Transcript Supplemental Pay

IRS Tax Law
By Wendy Speelman
11/14/06
Federal, State, & Local
Government (FSLG)
State Agencies
County Governments
Federal Agencies
Municipal Governments
School Districts
Compliance Activities
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Outreach events
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Compliance checks
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Review of adherence to recordkeeping and
information reporting requirements
Examinations
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What to expect
IRS vs. State audit
IRS examination steps
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Initial contact to set up appointment
Information Document Request (IDR)
Interview
Review books and records
Proposal of adjustments
Closure
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Agreed or Unagreed – Supervisor, Appeals
Common audit adjustments
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Wages subject to FICA or Medicare
Wages not reported for all employees
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Part-time, seasonal workers, students
Incorrect worker classification

Form 1099 vs. W-2
Common audit adjustments
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Wages or withholding incorrectly reported
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Bonuses, vacation pay or other pay not
reported
FMV of non-cash compensation not
reported
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Forms 941, W-2 and W-3
Fringe benefits
Failure to file/furnish Forms 1099
Penalties
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IRC §6651
Failure to File
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Failure to Pay
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5% per month – 25% maximum
½ of 1% per month - 25% maximum
Failure to Deposit

2% - 10% based on number of days late
FRINGE BENEFITS
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Any benefit an employee receives in
addition to their normal wage
Could be monetary, equipment or
services
Treasury Regulations 1.61-21(a)(3)
Taxable Fringe Benefits
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INCLUDE in Employee’s wages and
on W-2 (Never on 1099-MISC)
Subject to Federal Withholding, Social
Security and Medicare
Even if benefit is received by/for
spouse or child of employee
Exclusions
Taxable unless excluded by law
 Medical Premiums IRC 106
 Cafeteria Plans IRC 125
 Education Assistance IRC 127
 Dependent Care IRC 129
 Certain Fringe Benefits IRC 132
Non-Taxable Fringe Benefits
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No additional cost service
Qualified employee discounts
Working condition fringe
De minimis fringe
Qualified transportation expenses
Qualified Moving Expense
Reimbursements
De Minimis Benefit
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Property or service, the value of which
(after taking to into account
frequency) is so small that accounting
for it would be unreasonable
Must be small and infrequent
Frequency defined - an event which is
not haphazard but regularly
reoccurring
Cash Allowances
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Also knows as “Stipends”
Do Not qualify as a working condition
fringe benefit
Do Not qualify as de minimis fringe
benefit
Taxable to the Employee
 Unless paid under the accountable
plan rules
Accountable Plan
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Business Connection
Adequate ‘accounting’ by employee
in reasonable time period
Excess reimbursement returned in
a reasonable time period
IRC 62(c) & Treasury Regulations 1.62-2
Non-accountable Plan
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Does not meet all 3 requirements
for an accountable plan
Benefit is fully taxable when paid
Awards
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Taxable:
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Cash prizes including gift certificates
Performance awards
Non-Cash prizes use Fair Market Value
IRC 74
Nontaxable: if rules are followed
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Employee Achievement awards
Length of service awards
Treasury Regulations 1.274-8
Bonuses
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Taxable to the employee & included in
their wages/W-2
Never on Form 1099
Includes: All cash & check bonuses,
Christmas bonuses & gift certificates
IRC 61
Treasury Regulation 1.61-2 & 1.132-6(c)
Meal Money while
Traveling on business:

Meals away from home that are paid for,
reimbursed or given an allowance:
 Overnight
 Accountable Plan - Not taxable
 Not Overnight
 Taxable as wages
 Revenue Ruling 75-432 & 75-170
 IRC 162(a)(2)
Meal Allowance when
not traveling
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Meals with business meetings  NOT taxable if:
 clear business setting
 directly related
Employer buys you lunch  Taxable as wages
Cell phones
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Listed property §280F(d)(4)
 Susceptible to personal use
Substantiation rules §274(d)
Allocate cost between business and
personal use
Personal use is taxable fringe benefit
Cell phones
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Need itemized bills
Need written policy
Employee reimburse or include in wages
Taxable even if usage is not over monthly
amount paid by employer
Cell Phone Examples
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Plan is 500 min. & used 400 min. (100
personal) the personal use is still taxable
If using minutes during nights/weekends
this is still personal use and is taxable
If allowance is given for using personal
cell & no accountable plan then taxable
Automobile Expenses

