FAQs for government entities regarding Miscellaneous Reporting Issues
These frequently asked questions and answers are provided for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided.
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A public agency obtains financing for low- income or first-time homebuyers to assist them in purchasing homes. The agency retains the services of an attorney to conduct closings on the properties. The agency issues one check to the attorney to be deposited in escrow. The amount of the check includes the proceeds of the loans as well as the closing fees for multiple properties. The closing costs include legal fees and other settlement expenses. The agency must issue a Form 1099 to the attorney. How should this be reported?
In general, IRC 6041 requires that legal fees paid are reportable in box 7 of Form 1099-MISC. IRC 6045 requires that gross proceeds paid to an attorney be reported in box 14 of that form.
In this situation, the agency hired the attorney and is obligated to pay the legal fees. If the amount of the fees is known and total $600 or more for the year, they should be reported to the attorney on a Form 1099-MISC as nonemployee compensation in Box 7.
If the amount of the legal fees in this situation is not known, then no part of the amount paid to the attorney is reportable in box 7. Instead, the entire amount paid to the attorney is reportable under IRC 6045(f) on Form 1099-MISC, box 14. This box is used for information reporting by any person engaged in a trade or business with respect to payments made to an attorney in connection with legal services. This requirement applies to the gross proceeds paid to the attorney, not just the amount that is fixed or determinable income to the attorney.
The gross amount paid to the attorney need not be reported under section 6045(f) if any portion of that payment is reportable to the attorney under section 6041 (or would be reportable if not for the $600 threshold exception) or 6051 (payments to employees).
Note that, the exception for reporting payments to a corporation does not apply to legal fees or gross proceeds paid to an attorney or law firm that is a corporation..
Are liquidated and punitive damages subject to FICA taxes?
The term "liquidated damages" means damages for which the amount has been ascertained, either in a judgment or in an agreement. Typically, when a specific sum has been expressly agreed to by two parties as the amount of damages to be recovered in case of breach of an agreement, the sum is referred to as "liquidated damages."
It is necessary to look at the origin of the claim to determine whether employment taxes apply. Generally, FICA taxes apply to a dismissal payment Punitive damages are awarded to punish or make an example of a defendant based on outrageous conduct. Punitive damages are awarded in addition to compensatory damages for actual monetary losses. Because of the nature of punitive damages, they will not be the equivalent of wages on account of employment and consequently are not subject to FICA taxes.
Section 104 of the Internal Revenue Code deals with the treatment of punitive damages. Section 104(a)(2) excludes from income only "damages (other than punitive damages) received on account of personal physical injuries or physical sickness." Therefore, punitive damages, even in connection with personal injuries, are not excludable from income. Subsection 104(c) provides a narrow exception to the rule of inclusion for punitive damages in a wrongful death action where state law provides the only damages that may be awarded are punitive damages. These rules apply generally to amounts received after August 20, 1996.
If liquidated damages are not subject to FICA taxes, is a payer required to provide a Form 1099 to an individual who receives a legal settlement?
In general, a payer of damages, or its insurer, is required by section 6041 to report on Form 1099 when it makes payments of $600 or more, as a result of a judgment or a settlement. Generally, no information reporting is required for payments that are not subject to income tax. Thus, for example, there would be no reporting requirement for a payment of damages exclusively for physical injuries. See Internal Revenue Code section 104(a)(2).
What about a legal settlement related to termination of an employee?
Settlements of suits in cases of employee termination arise from a variety of causes of action. The settlement could be for a breach of contract, a tort, or a violation of any one of a number of federal or state statutes such as the Age Discrimination in Employment Act or the Americans With Disabilities Act. All the facts must be considered; for instance, the complaint, the settlement document, a court's opinion, etc., in determining what the award is for. There is no simple answer to this question.
If the payments arose in connection with the employment relationship and that the amounts were based on salary and years of service, these are indications that the settlement amounts are wages for employment.
Wages are generally subject to FICA tax when they are actually or constructively paid. Taxable severance payments are subject to FICA tax in the year in which they are paid. The FICA tax rate and wage base are those in effect in the year of payment. FUTA tax and income tax withholding also apply.
An employee of a town was laid off. During the period when he was receiving severance pay, he died. The remaining severance pay is paid to his widow (the beneficiary) before the end of the calendar year when the employee died. How is the payment of the severance pay treated for purposes of income tax, FICA tax and information reporting?
Severance pay is typically wages subject to FICA tax because the employee fully earned the right to the severance pay before death. However, any payment made to a beneficiary or the estate of a former employee after the end of the calendar year when the employee died is exempt from FICA.
Payments made to a beneficiary or the decedent's estate before the close of the taxable year in which the decedent dies are subject to FICA taxes. For income tax purposes, however, these amounts are taxable to the beneficiary or the estate. They should be reported to the beneficiary or the estate on Form 1099-MISC.
To ensure that the deceased employee receives proper social security and Medicare credit, severance pay earned by the deceased employee before his death should be reported on Form W-2 as social security wages and Medicare wages, on the decreased employee's final Form W-2. However, only the amounts paid to the decedent should appear as "Wages, tips, other compensation."
A municipality reimburses its retirees for the cost of Medicare B premiums. Is this a taxable fringe benefit?
Section 106 of the Code excludes from gross income employer-provided insurance coverage under an accident or health plan. Retirees are treated like employees for this purpose.
Reimbursement for the cost of Medicare B premiums can be excluded from a retiree's income. The reimbursements have to be handled so as to ensure that they are for actual premiums paid. The employer can reimburse the employee after receiving proof of prior payment of the premiums by the employee. It can also issue the employee a check payable directly to Medicare. The Medicare B premium reimbursements in this case would not be a taxable fringe benefit.
A school district has no health insurance plan. It gives employees cash from accounts payable to pay for their own health insurance. Is this benefit taxable and subject to FICA?
Generally, any plan that provides for payment of health insurance or medical expenses of employees is an excludable benefit under sections 105 or 106. However, cash given to employees in lieu of health insurance is taxable and should be reported as income and FICA wages on Form W-2. If an employer issues a check to an employee to pay for health insurance without requiring proof of payment of premiums, the amount is a taxable fringe benefit.
Is payment received for jury duty subject to income tax? What if jurors are paid for mileage from home to the courthouse?
Jury fees received as compensation for services are includible in gross income. See section 1.61-2(a)(1), Income Tax Regulations. However, amounts received separately as reimbursements or allowances for travel to and from the courthouse, meals, and lodging during jury duty are not included in gross income.
Some employers pay employees their regular wages on days that the employees perform jury duty. In exchange for these wages, the employer may require the employees to pay to the employer the jury fees that the employees receive as compensation for jury service. If an employee must pay these jury fees to his or her employer, the employee may claim an above-the-line deduction on Form 1040 for the amount of the fees paid to the employer.