US Internal Revenue Service: p15b--2004

8/14/2019 US Internal Revenue Service: p15b--2004

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ContentsDepartment of the TreasuryInternal Revenue Service Important Changes . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Publication 15-B 1. Fringe Benefit Overview . . . . . . . . . . . . . . . . . . . 2(Rev. January 2004) Are Fringe Benefits Taxable? . . . . . . . . . . . . . . . 2Cat. No. 29744N Cafeteria Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2. Fringe Benefit Exclusion Rules . . . . . . . . . . . . . 3

Accident and Health Benefits . . . . . . . . . . . . . . . 4

Employers Achievement Awards . . . . . . . . . . . . . . . . . . . . . 5Adoption Assistance . . . . . . . . . . . . . . . . . . . . . . 6Athletic Facilities . . . . . . . . . . . . . . . . . . . . . . . . . 6Tax Guide toDe Minimis (Minimal) Benefits . . . . . . . . . . . . . . . 6Dependent Care Assistance . . . . . . . . . . . . . . . . 6Educational Assistance . . . . . . . . . . . . . . . . . . . 7FringeEmployee Discounts . . . . . . . . . . . . . . . . . . . . . . 8Employee Stock Options . . . . . . . . . . . . . . . . . . 8Group-Term Life Insurance Coverage . . . . . . . . . 9BenefitsLodging on Your Business Premises . . . . . . . . . 11Meals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Moving Expense Reimbursements . . . . . . . . . . . 13For Benefits ProvidedNo-Additional-Cost Services . . . . . . . . . . . . . . . . 13in 2004 Retirement Planning Services . . . . . . . . . . . . . . . 14Transportation (Commuting) Benefits . . . . . . . . . 14Tuition Reduction . . . . . . . . . . . . . . . . . . . . . . . . 15Working Condition Benefits . . . . . . . . . . . . . . . . . 15

3. Fringe Benefit Valuation Rules . . . . . . . . . . . . . 17General Valuation Rule . . . . . . . . . . . . . . . . . . . 17Cents-Per-Mile Rule . . . . . . . . . . . . . . . . . . . . . . 17Commuting Rule . . . . . . . . . . . . . . . . . . . . . . . . . 18Lease Value Rule . . . . . . . . . . . . . . . . . . . . . . . . 19Unsafe Conditions Commuting Rule . . . . . . . . . . 21

4. Rules for Withholding, Depositing, andReporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

How To Get Forms and Publications . . . . . . . . . . . 23

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Important Changes

Cents-per-mile rule. The standard mileage rate you canuse under the cents-per-mile rule to value the personal useof a vehicle you provide to an employee in 2004 is in-creased to 37.5 cents a mile. See Cents-Per-Mile Rule insection 3.

Increase in qualified parking exclusion. Beginning Jan-uary 1, 2004, employers can exclude up to $195 per monthGet forms and other information from an employees wages for qualified parking. See Qual-

ified Transportation Benefits in section 2.faster and easier by

Internet www.irs.gov or FTP ftp.irs.gov

FAX 7033689694 (from your fax machine) IntroductionThis publication supplements Circular E (Pub. 15),Employers Tax Guide, and Publication 15-A, EmployersSupplemental Tax Guide. It contains specialized and de-

www.irs.gov/efile tailed information on the employment tax treatment offringe benefits.


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Comments and suggestions. We welcome your com- and report the employment taxes. These rules are dis-ments about this publication and your suggestions for cussed in section 4.future editions. You can email us while visiting our website If the recipient of a taxable fringe benefit is not yourat www.irs.gov. You can write to us at the following employee, the benefit is not subject to employment taxes.address: However, you may have to report the benefit on one of the

following information returns.Internal Revenue ServiceTE/GE and Specialty Forms and Publications Branch

If the recipientSE:W:CAR:MP:T:Treceives the benefit as: Use:1111 Constitution Ave. NW

Washington, DC 20224 An independent contractor Form 1099-MISC

We respond to many letters by telephone. It would be A partner Schedule K-1 (Formhelpful if you would include your daytime phone number, 1065)including the area code, in your correspondence.

