Transcript Chapter 4: Payroll Benefit Basics Payroll Source FPC

Chapter 4: Payroll Benefit Basics
Payroll Source
FPC Review Course 2014
Presented by:
Mary Lou Sipple, CPP
[email protected]
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Chapter 4
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4.1 Fringe Benefits
4.2 Prizes and Awards
4.3 Company Vehicles
4.4 Group-Term Insurance
4.5 Deferred Compensation
4.6 Section 125 Flexible Benefit Plans
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4.1 Fringe Benefits
Taxable Compensation
• Back Pay Awards
• Bonuses, Overtime Pay, Regular Wages, Tips
• Sick pay and disability benefits
• Commissions
• Company Vehicle (personal use)
• Dismissal and Severance Pay or Final Vacation Pay
• Employer paid transit passes and transportation in a commuter highway
vehicle in excess of $245/month
• Bicycle Commuters reimbursement in excess of $20/month
• Employer-paid parking greater than $245/month
• Fringe Benefits (unless specifically excluded)
• Gifts, Gift Certificates, Prizes and Awards
• Group Legal Services
• Group Term Life Insurance over $50,000
• Non-accountable reimbursed business expenses
• Noncash fringes, unless excluded by the Internal Revenue Code
• Non-Qualified Moving Expenses
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4.1 Fringe Benefits
Non-Taxable Compensation
• Dependent Child Care assistance (up to $5,000) under a
Section 129 plan
• Company vehicle (Business use only)
• De minimis fringes
• Disability Benefits (employee contributions)
• Educational assistance for job-related courses (no limit)
• Group-term life insurance premium ($50,000 or less of
coverage)
• Medical/Dental/Health plans (Employer Contributions)
• No additional cost fringes
• Qualified employee discounts on employer
goods/services
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4.1 Fringe Benefits
Non-Taxable Compensation
• Qualified moving expenses
• Qualified transportation fringes ($245 Transit/$245 Car
Pooling)
• Reimbursed business expenses (if accounted for in a
timely manner)
• Working condition fringes which would be deductible if
paid by employee
• Non-job-related education assistance up to $5,250 under
a qualified plan
• Long-term care insurance
• Health Savings Accounts
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4.1 Fringe Benefits
Fair Market Value of Non-Cash Compensation
In general, the fair market value of a fringe benefit is
determined on the basis of all the facts and
circumstances. Specifically, the fair market value of a
fringe benefit is the amount the employee would have
paid a third party to buy or lease the fringe benefit.
When determining the value of the benefit, keep the
following two statements in mind:
1. The employee’s perceived value of the benefit is not
relevant.
2. The amount the employer paid for the benefit is not
a determining factor.
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4.1 Fringe Benefits
Imputed Income
• Imputed Income represents the value of the benefits
employees receive that must be included in the
employee’s income.
• Imputing income reduces employees’ net pay by
increasing taxes.
• Employee does not receive additional pay in the form
of cash
– An example of Imputed Income is taxable Group Term Life
Insurance
** Inputting should occur as frequently as possible.
Inputting only at year end could reduce the employees
income drastically and result in little or no net pay.
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4.1 Fringe Benefits
Example of Imputed Income
An employee has $50.00 included in income for non-cash taxable fringe benefit. The employee’s
salary is $1,500.00 for the monthly pay period. A calculation of the employee’s taxes follows:
Pay Without
Imputed Income
Salary
$1,500.00
Noncash Taxable Fringe Benefit
Taxable Pay
Pay With Imputed
Income
$1,500.00
50.00
$ 1,500.00
$1,550.00
Federal Income Tax
(35.55)
(43.05)
Social Security Tax
(63.00)
(65.10)
Medicare Tax
(21.75)
(22.48)
Noncash Fringe Benefit
Net Pay
(50.00)
$ 1,379.70
$1,369.37
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4.1 Fringe Benefits
Noncash Fringe Benefits
• Benefits must be recognized as income at
least once a year, by December 31.
