Transcript COMPENSATION and Benefits Is it all Income?

COMPENSATION & BENEFITS
Is it all Taxable & Income?
Green Mountain
Payroll Conference
Presented By:
Daniel
Dycus, CPP
Outline
 Definitions
 Fair Market Value (FMV)
 Imputed Income
 Non-Taxable Comp &
Benefits
 Taxable Comp & Benefits
 Fringe Benefits
 Company Vehicles
 Annual Lease Method
 Cents per mile
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 Commuting Valuation
Method
 Bicycle Commuting
 Life
 Group Term Life (GTL)
 Dependent GTL
 Whole Life
 Moving / Relocation
 Educational Assistance
 Adoption Assistance
 Prizes & Awards
 Accountable vs. Non-
Accountable Plan
 Meals & Lodging
Outline
 Advances and Overpayments
 Loans
 Back Pay
 Military Pay
 Bonuses
 Severance or Dismissal Pay
 Commissions
 Stocks & Stock Options
 Dependent Care
 Tips
 Grossing Up
 Uniform Allowance
 Gifts
 Vacation Pay
 Golden Parachutes
 Withholding – Payments
 Guaranteed Payments
after Death
 Withholding & Reporting
Rules
 Jury Duty
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 Leave Sharing
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)
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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)
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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
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FMV Calculation
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 Employer Pays for parking
 How much is taxable
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.
to the employee?
 Space $350 per month
 $25 Employee contribution
 $230 Qualified amount
 $255 Qualified and
Employee contribution
 $350 – 255 = $95Taxable
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
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Imputed Income Calculation
An employee gets a $100 gift card from an employer.
This gift card is not a qualified plan gift.
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Salary
$
1,500.00
Imputed Amount
$ 100.00
Taxable Income
$
1,600.00
Federal Income Tax
Social Security (4.2%)
Medicare (1.45%)
$
$
$
(240.00)
(67.20)
(23.20)
Imputed Amount
$ (100.00)
Net Pay
$ 1,169.60
How do you actually impute the income?
1. Add the FMV of the gift into earnings
2. Tax the total earnings as normal
3. Remove the imputed amount to get the net pay
Non-Taxable Comp. & Benefits
 Dependent Care
 Company vehicle
 up to $5000
 business use
 Disability Benefits
 Moving Expenses
 attributable to EE
contributions
 Educational Asst.
 Job related – no limit
 Non-Job related up to
$5250 under accountable
plan
 GTL
 up to $50,000
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 qualified




De Minimus Fringes
No Additional Cost Fringes
Health Savings Accounts
Long Term Care
Non-Taxable Comp. & Benefits
 Premium Only Plans
 health
 dental
 etc
 Working Condition Fringe
 Commuter Fees
 under $120
 Parking
 under $230
 Accountable Business
Expense
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Taxable Comp & Benefits
 Wages
 overtime
 tips
 Bonuses
 Commuter Fees
 over $120
 Parking
 over $230
 Back-pay Awards
 Non-Accountable
 Severance
Reimbursement
 Dependent Care
 Gifts, Prizes & Awards
 Exceptions –Years of Service
& Safety Awards
 Legal Services
 over $5000
 Sick pay & Disability
 attributable to ER
contributions
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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
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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.
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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
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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
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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
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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
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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

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Tax Preparation
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
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Fringe Benefits / Non-Reportable
 Employer Provided Retirement Advice
 Employer must maintain a retirement plan
 Examples
o 401(k)
o 403(b)
o Simplified Employee Pension (SEP)
o SIMPLE
 457 Plans are not included in this benefit
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Fringe Benefits / Non-Reportable
 Benefit can include
Retirement planning advice or information
o Can be outside the plan itself
o Retirement income planning
 Benefit does not include
 Tax preparation
 Accounting or brokerage services
 This benefit cannot be discriminatory

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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.
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Fringe Benefits / Non-Reportable
 Excluded from income

