Presentation on theme: "COMPENSATION & BENEFITS Is it all Taxable & Income?"— Presentation transcript:
1 COMPENSATION & BENEFITS Is it all Taxable & Income? Green Mountain Payroll ConferencePresented By:DanielDycus, CPP
2 Outline Bicycle Commuting Definitions Life Fair Market Value (FMV) Group Term Life (GTL)Dependent GTLWhole LifeMoving / RelocationEducational AssistanceAdoption AssistancePrizes & AwardsAccountable vs. Non- Accountable PlanMeals & LodgingDefinitionsFair Market Value (FMV)Imputed IncomeNon-Taxable Comp & BenefitsTaxable Comp & BenefitsFringe BenefitsCompany VehiclesAnnual Lease MethodCents per mileCommuting Valuation Method
3 Outline Advances and Overpayments Back Pay Bonuses Commissions Dependent CareGrossing UpGiftsGolden ParachutesGuaranteed PaymentsJury DutyLeave SharingLoansMilitary PaySeverance or Dismissal PayStocks & Stock OptionsTipsUniform AllowanceVacation PayWithholding – Payments after DeathWithholding & Reporting Rules
4 DefinitionsWages: Any accession to wealth provided by the employer for services performed is considered wages and is subject to taxation.Fringe Benefits: IRS and the IRC (Internal Revenue Code) has not definitively defined Fringe Benefits.Fair Market Value: 3rd party value minus any after tax contributions and amount excludable by lawBenefit Amount = FMV – (EE paid Amt+ Amt Excludable by law)
5 Definitions Continued Imputed Income: fringe value added to gross pay that results in additional taxes, thus lessening the net pay.Highly Compensated Employee (HCE): A 5% owner of stock or capitol at any time in the current or preceding year. OR An employee who received more than $110,000 in compensation during the preceding year (indexed annually)
6 Fair Market ValueNon-cash items must be stated as “Fair Market Value”– FMVAmount an employee would reasonably pay an unrelated third partyEmployees perceived value of the benefit is not relevantAmount the employer paid for the benefit is not a determining factorStreet Value = What it would cost anyone to purchase off the street
7 FMV CalculationEmployer Pays for parking space adjacent to the employer’s businessMonthly employer cost is $350. Same as any renterEmployee pays $25 per month for the spaceIRC allows $230 per month excludable from income.How much is taxable to the employee?Space $350 per month$25 Employee contribution$230 Qualified amount$255 Qualified and Employee contribution$350 – 255 = $95 Taxable
8 Imputed IncomeImputing Income should be done as frequently as possibleNo less than annuallyBy December 31Taxes are reported and paid at time of imputingTaxes must be collected from the employee or paid by employer on their behalfif ER pays it on the EE’s behalf it can be recorded as an AR entry and must be repaid by April 1 of the following yearIf the EE does not repay, the taxes the ER has paid are now taxable income and have to be grossed up
10 Non-Taxable Comp. & Benefits Dependent Careup to $5000Disability Benefitsattributable to EE contributionsEducational Asst.Job related – no limitNon-Job related up to $5250 under accountable planGTLup to $50,000Company vehiclebusiness useMoving ExpensesqualifiedDe Minimus FringesNo Additional Cost FringesHealth Savings AccountsLong Term Care
11 Non-Taxable Comp. & Benefits Premium Only PlanshealthdentaletcWorking Condition FringeCommuter Feesunder $120Parkingunder $230Accountable Business Expense
12 Taxable Comp & Benefits WagesovertimetipsBonusesBack-pay AwardsSeveranceGifts, Prizes & AwardsExceptions – Years of Service & Safety AwardsLegal ServicesCommuter Feesover $120Parkingover $230Non-Accountable ReimbursementDependent Careover $5000Sick pay & Disabilityattributable to ER contributions
13 Taxable Comp & Benefits Educational Assistance – not job relatednot an accountable planover $5250GTLover $50,000Company vehiclepersonal useNon Qualified Moving ExpensesCommissionsNon-Cash Fringesunless excluded by IRC
14 Fringe BenefitsFocus is on exceptions and complications to compensation that is nontaxable or partially taxableMost fringe benefits are generally taxable for FIT, SS, MEDRemember ALL compensation is considered taxable unless it can be specifically excluded according to the IRS.