• Fringe Benefits as taxable income requires all
income and employment taxes be withheld
and deposited.
• Employers must collect the tax from the
employee or pay the tax on behalf of the
employee.
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4.1 Fringe Benefits
Nonreportable Fringe Benefits
In most cases these benefits are not reported on W2. Benefits are so small in
value it is unreasonable or administratively impractical to account for.
Section 132 – De minimis (minimal) fringe benefits include:
• Occasional typing of a personal letter by a company
administrative assistant
• Occasional personal use of the copies (<15% of total use of the
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machine)
Occasional parties for employees
Occasional tickets to the theater or sporting events
Occasional supper money for working overtime
Traditional holiday gifts like a turkey or a ham (Cash gifts or gift
certificates that are treated like cash are taxable)
Coffee or donuts furnished by the employer
Use of company telephone for personal calls
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4.1 Fringe Benefits
No-Additional Cost Services
Employees can take advantage of employer services with no tax
consequences when the services are sold to customers as part of the
employer’s regular line of business in which the employee works.
Examples include:
1. Free or reduced- price standby travel to employees of an airline
company
2. Free telephone service to employees of a telephone company
Qualified Employee Discounts
To be qualified, the property and services must be offered for sale to
customers in the ordinary course of an employer’s line of business.
1. The discount on property is not greater than the gross profit
earned on the property at the price normally sold to customers or
2. The discount on services is not greater than 20% of retail price
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4.1 Fringe Benefits
Working Condition Fringes
Work related items, when paid for by the employee, may be deducted from
the employee’s individual tax return as a business expense. When these
items are provided by the employer, they represent nontaxable
compensation.
Examples include:
1. Business use of a company car or plane
2. Subscriptions to business periodicals
3. Fees to join professional organizations
4. Attendance at a job-related seminar
5. Good used by employees for product testing
6. Cell phone provided primarily for business purposes
Use of Athletic Facilities
The facility must be located on the employer’s premises and operated by the
employer. If the facility is made available to the public, the exclusion does not
apply.
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4.1 Fringe Benefits
Employer Provided Retirement Advice
Qualified retirement planning services may be
provided to an employee by an employer
maintaining a qualified plan.
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4.1 Fringe Benefits
Qualified Moving Expense Reimbursements
An employer’s reimbursement or payment of an employee’s moving expenses is an excludable
fringe benefit when the following rules are met:
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The distance from the employee’s new workplace to his old workplace must be at least 50
miles farther than the distance from the employee’s old workplace to his old residence.
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The employee must work full-time in the general location of their new principal place of
work at least 39 weeks during the 12 months immediately following the move.
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The reimbursements should be made under rules similar to those relating to an
accountable business expense reimbursement plan.
Deductible Moving Expenses with No Dollar Limitation include:
1.
Moving household goods and personal effect from the employee’s old residence to the
new residence.
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Traveling from the old resident to the new residence. Mileage Rate cannot exceed $0.24 (
for 2013) per mile. These expenses include lodging but NOT meals.
Taxable Moving Expenses are reported on Form W-2 in Boxes 1, 3 and 5 but not in Box 12.
Qualified Moving Expenses paid directly to the employee are reported on Form W-2 in Box 12,
Code P.
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4.2 Prizes and Awards
Prizes and Awards
Prizes and Awards are included in the employee’s taxable compensation.
Length of Service and Safety Awards may be excluded from income if the
awards follow certain guidelines.
For nonqualified plans, employees can receive an award
costing the employer $400 in a calendar year.
For qualified plans, all awards made to a single employee
cannot cost the employer more than $1,600 in a calendar
year, with the average cost of all individual awards to all employees
not exceeding $400.