Smart Cards
o 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
o 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
o This card is generally considered taxable unless very specific criteria are met.
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Fringe Benefits / Non-Reportable

Vanpool - $120.00 monthly exclusion
o
o
o
o

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 - $120.00 monthly exclusion
o On mass transit-not necessarily public owned
o Provided by any person in the business of transportation
o Cannot be cash. . . Must be passes, vouchers that are readily available to employees

Qualified Parking - $230.00 monthly exclusion
o FMV = amount of an “at arms-length” transaction for parking on or near premises or
parking space near commuter transit
o Can be discriminatory towards Highly Compensated Employees
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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
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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
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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
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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.
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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.
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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.
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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
Company Vehicles
 Accounting for Vehicle Use
 Valuation Method
 General valuation method or 3 safe harbor methods may be used
 General Valuation
o 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.
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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
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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
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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
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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
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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
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
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
Company Vehicles
 Vehicle FMV Limits

Vehicle Placed in Service 2010
o Under $15,300 from Blue Book

Truck or Van Place in Service 2010
o Under $16,000 value from Blue Book
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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
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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
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Personal Miles * Rate = Imputed Income
6,000 miles * .55 cents = $3,30.00
Gas Reduction
6,000 miles * .495 cents = $2,970.00
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
o Corporate Officer earning at least $95,000 in 2011
o A Director
o Earns at least 195,000 in 2011
o Is a 1% owner
OR
o Not a highly compensated employee
• 5% during the year or preceding year
• Greater than $110,000 in pay during the preceding year
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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 noncompensatory business reasons
 Car pool with company car provides each passenger with the $3.00 round
trip amount

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Commuting Valuation Calculation
 Employee is issued a company vehicle
 Employee uses it for business purposes only, except for





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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
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
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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)
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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
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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.
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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
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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
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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
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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)
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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
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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
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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
o anything above this amount is taxable
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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
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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
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 $5,000 Home purchase expenses
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
 Not qualified, therefore TAXABLE
 $5,000 Home purchase expenses
 Not qualified, therefore TAXABLE
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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
 $1532.85 Mileage to new home
 Reimbursed at .55 per mile / deductible .235
 $1,800 House hunting trip
 $250 meals
 $3,000 Home purchase expenses
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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
 $1,532.85 Mileage to new home
 Final move deductible rate is .235 per mile
 2787 miles * .235 = 654.95 NOT TAXABLE
 $1,532.85 – $654.95 = $877.90
or
TAXABLE
 .55 - .235 = .315 * 2787 = $877.90
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Relocation Calculation (2)
 $1,800 House hunting trip
 Not qualified, TAXABLE
 $250 meals
 Not qualified, TAXABLE
 $3,000 Home purchase expenses
 Not Qualified, TAXABLE
 Taxable Amount =





