Yearend Tax Traps: Fringe Benefit Reporting and 1099’s

Fringe Benefits: The IRS requires reporting of certain fringe benefits as income to employees on their W-2. These include 1) personal use of company vehicles; 2) group life insurance in excess of $50,000; 3) expense allowances for which employee has not provided supporting documentation; 4) country club dues; etc. Most of are well aware that these type items represent taxable compensation to the employee; however, there is another danger in failing to report these items. The “excess benefit” rules include a safe harbor for items contemporaneously reported as compensation to the employee. Therefore, failing to report these items as compensation could result in these items being automatically classified as “excess benefits”, subject to the excise tax penalty. By reporting these amounts as compensation, the organization can normally avoid the automatic classification as an excess benefit transaction. (The rules for excess benefits are complex, and other factors must be considered).
1099’s for Independent Contractors: The IRS also requires the organization to submit a 1099 for all independent contractors who were paid $600 or more for services. Second only to employee payroll tox errors, failure to provide 1099’s is probably the most common error addressed by the IRS in audits of nonprofit organizations. The burden for providing the 1099 rests solely on the organization. Unlike employees, who expect payroll tax withholdings, independent contractors only expect to be paid. It is often difficult for the organization to obtain their Social Security number; and, unlike payroll records which are normally maintained regularly, it is time consuming to search through payment records to summarize the amount s paid. The IRS will assess penalties for failure to file 1099’s.