An accountable plan allowance is an arrangement whereby the employer pays an employee a fixed amount or a formula- based amount of money to be used for employment-related expenses. The employee must account for how the money is used. All or a portion of the allowance or arrangement is not subject to payroll withholding rules provided the necessary substantiation requirements are met. Internal Revenue Service (IRS) per diem rates currently available are:
The IRS has issued the standard mileage rates for 2020 which taxpayers have the option to use to determine the deductible costs for eligible use of an automobile. The allowable rates will be as follows beginning January 1, 2020:
57.5 cents per mile for business use (down from 58 cents per mile previously).
17 cents per mile for medical or moving purposes (down from 20 cents per mile previously).
14 cents per mile for charitable purposes (unchanged from 2019).
Lodging, Meals, and Incidentals (Effective Oct. 1, 2020)
I. High/Low Method
High Cost Locality $292 ($71 considered meals and incidentals)
Other Cost Locality $198 ($60 considered meals and incidentals)
Contact our office for a list of “high cost localities” or the most recently published “specific locality” per diems.
II. Transportation Industry Rate for meals and incidentals
$66 per day for continental U.S. travel
$71 per day for non-U.S. travel
III. Federal Per Diem Rate
$151 standard rate ($55 considered meals and incidental expenditures)
Treasury regulations require non-accountable plan allowances be treated as taxable wages subject to Federal income tax and Social Security tax withholding.
First $142,800 is taxable, with a 6.2% tax rate for both employee and employer.
All wages are taxable, with a 1.45% tax rate for both employee and employer. Employers should withhold an additional 0.9% on wages exceeding $200,000. There is no employer match on the additional 0.9%.
Federal Unemployment tax is 6% with most employers receiving a credit reduction of 5.4%, taxing at .6% on the first $7,000 in wages.
For 2020, the first $35,000 is taxable at rates depending on employment history and industry.**
First $14,000 is taxable at rates depending on employment history and industry.**
*2021 update was not available before printing.
**Established employers will receive their 2021 experience-modified rate from respective states.
Tips are subject to Social Security and Medicare as well as Federal and state unemployment taxes. Service charges (forced gratuity) when turned over to the employee are considered regular wages. Sources: www.irs.gov / www.dwd.wisconsin.gov / www.uimn.org/employers/wages-taxes/tax-rates
IMPORTANT FILING DATE REMINDER:
NEW for 2020 Information Return Filings: Non-employee compensation is now reported on Form 1099-NEC rather than 1099-MISC, box 7. Form 1099-NEC has been inactive since 1982 when it was replaced by Form 1099-MISC. The IRS has reinstated Form 1099-NEC to alleviate confusion of due dates depending on the information reportable.
The following summary represents the filing requirements effective for 2020 information return reporting:
Income reportable: Non-employee compensation
Reportable payments: amounts over $600 made by a trade or business in exchange for services by nonemployees. Reportable payments include but are not limited to: director fees, commissions to non-employees, payments for legal services, services performed including parts and materials.
Due Date to recipients: February 1, 2021
Due Date to IRS: February 1, 2021
Income reportable (most common listed): Rent, Royalties, Other Income, Health care payments, Gross Proceeds to an Attorney
Reportable payments: $10 in royalties, $600 in rents, prizes and awards, other income payments, and health care payments
Due Date to recipients: February 1, 2021
Due to IRS: March 1, 2021 (Paper), March 31, 2021 (Electronic)
1099-INT, 1099- DIV, 1099-R
Income reportable: interest, dividends and distributions of stock, distribution from a qualified benefit plan.
Reportable payments: payments of at least $10 of interest, or $600 of interest (including tax-exempt interest) if paid in the trade or business of lending money or on registered notes, aggregate dividends and other distributions on stock of $10 or more, and for each distribution of at least $10 from a pension, annuity, retirement plan, Section 457 Plan, IRA, insurance contract, etc. during the year.
Due Date to recipients: February 1, 2021
Due to IRS: March 1, 2021 (Paper), March 31, 2021 (Electronic)
Payments made by credit card or payment card and certain other types of third party network transactions, must be reported on Form 1099-K. This reporting is done by the credit card or third party network provider and should not be reported on Form 1099-MISC or NEC. When reviewing your recipient lists, exclude amounts that were paid by one of these payment types. If a recipient was paid by both check and credit card, only the amounts payable by check would be reported on either the 1099-MISC or NEC.
