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COMPENSATION & BENEFITS Is it all Taxable & Income?

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Presentation on theme: "COMPENSATION & BENEFITS Is it all Taxable & Income?"— Presentation transcript:

1 COMPENSATION & BENEFITS Is it all Taxable & Income?
Green Mountain Payroll Conference Presented By: Daniel Dycus, CPP

2 Outline Bicycle Commuting Definitions Life Fair Market Value (FMV)
Group Term Life (GTL) Dependent GTL Whole Life Moving / Relocation Educational Assistance Adoption Assistance Prizes & Awards Accountable vs. Non- Accountable Plan Meals & Lodging Definitions Fair Market Value (FMV) Imputed Income Non-Taxable Comp & Benefits Taxable Comp & Benefits Fringe Benefits Company Vehicles Annual Lease Method Cents per mile Commuting Valuation Method

3 Outline Advances and Overpayments Back Pay Bonuses Commissions
Dependent Care Grossing Up Gifts Golden Parachutes Guaranteed Payments Jury Duty Leave Sharing Loans Military Pay Severance or Dismissal Pay Stocks & Stock Options Tips Uniform Allowance Vacation Pay Withholding – Payments after Death Withholding & Reporting Rules

4 Definitions Wages: 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 law Benefit 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 Value Non-cash items must be stated as “Fair Market Value”– FMV Amount an employee would reasonably pay an unrelated third party Employees perceived value of the benefit is not relevant Amount the employer paid for the benefit is not a determining factor Street Value = What it would cost anyone to purchase off the street

7 FMV Calculation Employer Pays for parking space adjacent to the employer’s business Monthly employer cost is $350. Same as any renter Employee pays $25 per month for the space IRC 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 Income Imputing Income should be done as frequently as possible No less than annually By December 31 Taxes are reported and paid at time of imputing Taxes must be collected from the employee or paid by employer on their behalf if 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 year If the EE does not repay, the taxes the ER has paid are now taxable income and have to be grossed up

9 Imputed Income Calculation

10 Non-Taxable Comp. & Benefits
Dependent Care up to $5000 Disability Benefits attributable to EE contributions Educational Asst. Job related – no limit Non-Job related up to $5250 under accountable plan GTL up to $50,000 Company vehicle business use Moving Expenses qualified De Minimus Fringes No Additional Cost Fringes Health Savings Accounts Long Term Care

11 Non-Taxable Comp. & Benefits
Premium Only Plans health dental etc Working Condition Fringe Commuter Fees under $120 Parking under $230 Accountable Business Expense

12 Taxable Comp & Benefits
Wages overtime tips Bonuses Back-pay Awards Severance Gifts, Prizes & Awards Exceptions – Years of Service & Safety Awards Legal Services Commuter Fees over $120 Parking over $230 Non-Accountable Reimbursement Dependent Care over $5000 Sick pay & Disability attributable to ER contributions

13 Taxable Comp & Benefits
Educational Assistance – not job related not an accountable plan over $5250 GTL over $50,000 Company vehicle personal use Non Qualified Moving Expenses Commissions Non-Cash Fringes unless excluded by IRC

14 Fringe Benefits Focus is on exceptions and complications to compensation that is nontaxable or partially taxable Most fringe benefits are generally taxable for FIT, SS, MED Remember ALL compensation is considered taxable unless it can be specifically excluded according to the IRS.

15 Fringe Benefits / Non-Reportable
IRC Section 132 Benefits generally not reported on the employees Form W-2 Section 132 Benefits include: De minimis Fringe Benefits minimal or occasional shows of gratitude Occasional use of photocopier show tickets supper money while working overtime Cash, gift cards, gift certificates are always taxable Supper money – not on a regular basis