An S corporation shareholder Schedule K-1 (Form1120S)

1. Fringe Benefit Overview For more information, see the instructions for the formslisted above.

A fringe benefit is a form of pay for the performance ofservices. For example, you provide an employee with a

Cafeteria Plansfringe benefit when you allow the employee to use abusiness vehicle to commute to and from work.

A cafeteria plan, including a flexible spending arrange-ment, is a written plan that allows your employees toPerformance of services. A person who performs serv-choose between receiving cash or taxable benefits insteadices for you does not have to be your employee. A person

of certain qualified benefits for which the law provides anmay perform services for you as an independent contrac-exclusion from wages. If an employee chooses to receive ator, partner, or director. Also, for fringe benefit purposes,qualified benefit under the plan, the fact that the employeetreat a person who agrees not to perform services (such ascould have received cash or a taxable benefit instead willunder a covenant not to compete) as performing services.not make the qualified benefit taxable.

Provider of benefit. You are the provider of a fringe Generally, a cafeteria plan does not include any planbenefit if it is provided for services performed for you. You that offers a benefit that defers pay. However, a cafeteriamay be the provider of the benefit even if it was actually plan can include a qualified 401(k) plan as a benefit. Also,furnished by another person. You are the provider of a certain life insurance plans maintained by educational in-fringe benefit your client or customer provides to your stitutions can be offered as a benefit even though theyemployee for services the employee performs for you. defer pay.

Recipient of benefit. The person who performs servicesQualified benefits. Qualified benefits include the follow-for you is the recipient of a fringe benefit provided for thoseing benefits discussed in section 2.

services. That person may be the recipient even if thebenefit is provided to someone who did not perform serv- Accident and health benefits (but not medical sav-ices for you. For example, your employee may be the ings accounts or long-term care insurance).recipient of a fringe benefit you provide to a member of the

Adoption assistance.employees family.

Dependent care assistance.Are Fringe Benefits Taxable?

Group-term life insurance coverage (including coststhat cannot be excluded from wages).Any fringe benefit you provide is taxable and must be

included in the recipients pay unless the law specificallyexcludes it. Section 2 discusses the exclusions that apply Benefits not allowed. A cafeteria plan cannot includeto certain fringe benefits. Any benefit not excluded under the following benefits discussed in section 2.the rules discussed in section 2 is taxable.

Archer medical savings accounts. (See AccidentIncluding taxable benefits in pay. You must include in a and Health Benefits.)recipients pay the amount by which the value of a fringe

Athletic facilities.benefit is more than the sum of the following amounts.

De minimis (minimal) benefits. Any amount the law excludes from pay.

Educational assistance. Any amount the recipient paid for the benefit.

Employee discounts.The rules used to determine the value of a fringe benefitare discussed in section 3. Lodging on your business premises.

If the recipient of a taxable fringe benefit is your em- Meals.ployee, the benefit is subject to employment taxes and

Moving expense reimbursements.must be reported on Form W-2, Wage and Tax Statement.However, you can use special rules to withhold, deposit, No-additional-cost services.

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Transportation (commuting) benefits. 2) An employee who for 2004 was either of the follow-ing:

Tuition reduction.

a) A 5% owner of your business. Working condition benefits.

b) A 1% owner of your business whose annual payIt also cannot include scholarships or fellowships (dis- was more than $150,000.

cussed in Publication 970, Tax Benefits for Education).

Employee. For these plans, treat the following individualsas employees. More information. For more information about cafeteria

plans, see section 125 of the Internal Revenue Code and A current common-law employee (see section 2 inCircular E (Pub 15) for more information). its regulations.

A full-time life insurance agent who is a current stat-utory employee.