Some payments do not have to be reported although the income may be taxable to the recipient. Below are the most common:
• Generally payments to a corporation, including a LLC that is treated as a C or S corporation are exempt from information reporting. Medical and Health care providers and attorneys that are taxed as a corporation are not allowed this exception and the amounts paid are still reportable.
• Payments for merchandise, freight, storage and similar items do not need to be reported.
• Payments to a tax-exempt organization, the United States, a state, or a foreign government do not need to be reported.
How to file
You are required to file electronically when your filings exceed 250 recipients per form type. For example, 300 1099-NEC and 100 1099-INT, only the 1099-NEC in this example meets the electronic filing requirement. Businesses reporting less than 250 recipients per form type can file by paper on the IRS preprinted red forms.
Failure to file or late filing of Annual Information Returns range from $50-$280 per information return; penalties for failure to provide Forms 1099 and 1098 to recipients range from $50-$280 per recipient; and intentional disregard of filing requirements incur a penalty of at least $560 per payee statement with no maximum penalty.
Other annual information reporting requirements:
Form 1099-LS Reportable Life Insurance Sale, which requires the acquirer of a life insurance contract or any interest in a life insurance contract in a reportable policy sale to issue a form reporting payments made with respect to the sale.
Form 1098 - Mortgage interest recipients of $600 in the course of a trade or business
Form 1099-B - Broker or Barter exchange transactions
Form 1099-S - Real estate sales
Form 1099-G - Certain federal, state or local government unit payments (unemployment compensation)
Form 1099-PATR - Cooperatives which have paid at least $10 in patronage dividends and other distributions.
For detailed information regarding Form 1099 reporting, visit www.irs.gov.
If you have questions regarding information return reporting requirements or would like Redpath to prepare your forms, please contact Heather Larson, CPP at email@example.com
For Redpath and Company preparation of 1099s and 1098s, we require the following information by Jan. 15, 2021 in Microsoft Excel for over 10 recipients;
Social Security Number or Federal I.D. Number
Total of Payments in 2020
There is still time to adopt an IRS qualified retirement plan as a tax planning strategy for 2020. Retirement plans are a great way to generate needed employer deductions and tax-deferred savings for the employee.
Plans to consider for 2020 are:
• Profit sharing
• Money purchase pension
• S-corp ESOPs
• C-corp ESOPs
• Cross-tested plans.
We can assist you in the implementation of these plans. For more information, contact Val Kammerer, Employee Benefits Specialist, at firstname.lastname@example.org. The benefits plan dollar limits for 2020 and 2021 are highlighted below.
IRS Benefit Plan Dollar Limits (Adjusted for cost-of-living increases)
|Deferrals to 401(k) and 403(b) plans Under age 50||Deferrals to 401(k) and 403(b) plans Age 50 or older||Deferrals to SIMPLE Under age 50||Deferrals to SIMPLE Age 50 or older||Annual Limit on Compensation||Individual Account Limitation|
The IRS requires more information on W-2 Forms each year. Failure to comply with IRS reporting requirements can result in the assessment of penalties for non-compliance.
Following is a general list of items that must be included in various boxes on the 2020 W-2 Forms, in addition to normal wages and compensation:
Owners of Minnesota residential rental property are required to file a 2020 Form CRP (Certificate of Rent Paid). The form must be signed by the landlord and given to tenants by January 31, 2021. Redpath and Company can assist in preparing these forms. Please contact Heather Larson, CPP at email@example.com before Jan. 15, 2021 for assistance.
Minnesota and many other states have annual filing requirements for companies registered to conduct business in their state. For states with a filing requirement, businesses need to file an annual report or renewal with the Secretary of State. This filing requirement is separate from your income tax filing. Since each state has different deadlines and registration fees, it’s important to have a system to prompt filing as required throughout the year to keep your company in good standing. Minnesota’s annual renewal is due by December 31, 2020.
If you’d like assistance with your annual filing requirements, please contact Teri Grahn, CMI, at firstname.lastname@example.org or 651-407-5889.
The Federal minimum wage to be paid by covered employers is currently $7.25/hour. In cases where an employee is subject to both the State and Federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.
Minnesota (as of January 1, 2021)
Minnesota’s minimum wage for all ages is $8.21/hour if annual sales are less than $500,000. If annual sales are $500,000 or greater, the minimum wage is $10.08/hr. A wage of $8.21/hr is available for new employees under the age of 20 during their first 90 consecutive days of employment for training and for youth workers under the age of 18. Employers with employees working within the boundaries of Minneapolis have additional minimum wage requirements.
