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FEDERAL UPDATES
Annual Update on Expense Reporting and Per Diem Rates
Accountable Plan Allowance
An accountable plan allowance is an employer arrangement that reimburses employees for work-related expenses using a fixed or formula-based amount. Employees are required to substantiate how the funds are used. When IRS substantiation requirements are met, all or a portion of the allowance is not subject to payroll withholding.
IRS Standard Mileage Rates (Effective January 1, 2026)
The IRS has released the optional standard mileage rates for the use of automobiles, including vans, pickups, and panel trucks:
- 72.5 cents per mile for business use
- 20.5 cents per mile for medical or moving purposes for qualified active-duty members of the Armed Forces (and certain intelligence community members)
- 14 cents per mile for miles driven in service of charitable organizations
For business mileage, 35 cents per mile of the standard rate is treated as depreciation and reduces the vehicle’s basis. These rates apply to electric and hybrid-electric vehicles, as well as gasoline- and diesel-powered vehicles. Taxpayers may also choose to calculate and deduct actual vehicle expenses instead of using the standard mileage rates.
Lodging, Meals, and Incidentals (Effective Oct. 1, 2025 — FY 2026)
High/Low Method
- High-Cost Locality - $319 per day ($86 allocated to meals and incidental expenses). High-cost localities are defined by the IRS and generally include major metropolitan areas where standard federal lodging rates exceed established thresholds.
- Other Localities (Standard U.S.) - $225 per day ($74 allocated to meals and incidental expenses). Applies to all U.S. locations that are not designated as high-cost localities under IRS guidelines.
- Transportation Industry Rate (Meals & Incidentals Only) - $80 per day for continental U.S. travel, $86 per day for non-U.S. travel. This special IRS-approved meals and incidental expense (M&IE) rate applies to transportation industry workers, including truck drivers, railroad employees, and airline personnel.
- Federal Per Diem (Standard CONUS) - $178 per day ($68 allocated to meals and incidental expenses). Used primarily by federal agencies and federal contractors for official travel reimbursement within the continental United States.
Non-Accountable Plans
Under Treasury regulations, non-accountable plan allowances are treated as taxable wages. These amounts are subject to federal income tax withholding, as well as Social Security and Medicare taxes.
2026 Payroll Wage Bases
and Tax Rates
Social Security
The first $184,500 of wages is subject to Social Security tax. The tax rate is 6.2% for the employee and 6.2% for the employer.
Medicare
All wages are subject to Medicare tax at a rate of 1.45% for both the employee and the employer. Employers must also withhold an additional 0.9% Medicare tax on employee wages exceeding $200,000. This additional tax does not require an employer match.
Federal Unemployment (FUTA)
Federal unemployment tax is 6% on the first $7,000 of wages. After applicable credits, the typical effective FUTA rate is 0.6%.
Tips and Service Charges
Tips are subject to Social Security and Medicare taxes, as well as federal and state unemployment taxes. Service charges or mandatory gratuities that are distributed to employees are treated as regular wages for payroll tax purposes.
Overtime & Tips Deduction Reminder
Employees who received overtime pay or reported tips in 2025 may qualify for an overtime/tips tax deduction. This amount may appear directly on their Form W‑2, but in some cases employees may need to request the necessary information from their employer. While this deduction applies only to certain individual taxpayers, it may also affect how some businesses report payroll items for the 2025 tax year.
FORM 1099: Reporting Requirements for Annual Information Returns
The following summary outlines federal information return filing requirements for payments made during the 2026 tax year.
Form 1099-NEC
Income Reported: Non-employee compensation
Reportable Payments: Payments of $2,000 or more made by a trade or business for services performed by non-employees.
This includes, but is not limited to:
- Director fees
- Commissions paid to non-employees
- Legal services
- Services performed, including associated parts and materials
Due Date to Recipients: January 31, 2027
Due Date to IRS: January 31, 2027
1099-MISC
Income Reported (most common): Rent, royalties, other income, health care payments, and gross proceeds paid to an attorney.
Reportable Payments:
- $10 or more in royalties
- $2,000 or more in rents, prizes and awards, other income payments, and health care payments
Due Date to Recipients: January 31, 2027
Due Date to IRS: February 28, 2027 (paper filings) / March 31, 2027 (electronic filings)
EXEMPTIONS
Certain payments are not required to be reported, even though the income may still be taxable to the recipient. Common exceptions include:
- Payments to corporations, including LLCs taxed as C or S corporations, are generally exempt from information reporting. Note: This exception does not apply to payments made to medical or health care providers or to attorneys, even if they are taxed as corporations.