15 Fringe Benefits / Non-Reportable IRC Section 132 Benefitsgenerally not reported on the employees Form W-2Section 132 Benefits include:De minimis Fringe Benefitsminimal or occasional shows of gratitudeOccasional use of photocopiershow ticketssupper money while working overtimeCash, gift cards, gift certificates are always taxableSupper money – not on a regular basis
16 Fringe Benefits / Non-Reportable No Additional Cost ServicesProvided to all employeesBenefit has to be in the line of business they work inA product or services provided regularly to customersMust not be discriminatory towards highly compensated employeesNo substantial additional costStay in hotel when there is availability . Free hotel rooms are no additional cost service, even though he receives housekeeping services incidental to the roomLine of business can extend of they have a sister relationship - Airline owns hotels – can get discounted rooms as they own both. The parent companies consider it sister and offers benefits to all. Benefits have to extend both directions
17 Fringe Benefits / Non-Reportable Qualified Employee DiscountsMust be offered to customers in the ordinary course of the employers businessDiscount is not greater than the gross profit of the normal priceFormula Used: Total Sales – COGS / Total SalesThe discount on services is not greater than 20% of the retail priceMust be available to all EE not only HCE or becomes taxable incomeFORMULA USED: (Total sales – COGS) / total salesEXAMPLE: A Widget costs $200 retail and costs $175 to makeThe Gross Profit on this item is 200 – 175 = $25The Discount amount on this item cannot exceed($200 - $175) / $200 = 12.5%
18 Fringe Benefits / Non-Reportable Working Condition Fringes-Work related items provided by employer that if employee paid could be written off as business expense on their individual tax returnsThe employee’s use must relate to the employer’s business or tradeThe employer must maintain substantiation records and if the payment is involves cash excess must be returned within a reasonable period of time
19 Fringe Benefits / Non-Reportable Working Condition Fringes-ExamplesBusiness use of a company car or planeDues and membership fees for professional organizationsEmployee’s subscriptions to business periodicalsNot considered a working condition fringeTax Preparation
20 Fringe Benefits / Non-Reportable Athletic FacilitiesMust be on premisesOperated by the employer through its employees or another entitySubstantially all use of the facility is by:EmployeesTheir SpousesTheir Dependent Children
21 Fringe Benefits / Non-Reportable Employer Provided Retirement AdviceEmployer must maintain a retirement planExamples401(k)403(b)Simplified Employee Pension (SEP)SIMPLE457 Plans are not included in this benefit
22 Fringe Benefits / Non-Reportable Benefit can includeRetirement planning advice or informationCan be outside the plan itselfRetirement income planningBenefit does not includeTax preparationAccounting or brokerage servicesThis benefit cannot be discriminatory
23 Fringe Benefits / Non-Reportable Qualified Transportation FringesFor employees onlySome transportation choices can be excluded up to the limitsExamplesTransit PassesParking“Employee” does not include partners, independent contractors, or 2% shareholders of an S corporation.If cash is received for the fringe benefit, it is always taxable.
24 Fringe Benefits / Non-Reportable Excluded from incomeSmart CardsIf the fare media value stored on the card is useable only as fare media for the applicable transit system and the amount is within the limit.Terminal Restricted Debit CardsA terminal restricted debit card qualifies as a transit system voucher if it can be used only at a merchant terminal at points of sale where only fare media for the applicable transit system can be purchased and the amount is within the limits.MCC – Restricted Debit CardsThis card is generally considered taxable unless very specific criteria are met.
