1099-MISC tips

Below are some tips on 1099-MISC forms from the instructors of our recent webinar on that topic -

• According to the IRS, payments made with credits cards do not have to be reported on the Form 1099-Misc.

• Forms 1099-Misc can be filed electronically no matter the number processed. If 250 or more are processed, then they are required to be filed electronically.

• Payments made to attorneys should be included on the Form 1099-Misc. Payments are reported in Box 7 or Box 14 depending on the type of payment.  Box 7 would include professional services fees paid. Box 14 would include payments made in connection with a legal settlement.

• Box 6, Medical and Healthcare Payments should include payments of $600 or more made to physicians, hospitals or other vendors for medical healthcare services. This would include charges for physicals, drug testing etc.   If you are only purchasing supplies and no service is provided, do not issue Form 1099- Misc. If supplies are provided as a part of a service (i.e. injection, drugs etc.) then include the total for supplies and services in Box 6. Payments to pharmacies for prescription drugs or insurance companies for premiums for insurance coverage does not have to be reported on the Form 1099-Misc.

Legal and Tax Advice Disclaimer:

The information presented above does not constitute legal advice or tax advice. The authors and Heinfeld, Meech & Co., P.C. make no claims about its accuracy, completeness, or currency of information presented, including any external references provided.  The authors are not acting as your tax consultant or attorney.  Legal rules and tax rules change frequently, therefore, we cannot guarantee that any information is accurate or up to date.
The information presented in this webinar is not intended to be used for the purpose of state or federal tax penalty protection.  The law varies widely from jurisdiction to jurisdiction, and it is subject to varying interpretation. Legal advice, including tax advice, must always be tailored to your circumstances, and no content of this presentation should be viewed as a substitute for the advice of a competent attorney.  Please consult your legal counsel for advice pertaining to your specific organization.

Payroll Tips

Our annual Payroll Basics workshop took place last week.  Below are some takeaway items provided by the instructors:

1. Ensure you properly classify individuals as Employees or Independent Contractors.  This can be done by utilizing the IRS tests that include Behavioral Control, Financial Control and Relationship of Parties.  Improperly classifying an individual as an Independent Contractor when they should be classified as an employee will result in the employer being responsible for back taxes, penalties and interest.
2. Create a timeline of all the important deadlines for employee related documents such as I-9, W-4, A-4 and E-Verify.  Additionally, monitor to ensure all 941s, A1-QTRs, W-2s and 1099s are filed timely. There are stiff penalties if these forms are not completed in entirety and timely.
3. Verify the exempt vs. non-exempt status of your employees to ensure they are properly classified.  Be sure you are following all FLSA rules associated with the docking of non-exempt and exempt employees wages.
4. Review IRS Publication 15-B to ensure you are taxing all appropriate fringe benefits.
5. Conduct an internal review on the segregation of duties within your payroll and human resources department.  To protect your organization, ensure one person is not able to set up an employee, establish a rate of pay, process their bi-weekly pay, and issue a paycheck.
6. Arizona Minimum Wage increases to $7.80 effective January 1, 2013

Enhancing Your Grant Reporting

by Jill A. Shaw, CPA, Partner

    The failure by a nonprofit organization to manage grant funds wisely and fulfill its obligation to donors can lead to negative publicity, litigation, criminal prosecution, and the revocation of grant funding or tax-exempt status.  It is definitely exciting when you get a sizable grant and can deposit a big sum in the bank.  However if the grantor has placed any conditions on the grant, such as the period during which you can spend it or the kinds of things you can spend it on, you will need to be able to track the satisfaction of those restrictions.  Likewise, it’s a sad day indeed when an executive director realizes that, although there’s plenty of money in the bank, most of it is restricted, and the unrestricted fund is actually in debt.  Don’t let this happen to your nonprofit organization; build procedures into your accounting that will enable accurate reporting on restricted grant funds. 

Here are a few tips to help keep your nonprofit organization out of trouble:

• Familiarize yourself with grant award documents so you know what types of expenses are allowable.
• Identify and understand each donor’s reporting requirements.
• Create a funding grid that details how the grant funds received have been allocated and spent. A funding grid assists you in tracking how much of your budget is funded and by whom. It contains columns that identify the various donors and compares the funds received against your master budget and the actual costs incurred.
• Purchase suitable financial-management software that will allow you to properly record grant activity in a way that is meaningful.
• Adopt a detailed coding system that can categorize expenses to a cost type (i.e., salaries) as well as to a specific cost center (i.e., behavioral health program).
• Set up your chart of accounts in such a way that you can map from your own account codes to the grantor’s codes if they are different.
• Document payroll allocations as evidence of time spent on individual programs. 