16 Fringe Benefits / Non-Reportable
No Additional Cost Services Provided to all employees Benefit has to be in the line of business they work in A product or services provided regularly to customers Must not be discriminatory towards highly compensated employees No substantial additional cost Stay in hotel when there is availability . Free hotel rooms are no additional cost service, even though he receives housekeeping services incidental to the room Line 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 Discounts Must be offered to customers in the ordinary course of the employers business Discount is not greater than the gross profit of the normal price Formula Used: Total Sales – COGS / Total Sales The discount on services is not greater than 20% of the retail price Must be available to all EE not only HCE or becomes taxable income FORMULA USED: (Total sales – COGS) / total sales EXAMPLE: A Widget costs $200 retail and costs $175 to make The Gross Profit on this item is 200 – 175 = $25 The 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 returns The employee’s use must relate to the employer’s business or trade The 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- Examples Business use of a company car or plane Dues and membership fees for professional organizations Employee’s subscriptions to business periodicals Not considered a working condition fringe Tax Preparation

20 Fringe Benefits / Non-Reportable
Athletic Facilities Must be on premises Operated by the employer through its employees or another entity Substantially all use of the facility is by: Employees Their Spouses Their Dependent Children

21 Fringe Benefits / Non-Reportable
Employer Provided Retirement Advice Employer must maintain a retirement plan Examples 401(k) 403(b) Simplified Employee Pension (SEP) SIMPLE 457 Plans are not included in this benefit

22 Fringe Benefits / Non-Reportable
Benefit can include Retirement planning advice or information Can be outside the plan itself Retirement income planning Benefit does not include Tax preparation Accounting or brokerage services This benefit cannot be discriminatory

23 Fringe Benefits / Non-Reportable
Qualified Transportation Fringes For employees only Some transportation choices can be excluded up to the limits Examples Transit Passes Parking “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 income Smart Cards If 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 Cards A 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 Cards This card is generally considered taxable unless very specific criteria are met.

25 Fringe Benefits / Non-Reportable
Vanpool - $ monthly exclusion Provided by employer Commuter highway vehicle with at least six seats Minimum of 80% of mileage must be for commuting from a residence to work Must be at least 50% occupied Transit Pass - $ monthly exclusion On mass transit-not necessarily public owned Provided by any person in the business of transportation Cannot be cash. . . Must be passes, vouchers that are readily available to employees Qualified Parking - $ monthly exclusion FMV = amount of an “at arms-length” transaction for parking on or near premises or parking space near commuter transit Can be discriminatory towards Highly Compensated Employees

26 Fringe Benefits / Non-Reportable
Bicycle Commuting Reimbursement ($20 per month) Can be used for: Purchase of bicycle Repair or improvement Storage Expenses 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 – Taxable Business Use – Nontaxable Requirement for proper Accounting for taxation Business miles driven Date of trip Purpose of trip Expenses 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 assigned SS/MED must be withheld, if employee terminates prior to posting, employer becomes responsible for both employee and employer withholding EE 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 practice Fringe 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. 29 29

30 Company Vehicles Automobile Salesperson Exclusion
Employer must have a written plan/policy Prohibits use outside of normal business hours other than by full time salespeople Prohibits use for personal vacation trips Prohibits use outside of the sales area Prohibits storage of personal possessions in the vehicle Limits 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 Vehicles Simplified method for partial exclusion Salesperson 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 policy The employer must impute (at least monthly) the appropriate amount from the table below and maintain substantiating records. Value of the Demonstration Vehicle Daily Inclusion Amount 0 -$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 used General Valuation FMV 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 vehicle Lease amounts over $59,999 are equal to 25% of the FMV plus $500 Company provided fuel adds .055 cents per mile to imputed amount Same driver can only hold lease value for 4 years New driver allows for recalculating the value

34 Annual Lease Method Steps
Step 1. Find the cars fair market value Step 2. Use the table to find the Annual Lease Value (ALV) Step 3. Divide the personal miles driven by the total miles driven Step 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 days You must prorate the ALV Formula = ALV * number of days driven / 365 days

35 Annual Lease Value Calculation
Employer has been issued an employer provided car Employee drive the car for the entire year Employee uses the car for both personal and business use During the year, the employee drive the car a total of 27,950 miles 17,830 were business 10,120 were personal The cars FMV is $14,900