Employee car used for employer’s
business
 2006 Federal Mileage Rate - .445
 At this rate or less: Non-taxable to
employee
 Excess over rate: Taxable to
employee - only the excess amount
Substantiation Required

Employee reports to Employer:
 Date, Purpose, Place of each trip
 Mileage
 Examples: Diary, log, trip sheet,
expense statement or similar
record
 IRC 274(d) – IRC 280F(d)(4)
Employer-Provided Vehicles

Personal Use is taxable
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Includes commuting
Business Use is not taxable
Employee can reimburse Employer
for personal use or have included in
wages
Exception: Qualified nonpersonal use
vehicles
Examples of qualified
Non-personal use Vehicles
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Clearly marked police and fire vehicles
Unmarked vehicles used by law
enforcement officers
The officer must be:
1. Authorized & regularly carries a
firearms
2. Execute search warrants
3. Make arrests (not citizen’s arrest)
Examples of Vehicles continued
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Ambulance
Dump truck
Flatbed trucks
Utility repair truck
(not a pickup truck)
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Passenger buses
(at least 20 passenger)
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Delivery trucks with
driver seat only or
driver & folding
jump seat
Vehicle designed to
carry cargo loaded gross
vehicle weight over
14,000 lbs
Qualified Non-personal
Use Vehicles
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Must have policy on restricting personal
use of the vehicle
Commuting is nontaxable to the
employee
Substantiation and record keeping is
not required
1.274-5T(k)
Personal Usage
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If employer provided vehicle does not
meet the qualifications for nonpersonal use vehicle, and
Employee is not restricted from using
the vehicle for personal use, then
Personal use is usually a non-cash
taxable fringe benefit
Example
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Town owns pickup truck with town
name marked on vehicle
Employee is allowed to take the
vehicle home because he is “on call”
No personal use is allowed
Commuting is included in wages as a
fringe benefit
Personal Use
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If No record kept:

Value of ALL use is taxable
If record kept:
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Only Personal Use is taxable
Automobile Valuation Rules
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Cents-Per-Mile Rule
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Commuting Rule
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Treasury Regulations 1.61-21(d)
Treasury Regulations 1.61-21(e)
Automobile Lease Valuation Rule
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Treasury Regulations 1.61-21(f)
Cents-Per-Mile Rule
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Vehicle “regularly used” in business OR
Vehicle driven 10,000 miles a year and
FMV in 2005 limited to $14,800
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Regularly used means
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50% or more of mileage is for business or
Vehicle is used to transport at least 3
employees to work
Commuting Rule
$1.50 per one-way commute if:
 Vehicle owned or leased by employer
 Employer requires the employee to
commute for bona fide
noncompensatory business reasons
 Written policy on personal use
 No control employees (elected officials)
Commuting example
Supervisor takes home truck every day and
is using the commuting method of $1.50
each way. He is called out to check on a
problem at 6AM. He leaves from home
goes to where problem is and then goes
into the office. In the afternoon goes from
office to home. He would include $1.50
commuting for that day. The morning
driving was business not commuting.
Lease Valuation Rule
1.
2.
3.
4.
5.
Determine FMV of vehicle
Use table in Reg. 1.61-21(d)(iii) or
Publication 15-B
Determine % of personal use
Multiple Annual Lease Value by % of
personal use
Value the fuel if provided 5.5 cents
Uniforms
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Cost and upkeep of clothes are
excluded from employee’s income if:
1. Condition of employment
2. Not suitable for everyday wear and
3. Not worn while away from work
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IRC 162 & 262
Donnelly v. Commissioner 262 F.2d 411
Yeomans v. Commissioner 30 T.C. 757
Uniforms
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If suitable to replace regular clothing
then include in wages
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Mella v. Commissioner T.C. Memo 1968-594
Pevsner v. Commissioner 628 F.2d 467
Must meet accountable plan rules
 Treasury regulations 1.62-2(c)(1)
Uniform law
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IRC 162 & 262
Regulation 1.62-2(c)(1)
Donnelly v. Commissioner 262 F.2d 411
Yeomans v. Commissioner 30 T.C. 757
Revenue Ruling 70-474
Mella v. Commissioner T.C. Memo 1968-594
Pevsner v. Commissioner 628 F.2d 467
Drill v. Commissioner 8 T.C. 902
Timing of Fringe Benefits
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Pay period, quarterly, semi-annually,
annually or other basis
Don’t need same election for each
employee
May change election during the year as
long as treat as being paid by 12/31
Timing of Fringe Benefits
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A single fringe benefit received may be
paid on more than one date
Include in regular wages or treat as
supplemental wages
IRC 451(a) & Announcement 85-113,
1985-31 IRB 31
Form W-9