Wisconsin minimum wage is $7.25/hour and $2.33/hour for tipped employees. These are reduced to $5.90/hour and $2.13/hour for opportunity employees. An opportunity employee is an employee who is not yet 20 years old and who has been in employment status with a particular employer for 90 or fewer consecutive calendar days from the date of initial employment.
You have a household employee if you hired someone to do household work, and that worker is your employee. If you can control the work (i.e. when it is done, how it is done), then the individual would be treated as your employee. Household work can include: caretakers, cooks, housekeepers, nannies, and yard workers to name a few.
Nanny share arrangements will require each family using the nanny to report and file for each individual family’s wages paid. In addition, due to the pandemic in 2020, families that utilize a tutor for distance learning will not meet the definition of household work even though services may have been performed in an individual’s home. See IRS Publication 926 for more examples and definitions regarding workers who are not your employees.
For 2020, if you paid cash wages of $2,200 (2021 cash wages are $2,300) to any one household employee you need to withhold and pay Social Security and Medicare Taxes. Special wage rules apply for Federal Unemployment tax and requirements to report to State Unemployment tax. W-2 reporting is also required if the $2,200 in Social Security and Medicare wages is met or you withhold federal income tax from wages paid.
For assistance regarding household employer rules, please contact Heather Larson, CPP at email@example.com or 651-255-9324.
A Fringe Benefit is a form of pay for the performance of services. For example, you provide an employee a fringe benefit when you offer to pay a portion of their health insurance premiums.
Any fringe benefit you provide is taxable and must be included in income unless the law excludes it.
There are many cases where the law excludes the employer paid fringe benefit from income for regular employees. However, this exclusion does not always apply to greater than 2% shareholders of an S-corporation and any individual related to that owner through attribution rules (including spouse, children, grandchildren, and parents).
The following benefits, if paid by the company on behalf of greater than 2% owners, are considered taxable compensation.
Not subject to Social Security and Medicare*:
• Health Insurance
• Dental Insurance
• Disability Insurance**
• Employer HSA Contributions
Subject to Social Security and Medicare:
• Section 119, Excluded meals and lodging
• Section 79, Group term life insurance
• Section 120, Group Legal Services
• Personal Use of employer-provided vehicles
• Non-Group Life Insurance
All of the above benefits are subject to applicable Federal and state withholding taxes. See individual state guidelines for more information. Important Note: Partners and greater than 2% shareholders of an S-corporation (including related individuals) are prohibited from participating in cafeteria plans. This includes health insurance and HSA deductions done through payroll. The benefit, if set up as a payroll deduction, should be set up after tax for greater than 2% shareholders and related individuals.
* Premiums must be pursuant to a company plan (a plan or system for employees or classes of employees).
** Insurance premiums subject to tax for Federal and State income puposes to avoid taxation of benefits are also subject to Social Security and Medicare Tax.
The Patient Protection and Affordable Care Act of 2010 required employers to report the cost of coverage under an employer-sponsored group health plan beginning with 2012 W-2 Forms, but most employers met the transitional relief rules making reporting optional and not requiring them to report the costs. The most common transitional relief rule making 2012 reporting optional applies to businesses that filed fewer than 250 W-2 Forms in the prior year. To date, no further guidance has been provided. The transitional relief rules applying to 2012 W-2 forms still apply to 2020 W-2 forms employers provide to employees in January 2021.For employers with greater than 250 Form W-2’s, see the Employer Shared Responsibility page on IRS.gov or contact Heather Larson, CPP at firstname.lastname@example.org.
Redpath and Company, Ltd. is 100% employee-owned (ESOP) and a leading accounting firm providing proactive, innovative, and value-driven CPA services for closely held businesses, government entities, and not-for-profit organizations. The firm started operations in 1971, and with offices located in downtown St. Paul and White Bear Lake, Minnesota, the firm ranks as one of the top CPA firms in the Twin Cities area. Bottom Line is published by Redpath and Company, Ltd. Office locations:
The information provided in this document does not constitute legal, accounting, or financial advice and is offered as a source of information only. Those seeking specific advice should contact a professional advisor. Laws, rules, and regulations can vary widely based on the specific facts involved. Given the changing nature of laws, rules, and regulations, the information in this document is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. It should not be used as a substitute for consultation with professional accounting, tax, legal, or other professional advisors. Redpath and Company is not responsible for any errors or omissions, or for the results obtained from the use of this information.