- Payments for merchandise, freight, storage, and similar items are not reportable.
- Payments to tax-exempt organizations, the United States government, state governments, or foreign governments are not reportable.
Refer to IRS: Instructions for Forms 1099-MISC and 1099-NEC (04/2025)
1099-INT, 1099-DIV, 1099-R
Income reportable: Interest, dividends, and retirement plan distributions.
Reportable payments:
- 1099-INT: $10 or more in interest; $600 or more if paid in the course of a lending business
- 1099-DIV: $10 or more in dividends or distributions
- 1099-R: $10 or more per distribution from pensions, annuities, retirement plans, IRAs, Section 457 plans, or insurance contracts
Due Date to Recipients: January 31, 2027
Due to IRS: February 28, 2027 (Paper), March 31, 2027 (Electronic)
1099-K
Payments made by credit card or payment card, as well as certain third-party network transactions, are reported by the payment processor on Form 1099-K. These amounts should be excluded from Form 1099-NEC and Form 1099-MISC reporting to avoid duplicate reporting.
Other Annual Information Returns to Consider (as applicable)
- Form 1099‑LS: Reportable life insurance sale (issued by acquirer/payer in a reportable policy sale)
- Form 1098: Mortgage interest received in the course of a trade or business
- Form 1099‑B: Broker and barter exchange transactions
- Form 1099‑S: Real estate transactions
- Form 1099‑G: Certain government payments (e.g., unemployment compensation)
- Form 1099‑PATR: Patronage dividends and distributions paid by cooperatives
Please contact your Redpath Client Manager if you are unsure whether any of the above appy to your situation.
Electronic Filing Requirements
Electronic filing is required when 10 or more information returns are filed in aggregate during the year. This requirement applies across all information return types.
Penalties
Failure to file information returns, or filing them late, may result in penalties ranging from $60 to $330 per return. Failure to provide required recipient statements may also result in penalties ranging from $60 to $330 per statement. In cases of intentional disregard, penalties are at least $660 per payee statement, with no maximum penalty.
How to File
Electronic filing is required when more than nine information returns are filed in aggregate. This includes forms such as W-2s, 1099s, 1095s, and similar returns. For example, an employer that files seven W-2s, two Forms 1099-NEC, and one Form 1099-MISC exceeds the threshold and must file all information returns electronically. The IRS treats a failure to file electronically when required as a failure to file, subjecting the filer to the penalties outlined above.
If you have questions regarding information return reporting requirements or would like Redpath to prepare your forms, please contact Clare Chisholm at CChisholm@redpathcpas.com.
Federal Household Employee Requirements
A household employee exists when an employer controls how and when household work is performed. Common examples include nannies, caretakers, housekeepers, cooks, and yard workers.
Under federal payroll tax rules, the following requirements apply:
- FICA Taxes: If cash wages of $3,000 or more are paid to any one household employee during the year, the employer is required to withhold and pay Social Security and Medicare taxes.
- Federal Unemployment Tax (FUTA): FUTA may apply depending on the total amount of household wages paid during the year.
- Form W-2: A Form W-2 must be issued to any household employee who meets the $3,000 wage threshold or for whom federal income tax was withheld.
- Employer Filing Responsibilities: Employers must file the appropriate federal payroll tax forms, including Schedule H, which is filed with the employer’s individual income tax return.
Note: These federal requirements apply regardless of the state in which the household employee works.
For assistance regarding household employer rules, please contact Clare Chisholm at CChisholm@redpathcpas.com.
S Corporation - Special Fringe Benefit Reporting Rules
A fringe benefit is a form of compensation provided in connection with the performance of services. For example, an employer provides a fringe benefit when it pays all or a portion of an employee’s health insurance premiums. Unless specifically excluded by law, fringe benefits are taxable and must be included in income.
In many cases, employer-paid fringe benefits are excluded from taxable income for regular employees. However, these exclusions do not always apply to greater-than-2% shareholders of an S corporation or to individuals related to those owners under attribution rules, including spouses, children, grandchildren, and parents.