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To obtain a correct Taxpayer
Identification Number (TIN)
Anyone required to file an information
return with IRS must use the form
Substitute form is acceptable
Applies to any US person including
resident aliens
IRC 6041A(f) requires vendor to furnish
information
No W-9 Information

No TIN provided — Payments subject to
Backup Withholding
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IRC §3406(a)
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Backup Withhold rate is 28% for 2006
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Publication 1281 and Form 1099 instructions
Reporting Backup Withholding

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Report withholding to payee and to IRS
in Box 4 of Form 1099-MISC
Form 945 to pay the IRS
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annual return, due 1/31/xx
ordinary deposit rules apply
make Form 945 deposits separate from
Form 941 deposits
Backup Withholding
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Begins when aggregate payments for
the year equal or exceed $600, or
immediately if:
 payee was paid >$600 in prior year
and an information return was
issued, or
 payee was subject to backup
withholding in the prior year
Form 1099
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Paid in the course of your trade or business
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Including payments made by Federal, State and
Local Governments
Payment of $600 or more to:
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Individuals
Partnerships
Estates and Trusts
Form 1099-MISC
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Payments of $600 or more for the year for:
 Rents
 Services or a combination of services and
products (including parts and materials)
 Prizes/Awards
 Other Income
 Medical and Health Care Payments
IRC 6041
Examples of Service
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Auto repair
Construction
Custodial
Maintenance
Landscapers
Locksmiths
Referees
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Printing Services
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Professional Services
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Accountants
Appraisers
Architects
Consultants
Engineers
Advertising
Medical & Healthcare Payments
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$600 or more in Box 6
Report payments to all individuals,
partnerships, and corporations
Medical payments include doctor fees,
drug testing, lab fees, physical
therapy, etc.
Treasury Regulations §1.6041-3
* Do not report payments to pharmacies or
tax exempt hospitals
Payments to Attorneys

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Section 1031 of the House Bill and
Proposed Regulation 1.6041-3 codify the
requirement to report payments to
attorneys (individuals and corporations)
 gross proceeds, and payments for
services regardless if they are a
corporation
Effective for 1998 and later years
Payments to Attorneys
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Attorney’s Fees
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Gross Proceeds paid to Attorneys
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Reported in Box 7
Payments of $600 or more
Report in Box 14
Any Amount Paid
Don’t report in Box 14 if reported in box 7
IRC 6045(f)
LLC’s & Reportable payments
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LLC can be taxed as sole proprietorship,
partnership, or corporation
Obtain a W-9 to determine status
Report payments to sole proprietors
and partnerships (sometimes corp.)
One or
more owners
Shouldn’t be on 1099-MISC

Payments to employees
 Fringe benefits
 Travel reimbursements

if not paid as part of an accountable
plan, travel reimbursements and auto
expenses should be included in wages
and reported on W-2
Exemptions to filing form 1099
•
•
•
Payments for only merchandise
• Ex: Office or Cleaning Supplies
Wages
Payments to a corporation except:
• Medical, health care providers and
Attorneys
Filing Requirements
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Payments on calendar year basis
Provide copy to recipient by Jan. 31
File with IRS by Feb. 28
Form 1096 transmittal form with Forms
1099 to IRS
Common Errors
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Failure to obtain identifying information
before making payment (use Form W-9)
Failure to aggregate payments from all
expense categories (use vendor files)
Assuming payee is a corporation:

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because name is “Company or Associates”
because an EIN is furnished
Independent Contractor
or Employee
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Behavioral Control - how, when and
where to do the work; training
Financial Control - significant
investment, expenses, opportunity for
profit or loss
Relationship of the Parties - employee
benefits, written contracts
Employees
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Required to wear uniforms
Required to work certain hours
Owner provides training
Owner provides supplies and materials
Can quit job without liability to employer
No financial risk of loss
Independent Contractor
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Makes own schedule
Has own phone number
Advertises
Buys own products
Furnishes own equipment & supplies
Makes a profit or loss as a result of his
own business decisions
Resources
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Publication 1779 - determination on
status of worker as either an
independent contractor or an employee
Publication 963 Chapter 3
Revenue Ruling 87-41 – 20 factors
IRC 3401
Employee or Contractor??
Many state and local government officials
are employees by statute
Elected Officials are always employees
Withhold taxes
Report on Form W-2
Medicare Wages

Mandatory Medicare Coverage:
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employees hired or rehired after 3/31/86
Coverage is mandatory, not voluntarily
Even if paying into a retirement system
Medicare Exception:

Hired prior to 4/1/86 and no break in service
Medicare Example

Employee was hired in 1980 & therefore
does not pay into Medicare. They retire
on 6/30/06. They are rehired on 7/1/06.
They never stop working. They MUST
pay into Medicare starting on 7/1/06
because they are a new employee hired
after 3/31/86.
Reconciling Forms

Reconcile Form 941, Form W-2 & Form W-3
 Wages
 Social Security wages
 Medicare wages
 Federal income tax
When to Deposit

Make payment with return if:
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Less than $2,500 tax liability for quarter
 Line 10, Form 941
Pay in full with timely filed return
Monthly depositor if:

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Liability for look back period $2,500 to
$50,000
Deposit by 15th of following month
When to Deposit

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Semiweekly depositor if (line 8):
 Liability for look back period > $50,000
 If payday Wed. Thurs. or Fri. deposit taxes
by following Wed.
 If payday is Sat. – Tues. deposit taxes by
following Friday
Next day depositor if (line 10):
 Accumulate $100,000 or more of taxes in
a deposit period (even if monthly or
semiweekly depositor)

Pub 15 Circular E
Look back period
How to Deposit
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Payment with return
Coupons
 Form 8109 – get from IRS
 Deposit with authorized depositary
Electronic deposits
 EFTPS – Electronic Federal tax Payment
System WWW.EFTPS.GOV
Form 941 – Liability Summaries

Monthly depositor -Line 15 (2nd page)

Semiweekly depositor - schedule B

Schedule B total should match total
liability on 941 (Line 10)
Trust Fund Recovery Penalty
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If taxes are withheld but not remitted to
IRS
Penalty is 100% of tax assessed
Applies to person responsible for
collecting, accounting, & paying the
taxes and who acted willfully
Willfully = voluntarily, consciously, &
intentionally
Form 941C – Common uses

Use to correct Medicare withholding
errors
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Failed to withhold the tax
Withheld in error
Use to correct FICA tax withholding
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Failed to withhold on elected official opting
out of OPERS
Form 941C
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Form 941C cannot be filed by itself
File with Form 941 in quarter error
discovered
Make deposit based on date error
discovered
May need to correct W-2s
Adjustments on line 7D or 7E on 941
Form 941C

Do not use to correct errors previously
reported on:
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Monthly Deposits on Form 941, 2nd page
line 15
Schedule B
Number of employees on Form 941 line 1
Wages on Form 941 line 2
Forms W-4
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Treasury Decision 9196 effective 4/15/2005
No longer required to send W-4s to IRS
IRS will use W-2 information to determine
problems
Lock-In letters issued to both employer
and employee
Forms W-4

Maintain for every employee
Determine amount of tax to withhold
Specify filing status and allowances
Update for life changing events
Don’t need new W-4 each year

IRC 3402(f) – requirement to get information

Pub 505, Form W-4 worksheet
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Forms W-4

If employee claimed exempt status they
must submit new Form W-4 by Feb. 15th
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If not, change to Single Zero
If employee gets Advanced EIC, Form W5 by December 31st
Health Insurance Premiums
paid by employee
Excluded from Income If:
 Employer reimburses employee for
paying health insurance premiums
 Must require proof of prior payment
 Can’t receive cash in lieu of premium
reimbursements
 Revenue Ruling 61-146 and 75-241
 Private Letter Ruling 9022060
Revenue Ruling 58-360
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Court Reporters fees from the
preparation & sale of transcripts
Income from trade or business
Not treated as wages
In addition to statutory wages
Dual capacity – employee (W-2) &
independent contractor (Form 1099)
Recent Rulings

