Alan Huberman & Anthony Switajewski & Stephanie Finnegan | December 17, 2019
Year-end Payroll Processing Reminders:
Self-Employed Health Insurance Deduction
Health and accident insurance premiums paid on behalf of a greater than a 2% S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee’s Form W-2, subject to income tax withholding.
These additional wages are not subject to Social Security (FICA), Medicare (MEDC), or Unemployment (FUTA) taxes if the payments of premiums are made to, or on behalf of, an employee under a plan or system that makes provision for all or a class of employees (or employees and their dependents). Therefore, the additional compensation is included in the shareholder-employee’s Box 1 (Wages) of Form W-2, Wage and Tax Statement, but is not included in Boxes 3 and 5 of Form W-2.
Income from Self-Employment
In order to deduct health insurance on Schedule 1, line 29 included with the Form 1040, one of the following statements must be true:
- The taxpayer was self-employed and had a net profit for the year reported on Schedule C, C-EZ or F.
- The taxpayer was a partner with net earnings from self-employment reported on Schedule K-1.
- The taxpayer received wages subject to FICA and Medicare taxes from an S corporation in which the taxpayer was a 2% or more shareholder. Health insurance premiums paid or reimbursed by the S corporation must be shown on Form W-2 and are not subject to FICA and Medicare taxes.
- Net profit is reduced by amounts of deductions on Schedule 1, line 27 for deductible part of self-employment tax and line 28 for contributions to self-employed retirement plans.
Qualified Health Insurance
The insurance plan must be established, or considered to be established as discussed in the following bullets, under the taxpayer’s business:
- For self-employed individuals filing a Schedule C, C-EZ or F, a policy can be either in the name of the business or in the name of the individual.
- For partners, a policy can be either in the name of the partnership or in the name of the partner. The taxpayer can either pay the premiums individually or the partnership can pay them and report the premium amounts on Schedule K-1 as guaranteed payments to be included in the taxpayer’s gross income. However, if the policy is in the taxpayer’s name and the taxpayer pays the premiums individually, the partnership must reimburse the taxpayer and report the premium amounts on Schedule K-1 as guaranteed payments to be included in the taxpayer’s gross income.
- For more than 2% shareholders, a policy can be either in the name of the S corporation or in the name of the shareholder. The taxpayer can either pay the premiums individually or the S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in gross income. However, if the policy is in the taxpayer’s name and the taxpayer pays the premiums individually, the S corporation must reimburse the taxpayer and report the premium amounts on Form W-2 as wages to be included in gross income.
Medicare premiums the taxpayer voluntarily pays to obtain insurance in the taxpayer’s name that is similar to qualifying private health insurance can be used to calculate the deduction.
Company Owned Autos and the Reporting Requirements for Personal Use by Employees/Owners
The use of company–owned vehicles continues to be a major issue for businesses and the IRS. It is essential that all our clients be aware of the various recordkeeping requirements and responsibilities.
The personal use of a company–owned vehicle by an employee, owner or shareholder results in “fringe benefit income” that is taxable to the user of the vehicle. The IRS has issued guidelines to follow in valuing the personal usage and in determining when and to what extent taxes must be withheld from the wages of the user.
Employers are given much leeway in the timing of withholding taxes on this fringe benefit.
A special election allows an employer to use a fiscal 12-month period ending October 31 in calculating the taxable personal use fringe benefit. This election alleviates the timing problems of calculating this fringe benefit, depositing the withheld taxes and including the information on the W-2. If the election is made, then the employer must notify its employees before January 31 of the following year. Thus, you have until January 31, 2020 to make the election for 2019.
Another election allows an employer to eliminate the need to withhold federal and state income taxes. However, the employer must withhold Medicare tax and Social Security tax if the employee has not already exceeded the withholding limits.
We recommend that our clients make these two elections annually. To do so, we have included a sample election document (Attachment A) that you should immediately copy onto your stationery and distribute to all employees (including owners) that use company provided automobiles.
