Linda Porada FPC, CPPlinda.porada@adp.com847-507-6377

Overview

• Gross Income and Wages• Fringe Benefits • Additional ER Provided Benefits• Other Payments• Withholding and Reporting Rules for

ER provided benefits

Internal Revenue Code

• All compensation an EE receives from an ER, no matter what form it takes, constitutes wages subject to federal income and employment taxes.

• Such compensation is excluded from wages and exempt from taxation ONLY where the IRC provides a specific exclusion.

Gross Income

• Gross Income– Includes compensation for services, including fees,

commissions, fringe benefits, perks and other similar items

– Includes all remuneration for employment, including the cash value of such, paid in any medium other than cash

Wages and benefits are excluded from being taxable only when IRC provides a specific exclusion.

Fair Market Value

IFBA = FMV – (EPA + AEL)

• The amount of the benefit the ER must include as income to the EE

IFBA: Includable fringe benefit amount

FMV: Fair Market Value

EPA: EE paid amount

AEL: Amount excluded by law

Formula applied =

Harry’s company pays $300.00 a month for his parking space. (Joe Citizen wanting purchase the same parking space would also pay $300.00 per month.)

FMV = $300.00Harry’s pays nothing towards the spot

EPA = $0

Up to $245.00 per month of ER provided parking is excluded from income by law for 2013.

AEL = $245.00

IFBA = $55.00 per month

Formula challenge = • Harry’s company pays $215.00 per month

for a space that would cost Joe Citizen $300.00 per month

• Harry contributes $35.00 per month for that spot.

FMV =EPA =AEL =IFBA=

Challenge solved• FMV = $300.00

• EPA = $35.00

• AEL = $245.00

Includable Fringe Benefit Amount

IFBA = $20.00

20.00 = 300.00 – (35.00 + 245.00)

Fringe Benefits

• Nontaxable Fringe Benefits– No-additional-cost-services– Qualified Employer Discounts– Working Condition Fringe– De Minimis Fringe– Qualified Transportation– On-Premises Athletic Facilities– Qualified Retirement Planning Services– Qualified Moving Expense Reimbursement

No-Additional Cost Services

• Regularly offered for sale to customers• No additional cost to employer• Current and former EE’s who left because

of retirement or disability and their widow(er)s, spouses and dependent children.

• Available on equal terms to all (cannot be in favor of highly compensated employees)

Highly compensated EE’s

5% owner of stock or capitalor

For 2013 received more than $115,000.00 in compensation from the ER during the preceding year

Qualified Employee Discounts

• Discount cannot exceed gross profit %

• Cannot exceed 20% off price to customers

• Must be same line of business

• Discount available to all in employees in group

• Real Estate excluded

• Current and former employees included

Working Condition Fringe

• Employee’s use must relate to trade or business

• Business deduction on personal tax return

• Current employee, partner, director or independent contractor only

• Employer must maintain records to substantiate deductions

Working Condition Fringes

• Examples– Business use of company car/airplane– Chauffer/body guard– Dues/membership fees to professional orgs– Subscriptions to business periodicals– Job-related education– Goods used for product testing– Outplacement services

Working Condition Fringe Cont’d

• Nondiscrimination rules do not apply

• Tax preparation services are not a working condition fringe

• Employer provided cell phones– IRS makes final determination– Substantiation that it is used primarily for

business use is recommended.

De Minimis Fringes

• Value is so small that accounting is unreasonable or impracticable

• Frequency matters

• Employee is anyone to whom the benefit is provided

• Can never, never, never be cash!– Cash is cash and cash is taxable!

De Minimis Fringe Cont’d

• Examples of De Minimis Fringe– Occasional typing of personal letters– Occasional use of copier– Occasional parties and picnics for all emp.– Occasional tickets to sporting events– Traditional holiday gifts w/ small value

• Turkeys• Candy

More Examples

• Occasional use of company telephones

• Occasional meals or cab fare

• Coffee and doughnuts

**Frequency needs to be considered

De Minimis Fringe Cont’d

• Rules to remember

No specific dollar maximum– Nondiscrimination rules do not apply– Gift certificates and gift cards are not

excludable• Readily ascertainable value – easily accounted for

– Meal allowances: taxability varies– In-kind meals: for the benefit of the ER

• Excluded from income

Qualified Transportation Fringes

• Excluded from income if:– Transportation between home and work in

commuter highway vehicle provided by employer

– Transit passes, vouchers, tokens or fare cards up to $245/month

– Parking provided on or near premises up to $245/month

Qualified Transportation Fringes Cont’d

• Exclusion Limits– Monthly limit applies

• Employees only

• Public and Private sector alike

• No written plan required

Qualified bicycle commuting reimbursement

A “qualified bicycle commuting reimbursement” can be made to EE’s for reasonable expenses incurred by an EE who regularly uses a bicycle to commute to and from work. The maximum qualified bicycle commuting reimbursement is $20.00 per month. A qualified month is a month in which the EE does not receive any other qualified transportation fringe benefit and regularly uses a bicycle for a substantial portion of travel between her residence and place of work.