25 Fringe Benefits / Non-Reportable Vanpool - $ monthly exclusionProvided by employerCommuter highway vehicle with at least six seatsMinimum of 80% of mileage must be for commuting from a residence to workMust be at least 50% occupiedTransit Pass - $ monthly exclusionOn mass transit-not necessarily public ownedProvided by any person in the business of transportationCannot be cash. . . Must be passes, vouchers that are readily available to employeesQualified Parking - $ monthly exclusionFMV = amount of an “at arms-length” transaction for parking on or near premises or parking space near commuter transitCan be discriminatory towards Highly Compensated Employees
26 Fringe Benefits / Non-Reportable Bicycle Commuting Reimbursement ($20 per month)Can be used for:Purchase of bicycleRepair or improvementStorageExpenses are considered reasonable as long as the bicycle is used regularly to transport the employee from home to work
27 Company Vehicles Can be both Taxable and Nontaxable Personal Use – TaxableBusiness Use – NontaxableRequirement for proper Accounting for taxationBusiness miles drivenDate of tripPurpose of tripExpenses incurred
28 Company Vehicles Reporting Requirements for Personal Usage Federal tax is optional- but if not withheld the employee must be notified by January 31 or 30 days after the vehicle is assignedSS/MED must be withheld, if employee terminates prior to posting, employer becomes responsible for both employee and employer withholdingEE portion must be grossed up
29 Company Vehicles Must be reported on the W2 Must be reported at least once a year– more frequently is best practiceFringe provided in November and December may be reported in following year.This means that if the expense was incurred in Nov or Dec 2010 you can report it when you do the 2011 Form W2’s.2929
30 Company Vehicles Automobile Salesperson Exclusion Employer must have a written plan/policyProhibits use outside of normal business hours other than by full time salespeopleProhibits use for personal vacation tripsProhibits use outside of the sales areaProhibits storage of personal possessions in the vehicleLimits total use (by mileage) of the vehicle outside of normal working hours to commuting between home and work plus an additional 10 miles or less each day.
31 Value of the Demonstration Vehicle Company VehiclesSimplified method for partial exclusionSalesperson meets all requirements with the exception of the 10 mile rule.Employer can use this method for taxation.The employer must have a written policy that prohibits the personal use and prohibits the storage of personal property.The ER must reasonably believe that the automobile salesperson has complied with the policyThe employer must impute (at least monthly) the appropriate amount from the table below and maintain substantiating records.Value of the Demonstration VehicleDailyInclusion Amount0 -$14,999$3$15,000 - $29,999$6$30,000 - $44,999$9$45,000 - $59,999$13$60,000 - $74,999$17$75,000 and above$21
32 Company Vehicles Accounting for Vehicle Use Valuation Method General valuation method or 3 safe harbor methods may be usedGeneral ValuationFMV of the vehicle if purchased or leased in the geographical area.Once a safe harbor is used it must be carried through as the method as long as the employee has the vehicle.
33 Company Vehicles Safe Harbor Method 1 – Annual Lease Method Amount as determined in the annual lease charts is accessed for comparable auto and the amount is multiplied by the percentage of personal use for the vehicleLease amounts over $59,999 are equal to 25% of the FMV plus $500Company provided fuel adds .055 cents per mile to imputed amountSame driver can only hold lease value for 4 yearsNew driver allows for recalculating the value
34 Annual Lease Method Steps Step 1. Find the cars fair market valueStep 2. Use the table to find the Annual Lease Value (ALV)Step 3. Divide the personal miles driven by the total miles drivenStep 4. Multiply the ALV by the percentage of personal miles driven.This is what is to be imputed into income.Car issued less than one year, but more than 30 daysYou must prorate the ALVFormula = ALV * number of days driven / 365 days
35 Annual Lease Value Calculation Employer has been issued an employer provided carEmployee drive the car for the entire yearEmployee uses the car for both personal and business useDuring the year, the employee drive the car a total of 27,950 miles17,830 were business10,120 were personalThe cars FMV is $14,900
36 Annual Lease Value Calculation The FMV of the car = $14,900Annual Lease Value from the ALV Table = $4,100FormulaPersonal Miles / Total Miles = % of personal use10,120 Miles / 27,950 Miles = .36 or 36%36% of the miles were personalFMV Table * % of Personal Use = Imputed Income4,100 ALV * 36% Personal Use = $1,476.00