36 Annual Lease Value Calculation
The FMV of the car = $14,900 Annual Lease Value from the ALV Table = $4,100 Formula Personal Miles / Total Miles = % of personal use 10,120 Miles / 27,950 Miles = .36 or 36% 36% of the miles were personal FMV Table * % of Personal Use = Imputed Income 4,100 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 30 55 Cents per mile (Employer pays for gas) – Effective July 1 49.5 Cents per mile (Employee pays for gas) – Effective July 1 You can deduct up to 5.5 cents for employee paid gas Qualifications Employer must expect vehicle to be used by the employee throughout the year for business Vehicle 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 Book Truck or Van Place in Service 2010 Under $16,000 value from Blue Book

39 Cents Per Mile Calculation
Employee is issued and employer provided car Issued for the entire year Employer paid for the gas Employee uses the car for both personal and business use Employee drive the car 17,945 miles 11,945 miles for business 6,000 miles for personal The FMV of the car is $14,000

40 Cents Per Mile Calculation
FMV is below the limit of $15,300 Miles drive were above the minimum of 10,000 Employer paid for the gas Use 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 gas Formula Personal Miles * Rate = Imputed Income 6,000 miles * .55 cents = $3,30.00 Gas Reduction 6,000 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 employee Corporate Officer earning at least $95,000 in 2011 A Director Earns at least 195,000 in 2011 Is a 1% owner OR Not a highly compensated employee 5% during the year or preceding year Greater than $110,000 in pay during the preceding year

42 Company Vehicles Restricted for usage between work & home – no personal use allowed A written policy is required An employee who commutes in company vehicle due to non- compensatory business reasons Car pool with company car provides each passenger with the $3.00 round trip amount

43 Commuting Valuation Calculation
Employee is issued a company vehicle Employee uses it for business purposes only, except for driving home each day. Employee drives 16,000 mile during the year The card FMV is $14,000.00 Employee drive to and from work 260 days during the year The company has a specific policy that dictates the use of the vehicle The employee is not a control employee

44 Commuting Valuation Calculation
Employee is not a control employee The vehicle is covered under a written policy Vehicle is only driven for business use The Commuting Valuation method can be use Formula Days Driven * Commute Value = Imputed Income 260 round trip * 3.00 round trip = $780.00 Without 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 Tax Exempt from withholding Taxes paid on Federal return (Form 1040) Social Security & Medicare If not withheld from the employee, the employer must pay Exempt 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 coverage Amounts increase with age Age 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 coverage Amount excludable ($50,000) Amount of coverage - $50,000 = Taxable Monthly Value Taxable Value – employee after tax contribution = Taxable Value of GTL per month. Pretax employee contributions do not reduce the taxable value After tax contributions cannot reduce the taxable value below Zero.

48 GTL Calculation Company offers GTL to it’s employees at 3 times their annual base salary The premium is paid partially by the employer and partially by the employee The employee premium is not part of a section 125 plan, therefore it is not pretax The employee portion is $5.00 per month Employee is 39 years old as of 12/31 Annual salary $70,000

49 GTL Calculation Amount of coverage $70,000 * 3 = $210,000
Amount of coverage – excludable = Excess Coverage $210,000 - $50,000 = $160,000 Excess Coverage / $1,000 (coverage per table = Factor $160,000 / 1000 = 160 Get the cost per $1,000 from the table Multiply the factor by the rate 160 * .09 = $14.40 Benefit Value

50 GTL Calculation Take the benefit value and subtract the employee contribution $14.40 – $5.00 = $9.40 $9.40 is the Taxable Value of the GTL per month If 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 taxable Dependent GTL Greater than $2,000 Entire amount is taxable income Taxable for Federal Income Tax Taxable for Social Security and Medicare withholding If not collected, employer must pay Exempt from Federal Unemployment Tax (FUTA)

