Workers Compensation Insurance and North Carolina (NC)
Health insurance may be the hot topic right now, but employers should not forget about workers’ compensation insurance. The beginning of the year is a good time to get on track if your business has not been compliant in the past. From the NC Department of Commerce website, “The North Carolina Workers’ Compensation Act requires businesses which employ three or more employees, including those operating as corporations, sole proprietorships, limited liability companies and partnerships, obtain workers’ compensation insurance or qualify as self-insured employers for purposes of paying workers’ compensation benefits to their employees.”
A Chairman at the NC Department of Commerce has put in place an initiative to make sure NC employers carry workers’ compensation insurance. Over the last 18 months many businesses may have been confronted with an investigator inquiring about their insurance. These investigators are not only enforcing compliance, but they are imposing fines and misdemeanor charges for employers willingly not having coverage. Per the Raleigh News and Observer the NC Department of Commerce has collected “nearly $1 million in civil fines.”
They are able to detect these companies by state agencies starting to work together. We have seen increased examples of this in the tax world as well. The Secretary of State and counties are utilizing each other’s data to see if registered businesses with the Secretary of State have filed their county property tax listings. If not, the county is sending out notices to these businesses. The NC Department of Commerce is working to increase the data mining capabilities as soon as possible. The increased ability to collect data from various state agencies will result in more company visits in the upcoming years. Letting a worker’s compensation policy lapse is a good way to increase chances of those visits.
Lack of insurance not only can result in fines and charges for the employer, but it can be devastation for the employee as well. If employees are not properly insured they can face significant health costs when they go to get their medical bills paid while trying to recover from an injury. Typically their only recourse is to file a claim with the Industrial Commission or worse, go after their employer. This issue is perpetuated if the employee is misclassified as an independent contractor. The employee believes they are covered, but the independent contractor designation excludes the employer from providing coverage. We have been working to educate our clients on the need to properly classify their workers as employees or independent contractors. We should see misclassification of workers become a point of investigation in conjunction with the workers’ compensation investigations.
If you believe you may have a misclassification issue or need assistance finding a representative to provide workers’ compensation insurance, let us know.
1099 Forms and 1/31 Deadline
As we embark on the start of 2016, tax preparers are preparing for the start of busy season. With January, comes due dates for 1099’s and W-2’s. Most of the time, taxpayers do not realize that they need to prepare any 1099’s. Within the last few years we have seen the following questions appear on Schedule C’s, Schedule E’s, and business tax returns:
1.) Did you make any payments in 20XX that would require you to file Form(s) 1099?
2.) If “Yes,” did you or will you file required Forms 1099?
As paid preparers, we have to make sure that we answer these questions correctly, which means verifying with you, the taxpayer, whether or not you had any required 1099s to be filed. The penalty for not filing a 1099 ranges from $30 per 1099 to $100 per 1099, depending on when the forms are filed.
Do You Need to Prepare 1099’s?
If you have paid someone over $600 for services or for rent, then you most likely need to send them a 1099. However, if you paid a corporation or paid them via credit or debit card, then you are not required to send a 1099. Some corporations are still required to receive a 1099, such as attorneys. We advise all clients to have people who are providing services for them to fill out a W-9. This helps us determine if they need to receive a 1099 because they have to tell us what type of entity they are by checking a box. The following payments would require issuance of a 1099:
-Rent over $600 – reported on 1099-Misc
-Royalties over $10 – reported on 1099-Misc
-Other Income over $600 – reported on 1099-Misc
-Nonemployee Compensation over $600 (Independent Contractors) – reported on 1099-Misc
-Gross Proceeds Paid to an Attorney over $600 (this is reported in Box 14 of 1099-Misc – it typically applies if you paid out a settlement, any other legal services would be reported in Box 7 on 1099-Misc)
-Interest on Business Debt to Someone over $10 (excluding interest on an obligation issued by an individual) – reported on 1099-Int
-Dividends or other distributions to a company shareholder over $10 (most applicable to C Corporations) – reported on 1099-Div
What Do We Need to Prepare a 1099?