2. Fringe Benefit Exclusion A leased employee who has provided services toyou on a substantially full-time basis for at least a Rulesyear if the services are performed under your pri-mary direction or control.

This section discusses the exclusion rules that apply tofringe benefits. These rules exclude all or part of the valueException for S corporation shareholders. Do notof certain benefits from the recipients pay.treat a 2% shareholder of an S corporation as an employee

of the corporation. A 2% shareholder for this purpose is The excluded benefits are not subject to Federal incomesomeone who directly or indirectly owns (at any time dur- tax withholding. Also, in most cases, they are not subject to

ing the year) more than 2% of the corporations stock or social security, Medicare, or Federal unemploymentstock with more than 2% of the voting power. (FUTA) tax and are not reported on Form W-2.

Plans that favor highly compensated employees. If This section discusses the exclusion rules for the follow-your plan favors highly compensated employees as to ing fringe benefits.eligibility to participate, contributions, or benefits, you mustinclude in their wages the value of taxable benefits they Accident and health benefits.could have selected. A plan you maintain under a collec-

Achievement awards.tive bargaining agreement does not favor highly compen-sated employees. Archer medical savings accounts.

A highly compensated employee for this purpose is Athletic facilities.

any of the following employees. De minimis (minimal) benefits.

1) An officer. Dependent care assistance.

2) A shareholder who owns more than 5% of the voting Educational assistance.power or value of all classes of the employers stock.

Employee discounts.3) An employee who is highly compensated based onthe facts and circumstances. Employee stock options.

4) A spouse or dependent of a person described in (1), Group-term life insurance coverage.(2), or (3).

Lodging on your business premises.

Plans that favor key employees. If your plan favors key Meals.employees, you must include in their wages the value of

Moving expense reimbursements.taxable benefits they could have selected. A plan favorskey employees if more than 25% of the total of the nontax- No-additional-cost services.able benefits you provide for all employees under the plan

Transportation (commuting) benefits.go to key employees. However, a plan you maintain undera collective bargaining agreement does not favor key em-

Tuition reduction.ployees. Working condition benefits.A key employee during 2004 is generally an employee

who is either of the following:See Table 21 for an overview of the employment tax

treatment of these benefits.1) An officer having annual pay of more than $130,000.

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Table 21. Special Rules for Various Types of Fringe Benefits(For more information, see the full discussion in this section.)

Treatment Under Employment Taxes

Type of Fringe Benefit Income Tax Withholding Social Security and Medicare Federal Unemployment (FUTA)

Exempt1,2, except for certain Exempt, except for certain Exemptlong-term care benefits payments to S corporation

Accident and health benefitsemployees who are 2%shareholders.

Achievement awards Exempt1 up to $1,600 ($400 for nonqualified awards).

Adoption assistance Exempt1 Taxable Taxable

Exempt if substantially all use during the calendar year is by employees, their spouses, and theirAthletic facilities

dependent children.

De minimis (minimal) benefits Exempt Exempt Exempt

Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return).

Educational assistance Exempt up to $5,250 of benefits each year. (See Educational Assistance on page 7.)

Employee discounts Exempt4 up to certain limits. (See Employee Discounts on page 8.)

Employee stock options See Employee Stock Options on page 8.

Exempt Exempt1,5 up to cost of $50,000 ExemptGroup-term life insurance

of coverage. (Special rules applycoverage

to former employees.)

Lodging on your business Exempt1 if furnished for your convenience as a condition of employment.premises

Exempt if furnished on your business premises for your convenience.Meals

Exempt if de minimis.

Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them.

No-additional cost services Exempt4 Exempt4 Exempt4

Exempt1 up to certain limits if for rides in a commuter highway vehicle ($100), transit passes ($100), orqualified parking ($195). (See Transportation (Commuting Benefits) on page 14.)Transportation (commuting)

benefitsExempt if de minimis.

Tuition reduction Exempt4 if for undergraduate education (or graduate education if the employee performs teaching orresearch activities).