37 Company Vehicles Safe Harbor Method 2 – Cents Per Mile Method 51 Cents per mile (Employer pays for gas) – Jan 1 – Jun 3055 Cents per mile (Employer pays for gas) – Effective July 149.5 Cents per mile (Employee pays for gas) – Effective July 1You can deduct up to 5.5 cents for employee paid gasQualificationsEmployer must expect vehicle to be used by the employee throughout the year for businessVehicle must be driven at least 10,000 miles annually, including personal use and used primarily by employees
38 Company Vehicles Vehicle FMV Limits Vehicle Placed in Service 2010 Under $15,300 from Blue BookTruck or Van Place in Service 2010Under $16,000 value from Blue Book
39 Cents Per Mile Calculation Employee is issued and employer provided carIssued for the entire yearEmployer paid for the gasEmployee uses the car for both personal and business useEmployee drive the car 17,945 miles11,945 miles for business6,000 miles for personalThe FMV of the car is $14,000
40 Cents Per Mile Calculation FMV is below the limit of $15,300Miles drive were above the minimum of 10,000Employer paid for the gasUse the rate of .55 Cents per mile (Employer pays gas)Use the rate of 49.5 Cents per mile (Employee pays for gas)You can deduct up to 5.5 cents for employee paid gasFormulaPersonal Miles * Rate = Imputed Income6,000 miles * .55 cents = $3,30.00Gas Reduction6,000 miles * .495 cents = $2,970.00
41 Company Vehicles Safe Harbor Method 3 – Commuting Valuation Method Include $1.50 per one way commute - $3.00 round trip if personal use of the company vehicle is:Not by a controlled employeeCorporate Officer earning at least $95,000 in 2011A DirectorEarns at least 195,000 in 2011Is a 1% ownerORNot a highly compensated employee5% during the year or preceding yearGreater than $110,000 in pay during the preceding year
42 Company VehiclesRestricted for usage between work & home – no personal use allowedA written policy is requiredAn employee who commutes in company vehicle due to non- compensatory business reasonsCar pool with company car provides each passenger with the $3.00 round trip amount
43 Commuting Valuation Calculation Employee is issued a company vehicleEmployee uses it for business purposes only, except for driving home each day.Employee drives 16,000 mile during the yearThe card FMV is $14,000.00Employee drive to and from work 260 days during the yearThe company has a specific policy that dictates the use of the vehicleThe employee is not a control employee
44 Commuting Valuation Calculation Employee is not a control employeeThe vehicle is covered under a written policyVehicle is only driven for business useThe Commuting Valuation method can be useFormulaDays Driven * Commute Value = Imputed Income260 round trip * 3.00 round trip = $780.00Without a written plan this method cannot be used
45 Group Term Life (GTL) GTL Greater than $50,000 is taxable income Over $50,000 is taxable for:Federal Income TaxExempt from withholdingTaxes paid on Federal return (Form 1040)Social Security & MedicareIf not withheld from the employee, the employer must payExempt from:Federal Unemployment Tax (FUTA)
46 Group Term Life (GTL) Must have the GTL Chart to calculate the value Show the monthly amount for $1,000 worth of coverageAmounts increase with ageAge is determined by the last day of the year (12/31)Imputed Income is the amount the employer pays above the excludable limit
47 GTL Calculation Determine the value of the excess GTL What is the total amount of coverageAmount excludable ($50,000)Amount of coverage - $50,000 = Taxable Monthly ValueTaxable Value – employee after tax contribution = Taxable Value of GTL per month.Pretax employee contributions do not reduce the taxable valueAfter tax contributions cannot reduce the taxable value below Zero.
48 GTL CalculationCompany offers GTL to it’s employees at 3 times their annual base salaryThe premium is paid partially by the employer and partially by the employeeThe employee premium is not part of a section 125 plan, therefore it is not pretaxThe employee portion is $5.00 per monthEmployee is 39 years old as of 12/31Annual salary $70,000
49 GTL Calculation Amount of coverage $70,000 * 3 = $210,000 Amount of coverage – excludable = Excess Coverage$210,000 - $50,000 = $160,000Excess Coverage / $1,000 (coverage per table = Factor$160,000 / 1000 = 160Get the cost per $1,000 from the tableMultiply the factor by the rate160 * .09 = $14.40 Benefit Value
50 GTL CalculationTake the benefit value and subtract the employee contribution$14.40 – $5.00 = $9.40$9.40 is the Taxable Value of the GTL per monthIf the employee deduction is pretax, then you do NOT subtract the employee contribution from the Taxable Value.This would make Taxable Value of GTL per month to be $14.40