TAM 200437031
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Revenue Ruling 2006-36
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Gift Certificates
HSA accounts with beneficiaries
Revenue Ruling 2006-43
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What is a valid pick up plan
Gift certificates
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TAM 200437031
Employer provided holiday gift coupon
redeemable at local stores
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Intended to be used for ham or turkey
Had restrictions on it (i.e. tobacco)
Limited dates to redeem it
Determined to be taxable
Revenue Ruling 2006-36

Reimbursement from HSA taxable if:

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Plan permits amounts to be paid as
§213(d) medical benefits to designated
beneficiary other than spouse/dependents
after employee and surviving
spouse/dependents die
All payments, including those to
employee, would be taxable
Rev. Rul. 2006-36 plan details
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Employer sponsored
Reimburses for medical expenses not covered
by another plan
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Covers employees, retirees, spouses, dependents
Provides for annual maximum limit
Used amount carried forward
Upon death of employee, surviving spouse &
dependents any unused amount is paid as
reimbursement of substantiated medical care
expenses to a designated beneficiary

Because of this provision, all reimbursements
made are taxable to employee!
“Pick up” of employee
contributions by Employer
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Revenue Ruling 2006-43
Requirements to conform with §414(h)(2)
Provides transition relief for pre-existing
“pick-ups”
Only addresses federal income tax
Requirements of pick up plan

Must specify contributions, although
designated as employee contributions are
being paid by employer
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Formal action required
Employee not permitted to have cash or
deferred election with respect to designated
contributions

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Cannot opt out of “pick-up”
Participation required
Questions??
Wendy Speelman (419) 526-2607
[email protected]
Amy Myers (419) 522-2259
[email protected]
Trudee Billo (419) 522-2359
[email protected]
Wendy Speelman (419) 526-2607
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Business and Specialty Tax line 1-800-829-4933
EFTPS hotline 1-800-555-4477
Employee Plans Taxpayer Assistance 1-877-829-5500
Form 941 Online filing program (E-help) 1-866-255-0654
To get IRS Forms 1-800-829-3676
Copy A, Form W-2 reporting questions, SSA employer
reporting service 1-800-772-6270 or
[email protected]
Information reporting program customer service 1-866455-7438 or [email protected]
Information reporting web page www.irs.gov/smallbiz
List of Resources
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The quarterly “Federal, State and Local Governments
Newsletter” is available on the IRS Web site at
www.irs.gov/govts.
The Taxable Fringe Benefit Guide provides basic
information for determining the taxability, withholding,
and reporting requirements regarding employee fringe
benefits. This resource guide can be found at
www.irs.gov/govts , link to Educational Products, then
on the Taxable Fringe Benefit Guide 117 pages
List of Resources
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e-Help Desk Toll Free Number 866-255-0654
Supports e-file, Electronic Federal Tax Payments
System, and future e-Services customers.
Operational hours of the e-Help Desk can be found
at www.irs.gov/efile
Social Security Administration electronic filing of
wage reports (Forms W-2/W-3) through SSA’s
Online Wage Reporting Service (OWRS). Register
for Internet filing at www.ssa.gov/employer/ then
click on Employer Services Online. You will receive a
PIN assigned by SSA. Within two weeks of your
registration, you will receive in the mail from SSA, a
Password.
List of Resources
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IRS e-News for tax Professionals - Ohio
If you want to subscribe to this mailing list,
please send a blank e-mail to mailto: [email protected] to subscribe.
e-Services, including TIN Matching www.irs.gov
link to Tax Professionals; scroll to bottom of
page and link to e-services-New Products. Must
register to access products.
List of Resources
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Questions relating to information returns (forms
1099) contact Martinsburg Computing Center
[email protected] or call 866-455-7238
Fire System www.irs.gov/efile or Reporting
Program Customer Service at 866-455-7438 or
email at [email protected]. Electronic submission
of information returns (forms 1099) use FIRE
system (Filing Information Returns Electronically)
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IRS Government Call Site 1-877-829-5500
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EFTPS
www.eftps.gov