52 Whole Life If the employee designates the beneficiary of the policy, it is taxable If the employee pays for the insurance with after tax dollars, this is non taxable If 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 themselves The employee did not deduct the expense in a prior year Certain 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 residence The 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 / Relocation Deductible expenses are excluded from income with reimbursed with no dollar limit Expenses incurred moving household goods and personal effects Expenses incurred by the employee and family for travel from the old residence to the new residence. Lodging is included Meals are not included Mileage Rate cannot exceed .19 per mile - Jan 1 – Jun 30 Mileage Rate cannot exceed .235 per mile – Effective July 1 anything above this amount is taxable Relocation – talk to the car and ask it to be more efficient - Little joke IRS Announces 2011 Standard Mileage Rates IR , Dec. 3, 2010 Corrected on Dec. 13, 2010, to reflect changes for 2011 WASHINGTON — 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 driven 19 cents per mile driven for medical or moving purposes 14 cents per mile driven in service of charitable organizations The 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 / Relocation Reimbursements that are employer paid not meeting the exclusion are taxable income They are reported on Form W-2 Boxes 1,3,5 and state if applicable Qualified expenses paid directly to a 3rd party are not reported on the Form W-2 Qualified expenses paid directly to the EMPLOYEE report on the Form W-2 in Box 12, Code P Remember “P” = Packing Qualified moving expenses do not report on Form 941 Report on Form 940, Part 2, Lines 3 & 4 P = Pain in the ass as relocation is a Pain

56 Relocation Calculation (1)
Employee relocates from Washington DC to Napa CA March 2010 Employee is still employed at year end The move is qualified Met the 50 mile test 39 week test Employer 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 move Qualified and therefore NOT TAXABLE $1,200 Airfare Final move trip is qualified, therefore the airfare is NOT TAXABLE $1,500 House hunting trip Not qualified, therefore TAXABLE $1,000 Temporary living expenses $5,000 Home purchase expenses

58 Relocation Calculation (2)
Employee transfers from Washington DC to Napa CA March 2010 Employee is still employed at year end It is 2787 miles to the new job Employer paid the following expenses $9,000 Household goods move $ Mileage to new home Reimbursed 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 move Qualified and therefore NOT TAXABLE $1, Mileage to new home Final move deductible rate is .235 per mile 2787 miles * .235 = NOT TAXABLE $1, – $ = $877.90 or TAXABLE = .315 * 2787 = $877.90

60 Relocation Calculation (2)
$1,800 House hunting trip Not qualified, TAXABLE $250 meals $3,000 Home purchase expenses Not Qualified, TAXABLE Taxable Amount = (mileage) 1, (house hunting trip) (meals) 3, (home purchase) 5,927.90

61 Educational Assistance
Job related education is a working condition fringe if: The courses are not required to meet the minimum education requirement The courses are not taken to qualify the EE for a promotion or transfer to a different type of work The 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 Education EGTRRA extended the income exclusion to be $5250 for non job-related courses EAP (Education Assistance Program) must be in place Must be for the employees benefit Written Plan No Discrimination Allowed No more than 5% of the total assistance per year can go for owners owning more than 5% of stock Cannot be part of a cafeteria plan Can be tied to grade Substantiation required

63 Adoption Assistance Employer provided adoption assistance Written Plan
can be non-taxable for Box 1 Written Plan No Discrimination No funding required Notification of employees of availability Benefit limited for owners (5% rule) Adoption of Eligible Child Under 18 – not emancipated or special needs Citizen of US Income Limitation Modified AGI < 185,210 Phase Out from 182,210 – 225,210

64 Adoption Assistance Employer provided adoption assistance can be non-taxable for Box 1 Dollar Limitation (NOT ANNUAL) 2011 = $13,360 per eligible child Qualified Expenses ONLY Reasonable 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 Reporting Boxes 3,5,4,6 and 12 with a “T” T=Toddler .02 Adoption Credit. For taxable years beginning in 2011, under § 36C(a)(3) the credit allowed for an adoption of a child with special needs is $13,360. For taxable years beginning in 2011, under § 36C(b)(1) the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $13,360. The available adoption credit begins to phase out under § 36C(b)(2)(A) for taxpayers with modified adjusted gross income in excess of $185,210 and is completely phased out for taxpayers with modified adjusted gross income of $225,210 or more. (See section 3.08 of this revenue procedure for the adjusted items relating to adoption assistance programs.)

