Roth contributions under a section 401(k) plan;
- Code BB – Designated Roth contributions under a section 403(b) plan;
- Code EE – Designated Roth contributions under a government section 457(b) plan.
Use separate reporting of the wage bases for the two parts of the Social Security tax, i.e. Social Security and Medicare. The wage base limits are $118,500 for Social Security and no limit for Medicare. The employee Social Security tax rate is 6.2%, and the Medicare rate is 1.45%. Employers are required to withhold an additional .9% on wages paid to an employee in excess of $200,000 in a calendar year. The employer Social Security tax rate is 6.2% and the Medicare rate is 1.45%.
The wage base limit for 2017 will increase to $127,200 for Social Security, and there is no wage base limit for Medicare. The Social Security tax rate is 6.2% and the Medicare rate will be 1.45% for both employer and employee. Wages in excess of $200,000 will be taxed for Medicare purposes at a rate of 2.35% (1.45% +.9%). The additional Medicare tax is not matched by employers.
Dependent Care Benefits
Total dependent care benefits paid or incurred for the employee through pre-tax contributions to a section 125 dependent care cafeteria plan must be reported in Box 10. This should include any amount in excess of the $5,000 exclusion. Also include amounts over $5,000 in boxes 1, 3, 5 and 16.
Health Savings Account (HSA)
All employer contributions (including employee contributions through a cafeteria plan) to an employee’s Health Savings Account are not subject to federal income tax withholding, social security, Medicare or FUTA taxes. Report any employer contributions; including amounts the employee contributed using a section 125, (cafeteria) plan in Box 12 with a code W.
S corporations may be subject to additional W-2 reporting requirements to reflect the cost of fringe benefits for shareholder-employees. A 1991 IRS ruling requires that the cost of health insurance premiums paid for “2-percent (or more) shareholders” who are also employees be reported as compensation. While such amounts are subject to income tax withholding, they are not subject to Social Security or Medicare tax withholding. In order to receive a deduction for self-employed health insurance, the premium amount must be reported as compensation on the stockholder’s W-2.
This treatment is likely applicable to the cost of all other fringe benefits for shareholder-employees (other than dependent care assistance programs which continue to be fully deductible by S corporations), although the ruling addressed only accident and health insurance premiums.
The actual premium cost of shareholder-employee’s group term life insurance must also be treated as compensation; you are not allowed to use the “deemed cost” rules addressed on page 1 for shareholder-employees.
Reconciliation of Forms 941 and W-3
Amounts reported on the quarterly Forms 941 for 2016 should be reconciled with the Form W-2 totals reported on Form W-3. Your reconciliation should include total compensation, Social Security wages and tips, Medicare wages and tips, advanced Earned Income Credit, income tax withheld, and Social Security and Medicare taxes. While the amounts may not always match, you should determine the reason and note it on the reconciliation, which should be retained in the event of future inquiries.
The Minnesota Department of Revenue requires that you electronically submit your 2016 W-2 forms if you have more than 10 forms. This is true even if you are not required to electronically submit W-2 forms to the IRS. The federal electronic filing threshold remains at 250 forms.
The Internal Revenue Service requires that Form 1099-MISC be issued to non-corporate service providers who are paid $600.00 or more during a calendar year and to any payee that federal income tax was withheld under the backup withholding rules, regardless of the amount of the payment.
Best practice is to obtain a Form W-9 from each of your vendors prior to paying for services. The form W-9 provides the vendor’s name, address, and tax ID number as well as their designation as a corporation, partnership, or other legal entity.
The recipient copies are due January 31, 2017. The filing deadline for 2016 paper W-2s is now January 31, 2017. The due date for e-filing 2016 Forms W-2 with the SSA is now January 31, 2017. There are penalties for failure to file by the due date.
Some businesses may be required to file other 1099 forms such as 1099-INT, 1099-DIV, 1099-R, 1099-C, or form 1098. We are happy to provide additional information or assistance with any of these items. If you would like us to prepare these forms for you, please provide the information to us early in January.
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