Tax Treatment of Employer-Paid Benefits for >2% S Corporation Shareholders
When paid by the company on behalf of greater-than-2% shareholders, the following benefits are treated as taxable compensation:
Not subject to Social Security and Medicare taxes*
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Health insurance
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Dental insurance
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Disability insurance**
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Employer HSA contributions
Subject to Social Security and Medicare taxes
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Section 119: Excluded meals and lodging
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Section 79: Group-term life insurance
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Section 120: Group legal services
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Personal use of employer-provided vehicles
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Non-group life insurance
All of the above benefits are subject to applicable federal and state income tax withholding. State tax treatment may vary; refer to individual state guidelines for additional requirements.
Important Notes:
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Partners and greater-than-2% S corporation shareholders (including related individuals) are not permitted to participate in cafeteria plans. This includes pre-tax payroll deductions for health insurance and HSA contributions.
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Any payroll deductions for these individuals must be set up as after-tax.
* Insurance premiums must be paid pursuant to a company plan (a plan or system for employees or classes of employees).
** Disability insurance premiums that are taxed for federal and state income tax purposes in order to avoid taxation of benefits are also subject to Social Security and Medicare taxes.
Retirement Plan Tax Strategies Available for 2026
As you plan for the year ahead, now is an ideal time to evaluate retirement plan strategies that can help optimize tax outcomes and support long‑term financial goals. Depending on your business structure and strategic objectives there are qualified retirement plan options that may be advantageous in 2026, including:
- Profit Sharing Plans
- 401(k) Plans
- Employee Stock Ownership Plans
- Simple Plans
2026 Retirement Plan Contribution Limits
Contribution limits are adjusted annually for cost‑of‑living changes and can significantly influence plan design, funding strategies, and participant benefits. Updated limits for 2026 and 2025 help employers and employees plan more effectively for the year ahead.
| 2026 | 2025 | |
| Elective Deferrals ( 401k/403b) | $24,500 | $23,500 |
| Catch-up Contributions – Age 50+ | $8,000 | $7,500 |
| Super Catch-up – Age 60-63 | $11,250 | $11,250 |
| Individual Account Limit | $72,000 | $70,000 |
| Annual Compensation Limit | $360,000 | $350,000 |
| SIMPLE Elective Deferrals | $17,000 | $16,500 |
| SIMPLE Catch-up Contributions – Age 50+ | $4,000 | $3,500 |
| SIMPLE Super Catch-Up Contributions – Age 60-63 | $5,250 | $5,250 |
| IRA Contribution Limit | $7,500 | $7,000 |
| IRA Catch-up Age 50+ | $1,100 | $1,000 |
Key Items Commonly Reported on Forms W‑2
Several topics addressed throughout this newsletter impact Form W-2 reporting. The following highlights common items employers should review during year-end payroll processing to help ensure accurate W-2 preparation. This summary is provided for convenience and should be read in conjunction with the applicable sections above.
Common W-2 reportable items include, but are not limited to:
- Employee elective deferrals to retirement plans (e.g., 401(k), SIMPLE, and designated Roth contributions)
- Employer and employee contributions to Health Savings Accounts (including amounts withheld through a cafeteria plan)
- Imputed income for employer-provided group-term life insurance coverage in excess of $50,000
- Taxable fringe benefits, including the value of personal use of employer-provided vehicles
- Cash and non-cash fringe benefits provided to greater-than-2% S corporation shareholders and related individuals (see S Corporation – Special Fringe Benefit Reporting Rules)
- Tips and allocated tips, including amounts subject to Social Security and Medicare taxes (see Tips and Service Charges)
- Reimbursed employee business expenses paid under non-accountable plans or in excess of substantiated amounts
- Dependent care assistance and adoption assistance benefits, where applicable
Nonqualified deferred compensation deferrals, distributions, or vesting events, if applicable - Household employee wages that meet federal reporting thresholds (see Federal Household Employee Requirements)
- Military-qualified moving expense reimbursements, where applicable
Electronic Filing Requirements
Federal electronic filing is required when an employer files 10 or more aggregate federal information returns (such as Forms W-2, 1099, and 1095) during the calendar year. Minnesota also requires electronic filing when more than 10 Forms W-2 are issued.
Failure to properly report taxable wages and fringe benefits may result in corrected filings, penalties, and interest. Employers are encouraged to carefully review year-end payroll records and coordinate with their payroll provider or tax advisor as part of the W-2 preparation process.