Knowledge

• An EE’s parking garage is two blocks away from his down-town office. It costs $260.00 per month to rent a stall there, but the employee doesn’t mind because it’s convenient and his ER reimburses him for 100% of the costs. How much of his monthly parking is taxable?

$15.00

On-premises Athletic Facilities

• Must be located on premises

• Facility is operated by the employer

• All use is by employees, spouses and dependent children

• Current and former employees

• Is not a resort or residential facility

Qualified Retirement Planning Services

• Employees and spouses

• Retirement planning advice or information on qualified retirement plan (401K)

• Can include advice outside plan

• Does not include tax preparation, accounting or brokerage services

• Cannot discriminate towards highly compensated

Personal Use of Employer Provided

Vehicles• Business use is NOT Taxable• Personal Use is Taxable if not

– De Minimis– Qualified Non-personal Use– Automobile Salespersons (pp 3-17, 3-18)

• If an EE uses a company provided vehicle for both business and personal travel, the EE MUST

account to the ER for the business use. Everything else is considered

personal use.

Accounting for vehicle use

Valuation Methods

• Employers can determine the fair market value of taxable personal use of a company-provided vehicle by using either

- General Valuation Method- one of three Special Valuation

(Safe Harbor) methods (pg 3-19)

Once an ER begins to use a safe-harbor valuation method for a vehicle, they must continue using that method as long as the EE uses that vehicle.

Safe Harbor Methods

• Annual lease value method

• Cents-per-mile method

• Commuting value method

Annual lease value method

• Also called the Fair Market Valuation MethodTable on page 3-21

The first step is to determine the fair market value of the vehicle on the first day the EE uses the vehicle. The annual lease value amount is then multiplied by the percentage of personal use.

EXAMPLEAssume an EE uses a company car 50% for business. The car has a fair market value of $20,000.00.Taxable Compensation for personal use of the car is $2800.00.

** FUEL NOT INCLUDEDWhen the ER provides fuel for personal use, add the cost of fuel based on the personal mileage (at a rate of $0.055 per mile or actual expenses.)

Knowledge

EE Amy has an employer provided car that she uses for both business and personal driving. Amy drove 17,000 for the year. 12,300 miles were for business. The car’s FMV is $16,200. What amount must be included as taxable income for the year?

Solution

ALV of $16,200 car (from table) = $4600Personal miles = Total miles – business use

4700= 17000 – 12300Find the percentage of personal miles

4700 / 17000 = .2765.2765 = 27.65%

FMV of personal use = $4600 X 27.65%$1271.90

Cents-per-mile method

The value of personal use can be determined by multiplying the personal miles by the business standard mileage rate.

$ 0.565 per mile (56 and one half cents) - The ER must reasonably expect the vehicle to be used throughout the year for business, or- The vehicle must be driven at least 10,000 miles annually (including personal use) and be used primarily by employees.

Easy cheesy

Knowledge

• Employee Maggie drives 16,000 miles including 7600 personal miles.

If her ER pays for the gas:FMV of personal use = 7600 x $.0565 = $4294.00

If Maggie pays for gas:FMV of personal use = 7600 x ($0.565 - $0.055) =

7600 x $0.51 = $3876.00

Commuting Value Method

• Include in the EE’s income $1.50 per one-way commute ($3.00 for a round trip) if the personal use of the company vehicle is:

- Not by a “control employee”

- Restricted in writing to driving between work and home

- By an EE who commutes in the company vehicle due to noncompensatory business

reasons.

This method also applies to more than one EE commuting in the same vehicle or for company sponsored car-pools.

Business Use of personal vehicles

• EE’s who use their personal vehicle for business use may be reimbursed at the

Business Standard Mileage Rate

$0.565 per mile for 2013

- Must be documented

- Excess to that rate is taxable

Check your understanding

• A Salesperson drives a company-owned vehicle valued at $12,000. In the year, he logs 10,000 miles for business travel and 5000 miles for personal use.