As mentioned previously, you should have anyone fill out a W-9 who will be receiving payment for any of the items listed above. On the W-9, they list their legal name, federal ID or social security number, address and type of entity. I can’t stress the importance of having the W-9 before you pay the person. If you pay somebody one time for $2,000 and do not have any of their information, and then in January you are not able to reach the person to get their information, you’re in trouble and potentially face penalties from the IRS for not submitting a complete 1099.
Please feel free to reach out to us if you have any questions regarding 1099’s.
NC Unemployment Rate Reduction and Tax Savings
A recent release by the NC Department of Employment Security Commission (NCESC) reports that our state’s unemployment trust fund reserve has reached $1 billion. This is the first time this has happened in over a decade! In fact, up until May of this year our state was in debt to the Federal government. From 2011–2014 North Carolina business paid $1 billion in penalties and interest due to that debt. Is there any good news? It is estimated since this debt is paid off and the unemployment reserve mark has been hit that employers will save more than $600 million in taxes during 2015-2016. Below is how this will be accomplished:
(1) Federal Unemployment Taxes – Up until 2015, NC employers did not receive the full Federal Unemployment Tax Act (FUTA) credit due to being in debt to the Federal government. On Federal Form 940, NC employers paid an additional 1.2% in unemployment tax on the Federal unemployment wage base. After reviewing several of our client’s Forms 940, this easily can equate to a $1,000+ per year tax savings for small to medium sized businesses. The change can be seen on the 2015 Form 940 draft forms showing NC as now a 0% payer for the credit reduction: https://www.irs.gov/pub/irs-dft/f940sa–dft.pdf
(2) State Unemployment Taxes – For 10 years employers have been paying a 20% state unemployment insurance tax surcharge. Per information reported by North Carolina News Network, this is set to be discontinued. Employers should review their 2016 unemployment tax rates for this change.
We recommend contacting your payroll provider for additional information on the above changes. This may be a tax savings that business owners were not aware of, but it is hopefully a permanent change that will produce yearly payroll tax savings.
Insolvency and Cancellation of Debt
Generally, if you are forgiven or discharged from debt in which you were personally liable, you are required to include the cancelled amount into income in the year in which it was cancelled. The company that is forgiving the debt will issue you a 1099-C showing this amount.
Keep in mind, if you default on a credit card, this process could take a couple of years before the company releases you of the debt. The correct thing to do upon receiving the 1099-C is amend the tax return for that year and pay the amount of taxes due.
There is an exception to the rule. If you were insolvent (your liabilities were more that your assets), you may be able to exclude this additional income on your federal tax return. Upon receiving the 1099-C, if you discover that you were indeed insolvent, you should still file the amended tax return and attach Form 982.
Keep in mind that state laws are typically not the same. They do not exclude this income regardless of your situation. The “income” will be added back to you state tax return and you will owe the taxes.
If you have questions, please let us know.
The federal government has been back up and running for a few weeks. However, we are still feeling some of the impacts. One of which we have previously mentioned- the delay of the start of the coming tax filing season.
A more noticeable and/or significant impact is a delay in the IRS processing correspondence. Under normal circumstances it is fairly typical for the IRS to send a letter, the taxpayer to respond, and the IRS to send back a response that we are processing your response. However, with the shutdown the IRS may not even know that they have received a response to a previous correspondence. It may still be sitting in a stack of correspondence somewhere. They can them come back with their more aggressive action based upon their belief that you have not responded to them and threaten to take collection action. The bottom line is don't be surprised if correspondence don't make a lot of sense. Also pay close attention to them and seek professional assistance where needed. CPA's deal with this stuff day to day.
By Adam Shay
CPA Wilmington, NC
A reminder from your Wrightsville Beach CPA.