State Annual Business Renewal Filing Requirement
Minnesota, along with many other states, requires businesses registered to conduct operations within the state to file an annual report or renewal with the Secretary of State. This requirement is separate from federal and state income tax filings. Each state establishes its own filing deadlines and registration fees. Businesses operating in multiple states should maintain a reliable system to track and complete required filings throughout the year to remain in good standing.
If assistance is needed with annual filing requirements, please contact Teri Grahn, CMI, at tgrahn@redpathcpas.com.
MINNESOTA STATE UPDATES
Minnesota State Annual Filing Requirement
Businesses registered to conduct business in Minnesota are required to file an annual renewal with the Secretary of State. Minnesota’s annual renewal is due by December 31, 2026. Businesses operating in multiple states should maintain ongoing reminders and tracking processes to remain in good standing across all jurisdictions.
Minnesota Minimum Wage Law
Effective January 1, 2026, Minnesota’s statewide minimum wage for all ages and all employers is $11.41 per hour.
Employers operating in Minneapolis or St. Paul should note that these cities have local minimum wage ordinances that exceed the statewide rate. Applicable wage requirements vary by location and employer size, and employers must comply with the specific standards for each city in which they operate.
The Department of Labor has a chart with the minimum wage in each state: https://www.dol.gov/agencies/whd/minimum-wage/state
Minnesota Earned Sick and
Safe Time (ESST)
Minnesota’s statewide Earned Sick and Safe Time (ESST) law became effective on January 1, 2024, and continues to apply in 2026 as a separate mandate.
ESST accrual, usage, and documentation requirements are administered by the Minnesota Department of Labor and Industry (DLI). The DLI has issued updated guidance since the law’s implementation. Employers should refer to the DLI’s website for the most current information and compliance details. https://www.dli.mn.gov/sick-leave.
Minnesota Paid Family and Medical Leave (PFML)
Minnesota’s Paid Family and Medical Leave (PFML) law took effect statewide on January 1, 2026. Employers are required to begin withholding and remitting PFML premiums as of the effective date.
PFML is a statewide program that provides eligible workers with partial wage replacement when they need time away from work for qualifying family or medical reasons, including caring for a new child, addressing a serious health condition, or caring for an ill family member.
Minnesota law allows employers to opt out of the state-run PFML program by offering an approved private plan, provided specific requirements are met.
Large Employers (30 or more Minnesota employees)
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Total premium: 0.88% of each employee’s wages (up to the Social Security wage cap).
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Employer share (minimum): 0.44% of wages.
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Employee share (maximum): 0.44% of wages (deducted from paychecks).
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Employers may choose to pay 100% of the premium (i.e., cover the employee share too).
Small Employers (Fewer than 30 Minnesota employees, with average wage requirements)
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Total premium: 0.66% of wages.
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Employer share (minimum): 0.22% of wages.
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Employee share (maximum): 0.44% of wages (same as larger employers).
Refer to the Minnesota Paid Leave (PFML) website for details. https://paidleave.mn.gov/
Minnesota Household Employee Requirements
In addition to federal requirements, Minnesota imposes state-specific obligations on household employers that must be evaluated separately.
- Minnesota Unemployment Insurance (UI): Employers may be required to register with the Minnesota Unemployment Insurance program and pay state unemployment taxes if household wages meet Minnesota UI thresholds.
- Minnesota Income Tax Withholding: State income tax withholding may apply if the employer agrees to withhold Minnesota income tax from the household employee’s wages.
- State Labor Law Compliance: Employers must comply with Minnesota labor laws, including minimum wage, recordkeeping, and other applicable employment standards.
Note: Minnesota household employment requirements are separate from federal obligations and should be reviewed independently to ensure full compliance.
WISCONSIN STATE UPDATES
Wisconsin Minimum Wage Law
Wisconsin’s minimum wage is $7.25 per hour. For tipped employees, the minimum cash wage is $2.33 per hour. For opportunity employees (employees under age 20 during their first 90 consecutive days of employment), the minimum wage is $5.90 per hour, with a minimum cash wage of $2.13 per hour for tipped opportunity employees.
FOR OUR CLIENTS IN OTHER STATES
The information included here highlights federal requirements and key updates for Minnesota and Wisconsin. If you reside in or your business operates in a state outside of Minnesota and Wisconsin, additional state-specific requirements may apply. Our team can provide detailed guidance tailored to your state, helping you stay compliant and avoid surprises.
Please reach out to your Redpath Client Manager and our team for assistance.
SOURCES
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.