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Payroll Tax Rules, Employee Benefits,
and Income Tax Reporting
Winter Conference
February 2016
Karen M. Field
KPMG LLP
1©2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member f irms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Notice
The following information is not intended to be “written advice concerning one or more Federal tax
matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
1
2©2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member f irms affiliated with KPMG
International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Federal Income Tax Reporting and Withholding
Section 61 – compensation paid to employees is included in income unless otherwise
excluded
■ If income AROSE OUT OF employment relationship, it is usually taxable compensation
unless specifically excluded
Section 6041 – must report income on Form W-2
Section 3402 – must withhold federal income tax
Section 3121 – must withhold FICA/Medicare
Form 941 – quarterly report of compensation paid and withholding
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Non-employee Compensation
Non-employee compensation – Report on Form 1099-MISC Box 7
■ No withholding
■ Subject to SECA
Taxable injury payments and other non-employment settlements – 1099-MISC Box 3
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Taxable Compensation
Section 1.61 or section 83 - taxable compensation
■ Form W-2 if arises out of employment relationship (NOT 1099-MISC unless earned as non-
employee or no longer alive!)
■ Usually DO WITHHOLDING FIRST
– Withhold by holding back other compensation
– Withhold by obtaining check from employee
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Withholding Timing and Method
Federal
■ Regular
– payroll withholding deposited within 2-5 days after payroll (for most employers) – based on
weekday of payment
– Follows Form W-4 – whatever the W-4 says, goes (between ee and IRS unless IRS
contacts the employer
■ Supplemental
– Any non-regular wages (bonuses), can generally be run through payroll but OPTIONAL
supplemental withholding is typical
– 25% flat rate (39.6% rate once a person’s supplemental wage > 1 million.
■ Next Day rule – deposit FASTER
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Taxable Fringe Benefits Payroll
Section 102(c) – “Gifts” to employees from employers are generally compensation
Section 1.61-21
■ Non-cash benefits (that do not fall into section 83 property or one of the fringe benefit
exclusions)
■ Taxable at FMV of the benefit in an arms-length transaction
■ Subject to FICA/Medicare and FIT withholding during the calendar year – employer can
choose when during the calendar year.
– Lag method – benefits earned in last 2 months of calendar year
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Deferred Compensation - Payroll
Section 457(b)
Vested (usually) deferred compensation, up to $18,000 per year per person
Section 3121(v)(2) – withhold FICA/Medicare on any amounts contributed that are vested
during year of contribution.
Withhold on other income, usually.
Withhold FIT in year of DISTRIBUTION – taxable at proper distribution
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Deferred Compensation - Payroll
Section 457(f)
ANY deferral of compensation, contractual, annual that is unvested must be taxed in the year
of vesting
Vesting = lapse of the last substantial risk of forfeiture
■ Ignore “for cause” risk of forfeiture, ignore most “non-complete risks of forfeiture. “You
leave, you lose” is the usual substantial risk of forfeiture
Subject to FIT and FICA/Medicare in year of vesting, no matter when paid
Exception for INVOLUNTARY severance
■ Does not resemble other deferred compensation
■ Paid over less than 2 years after termination
■ Total is less than 2 x prior compensation (IRS may narrow this)
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Deferred Compensation - Payroll
Qualified Plans
– Generally 20% mandatory withholding unless rolled over or annuity payments (withheld
by plan administrator, not employer)
■ 401(k) – elective deferrals –
– FICA/Medicare as deferred
– 401(k) amounts no federal taxation until distributed- withheld by plan administrator
■ Employee after-tax contributions –
– FICA/Medicare as contributed
– subject to federal income tax as contributed (withheld by employer)
■ Employer contributions –
– not subject to FICA/Medicare
– Subject to federal taxation as distributed (plan administrator)
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Correcting Failure to Report or Withhold
Failed to withhold or report
Form 941c correction (if done correctly) is interest free
■ Do Form 941-X paying in FICA/Medicare
■ Do Form W-2c reporting income and FICA/Medicare properly to employees
■ Obtain Form 4669 (affidavit) from employees “you did not withhold but I did pay tax”
Go into IRS and negotiate – rare unless amounts are large or IRS is already in the door
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Payroll Penalties
Failure to report on Form W-2
■ $100 employee, $100 IRS
100% penalty for failure to withhold FICA/Medicare
100% liability for tax (section 3403)
Section 6656 – progressively higher % of TAX over time for late deposit
Form 941 failure to file
Negligence penalties can also apply
■ 20% of tax
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
State Payroll Issues
Most states (not FL) require wage withholding
■ Regular
■ Supplemental
■ Multistate withholding
– Two states have the right to tax, both can.
■ If one state does not tax, the other will not cede right to tax.
■ Nonqualified deferred compensation rules
■ Qualified deferred compensation rules
■ Equity compensation rules (FL is unlikely to get the money)
FL State Unemployment (now “Re-employment Tax” rate for 2016)
■ Quarterly employer payment into fund
■ Beginning rate 2.7% of first $7,000 of wages
■ Recalculate after 10 quarters
Taxable Fringe Benefits
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
IRS Payroll Tax/Employment Tax Examinations
Reviews Compensation Reporting/Withholding issues
■ Highly Compensated Employee Compensation
■ Deferred Compensation
■ Taxable Fringe Benefits
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
IRS Examination List of Fringe Benefits
Gift cards
Inappropriate “tax free” education
Car or use of car, driver
Spousal/dependent travel
Employer or vendor-paid vacations
Free dining rooms (unless meet section 119 or 132(e)(2) direct cost rules)
Club memberships
Tax return or wealth management assistance
Security
Excludible Fringe Benefits
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Excludible Fringe Benefits
Section 132
■ De minimis
■ Working Condition
■ On premise gym
■ Transportation Fringe/Parking
■ Employee Discounts
■ No-additional-cost benefit
■ Line of business rules
■ Discrimination rules
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
De Minimis
Definition of employee
Administratively difficult to handle
■ Almost never cash or cash equivalents!