51 Dependent Group Term Life Dependent GTL $2,000 or less is not taxableDependent GTL Greater than $2,000Entire amount is taxable incomeTaxable for Federal Income TaxTaxable for Social Security and Medicare withholdingIf not collected, employer must payExempt from Federal Unemployment Tax (FUTA)
52 Whole LifeIf the employee designates the beneficiary of the policy, it is taxableIf the employee pays for the insurance with after tax dollars, this is non taxableIf the employer is the sole beneficiary of the policy, it is not taxable
53 Moving / Relocation Qualified Moving Reimbursements (Non Reportable) Expense would be deductible by the employee if they had paid themselvesThe employee did not deduct the expense in a prior yearCertain rules apply:The distance from the new work place and residence must be at least 50 miles more than the distance from the old work place and residenceThe employee must be employed full time for a minimum of 39 weeks in the immediate 12 months, unless death, disability, employer benefited transfer, or discharge from duties, except for willful misconduct
54 Moving / RelocationDeductible expenses are excluded from income with reimbursed with no dollar limitExpenses incurred moving household goods and personal effectsExpenses incurred by the employee and family for travel from the old residence to the new residence.Lodging is includedMeals are not includedMileage Rate cannot exceed .19 per mile - Jan 1 – Jun 30Mileage Rate cannot exceed .235 per mile – Effective July 1anything above this amount is taxableRelocation – talk to the car and ask it to be more efficient - Little jokeIRS Announces 2011 Standard Mileage RatesIR , Dec. 3, 2010Corrected on Dec. 13, 2010, to reflect changes for 2011WASHINGTON — The Internal Revenue Service today issued the 2011 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:51 cents per mile for business miles driven19 cents per mile driven for medical or moving purposes14 cents per mile driven in service of charitable organizationsThe standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously. The IRS is requesting public comments on whether taxpayers should be allowed to use the business standard mileage rate in this circumstance.Beginning in 2011, a taxpayer may use the business standard mileage rate for vehicles used for hire, such as taxicabs.Also beginning in 2011, the standard mileage rates are announced in a separate notice, which also provides the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate and the maximum standard automobile cost for automobiles under a FAVR allowance. The IRS plans to discontinue publishing the standard mileage rate revenue procedure annually but will publish modifications as required.Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.Revenue Procedure and Notice contain additional details regarding the standard mileage rates.
55 Moving / RelocationReimbursements that are employer paid not meeting the exclusion are taxable incomeThey are reported on Form W-2Boxes 1,3,5 and state if applicableQualified expenses paid directly to a 3rd party are not reported on the Form W-2Qualified expenses paid directly to the EMPLOYEE report on the Form W-2 in Box 12, Code PRemember “P” = PackingQualified moving expenses do not report on Form 941Report on Form 940, Part 2, Lines 3 & 4P = Pain in the ass as relocation is a Pain
56 Relocation Calculation (1) Employee relocates from Washington DC to Napa CAMarch 2010Employee is still employed at year endThe move is qualifiedMet the 50 mile test39 week testEmployer paid the following expenses$10,500 Household goods move$1,200 Airfare$1,500 House hunting trip$1,000 Temporary living expenses$5,000 Home purchase expenses
57 Relocation Calculation (1) How much of the reimbursement is taxable? $7,500$10,500 Household goods moveQualified and therefore NOT TAXABLE$1,200 AirfareFinal move trip is qualified, therefore the airfare is NOT TAXABLE$1,500 House hunting tripNot qualified, therefore TAXABLE$1,000 Temporary living expenses$5,000 Home purchase expenses
58 Relocation Calculation (2) Employee transfers from Washington DC to Napa CAMarch 2010Employee is still employed at year endIt is 2787 miles to the new jobEmployer paid the following expenses$9,000 Household goods move$ Mileage to new homeReimbursed at .55 per mile / deductible .235$1,800 House hunting trip$250 meals$3,000 Home purchase expenses
59 Relocation Calculation (2) How much of this reimbursement is taxable?Employer paid the following expenses$9,000 Household goods moveQualified and therefore NOT TAXABLE$1, Mileage to new homeFinal move deductible rate is .235 per mile2787 miles * .235 = NOT TAXABLE$1, – $ = $877.90or TAXABLE= .315 * 2787 = $877.90