    There are substantial advantages of properly managing grant awards.  Proper processes can help you to make optimum use of restricted funds.  They can help to identify instances of duplicate funding (activities that are funded simultaneously by more than one donor).  An accurate method would also help identify gaps in project funding (especially overhead costs) or help you make decisions with the allocation of unrestricted funds.  After the appropriate analysis, you may find that your organization needs to go back to a donor to see if there is any flexibility in the restricted budgets. 

    In addition, good systems will allow for stress-free reporting according to the donor’s specified format.  Naturally donors want to support organizations that can prove their donation was spent as promised.  Accurate reporting of grant funds instills confidence in donors, which could lead to future funding!

AICPA Makes Recommendations to IRS for 990 Tax Form

The American Institute of Certified Public Accountants has issued a list of recommendations to the Internal Revenue Service on improving and simplifying the current Forms 990 and 990-EZ, the informational tax returns utilized for not-for-profit organizations.   

To download the complete list of recommendations, click here.

Verify Your Payroll Deductions

Recent legislation has impacted paycheck deductions for political purposes after October 1, 2011. 

Under A.R.S. §23-361.02, public or private employees are now prohibited from making deductions for political purposes from an employee’s paycheck unless the employee gives written or electronic authorization on a yearly basis. 

Violation of this law can result in at least a $10,000 civil penalty for each violation made by the employer.  

For the full A.R.S., visit: www.azleg.gov/FormatDocument.asp?inDoc=/ars/23/00361-02.htm&Title=23&DocType=ARS  

Is Your Nonprofit Organization a Voluntary Health & Welfare Organization?

By Kimberly A. Robinson, CPA, Partner

What is a voluntary health and welfare organization?

    Voluntary health and welfare organizations (VHWO’s) are those not-for-profit organizations that derive their revenue primarily from voluntary contributions from the general public to be used for general or specific purposes connected with health, welfare, or community services. There are two separate parts to this definition: 
1.  the organization must derive its revenue from voluntary contributions from the general public (which does not include governmental entities), and
2.  the organization must be involved with health, welfare, or community services.

    Many organizations fit the second part of this definition, but receive a substantial portion of their revenues from sources other than public contributions. For example, an opera company would not be a VHWO even though it exists for the common good, since its primary source of income would be box office receipts.  Likewise, a community organization like the YMCA would be excluded because it normally receives most of its revenues from dues and program fees.  On the other hand, a museum would be excluded even if most of its revenue came from contributions, since its activities are essentially educational and not focused on the areas of health and welfare.

    Some additional examples of VHWO’s are: Salvation Army, Red Cross, Goodwill (local chapters), United Way, Boy Scouts, Girl Scouts, Boys & Girls Clubs, and nonprofit organizations whose purpose is to find cures for diseases or to assist people diagnosed with diseases such as cancer, diabetes, heart disease or muscular dystrophy.

How does this impact my organization?

    FASB ASC 958 differentiates between voluntary health and welfare entities and other nonprofit entities.  For example, only VHWO’s are required to present a statement of functional expenses as a basic financial statement.  Therefore, it is important to how your organization should be defined to know if this requirement applies to your financial statements.  But, as noted above, sometimes the distinction can be difficult to make.  If you are unsure, it is recommended to include a statement of functional expense as a basic financial statement.

Where can I find additional guidance?
    There is additional guidance available in a book titled Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations, Fourth Edition, 1998 (also known as the Black Book).  The Black Book’s objective is to attain uniform accounting and external financial reporting in compliance with GAAP by all voluntary health and welfare organizations.  The Black Book does not establish GAAP but rather explains existing authoritative literature and gives illustrations relevant to VHWO’s. 

    The Black Book expands on the definition and notes that voluntary contributions from the general public may include the following:
- Direct gifts from board members
- Private foundations
- Corporations
- Allocations of contributions that federated fund-raising organizations or affiliated organizations receive from the general public

    Finally, the Black Book states that an organization’s membership in, or affiliation with, the National Health Council, Inc., the National Human Services Assembly, or the United Way of America is usually an indicator that the organization should be identified as a VHWO.