65 Prizes and Awards Generally included as taxable income
Exceptions Service & Safety Safety /Service Awards Must Meet The Following Criteria: Cannot include cash Must be tangible and presented in a meaningful ceremony

66 Prizes and Awards Safety Length of Service
10% or less of all employees Cannot be given to Managers, clerical, administrative or professional employees Employee must be full time with at least one year of service Length of Service Only given in 5 increments Not 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 $400 Must be a written plan that does not favor HCE’s Non-qualified plan Cannot cost the employer more than $400 in a calendar year WARNING!! 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 connection The 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 excess Periodic Statement: Statements provided no less than quarterly – 120 days to respond If one criteria is not met the plan is considered Non- Accountable Becomes a Taxable Fringe and is subject to FED, SS & Med (FICA) and FUTA.

70 Meals & Lodging Meals Meals Furnished with a charge
Generally not taxable Furnished on premises Convenience of employer If furnished during non working hours – generally taxable Meals Furnished with a charge Depends on if it is considered for convenience of employer If a Choice – Discount is Taxable No Choice – Discount is Non-taxable

71 Meals & Lodging Lodging
Excluded if passes the following test Employer’s Premises (i.e.: camp, foreign country) Employer’s convenience Condition of Employment If 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 receipt Repayments Federal Same Year repayment reduces box 1 Subsequent Years repayment does not reduce box 1 Social Security & Medicare Same Year repayment reduces SS/Medicare wages and taxes Repayment is in a future year, it will not reduce the SS/Med Wages for the year of repayment W2c may be required for the previous year in which the overpayment occurred. If you run through PR in same year, it will auto adjust Subsequent year, can’t run through payroll

73 Advances/Overpayments
Social Security & Medicare Repayment taxes must be refunded to EE for the period the overpayment was made regardless of timing Written 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 2010 Monthly salary $3,000 Sign on bonus $1,000 Stipulations 1 year of service Repayment Employee resigned in October 2010 Employee repaid the net pay - $673.50

75 Advance/Overpayments Repaid (1)
What employee income is affected by this repayment? Form W-2 Box 1 - Gross Box 2 – Federal Withholding Box 3 – Social Security Wages Box 4 - Social Security Taxes Box 5 – Medicare Wages Box 6 – Medicare Taxes What corrections did the employer have to make? Form 941c for Q2 2010 Corrected 941 payments Recovered employee and employer Social Security and Medicare Q2 wages were actually over stated Many companies would do adjustment current which would mean no 941 adjustments

76 Advance/Overpayments Repaid (2)
Company hired employee in May 2009 Monthly salary $3,000 Sign on bonus $1,000 Stipulations 2 years of service Repayment Employee resigned in April 2010 Employee 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 2009 Recovered 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 2009 Form 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 Act Excludes Physical injury Physical sickness Includes (Form 1099 MISC, box 3) Punitive (beyond damages for medical care) Emotional Distress Questions: Call SSA

80 Bonuses Signing & Contract Cancellation Push Money Exception Taxable
Constructive Receipt Push Money Exception NOT Taxable Vendor pays employee to push its product Vendor then owes the employee a Form 1099 this is taxable on the personal tax return

81 Commissions Taxable Exception
Life Insurance Salesmen (statutory employee) Federal Income Taxable Do not have to withhold Social Security & Medicare Taxable Must withhold Not FUTA taxable wages if commission only

82 Dependent Care Assistance
Qualified Plan Not taxable for FIT, SS/Med, FUTA RULES: Written Plan Cannot Discriminate (HCE < 25% of overall use) Cannot Exceed $5000 annually Must be necessary Child must be under age 13 or cannot care for themselves Notification Annual Statement by Jan 31st (W2 Box 10) Taxability for overages treated when incurred not paid