Working condition benefits Exempt Exempt Exempt

1 Exemption does not apply to S corporation employees who are 2% shareholders. See page 3.2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees.3 Exemption does not apply to certain highly compensated employees under a program that favors those employees.4 Exemption does not apply to certain highly compensated employees.5 Exemption does not apply to certain key employees under a plan that favors those employees.

Contributions to Archer MSAs (discussed in Publi-Accident and Health Benefitscation 969, Medical Savings Accounts (MSAs)).

This exclusion applies to contributions you make to anThis exclusion also applies to payments you make (di-accident or health plan for an employee, including the

rectly or indirectly) to an employee under an accident orfollowing:health plan for employees that are either of the following:

Contributions to the cost of accident or health insur- Payments or reimbursements of medical expenses.ance.

Payments for specific injuries or illnesses (such as Contributions to a separate trust or fund that pro-the loss of the use of an arm or leg). The paymentsvides accident or health benefits directly or through

insurance.

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must be figured without regard to any period of ab- clude all or part of the amounts you pay to these employ-sence from work. ees in their wages subject to Federal income tax

withholding. However, you can exclude these amounts(other than payments for specific injuries or il lnesses) from

Accident or health plan. This is an arrangement thatthe employees wages subject to social security, Medicare,

provides benefits for your employees, their spouses, andand FUTA taxes.

their dependents in the event of personal injury or sick-A self-insured plan is a plan that reimburses your em-ness. The plan may be insured or noninsured and does not

ployees for medical expenses not covered by an accidentneed to be in writing.or health insurance policy.

Employee. For this exclusion, treat the following individu- A highly compensated employee for this exception is

als as employees. any of the following individuals.

A current common-law employee. One of the five highest paid officers.

A full-time life insurance agent who is a current stat- An employee who owns (directly or indirectly) moreutory employee. than 10% in value of the employers stock.

A retired employee. An employee who is among the highest paid 25% ofall employees (other than those who can be ex-

A former employee you maintain coverage for basedcluded from the plan).on the employment relationship.

A widow or widower of an individual who died while For more information on this exception, see sectionan employee. 105(h) of the Internal Revenue Code and its regulations.

A widow or widower of a retired employee. COBRA premiums. The exclusion for accident andhealth benefits applies to amounts you pay to maintain

For the exclusion of contributions to an accident or medical coverage for a former employee under the Com-health plan, a leased employee who has provided

bined Omnibus Budget Reconciliation Act of 1986services to you on a substantially full-time basis for(COBRA). The exclusion applies regardless of the lengthat least a year if the services are performed underof employment, whether you pay the premiums directly oryour primary direction or control.reimburse the former employee for premiums paid, andwhether the employees separation is permanent or tem-Exception for S corporation shareholders. Do notporary.treat a 2% shareholder of an S corporation as an employee

of the corporation for this purpose. A 2% shareholder isAchievement Awardssomeone who directly or indirectly owns (at any time dur-

ing the year) more than 2% of the corporations stock orThis exclusion applies to the value of any tangible personalstock with more than 2% of the voting power.property you give to an employee as an award for eitherlength of service or safety achievement. The exclusionExclusion from wages. You can generally exclude the

does not apply to awards of cash, cash equivalents, giftvalue of accident or health benefits you provide to an certificates, or other intangible property such as vacations,employee from the employees wages.meals, lodging, tickets to theater or sporting events,

Exception for certain long-term care benefits. You stocks, bonds, and other securities. The award must meetcannot exclude contributions to the cost of long-term care the requirements for employee achievement awards dis-insurance from an employees wages subject to Federal cussed in chapter 2 of Publication 535, Business Ex-income tax withholding if the coverage is provided through penses.a flexible spending or similar arrangement. This is a benefitprogram that reimburses specified expenses up to a maxi- Employee. For this exclusion, treat the following individu-mum amount that is reasonably available to the employee als as employees.and is less than 5 times the total cost of the insurance.However, you can exclude these contributions from the A current employee.employees wages subject to social security, Medicare,