There are three different methods to calculate the value of the personal use of a vehicle:
- The commuting value method cannot be used for a “control employee,” which includes officers, directors or 1% or greater owners in addition to wage restrictions
- The cents per mile method (Pub 15-B), which is restricted to $50,400 maximum Fair Market Value of an employer-provided vehicle first made available to employees for personal use and used over 10,000 miles per year primarily by employees
- The safe harbor/automobile lease value method (discussed in detail below)
IT IS OUR RECOMMENDATION that clients rely on method 3 above —the safe harbor/automobile lease value method. his method requires that the personal use charge be based on the Fair Market Value of the vehicle. An Annual Lease Value is determined via a table provided by the IRS (see Attachment C). The personal use percentage is determined by dividing personal use miles by the total miles used during the annual period. This value is assumed to include maintenance and insurance. An additional charge of 5.5 cents per personal mile for fuel is to be added to the personal use annual lease value. Once the lease value is determined, it must be used for four full years unless the auto is transferred. After four years the Annual Lease Value is re-determined annually based on the Fair Market Value.
Example:
An employee is provided a car with a fair market value of $40,000. They drive it 5,000 miles for personal use and 10,000 miles for business use during the period November 1, 2018 through October 31, 2019 (the employer has elected a fiscal–year determination). As a result, the personal use percentage is determined to be 33%. Utilizing the IRS table, the fringe benefit value for the personal use of the car is determined to be $3,583 (i.e., $10,750 x 33%). The fuel value is determined to be $275 (i.e., 5,000 x .055). As a result, the amount to be included as additional wages on the employee’s Form W-2 is $3,858.
To ensure the timeliness of information gathering and to avoid the December bottleneck, we suggest the following actions be taken immediately:
- Notify your employees in writing by January 31, 2020 (but do it now) that the special accounting rule using October 31 as the cutoff date for calculating the taxable value of the personal use of a company vehicle has been elected.
- Notify employees in writing by January 31, 2020 (but do it now) that only Social Security and Medicare taxes (and not income taxes) will be withheld from wages for the taxable value of the personal use of a company vehicle.
- Treat the taxable fringe benefit as paid in December in order to include the income and related taxes in the December payroll.
- To accomplish the above, issue Attachments A, B & C to all applicable employees, including owner-employees.
Please refer to Attachment B for use in providing data to determine the compensation resulting from personal use of a company vehicle.
Meals and Entertainment
On October 3, 2018, the IRS issued new guidance in IRS Notice 2018-76 that allows business deductions for certain business meals, despite restrictions imposed by the new Tax Cuts and Jobs Act (TCJA) on entertainment expenses.
Previously, a business taxpayer could deduct 50% of the cost of qualified entertainment expenses, if those expenses were properly substantiated. This included entertainment that was “directly related” to or “associated with” the business. For instance, deductions were allowed for meals in a clear business setting as well as meals directly following or preceding a substantial business discussion. The 50% deduction for food and beverages was limited to costs that were not lavish or extravagant. Also, the business taxpayer, or a representative of the business such as an employee, had to be present when the food and beverages were served.
The IRS clarified the rules in the new guidance. Under Notice 2018-76, taxpayers may deduct 50% of the cost of business meals if:
- The expense is an ordinary and necessary business expense under Section 162(a) that is paid or incurred during the tax year when carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
- The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact; and
- For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
To illustrate these rules, the IRS provided three examples when taxpayers attend sporting events with customers. These examples assume that the requirements stated above are met.
Example 1: The taxpayer takes a business contact to a baseball game and buys the tickets, hot dogs and drinks. The tickets are nondeductible entertainment expense, but the taxpayer can deduct 50% of the cost of the hot dogs and drinks purchased separately.
Example 2: The taxpayer takes a business contact to a basketball game in a luxury suite. The cost of the basketball game ticket, as stated on the invoice, includes food and beverages. Thus, the cost of the food and beverages also is an entertainment expense and nondeductible entertainment expense.
Example 3: The facts are the same as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages. In this case, the taxpayer can deduct 50% of the cost of the food and beverages.
The IRS expects to publish proposed regulations clarifying when business meal expenses are deductible and what constitutes nondeductible entertainment. Until these proposed regulations take effect, taxpayers can rely on the guidance provided in Notice 2018-76.