83 Dependent Care Assistance
In House Value of Benefit Formula 125% 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 employee When a desired net payment is required For Payment For Recordation Only Formula

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 $104,000.00 State Supplemental Tax Rate 3%

87 Gross Up Crossing SS Limit

88 Gifts Taxable Unless excluded as de minimus

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 years ALL subject to FIT, SS & Med (Box 1, 3 & 5) EXCESS subject to 20% excise and excess reported on W2 - Box 12 (K) K = Kite

90 Guaranteed Payments All Taxable

91 Jury Duty Pay while away on Jury duty is taxable
Difference pay while away on jury duty is taxable

92 Leave Sharing Compensation for paid leave used from a “leave bank” is taxable to the person using the leave Donating employee may not claim deduction or expense for donating Employees 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 Loans Difference between FMV interest and actual interest is taxable in loans > 10,000 Not subject to FIT withholding but must be reported on W2 Subject to SS, Med, FUTA If 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 W2 Active Duty (not-taxable) – report on 1099 MISC box 3 Vacation or PTO accrued prior to duty is taxable as wages regardless of when it is paid.

95 Severance or Dismissal Pay

96 Stocks & Stock Options Employer Stock Compensation
Paid in lieu of compensation Taxable at FMV upon transfer completion without restrictions

97 Stocks & Stock Options Stock Options Incentive Stock Options (ISO)
Fixed price for a period of time Qualified = no income tax, no income recognized until sold Shareholder Approval 10 year exercise requirement Price must = FMV when granted Not transferable before death Employee < 10% voting stock Cannot sell < 2 years of grant or 1 year of exercise Must exercise while employed or within 3 months of term No 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 discount Qualified = no income tax, no income recognized until sold Available to all full-time EE (except HCE , PT & Temp) Discount < 15% of FMV when granted if exercise period is under 27 month If longer then < 15% of FMV at exercise EE < 5% voting stock Cannot sell < 2 years of grant or 1 year of exercise Must exercise while employed or within 3 months of term No more than $25,000 can be exercisable in any year Written 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 time Non Qualified = income recognized at the time of exercise for amount difference between purchase price and FMV Reported 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 4070 Electronic Tip Reporting Must be accurate Must document every time accessed Hard copy for audit Must 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 made Under 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 Sales Difference between amount withheld and 8% is allocated to EE Report on W2 Box 8 NOT 1, 3 or 5 Also must be reported to IRS on Form 8027 by the last day February

103 Tips Allocating Tips Sample

104 Tips

105 Uniform Allowance Not wages if:
Condition of Employment Cannot be worn as street clothes Accounting and excess returns required All other reasons are included in wages

106 Vacation Pay Taxable Paid cash in lieu of time off
Included in regular pay, if time is taken Paid cash in lieu of time off treat as supplemental

107 Wages Paid After Death If employee dies before cashing – reissue same to agent Wages paid after death but same year NO FIT (send 1099 MISC to estate) SS/Med and FUTA (add to W2 boxes 3 and 5) Wages paid after death in subsequent year NO FIT, SS/Med and FUTA Send 1099 MISC to recipient of wages

108 Withholding and Reporting Rules
Cash Fringes Constructive Receipt Non- Cash Fringe Weekly, Monthly, Quarterly or Annually Can treat as regular wages or supplemental when imputing Special Accounting Rule November or December Report in following year Cannot do this for Life Insurance or moving expense reimbursements

109 Items to Keep Close By IRS Publication 15 – Circular E – Employer’s Tax Guide IRS Publication 15-B – Employers Tax Guide to Fringe Benefits IRS Publication 521 – Moving Expenses IRS Publication 531 – Reporting Tip Income IRS.GOV FAQs IRB IRC GOOGLE can be your best friend or any other search engine

110 Senior Manager, Payroll Shared Accounting Services
Questions ????? Presented By: Daniel Dycus, CPP Senior Manager, Payroll Shared Accounting Services Intelsat Corporation

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