Use the annual lease value method to calculate the value of his personal use of the vehicle. Page 3-21

$1200.00

• The salesperson uses the car two-thirds for business and one-third (5000 / 15000) for personal use.

The lease value of a $12,000 automobile is $3600.

$3600 times one-third = $1200.00

• Personal Use of Employer Provided Aircraft– General Valuation Rule– Non-commercial Flight Valuation Rule

• Free or Discounted Commercial Flights• Discounts on Property or Services• Club Memberships

– Working Condition Fringe?– Club vs. Organization

Other Taxable Fringe Benefits

Additional Employer Provided Benefits

• Life Insurance– Group-term life insurance– Whole life insurance– Split dollar life insurance– Owners

Group Term Life

• The value of group-term life insurance provided to an EE in excess of $50,000 is taxable compensation.*Dependent group-term life insurance coverage of $2000 or less is excludable from income as a de minims benefit.

If dependent group-term life is more than $2000 the entire amount is taxable and subject to all withholding.

GTL Key points

• The value of excess GTL is exempt from Federal Income Tax withholdingHowever, the amount is taxable on the EE’s individual tax return and must be reported on Form W-2

• Must withhold Soc Sec and Medicare• Exempt from FUTA• Calculated on EE’s age as of 12/31 of the year

in which the benefit is taxable.

Imputed income

• The value of excess GTL is an example of imputed income.

Imputing income reduces employees’ net pay by increasing taxes.

Group Term Life

Please use table on 3-29

Example 1

Employer paid life = 2 X Employee’s salary, Salary = $65,000, Age 59 on 12/31/13, Maximum coverage is $125,000 per plan

Step 1: 2 x $65,000 = $130,000

Step 2: $125,000 – $50,000 = $75,000

Step 3: $75,000/$1000 = 75 units

Step 4: 75 x $.43 = $32.25

Step 5: $32.25 per month in taxable income

Group Term Life

Example 2Employer paid life = 2 X Employee’s salary, Salary = $65,000, Age

59 on 12/31/13, Maximum coverage is $125,000 per plan, Employee pays $25/month after tax for coverage

Step 1: 2 x $65,000 = $130,000

Step 2: $125,000 – $50,000 = $75,000

Step 3: $75,000/$1000 = 75 units

Step 4: 75 x $.43 = $32.25

Step 5: $32.25 - $25.00 = $7.25

Step 6: $7.25 per month in taxable income

GTL Challenge

On January 1st of 2013 Linda’s company provides Group Term Life benefit of $225,000.00

Linda’s birthday is 11/16/1979

How much is considered taxable for the month of January, 2013

Figure out Linda’s age as of 12/31/201334 years old

Amount of coverage over $50,000225,000 – 50,000 = 175,000

175,000 divided by 1000 = 175175 X .08 = $14.00 per month in 2013 is

taxable (regardless of which month)

Linda told a fib !

• Same coverage.

• Linda’s birthday is really 11/16/1949

MATH IS FUN !!

175 X .66 = $115.50 per month is taxable

Break

Qualified Moving

Expenses

ER’s reimbursement or payment of EE’s moving expenses is an excludable fringe benefit when:●Distance from EE’s new workplace to old residence must be at least 50 miles farther than the distance from the EE’s old workplace to her old residence.

●EE must work full time for at least 39 weeks during the 12 months immediately following the move

●Documentation necessary

Deductible moving expenses that are defined in IRC 217 are excluded from

income when reimbursed with no dollar limitations

as long as they are REASONABLE

• Expenses incurred moving household goods and personal effects from EE’s old residence to new.

• Expenses incurred by the EE and her family for

traveling from the old residence to new (excluding meals) If reimbursing mileage during a move, the rate cannot exceed $0.24 per mile without incurring taxation.

*These expenses include lodging but not meals.

• Nondeductible (taxable) moving expenses– Meals while in transit– House hunting trips– Real estate expenses

Nonqualified Moving Expenses

Any reimbursed or ER paid moving expenses not meeting the qualified moving expense reimbursement requirements are included in the EE’s income and are subject to employment taxes and income tax withholding. They must be reported in Boxes 1, 3, and 5 of the EE’s form W-2 but not in Box 12. Qualified moving expenses paid directly to a third party are not reportable on Form W-2. However, the qualified moving expenses paid directly to the EE must be reported on Form W-2 in Box 12, Code P.