61 Educational Assistance Job related education is a working condition fringe if:The courses are not required to meet the minimum education requirementThe courses are not taken to qualify the EE for a promotion or transfer to a different type of workThe education is related to the employees current work and must help to improve or maintain knowledge.Graduate courses do not qualify
62 Educational Assistance Non Job Related EducationEGTRRA extended the income exclusion to be $5250 for non job-related coursesEAP (Education Assistance Program) must be in placeMust be for the employees benefitWritten PlanNo Discrimination AllowedNo more than 5% of the total assistance per year can go for owners owning more than 5% of stockCannot be part of a cafeteria planCan be tied to gradeSubstantiation required
63 Adoption Assistance Employer provided adoption assistance Written Plan can be non-taxable for Box 1Written PlanNo DiscriminationNo funding requiredNotification of employees of availabilityBenefit limited for owners (5% rule)Adoption of Eligible ChildUnder 18 – not emancipated or special needsCitizen of USIncome LimitationModified AGI < 185,210Phase Out from 182,210 – 225,210
64 Adoption AssistanceEmployer provided adoption assistance can be non-taxable for Box 1Dollar Limitation (NOT ANNUAL)2011 = $13,360 per eligible childQualified Expenses ONLYReasonable and necessary fees, court costs, attorneys fees, travel expenses,(including meals and lodging) while away from home, and other directly related expenses.Special needs children maximum applies regardless of qualification of expenses as long as the adoption is finalized.THEY DO NOT INCLUDE: Any expenses in violation of state or federal law, any surrogate arrangement, or any step-parent adoption.Form W-2 ReportingBoxes 3,5,4,6 and 12 with a “T”T=Toddler.02 Adoption Credit. For taxable years beginning in 2011, under § 36C(a)(3) thecredit allowed for an adoption of a child with special needs is $13,360. For taxableyears beginning in 2011, under § 36C(b)(1) the maximum credit allowed for otheradoptions is the amount of qualified adoption expenses up to $13,360. The availableadoption credit begins to phase out under § 36C(b)(2)(A) for taxpayers with modifiedadjusted gross income in excess of $185,210 and is completely phased out fortaxpayers with modified adjusted gross income of $225,210 or more. (See section 3.08of this revenue procedure for the adjusted items relating to adoption assistanceprograms.)
65 Prizes and Awards Generally included as taxable income ExceptionsService & SafetySafety /Service Awards Must Meet The Following Criteria:Cannot include cashMust be tangible and presented in a meaningful ceremony
66 Prizes and Awards Safety Length of Service 10% or less of all employeesCannot be given to Managers, clerical, administrative or professional employeesEmployee must be full time with at least one year of serviceLength of ServiceOnly given in 5 incrementsNot given in last 4 years
67 Prizes and Awards Qualified plans: Non-qualified plan WARNING!! All awards cost to employer MADE TO A SINGLE EMPLOYEE must be no more than $1600 in a calendar year, with cost of all individual awards being no more than $400Must be a written plan that does not favor HCE’sNon-qualified planCannot cost the employer more than $400 in a calendar yearWARNING!!If awards exceed limitations the entire amount becomes taxable
68 Accountable vs. NonAccountable Taxable vs. Non-Taxable Accountable plans MUST meet ALL of the following criteria:Reimbursements must have a business connectionThe employee must substantiate business expense by providing amount, time, place and business purpose of the expense within a reasonable amount of time after incurred.
69 Accountable vs. NonAccountable NonTax vs. Taxable Excess amounts not substantiated must be returned within a reasonable amount of time.Fixed – Date: 30 days = prior payment / 60 days from payment to substantiate / 120 days to return excessPeriodic Statement: Statements provided no less than quarterly – 120 days to respondIf one criteria is not met the plan is considered Non- AccountableBecomes a Taxable Fringe and is subject to FED, SS & Med (FICA) and FUTA.
70 Meals & Lodging Meals Meals Furnished with a charge Generally not taxableFurnished on premisesConvenience of employerIf furnished during non working hours – generally taxableMeals Furnished with a chargeDepends on if it is considered for convenience of employerIf a Choice – Discount is TaxableNo Choice – Discount is Non-taxable
71 Meals & Lodging Lodging Excluded if passes the following testEmployer’s Premises (i.e.: camp, foreign country)Employer’s convenienceCondition of EmploymentIf area of housing is available to the public it is considered taxable.Cash allowances are considered taxable unless they are considered reimbursements under a qualified accountable plan.