A former common-law employee you maintain cover-and Federal unemployment (FUTA) taxes.

age for in consideration of or based on an agree-

S corporation shareholders. Because you cannot ment relating to prior service as an employee.treat a 2% shareholder of an S corporation as an employee A leased employee who has provided services to

for this exclusion, you must include the value of accident oryou on a substantially full-time basis for at least a

health benefits you provide to the employee in theyear if the services are performed under your pri-

employees wages subject to Federal income tax withhold-mary direction or control.

ing. However, you can exclude the value of these benefits(other than payments for specific injuries or i llnesses) from

Exception for S corporation shareholders. Do notthe employees wages subject to social security, Medicare,

treat a 2% shareholder of an S corporation as an employeeand FUTA taxes.

of the corporation. A 2% shareholder is someone whoException for highly compensated employees. If directly or indirectly owns (at any time during the year)

your plan is a self-insured medical reimbursement plan more than 2% of the corporations stock or stock with morethat favors highly compensated employees, you must in- than 2% of the voting power.

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Exclusion from wages. You can generally exclude the Employee. For this exclusion, treat the following individu-value of achievement awards you give to an employee als as employees.from the employees wages if their cost is not more than

A current employee.the amount you can deduct as a business expense for theyear. The excludable annual amount is $1,600 ($400 for A former employee who retired or left on disability.awards that are not qualified plan awards). See chapter 2

A widow or widower of an individual who died whileof Pub. 535 for more information on the limit on deductionsan employee.for employee achievement awards.

A widow or widower of a former employee who re-To determine for 2004 whether an achievementtired or left on disability.award is a qualified plan award under the de-

duction rules described in Pub. 535, treat any A leased employee who has provided services toCAUTION!

employee who received more than $90,000 in pay for 2003 you on a substantially full-time basis for at least aas a highly compensated employee. year if the services are performed under your pri-

mary direction or control.If the cost of awards given to an employee is more thanyour allowable deduction, include in the employees wages

A partner who performs services for a partnership.the larger of the following amounts.

The part of the cost that is more than your allowablededuction (up to the value of the awards). De Minimis (Minimal) Benefits

The amount by which the value of the awards ex-You can exclude the value of a de minimis benefit youceeds your allowable deduction.provide to an employee from the employees wages. A de

Exclude the remaining value of the awards from the minimis benefit is any property or service that you provideemployees wages. to an employee and has so little value (taking into account

how frequently you provide similar benefits to your employ-ees) that accounting for it would be unreasonable or ad-

Adoption Assistance ministratively impracticable. Cash, no matter how little, isnever excludable as a de minimis benefit, except for occa-

You must exclude all payments or reimbursements yousional meal money or transportation fare.

make under an adoption assistance program for anExamples of de minimis benefits include the following:employees qualified adoption expenses from the

employees wages subject to Federal income tax withhold- Occasional personal use of a company copying ma-

ing. However, you cannot exclude these payments from chine if you sufficiently control its use so that at leastwages subject to social security, Medicare, and Federal 85% of its use is for business purposes.unemployment (FUTA) taxes. For more information, see

Holiday gifts, other than cash, with a low fair marketPublication 968, Tax Benefits for Adoption.value.You must report all qualifying adoption expenses you

paid or reimbursed under your adoption assistance pro- Group-term life insurance payable on the death of an

gram for each employee for the year in box 12 of the employees spouse or dependent if the face amountemployees Form W-2. Use Code T to identify this is not more than $2,000.amount.

Meals. See Meals on page 11.Employee. For this exclusion, do not treat a 2% share-

Occasional parties or picnics for employees andholder of an S corporation as an employee of the corpora-their guests.tion. A 2% shareholder is someone who directly or

indirectly owns (at any time during the year) more than 2% Occasional tickets for entertainment or sportingof the corporations stock or stock with more than 2% of the events.voting power.