Knowledge• EE transferred from Miami to Dallas, company agreed to

pay 100% of his moving expenses. He claimed the following expenses which were paid in full by his company.

$5000.00 Moving household goods to new residence

$300.00 Mileage/lodging for traveling to new job site at $0.24 per mile

$50.00 Meals en route to the new location

$2200.00 Pre-move house-hunting expenses and temporary living expenses after relocating

in Dallas

$3000.00 Expenses related to purchase, sale or lease of a primary residence

$1000.00 Real Estate Taxes

How much of these expenses are excluded from income?

$5000.00 for moving household goods

plus

$300.00 for mileage (at $0.24 per mile)

and lodging for travel

$5300.00 are excluded from income and not taxable

The remaining $6250.00 is taxable.

Educational Assistance

• Job-Related - No Limit

• Non Job-Related - Up to $5,250

Group Legal

TAXABLE !!

All group legal services payments are included in the EE’s income and are subject to federal income tax withholding and social security, Medicare and FUTA taxes.

Business Travel Expenses

• Away from home (overnight) and• Temporary

- Daily Transportation Expenses may not be taxable

• Accountable Plan– Business Connection– Substantiation– Returning Excess Amounts– Timely

Business Travel Expenses Cont’d

• The IRS provides two safe harbors methods for requiring substantiation and the return of excess amounts within a reasonable time– Fixed-date method

If an advance is provided, no more than 30 days before an expense incurred, the expense is

substantiated with 60 days, and excess amount returned within 120 days

– Periodic statement methodER issued statement - at least quarterly - detailing

amounts paid but not substantiated and requesting EE substantiate or return excess amount to ER within 120 days of receiving the statement

• Accountable PlanER reimbursement for actual, substantiated EE business expenses under an accountable plan are NOT included in an EE’s income and are not subject to FIT, Soc Sec, Med or FUTA

• ER reimbursements under a non-accountable plan Must be included as EE income

The EE can take a deduction for unreimbursed amounts actually spent as business expenses on her personal tax return.

Taxation and reporting

requirements

Employer Provided Meals and Lodging

• Employer Provided Meals - Nontaxable

– Furnished on employer premise– For the convenience of the employer

• Employer Provided Lodging - Nontaxable

– On the employer premises– For the convenience of the employer– Required as a condition of employment

Adoption Assistance• Dollar Limitation - $12,970 / eligible child

• Income Limitation- phase out starts at $194,580

- totally lost over $234,580

• Eligible Child- under 18 yrs old or physically or mentally incapable of caring for self

• Qualified Expenses- Reasonable and necessary

• Exclude from FIT but…subject to Soc Sec, Medicare and FUTA. Reported in Boxes 3 and 5

• W2, Box 12, Code T (Toddler)

Advances and Overpayments

Must be included in the EE’s income for the payroll period when received.

- FIT WithheldIf paid back in the same year amount is excluded from reporting on W-2. The EE will receive any excess as refund when they file personal

return. If repayment is in a later year, income cannot be excluded. EE may be able to take a deduction or tax credit on personal return.– SS and Medicare taxesIf EE repays after ER filed Qtrly Form 941, ER must refund any over-

withheld Soc Sec and Medicare taxes to EE. – FUTAER may be able claim refund of overpaid FUTA if EE earned less than $ 7000.00

Gross repayments

• Because an ER cannot collect the prior year’s federal income tax withheld from an EE making a repayment in a subsequent year, employers can better protect themselves with a policy that requires the EE to repay the gross amount of the overpayment, rather than the net amount after taxes have been withheld.

Awards and Prizes

• Prizes and awards given to EE’s are generally included in the EE’s taxable compensation and require withholding. HOWEVER…

Length of Service andSafety Awards

May be excluded from income if the awards follow certain guidelines.– For nonqualified plans, EE’s can receive an award costing the

ER $400.00 per EE in a calendar year.– For qualified plans, all awards made to a single EE cannot cost

the ER more than $1600.00 in a calendar year, with the average cost of all individual awards to all EE’s not exceeding $400.00

• Other qualifications for length-of-service awards– Awards must not be given during the first five

years of employment with the employer.– Awards can be made only at five-year

intervals.

Time is on our side.

• Other qualifications for safety awards– No more than 10% of all employees may receive

safety awards.– No management, professional, administrative, or

clerical employees may receive safety awards.– The employee must work full time with at least one

year of service.