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4.3 COMPANY VEHICLES
• Business use of a vehicle is nontaxable
• Personal usage is taxable
• Accounting procedures for properly taxing
company vehicles require proper documentation
Employee records should include:
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Business miles driven
Date of trip
Purpose of trip
Expenses incurred
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4.3 COMPANY VEHICLES
Reporting Requirements – Personal Usage
• Federal tax is optional
• Social Security and Medicare must be
withheld
• Must be reported on the W2
• Required to be reported at least once a year
• Personal Usage provided in November and
December may be reported as paid in the next
year
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4.3 COMPANY VEHICLES
Valuation Method
3 Safe Harbor Methods
1. Annual Lease Value Method
2. Cents Per Mile Method
3. Commuting Value Method
Once a method has been chosen, it MUST be used the
entire time the employee has usage of the vehicle.
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4.3 COMPANY VEHICLES
Annual Lease Method
1. Find the cars fair market value
2. Use the table to find the Annual Lease Value (ALV)
3. Divide the personal miles driven by the total driven
4. Multiply the FMV by the personal miles driven.
REMEMBER: If the employee has the car less than a year
and more than 30 days you MUST pro-rate to get the
Annual Lease Value (ALV)
PRO-RATE FORMULA: ALV (number of days driven/365)
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4.3 COMPANY VEHICLES
Cents Per Mile Method
• 2013 $0.565
• Vehicle put in service in 2013
• Vehicle under $16,000 value or SUV under $17,000
value
• Fleet Vehicle under $21,200 or Fleet SUV under
$22,300
• Qualifications
• Business expectations use throughout the year
• Vehicle must be driven 10,000 miles annually
(including personal use) and be used primarily by
employees
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4.3 COMPANY VEHICLES
Commuting Valuation Method
• Include $1.50 one way or $3.00 roundtrip if
company vehicle is (includes car pools):
• Not by a “Control Employee”
• Restricted to driving between work and home
• Non-compensatory business reasons
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4.4 Group Term Life Insurance
Group Term Life
• Group Term Life > $50,000 is taxable income
• Exempt from Federal Income Tax Withholding
• Taxable for Social Security and Medicare, even
when an employee pays for this benefit using
pretax dollars as part of a cafeteria plan
• Exempt from FUTA – Federal Unemployment Tax
• Calculate the value of excess Group Term Life
Insurance using the IRS Table
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4.4 Group Term Life Insurance
Calculating the Value of Excess Group Term Life
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Determine the Amount of Coverage
Amount of Coverage minus $50,000 = Excess Coverage
Excess Coverage/1,000 x Table Value =Taxable Value per Month
Taxable Value minus Employee After Tax contributions = Taxable Value of Group
Term Life per Month
EXAMPLE: Employee age 32
1. Coverage 30,000 x2 = $60,000 Amount of Coverage
2. $60,000 - $50,000 = $10,000 Excess Coverage
3. $10,000/$1,000 x .08 = $ 0.80 (.08 taken from chart)
4. $0.80 Benefit Value per Month
5. $0.80 - $0.00 (Employee Contribution) = $0.80 Taxable Value of Group Term Life
per Month
NOTE: Pretax contributions do not reduce the taxable value
After tax contributions cannot reduce the taxable value below $0
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4.4 Group Term Life Insurance
Dependent Group Term Life Insurance
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Dependent Group Term Life Coverage < $2,000
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Dependent Group Term Life Coverage > $2,000
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Is excludable from Income
The entire amount is taxable and subject to all
withholding
Exempt from FUTA – Federal Unemployment Tax
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4.5 Deferred Compensation
Deferred Compensation Plans
Qualified Plans
401(K)
Non-Qualified Plans
403 (b)
457 (b)
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4.5 Deferred Compensation
Qualified Plans
 “Qualified” means not taxable
 Deferral of current income until retirement
 Qualified plans must meet provisions of Section 401 of the
Internal Revenue Code
 Be written and communicated to all employees
 Exclusive benefit for employees or their beneficiaries
 Nontransferable, Nonforfeitable (that is Vested)
 Satisfy eligibility and minimum vesting of employees’
interest in the plan
 Cannot discriminate in favor of Officers, Shareholders or
Highly Compensated Employees
 Benefits can vary based on length of service
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4.5 Deferred Compensation
401(k) – Qualified Plan
Cash or Deferred Arrangements or Salary Reduction Plans
• 2013 Maximum contribution
$ 17,500
• Catch Up Contribution (Age 50+)
$ 5,500
• Non-Taxable for Federal or State Income Tax (except in
Pennsylvania)
• 401(k) Taxable for Social Security and Medicare
• Annual maximum on all plans combined is $51,000 in
2013 or 100% of eligible compensation whichever is less
• Employer Options
• Plans may offer:
• Employer matching funds
• Ceilings for contributions
• Automatic enrollment
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4.5 Deferred Compensation
403(b) Plan
A retirement savings program for tax-exempt
organizations such as Public Schools, Colleges and
Universities, Religious Groups and Public Charities.
