2023 draft instructions released for Form 1042-S

2023 draft instructions released for Form 1042-S

The IRS has released a draft version of the 2023 instructions for Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding).

For those unaware, withholding agents file Form 1042-S to report amounts paid to foreign persons (e.g., salaries, interest, dividends, premiums, pensions, scholarships, and grants) from sources within the U.S. during the preceding calendar year that are subject to withholding. Copy A of Form 1042-S must be filed with the IRS even if:

  • No tax is withheld because the income was exempt from tax under a treaty or under the Internal Revenue Code, including the exemption for income effectively connected with conducting a trade or business in the United States.
  • The amount withheld was repaid to the recipient. This means that Form 1042-S should not be filed if the amount is required to be reported on Form W-2 or 1099.

The instructions have been updated to reflect requirements under IRS Codes 1446(a) and 1446(f) that apply beginning January 1, 2023. These requirements apply to brokers effecting transfers of interests in publicly traded partnerships (PTPs). In addition, two new income codes (57 and 58) and a new chapter 3 status code (39) have been added for new requirements, beginning in 2023.

Regardless if Form 1042-S is filed on paper or electronically, the form is due by March 15 of the following year. Additionally, Form 1042-S must be furnished to recipients of the income by March 15.

Note: Filers of 250 or more Forms 1042-S must file the forms electronically. However, the Taxpayer First Act of 2019 authorizes the Treasury and IRS to issue regulations that reduce the 250-return electronic filing requirement. The IRS has stated that until final regulations are issued, the threshold will remain at 250 returns.

Source: Thomson Reuters

2023 draft instructions released for Form 1042-S

IRS issues mock 2022 form for claiming the Small Employer Health Insurance Premium Credit

The IRS has issued a draft version of the 2022 Form 8941 (Credit for Small Employer Health Insurance Premiums). The draft 2022 instructions have not yet been released. Form 8941 is used by small businesses and tax-exempt organizations to calculate the small business health care tax credit when they file their 2022 income tax returns.

Background knowledge

The form was added by the 2010 Patient Protection and Affordable Care Act, which provides a sliding scale income tax credit to small employers with fewer than 25 employees. To qualify for the credit, an employer must pay at least 50% of the cost of health care coverage for its workers at the premium rate for an employee who has single coverage (as opposed to family coverage). Because the eligibility formula is based in part on the number of full-time equivalent employees (FTEs), not the number of employees, many businesses will qualify for the credit even if they employ more than 25 individual workers. In addition, the credit is applied against an employer’s income tax liability, rather than its employment tax liability. An employer may not reduce employment tax payments (i.e., withheld income tax, Social Security tax, and Medicare tax) during the year in anticipation of the credit.

The credit is computed on IRS Form 8941. Both small businesses and tax-exempt organizations will use the form to calculate the credit. Afterwards, small business will then include the amount of the credit as part of the general business credit on its income tax return.

Draft changes

One of the three requirements for a small employer to be eligible for the tax credit is the average annual wage paid per FTE. The draft notes that for 2022, the average annual wage paid per FTE must be less than $58,000 (increased from $56,000 in 2021). Line 3 of Form 8941 is where an eligible small employer should enter the average annual wages paid for the tax year (from Worksheet 3, line 3), which must be a multiple of $1,000.  

The draft also notes that if an eligible small employer had more than 10 FTEs and average annual wages of more than $27,000, the FTE and average annual wage limitations will separately reduce the employer’s credit. This may reduce the employer’s credit to zero even if the employer had fewer than 25 FTEs and average annual wages of less than $58,000.

Source: Thomson Reuters

2023 draft instructions released for Form 1042-S

IRS updates Determination Letter application forms to reflect electronic filing

In connection with the move to all-electronic filing of Form 5300 as of July 1, 2022, the IRS has updated related forms and instructions. Form 5300 is no longer available through the IRS forms and publications database; instead, filers are directed to the pay.gov website, where a search for “5300” will lead to a page that includes an option to preview the form. Updates to the form’s instructions include details about electronic filing such as limitations on uploaded attachments and a note that Form 8717 is not needed for submissions through the website. The updated Form 8717 instructions specify that this form should no longer be used for Form 5300 (or Form 5310, for which electronic filing has been required since August 1, 2021) unless an additional payment for an insufficient user fee is needed. The IRS’s About Form 5300 page has also been updated to reflect the electronic filing requirement.

EBIA Comment: Electronic filing of Form 5300 is now mandatory for all determination letter applications, as the brief transition period during which paper submissions were still accepted has ended.

Source: Thomson Reuters

2023 draft instructions released for Form 1042-S

IRS on track to release new 1099 filing platform in 2023

The IRS recently provided a June 2022 status update announcing that it is on track to launch the new 1099 filing portal in early January 2023.

Section 2102 of the Taxpayer First Act (TFA) requires the IRS to develop an internet portal by January 1, 2023 that will allow taxpayers to electronically file 1099 forms. The portal is to be modeled after the Social Security Administration’s (SSA’s) Business Services Online (BSO) system that allows employers to electronically file W-2 forms. The new website will provide taxpayers with IRS resources and guidance, and allow them to prepare, file and distribute 1099 forms, and create and maintain tax records.

While no details were released, the IRS has discussed the plans of the 1099 filing portal which includes retiring legacy systems, like FIRE system though no termination has been announced. The new system is expected to accept all 1099 forms, including Form 1099-NEC (Nonemployee Compensation) and will permit users to key in or upload information. The system will also be compatible with the Combined Federal/State Filing (CFSF) program.

Source: Thomson Reuters

2023 draft instructions released for Form 1042-S

Unused Qualified Parking Compensation Reductions Not Transferrable to Health FSA

The IRS has released an information letter responding to an inquiry from a qualified transportation plan participant whose employer decided to let him work from home permanently due to the COVID-19 pandemic. To avoid losing compensation reduction amounts he had previously set aside for parking, the participant asked whether his unused compensation reductions could be transferred to a health FSA under a cafeteria plan.

The letter explains that unused compensation reduction amounts under an employer’s qualified transportation plan can be carried over to subsequent periods under the plan and used for future commuting expenses, so long as the employee does not receive benefits that exceed the maximum excludable amount in any month. But cash refunds are not permitted, even to employees whose compensation reduction amounts exceed their need for qualified transportation fringe benefits. Furthermore, the Code prohibits cafeteria plans from offering qualified transportation fringe benefits, and IRS rules do not permit unused compensation reduction amounts under a qualified transportation plan to be transferred to a health FSA under a cafeteria plan. The letter also notes that COVID-19-related relief for FSAs gives employers the discretion to amend their cafeteria plans to permit midyear health FSA election changes for plan years ending in 2021.

EBIA Comment: The qualified transportation rules have proven sufficiently flexible to handle most situations resulting from the COVID-19 emergency. Most employers permit benefit election changes at least monthly, and plans can allow current participants to carry over unused balances indefinitely. Compensation reductions set aside for one qualified transportation benefit (e.g., parking) can even be used for a different transportation benefit (e.g., transit) if the plan permits and the maximum monthly benefit is not exceeded. But—as this participant’s request to transfer parking compensation reductions to a health FSA suggests—those options are not always sufficient. Because some risk of loss due to changing circumstances is unavoidable, employers should clearly articulate that risk to employees before they make compensation reduction elections.

Source: Thomson Reuters

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