■ Grocery certificate? TAM 200437030
Infrequent
Low value
■ MEALS (not every day…)
■ T-shirts, umbrellas
■ Branding does not help much!
■ $75-$100 (1.274-5(c)(2)(iii)(2))
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On-premise Dining Rooms
Section 132(e)(2)
■ On business premise
■ Employer run or run for employer by management co
■ Non-discriminatory
■ Employee pays direct cost OR direct cost is included in income
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Free Meals and Lodging
Section 119
■ Meals or lodging for employer’s convenience (NOT compensatory reasons)
■ On employer’s premise
■ Mandatory training on leased property? Free meals in remote areas on moving “business premise”?
Boyd Gaming and statute
■ 50% of employees rule
No discrimination rule on lodging
Free meals, section 119 passes through 132(e)(2) – discrimination rule applies
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Working Condition Fringe Benefit
Most executive and director costs
■ D&O insurance
■ Offices provided to directors, independent contractors?
Definition of employee includes partners
If employee could have deducted in business of being an employee of THIS employer,
employer can provide tax free
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Parking
Pre-tax payments for valuable parking or imputing value in income
Subject to indexed limit
■ Parking
■ Other transportation (subway cards, etc.)
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Health Benefits (sections 104, 105, and 106)
Insured benefits
Medical check-ups for top people
Self-funded benefits
■ Definition of HCE
■ Definition of covered benefits
■ Discrimination rules
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Education Benefits
Section 127
■ Discrimination rules apply
■ Broad array of classes available
Section 132(d)
■ No discrimination rules
■ Limited to improving “current job skills” – watch education that automatically prepares for
other career
Can ER pay for the CFOs MBA?
Can ER “groom” the up-and-coming manager for a new level by paying for education?
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Other Excludible Fringe Benefits
Section 74 Prizes and Awards
■ 5 year awards
■ Tangible personal property
Employee Loans
■ Small loans, relocation loans
■ Watch TAM/Gales case
■ Section 127 PLR
Taxable Fringe Benefits
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International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
Regular Taxable Fringe Benefit Rules
Financial management
Tax assistance
Car and driver
Employer-paid vacations
■ Watch “facility” rule!
■ Watch employer-provided travel
■ Watch spousal travel
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Fair Market Value
General Valuation Rules
■ what the employee would have to pay for the benefit in an arms length transaction (with a few
exceptions)
– Example: auto lease – what the employee could lease a car for, ignoring company
discounts. Same for planes – charter rate for use of plane.
Special Valuation Rules
■ 1.61-21 has special exceptions for use of a car, use of a company plane, commuting, etc.
■ If employer does not use special valuation timely, cannot go back an use the special methods.
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Spousal Travel
Danville Plywood vs Disney case
■ Is spouse REALLY along to perform a business function – facts and circumstances but hard
to argue
Section 274(m)(3) – no deduction for spouse to travel unless also an employee traveling
on business
■ However, section 274(e) – generally deductible if included in employee income (but watch
company plane rules)
Section 1.61-21(a) – if fringe is provided because of the service of another person, that
person must include the FMV of the benefit in income. Definition of “employee” very
broad for this purpose
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Security
Security study
SIFL rate
Home vs. work security
Family member security
Emergencies (country of assignment blow-ups)
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Retired Employee Taxable Fringe Benefits
Retiree health policy
Cars
Watch 409A “In-kind Benefit rules!
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Use of Automobile Fringe Benefits
Auto Lease rules
Commuting rule
FAVR
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Auto Lease Rules
Employer-provided car
Employee uses for business and personal
Substantiate and report personal use (per quarter or monthly)
Auto lease value rules
■ Use current IRS table of car values
■ Can use fleet average but only for cars worth less than $19,000 (currently)
■ Annual lease value x personal use percentage = income
Watch car allowances!
Can toss whole value in income and allow them to deduct, but not very beneficial
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Cars
Vehicle Cents per Mile Method
■ Car worth less than Annual Listed FMV (around $15,000)
■ Employer reasonably expects car will be used mostly by employee and regularly for business
■ 48.5 (indexed) cents for each mile of personal use
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Cars
Commuter Value
■ $1.50 per one way commute
■ required to use vehicle
■ de minimis personal use
■ not a control employee
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In-town Apartment
Section 119
■ SELDOM WORKS!
Section 62(c)
■ Not if the employee has chosen to live somewhere other than near the office (tax home) –
Flowers case
Temporary travel
■ Not if there is an expectation that this job will last beyond one year
Section 1.61-21 – taxable fringe benefit at FMV (probably long term rental value)
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Other facilities
Owned or leased
Use
■ Fishing boats?
■ Resorts?
Effect of section 274(e) on other facilities
Reimbursement Exclusion Rules
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Temporary Travel
Temporary vs. permanent
■ Is the job expected to be “temporary” (reasonably expected to last less than 1 year?)
■ Assignment letters?
■ Later extensions?
Tax home is where your office is, usually
■ Is a person’s post of duty somewhere other than the regular office?
CCAs
■ commuting, flexible work place, travel from home to other work sites, multiple long-term
assignments
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Reimbursements
Section 62(c) - Employees
Accountable Plan Rules
■ Business reason for expense (is primary reason for travel a business reason?)
■ Substantiation within a reasonable period of time
■ Advances required to be paid back!
Watch Business Pre-tax “accountable” plans
QUESTIONS?
Thank you
Presentation by Karen Field
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm
of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or
trademarks of KPMG International.
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