Excess Benefit Transactions: Do You Have Any?

by Kimberly A. Robinson, CPA, Partner


What is an excess benefit transaction?
    This is a term used by the Internal Revenue Service (IRS) to describe a transaction between an applicable tax-exempt organization and individuals of authority in the tax-exempt organization where the organization pays more than they would in a regular arm’s length transaction. 
    To be more specific, the IRS names the individuals of authority in these cases as “disqualified persons.” They are defined as those persons who are in a position to exercise substantial influence over the affairs of a tax-exempt organization.  Individuals of authority could include voting members of the governing body, any individual who has the ultimate responsibility for implementing the decisions of the governing body, or any individual who supervises the management, administration, or operation of the tax-exempt organization.   In addition, the IRS definition extends to include the family members of the individuals of authority or any organizations in which individuals of authority (or their family members) have a major interest.  (These definitions can be found in the Code of Federal Regulation Title 26 Section 53.4958-3 and Title 26 Section 53.4958-4.)


How can our organization avoid excess benefit transactions?
    Your best bet to ensure that this type of transaction does not occur is to obtain at least 3 quotes prior to engaging in services provided by any disqualified person.  Defensive recordkeeping is truly an organization’s best friend and will assist you if a transaction is called into question by the IRS.

What will happen if an excess benefit transaction occurs?
    If the IRS determines that an excess benefit transaction has occurred, there are several potential consequences.  The IRS may require the disqualified person who received the benefit to repay the “excess” to the organization.  Your organization may also be required to file a corrected 990 and/or make a disclosure to your auditors for inclusion in the audited financial statements.  The goal of these IRS penalties is generally to punish those responsible for creating private inurement without punishing the organization as a whole.

Health Care Cost Reporting on Your Employees' W-2 Forms

by Tracy McLaughlin, CFE, Consulting Manager

    In a recent article, the Internal Revenue Service (IRS) provided new guidance on the information that employers are required to provide to employees relating to the health care costs that employers provide through group health care.

When will I be required to report this information on our W-2’s?
    The Patient Protection and Affordable Care Act, P.L. 111-148, requires employers to report the “aggregate reportable cost” of “applicable employer-sponsored coverage” under an employer-sponsored group health plan on Form W-2, Wage and Tax Statement. To give employers more time to update their payroll systems, the IRS made this requirement optional for all employers for 2011 Forms W-2 due in 2012 (Notice 2010-69). Moreover, the IRS has provided further relief for small employers filing fewer than 250 Forms W-2 by making the reporting requirement optional for them for 2012 Forms W-2 (Notice 2011-28). 
    So, if you issue 250 W-2’s or more, currently you will be required to include the additional health care cost information on the 2012 forms furnished in January 2013.  However, if you issue less than 250 forms, you will be required to include the additional information on the 2013 forms. 

What information needs to be included as part of the health care cost reporting?
    The aggregate reportable cost generally includes the portion of the cost paid by the employer and the portion paid by the employee.  Both portions should be included, regardless of whether the employee paid through pretax or after-tax contributions.  However, contribution amounts made to Archer MSAs and HSAs are excluded. 
    Salary reduction contributions to a health FSA are also generally excluded.  However, to the extent the amount of a health FSA exceeds the employee’s salary reduction contributions for the year, it is included in the aggregate reportable cost.

For the most current information: 
    While the information presented here discusses Notice 2011-28, be sure to review newer notices issued by the IRS online at www.irs.gov.

New Form 990 Released by IRS

The IRS recently posted its final version of the 2011 990 form, which is used by not-for-profit organizations.  Significant changes to this version of the 990 are outlined in the IRS instructions, available here: http://www.irs.gov/pub/irs-pdf/i990.pdf

A recent article published in the AICPA's Journal of Accountancy also summarized the significant changes on the form.  The article is available here: http://www.journalofaccountancy.com/Web/20125042.htm

Employer's Tax Guide for 2012

The IRS recently released their Employer's Tax Guide (Publication 15) for 2012.  It is available here: http://www.irs.gov/pub/irs-pdf/p15.pdf

Payroll Tax Cut Extention Includes Recapture Tax Provision for Higher Wage Earners

As you probably have heard, the reduced payroll tax rate was recently extended through February 2012.  (This continues the reduction of employees' Social Security tax withholding rate from 6.2% to 4.2% of wages paid through Feb. 29, 2012.)

However, the law also includes a "recapture" provision.  This new provision applies only to employees who receive more than the Social Security wage base for the two-month period.  Therefore, employees receiving more than $18,350 for January and February 2012 (calculated as two months of the 12-month amount of $110,100) will need to pay an additional amount equal to 2% of the wages received during the extension time.  This "recapture tax" will be considered an add-on to income tax liability for higher wage earners and will be due in 2013 when the employee files his/her 2012 income tax return.

Additional info on the tax cut and the recapture provision are discussed on the IRS website: http://www.irs.gov/newsroom/article/0,,id=251650,00.html