72 Advances / Overpayments Advances (prepaid wages) and overpayments must be taxed at constructive receiptRepaymentsFederalSame Year repayment reduces box 1Subsequent Years repayment does not reduce box 1Social Security & MedicareSame Year repayment reduces SS/Medicare wages and taxesRepayment is in a future year, it will not reduce the SS/Med Wages for the year of repaymentW2c may be required for the previous year in which the overpayment occurred.If you run through PR in same year, it will auto adjustSubsequent year, can’t run through payroll
73 Advances/Overpayments Social Security & MedicareRepayment taxes must be refunded to EE for the period the overpayment was made regardless of timingWritten Evidence is required (dates and amounts)Written Statement from EE must be obtained stating they will not seek repayment from IRS
74 Advance/Overpayments Repaid (1) Company hired employee in May 2010Monthly salary $3,000Sign on bonus $1,000Stipulations1 year of serviceRepaymentEmployee resigned in October 2010Employee repaid the net pay - $673.50
75 Advance/Overpayments Repaid (1) What employee income is affected by this repayment?Form W-2Box 1 - GrossBox 2 – Federal WithholdingBox 3 – Social Security WagesBox 4 - Social Security TaxesBox 5 – Medicare WagesBox 6 – Medicare TaxesWhat corrections did the employer have to make?Form 941c for Q2 2010Corrected 941 paymentsRecovered employee and employer Social Security and MedicareQ2 wages were actually over statedMany companies would do adjustment current which would mean no 941 adjustments
76 Advance/Overpayments Repaid (2) Company hired employee in May 2009Monthly salary $3,000Sign on bonus $1,000Stipulations2 years of serviceRepaymentEmployee resigned in April 2010Employee repaid the net pay of $ at resignation
77 Advance/Overpayments Repaid (2) What income is effected by the repayment?Company had to file corrected Form 941 for Q2 2009Recovered the employee and employer portions of social security ($124) and Medicare ($29).Employer portion of the federal income tax withholding must be requested from the employee ($250).Cannot be claimed by the company for prior years Federal Income Tax Withheld.
78 Advance/Overpayments Repaid (2) Employee can claim a credit from their personal tax return 2009Form W-2c filed to show a reduction in:Box 3 – Social Security Wages ($1,000)Box 4 – Social Security Taxes ($62)Box 5 – Medicare Wages ($1,000)Box 6 – Medicare Taxes ($14.50)
79 Back Pay Awards Generally Taxable IRC 104(a) Excludes Amended by the Small Business Protection ActExcludesPhysical injuryPhysical sicknessIncludes (Form 1099 MISC, box 3)Punitive (beyond damages for medical care)Emotional DistressQuestions: Call SSA
80 Bonuses Signing & Contract Cancellation Push Money Exception Taxable Constructive ReceiptPush Money ExceptionNOT TaxableVendor pays employee to push its productVendor then owes the employee a Form 1099this is taxable on the personal tax return
81 Commissions Taxable Exception Life Insurance Salesmen (statutory employee)Federal Income TaxableDo not have to withholdSocial Security & Medicare TaxableMust withholdNot FUTA taxable wagesif commission only
82 Dependent Care Assistance Qualified PlanNot taxable for FIT, SS/Med, FUTARULES:Written PlanCannot Discriminate (HCE < 25% of overall use)Cannot Exceed $5000 annuallyMust be necessaryChild must be under age 13 or cannot care for themselvesNotificationAnnual Statement by Jan 31st (W2 Box 10)Taxability for overages treated when incurred not paid
83 Dependent Care Assistance In HouseValue of Benefit Formula125% of direct Cost / # of dependents at capacity / # days open X # days used
84 Employer Paid Taxes (Grossing Up) Employer pays taxes on behalf of the employeeWhen a desired net payment is requiredFor PaymentFor Recordation OnlyFormula
85 Simple Gross Up Bonus $1,000.00, Year to Date Salary $5,000.00 State Supplemental Tax Rate 3%
86 Gross Up Crossing SS Limit Bonus $10,000.00, Year to Date Eligible Wages $104,000.00State Supplemental Tax Rate 3%
89 Golden Parachute Change in ownership (owner, officer or HCE) 3 times the salary (Average Salary)Excess = portion that exceeds the average for last 5 yearsALL subject to FIT, SS & Med (Box 1, 3 & 5)EXCESS subject to 20% excise and excess reported on W2 - Box 12 (K)K = Kite
91 Jury Duty Pay while away on Jury duty is taxable Difference pay while away on jury duty is taxable
92 Leave SharingCompensation for paid leave used from a “leave bank” is taxable to the person using the leaveDonating employee may not claim deduction or expense for donatingEmployees donating leave to a charity are taxed for the leave as wages. They may then be able to deduct the Charitable Donation on their personal income taxes.