• Bonuses• Commissions• Conventions• Dismissal or Severance pay• Death Benefits

Reported on Form 1099

Not subject to social security or Medicare

Additional Payments

Other Payments Cont’d

• Dependent child care assistance– Up to $5,000 under Section 129 plan

Nontaxable

• Directors’ Fees (non-employee)– Not wages, reported on 1099-Misc

• Disaster Relief Payments– May be tax free

Employer Paid Taxes (Gross-Up)Gross Amount of Earnings = Desired Net Payment / (100% - Total Tax %)

1. Gross Amount of Earnings = $5,000 / (100% - Total Tax %)

2. 25% = Federal Income Tax Supplemental Tax Rate

6.2% = Social Security

1.45% = Medicare

32.65% = Total Tax %

3. Gross Amount of Earnings = $5,000 / (100% - 32.65 %)

4. Gross Amount of Earnings = $5,000 / 67.35%

Desired Net = $5,000.00

5. Gross Amount of Earnings = $7423.90

Knowledge

• Generosity Inc wants to give EE Linda a $6000.00 year end bonus in 2013. To ensure that Linda receives $6000, Generosity agrees to pay her federal and state income and social security and Medicare taxes on the bonus, which is treated as supplemental wages. Calculate the gross payment and the amounts that must be withheld assuming Linda has been paid $50,000.00 so far in 2013 and the state supplemental wage withholding rate is 3.5%.

• Total tax % = 25% FIT + 3.5% SIT + 6.2% SS + 1.45% Med• Total tax % = 36.15• Gross-up rate = 100% - 36.15% = 63.85%• Gross earnings = $6000 / 63.85% = $9397.02

– FITW = 25% x $9397.02 = $2349.26

– SITW = 3.5% x $9397.02 = $328.90

– SS = 6.2% x $9397.02 = $582.62

– Med = 1.45% x $9397.02 = $136.25

To check:

$9397.02 - $2349.26 - $328.90 - $582.62 - $136.25 = $5999.99

Remember

• Always check your answer by reversing the operation.

Be aware of the social security wage base for 2013:

$113,700

Other Payments Cont’dEquipment Allowance

– Not included in the EE’s wages and not subject to FIT, SS, Med or FUTA

• Gifts– Included in the EE’s income and subject

to all taxes (except if they’re a de minimis fringe)

• Golden Parachute Payments• Guaranteed Wage Payments

• Jury Duty Pay• Leave Sharing Plans• Loans to Employees• Military Pay• Outplacement Services• Retroactive Wage Payments

Other Payments Cont’d

• Security Provided to Employees

• Severance or Dismissal Pay

• Stocks

Other Payments Cont’d

• Stocks and Stock Options– Stock as compensation– Stock Options– Incentive Stock Options– Employee Stock Purchase Plan– Non Qualified Stock Options– Tax Treatment– Written Statement

Stocks and Stock Options

Other Payments Cont’d

• Strike Benefits• Supplemental Unemployment

Benefits

And just in case you thought we were nearly finished….

TIPS• Special rules apply towards tips.

– Withholding on tip income– More than $20 / entire amount is taxable

– When tips are deemed paid– ER share of FICA - Special rules for ER share of FICA taxes

on unreported or under-reported tips.

– Tip credit • The tip credit can be used to reduce EE hourly rate

only if the employee regularly receives more than $30.00 per month in tips

Form 8846– Credit for Employer Social Security and Medicare Taxes Paid on Certain

Employee Tips

Form 8027- Employer’s Annual Return of Tip Income and Allocated Tips

Effective July 24, 2009

• Federal Minimum Wage– $7.25 per hour

• Tip Credit– $5.12 per hour

• Minimum Cash Wage– $2.13 per hour

However, the actual tips received plus the cash wage must equal the required minimum wage.

Other Payments Cont’d

• Uniform Allowances

• Vacation Pay

• Wages Paid After Death– In same year– In subsequent year

*Make sure to check state law prior to any payouts

Withholding and Reporting for Employer Provided

Benefits• Cash Fringe Benefits• Non Cash Fringe Benefits

– Withholding Methods– Imputed Income– Gross Up– Special Accounting Rule– Reporting Requirements

Questions ?

Sources:

Tracie Sawade, CPP 2010 Presentation

Payroll Source

Payroll Practice Fundamentals

www.irs.gov