{"id":2125,"date":"2016-11-29T07:57:22","date_gmt":"2016-11-29T12:57:22","guid":{"rendered":"http:\/\/keysolutions.us\/blog\/?p=2125"},"modified":"2016-11-29T07:57:22","modified_gmt":"2016-11-29T12:57:22","slug":"form-1099-misc-misuse-and-misconceptions","status":"publish","type":"post","link":"https:\/\/keysolutions.us\/blog\/form-1099-misc-misuse-and-misconceptions\/","title":{"rendered":"Form 1099-MISC Misuse and Misconceptions"},"content":{"rendered":"

Since the December 31 year end is quickly approaching, it is the time when some employers think about issuing their employees a holiday or performance bonus. Generally, all payments made to employees MUST<\/u> be reported on Form W-2.<\/strong><\/p>\n

Let\u2019s look at some of the typical scenarios employers face.<\/p>\n

Employer A<\/span> likes to pay his\/her employee the bonus in cash and not report it to the IRS. The thinking is that the employee has received cash that will not be subject to income and payroll taxes.\u00a0 Accordingly, the employee has more cash to spend because no taxes were withheld. What can go wrong from the employer\u2019s perspective? The answer is \u201cEverything!\u201d The employer could be found in violation of federal and state labor laws. The company\u2019s retirement plan benefits, discrimination tests, and matching employer contributions could run afoul of ERISA requirements causing the plan to become disqualified. The company could be penalized for late payment of required payroll tax withholdings and the IRS could even assess the company for the employee\u2019s income taxes if the employee did not include the bonus as compensation.<\/p>\n

Employer B<\/span> realizes that Employer A has gone too far. Employer B will report the bonus to the IRS by issuing the IRS and the employee a Form 1099-MISC. Doing it this way means that there will be no payroll or income taxes withheld, and the employee will think that the bonus is more valuable because he is receiving the gross amount and not the net amount (after taxes). Employers are required to send the IRS a copy of Form 1099-MISC if the payee receives $600 or more. The employer believes that it has benefited because the employee will be responsible for paying both the employee and employer share of payroll taxes. In this scenario, if the bonus is included along with wages for labor law and retirement plan tests, the employer is somewhat better off. The employer still has failed to timely remit the required payroll taxes and could be subject to late payment penalties. What many employers do not realize is that even though the employee pays all of the self-employment Social Security and Medicare taxes, that the payment of self-employment taxes is a different tax than payroll withholding taxes even though they are both taxed at 15.3%. Thus, the employer could still be found liable for payment of the employer and employee share of Social Security and Medicare taxes (Western Management<\/em> case).<\/p>\n

Employer C<\/span> includes the bonus payment in the employee\u2019s pay and on his W-2 form. Since income and payroll taxes are withheld as required by law, the employer sleeps better at night (and perhaps so does the employee). Employment studies have shown that it is not the cash bonus that the employee appreciates, but rather the recognition for his contributions to the company. Recognize the achievements and the contributions of the employee, and the amount of the cash reward is not as important. A well-informed employee realizes that the bonus, even after income and payroll taxes are withheld, is still a net cash benefit.<\/p>\n

Employer D<\/span> thinks like Employer C, except he wants his valued employee to receive the full amount of the bonus, after taxes. He calls his tax professional and tells him that he wants to give his valued employee $500, net of taxes. The accountant computes a tax gross-up so that the employee receives a net check for $500. Since the employer will need to pay the employee more than $500 because of the tax gross-up computation, this is more costly to the employer. However, the employer has done everything \u201cby the book\u201d and will not have any IRS tax problems, the employee is recognized for his contributions, and receives the full amount of the desired bonus and will not incur any additional taxes.<\/p>\n

If you want to discuss your business or personal tax planning<\/a>, tax preparation<\/a> and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601<\/a> today to make an appointment at our Exton PA CPA office<\/a> to discuss your situation. You can also schedule a consultation at Click Here<\/a>.<\/p>\n

Copyright \u00a9 2016 Keystone Financial Solutions, P.C.\u00a0 All rights reserved.\u00a0 BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.<\/strong><\/h6>\n","protected":false},"excerpt":{"rendered":"

Since the December 31 year end is quickly approaching, it is the time when some employers think about issuing their employees a holiday or performance bonus. Generally, all payments made to employees MUST be reported on Form W-2. Let\u2019s look at some of the typical scenarios employers face.<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[3],"tags":[],"class_list":{"0":"post-2125","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-irs-tax-planning-ideas-tips-news","7":"entry"},"aioseo_notices":[],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9W9tf-yh","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/2125","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/comments?post=2125"}],"version-history":[{"count":4,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/2125\/revisions"}],"predecessor-version":[{"id":2129,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/2125\/revisions\/2129"}],"wp:attachment":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/media?parent=2125"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/categories?post=2125"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/tags?post=2125"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}