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2013 Maximum Contributions
$17,500
Catch Up Contribution (Age 50+)
$ 5,500
403(b) Taxable for Social Security and Medicare
Annual maximum on all plans combined is $51,000 in
2013 or 100% of eligible compensation whichever is less
• 2 plans available
• Tax Sheltered Annuities (TSAs)
• Tax deferred annuity issued by a life insurance company
• Tax Sheltered Custodial Accounts (TSCAs)
• Invested in mutual funds held by a qualifying custodian
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4.5 Deferred Compensation
457(b) Plan
Deferral of Wages for Governmental Employees
and some tax exempt organizations
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2013 Max Contribution (Age 50+)
$17,500
Catch Up Contribution
$ 5,500
Not subject to Federal Income Tax
Taxable for Social Security and Medicare
Treated in some ways as a non-qualified plan
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4.5 Deferred Compensation
Non-Qualified Plan
• No discrimination requirements
• Plans are a written promise by employer to pay a
given amount at a later date
• Usually not Federal Income Taxable
• Usually Social Security and Medicare Taxable
NOTE: Get legal advice about how to treat NonQualified Deferred Compensation
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4.6 Section 125 Flexible Benefit Plans
• Qualified “cafeteria plans” fall under Section 125 of the
Internal Revenue Code.
• Employees are allowed to select the type of tax free
benefits they need.
• Benefits may be changed during the plan year only when
there is a change in status, when the coverage or premiums
change significantly, or when the employee leaves the
company.
• Change in status can include: marriage, divorce, death of
spouse or dependent, birth or adoption, or a change in
employment.
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4.6 Section 125 Flexible Benefit Plans
Benefit menu must include at least two benefits
allowing the employee to receive cash or one or
more qualified (non-taxable benefits).
• Medical/Dental Coverage – Employee, Spouse,
Family
• Long Term Care Insurance
• Group Term Life Insurance
• Disability/Accident Coverage
• Dependent Care – Limited to $5,000 or $2,500 if
Married and Filing Separately
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4.6 Section 125 Flexible Benefit Plans
Qualified (non-taxable benefits) continued:
• Adoption Assistance
• Vacation Choices
• Cash or Deferred Arrangement (CODA)
• (Only 401(k) plans; 403(b) and 457(b) plans cannot be
included)
• 2 separate reimbursement or Flexible Spending
Accounts
1. One to pay for qualified expenses
2. Another for Dependent Care
• Health Savings Accounts
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4.6 Section 125 Flexible Benefit Plans
Section 125 Tax Implications
• The contributions are with pretax dollars, no amount
is withheld for federal income tax
• Cafeteria plan contributions are not subject to Social
Security tax or Medicare tax, with the exception of
401(k) plan contributions
• Cash benefits taxable – any benefits converted to
cash become taxable income to the employee at the
time the cash is received
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4.6 Section 125 Flexible Benefit Plans
Flexible Spending Accounts
1. Health Care Expenses
2. Dependent Care Expenses
Use it or Lose it
Uniform Coverage Requirement
• Employers must reimburse health care related flexible spending
account claims up to the employee’s annual election even if the
claim exceeds the employee’s account balance
Employer Options
• Employers can utilize the remaining balances at the end of a plan
year for overhead and administrative costs for the plan
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QUESTIONS?
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