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877.90 (mileage)
1,800.00 (house hunting trip)
250.00 (meals)
3,000.00 (home purchase)
5,927.90
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
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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
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Adoption Assistance
 Employer provided adoption assistance
 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
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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”
64
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
65
Prizes and Awards
 Safety
 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
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Prizes and Awards
 Qualified plans:
 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
67
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.
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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.
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Meals & Lodging
 Meals
 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
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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.
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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.
72
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
73
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
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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
75
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 $673.50 at resignation
76
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.
77
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)
78
Back Pay Awards
 Generally Taxable IRC 104(a)
 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
79
Bonuses
 Signing & Contract Cancellation
 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
80
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
81
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
82
Dependent Care Assistance
 In House
 Value of Benefit Formula
 125% of direct Cost / # of dependents at capacity / # days open X #
days used
83
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
Gross Amount
of Earnings
84
Desired Net Pay
100% - Total Tax %
Simple Gross Up
 Bonus $1,000.00,Year to Date Salary $5,000.00
 State Supplemental Tax Rate 3%
1,000.00
Gross Amount of Earnings =
100% -(25% FIT + 4.2% SS + 1.45% Med + 3% SIT)
100% - 33.65% = 66.35%
Gross Amount of Earnings
1,000 / 66.35%
Gross Amount of Earnings
1507.16
Calculation Confirmation
85
Gross
Federal (25%)
Social Security (4.2%)
Medicare (1.45%)
State (3%)
Net Pay
$1,507.16
$ 376.79
$ 63.30
$ 21.85
$ 45.21
$1,000.00
Gross Up Crossing SS Limit
 Bonus $10,000.00,Year to Date Eligible Wages $104,000.00
 State Supplemental Tax Rate 3%
First - figure amount to limit
Second - figure SS on Wages to limit
SS Limit - YTD Eligible Wages
$106,800 - $104,000 = $2,800
$2,800 * 4.2% = 117.60
Third - Add SS wages to limit to desired net $10,000 + $117.60 = $10,117.60
86
Gross Up Crossing SS Limit
10,117.60
Gross Amount of Earnings =
100% -(25% FIT + 0% SS + 1.45% Med + 3% SIT)
100% - 29.45% = 70.55%
Gross Amount of Earnings
$14,341.03 / 70.55%
Gross Amount of Earnings
14,341.03
Calculation Confirmation
87
Gross
Federal (25%)
Social Security (Flat Amount)
Medicare (1.45%)
State (3%)
Net Pay
$14,341.03
$ 3,585.26
$ 117.60
$ 207.94
$ 430.23
$10,000.00
Gifts
 Taxable
 Unless excluded as de minimus
88
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)
89
Guaranteed Payments
 All Taxable
90
Jury Duty
 Pay while away on Jury duty is taxable
 Difference pay while away on jury duty is taxable
91
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.
92
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
93
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.
94
Severance or Dismissal Pay
 Taxable
95
Stocks & Stock Options
 Employer Stock Compensation
 Paid in lieu of compensation
 Taxable at FMV upon transfer completion without restrictions
96
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
97
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
o if exercise period is under 27 month
o 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
98
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
99
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
100
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
101
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
102
Tips
 Allocating Tips Sample
If annual sales of a restaurant * 8% is equal to (or greater than) the total tips reported
by the employee, no allocation is necessary
Restaurant Sales =
8% of Sales
$150,000.00
$ 12,000.00
Reported Tips
Smith, J
$ 3,840.00
Jones, T
$ 7,300.00
Doe, J
$ 2,500.00
Total Tips Reported $ 13,640.00
$
103
1,640.00 Greater than 8%, no allocation necessary
Tips
If, however, the total tips reported are less than 8% of sales, you must allocate the diffference
between the 8% and the actual reported, based on hours worked (or sales generated, if available)
by employee.
Restaurant Sales =
8% of Sales
Smith, J
Jones, T
Doe, J
Total
$150,000.00
$ 12,000.00
Hours
1,042
2,080
452
3,574
% of Total
Hours
29.2%
58.2%
12.6%
100%
Required
Tips (1)
$ 3,504.00
$ 6,984.00
$ 1,512.00
$ 12,000.00
Reported
Tips
$ 2,463.00
$ 7,342.00
$ 1,500.00
$ 11,305.00
Allocated
Tips (2)
$ 1,041.00
$
$ 12.00
$ 1,053.00
Reported +
Allocated
Tips
$ 3,504.00
$ 7,342.00
$ 1,512.00
$ 12,358.00 (3)
(1) % of Total Hours * 8% of Sales
(2) Allocated Tips are not subject to FITW, Social Security, Medicare, or FUTA. They are reported on Form W-2, Box 8
(3) The total of Reported and Allocated Tips can be in excess of 8% of sales, but not less
104
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
105
Vacation Pay
 Taxable
 Included in regular pay, if time is taken
 Paid cash in lieu of time off
 treat as supplemental
106
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
107
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
108
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
109
Questions ?????
Presented By:
Daniel Dycus, CPP
Senior Manager, Payroll
Shared Accounting Services
Intelsat Corporation
202.944.7692
[email protected]