Upcoming Payroll Changes: Get Ready!

The Affordable Care Act included a number of changes to payroll reporting.

• On your 2011 W-2’s you will need to report the value of the employee’s health insurance. The amount reported does not affect tax liability. These are the W-2's that you will file in 2012 for the 2001 year. However you should take some steps now to get ready for next year. You need to contact your outside payroll company or your financial software company if you prepare payroll in-house, to make sure that the health insurance expense for each employee can be captured and included in next year’s W-2. Also check with your health insurer to make sure you will receive a yearend report that shows the health insurance expense for each employee.

• Starting January 1, 2011, the cost of over the counter drugs cannot be reimbursed from a Flexible Spending Arrangement unless a prescription is obtained.

Significant Changes to 1099 filing

Currently you are required to file form 1099 for every unincorporated vendor who provides you with services who you pay $600 or more during the year. In 2012 you will be required to file a 1099 for every vendor who you pay over $600 to regardless of the whether they are incorporated or unincorporated and whether it is for services or for products. Basically everyone you pay money to will either get a W-2 (for employees) or a 1099 (everyone else). As you are already imagining, this is a major paperwork process. By 1/1/2012, you will need to have a system in place that can track these payments so that you can send a completed 1099 to your vendors in the beginning of 2013 for the 2012 year. What do you need to do?
· Make sure you have the EIN for everyone you pay. All vendors should complete a form W-9. Start collecting this information now if you don’t have it already. This will strengthen your internal controls too.
· Make sure your financial software system can track and accumulate payments to vendors and generate the 1099’s at year end. Most systems already have this feature but if it is a feature that needs to be added, you’ll need to get in touch with the company now because adding a new feature to a software package could be time consuming.
· Look at where you use petty cash. If you use $59 in petty cash each month for park & rec supplies from the same supplier, you are going to need to give that supplier a 1099 at year end and they won’t be in your computer system. Consider using other purchasing methods.
· Talk to your auditor if you are considering using debit or credit cards instead of cash. Make sure you have strong internal controls in these areas. Tentatively the IRS is considering exempting purchases made by debit and credit cards from the reporting requirements. While it might seem like an easy solution, these payment methods have been abused and you need to make sure you have strong internal controls in these areas.
· Expenses that you reimburse employees for are also subject to reporting. If you have five employees who stay at a hotel in Harrisburg for 5 different training sessions throughout the year and you reimburse them for the hotel stay, you are responsible to report the payments made to that hotel on a Form 1099, even though you didn’t make the payment to the hotel directly, you paid employees.

Possibly this part of the healthcare legislation could be overturned or modified, but this is too large an undertaking to wait to see if this happens. It is better to proceed based on the current legislation and be prepared.

More Health Care Premium updates from the IRS

Under the Affordable Care Act, health coverage provided for an employee’s children under the age of 27 is now tax free to the employee effective March 30, 2010. If you have a cafeteria plan or a Section 125 plan, employees can make pre-tax contributions to this plan to pay for this benefit. See more information on this topic at the IRS website.

And the 65% subsidy on COBRA health insurance premiums has been extended past March 31, 2010. This subsidy covers employees who are involuntarily separated from their jobs between September 1, 2008 to May 31, 2010 and lasts for a period of 15 months. Eligible workers pay 35% of their premium to their former employers and the employer applies for a credit of 65% on their payroll tax return. See more information on this topic at the IRS website.