93 LoansDifference between FMV interest and actual interest is taxable in loans > 10,000Not subject to FIT withholding but must be reported on W2Subject to SS, Med, FUTAIf the loan is forgiven then the entire amount becomes subject to FIT, SS, Med FUTA
94 Military Pay Supplemental pay Temporary assignment (taxable) – report on W2Active Duty (not-taxable) – report on 1099 MISC box 3Vacation or PTO accrued prior to duty is taxable as wages regardless of when it is paid.
96 Stocks & Stock Options Employer Stock Compensation Paid in lieu of compensationTaxable at FMV upon transfer completion without restrictions
97 Stocks & Stock Options Stock Options Incentive Stock Options (ISO) Fixed price for a period of timeQualified = no income tax, no income recognized until soldShareholder Approval10 year exercise requirementPrice must = FMV when grantedNot transferable before deathEmployee < 10% voting stockCannot sell < 2 years of grant or 1 year of exerciseMust exercise while employed or within 3 months of termNo more than $100,000 can be exercisable in any year
98 Stocks & Stock Options Employee Stock Purchase Plans (ESPP) ER stock is available at a discountQualified = no income tax, no income recognized until soldAvailable to all full-time EE (except HCE , PT & Temp)Discount < 15% of FMV when grantedif exercise period is under 27 monthIf longer then < 15% of FMV at exerciseEE < 5% voting stockCannot sell < 2 years of grant or 1 year of exerciseMust exercise while employed or within 3 months of termNo more than $25,000 can be exercisable in any yearWritten statement of ownership of stock transfer required
99 Stocks & Stock Options Non-Qualified Stock Options ER stock is available at a set price for a period of timeNon Qualified = income recognized at the time of exercise for amount difference between purchase price and FMVReported in W2 Boxes 1,3 & 5 and Box 12 (V)Withhold as supplemental pay
100 Tips EE must report to ER > $20 per month by 10th following Form 4070Electronic Tip ReportingMust be accurateMust document every time accessedHard copy for auditMust have all information (including signature) as Form 4070
101 Tips Withholding/Reporting FIT, SS/Med & FUTA Receipt is upon Form 4070 or if no report when customer payment is madeUnder withheld SS/Med must be reported on W2 Box 12 with codes “A” and “B”The ER must pay SS/Med even if the EE was not fully collectable
102 Tips Allocating Tips Food & Beverage with more than 10 Employees If reported is < 8% of Gross SalesDifference between amount withheld and 8% is allocated to EEReport on W2 Box 8 NOT 1, 3 or 5Also must be reported to IRS on Form 8027 by the last day February
105 Uniform Allowance Not wages if: Condition of EmploymentCannot be worn as street clothesAccounting and excess returns requiredAll other reasons are included in wages
106 Vacation Pay Taxable Paid cash in lieu of time off Included in regular pay, if time is takenPaid cash in lieu of time offtreat as supplemental
107 Wages Paid After DeathIf employee dies before cashing – reissue same to agentWages paid after death but same yearNO FIT (send 1099 MISC to estate)SS/Med and FUTA (add to W2 boxes 3 and 5)Wages paid after death in subsequent yearNO FIT, SS/Med and FUTASend 1099 MISC to recipient of wages
108 Withholding and Reporting Rules Cash FringesConstructive ReceiptNon- Cash FringeWeekly, Monthly, Quarterly or AnnuallyCan treat as regular wages or supplemental when imputingSpecial Accounting RuleNovember or DecemberReport in following yearCannot do this for Life Insurance or moving expense reimbursements
109 Items to Keep Close ByIRS Publication 15 – Circular E – Employer’s Tax GuideIRS Publication 15-B – Employers Tax Guide to Fringe BenefitsIRS Publication 521 – Moving ExpensesIRS Publication 531 – Reporting Tip IncomeIRS.GOVFAQsIRBIRCGOOGLE can be your best friendor any other search engine