Transportation fare. See Transportation (Commut-ing) Benefits on page 14.

Athletic Facilities Occasional typing of personal letters by a company

secretary.You can exclude the value of an employees use of an

on-premises gym or other athletic facility you operate froman employees wages if substantially all use of the facilityEmployee. For this exclusion, treat any recipient of a de

during the calendar year is by your employees, theirminimis benefit as an employee.

spouses, and their dependent children. For this purpose,an employees dependent child is a child or stepchild who

Dependent Care Assistanceis the employees dependent or who, if both parents aredeceased, is age 24 or younger.

This exclusion applies to household and dependent careservices you pay for (directly or indirectly) or provide to anOn-premises facility. The athletic facility must be locatedemployee under a dependent care assistance programon premises you own or lease. It does not have to bethat covers only your employees. The services must be forlocated on your business premises. However, the exclu-a qualifying persons care and must allow the employee tosion does not apply to an athletic facility for residential use,work. These requirements are basically the same as thesuch as athletic facilities that are part of a resort.

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tests the employee would have to meet to claim the depen- Educational Assistancedent care credit if the employee paid for the services. Formore information, see Qualifying Person Test and This exclusion applies to educational assistance you pro-

vide to employees under an educational assistance pro-Work-Related Expense Test in Publication 503, Childgram. The exclusion also applies to graduate leveland Dependent Care Expenses.courses.

Employee. For this exclusion, treat the following individu- Educational assistance means amounts you pay or in-cur for your employees education expenses. These ex-als as employees.penses generally include the cost of books, equipment,

A current employee. fees, supplies, and tuition. However, these expenses do

not include the cost of a course or other education involv- A leased employee who has provided services to ing sports, games, or hobbies, unless the education:you on a substantially full-time basis for at least ayear if the services are performed under your pri-

Has a reasonable relationship to your business, ormary direction or control.

Is required as part of a degree program. Yourself (if you are a sole proprietor).

Education expenses do not include the cost of tools or A partner who performs services for a partnership.supplies (other than textbooks) your employee is allowedto keep at the end of the course. Nor do they include the

Exclusion from wages. You can exclude the value of cost of lodging, meals, or transportation.benefits you provide to an employee under a dependentcare assistance program from the employees wages if you Educational assistance program. An educational assis-reasonably believe that the employee can exclude the tance program is a separate written plan that providesbenefits from gross income. educational assistance only to your employees. The pro-

gram qualifies only if all of the following tests are met.An employee can generally exclude from gross incomeup to $5,000 of benefits received under a dependent care

The program benefits employees who qualify underassistance program each year. This limit is reduced to rules set up by you that do not favor highly compen-$2,500 for married employees filing separate returns. sated employees. To determine whether your pro-

However, the exclusion cannot be more than the earned gram meets this test, do not consider employeesincome of either: excluded from your program who are covered by a

collective bargaining agreement if there is evidence The employee, or

that educational assistance was a subject of The employees spouse. good-faith bargaining.

Special rules apply to determine the earned income of a The program does not provide more than 5% of itsspouse who is either a student or not able to care for benefits during the year for shareholders or owners.

A shareholder or owner is someone who owns (onhimself or herself. For more information on the earnedany day of the year) more than 5% of the stock or ofincome limit, see Pub. 503.

the capital or profits interest of your business.Exception for highly compensated employees. You The program does not allow employees to choose tocannot exclude dependent care assistance from the

receive cash or other benefits that must be includedwages of a highly compensated employee unless the ben-in gross income instead of educational assistance.efits provided under the program do not favor highly com-

pensated employees and the program meets the You give reasonable notice of the program to eligiblerequirements described in section 129(d) of the Internal employees.Revenue Code.

Your program can cover former employees if their employ-For this exclusion, a highly compensated employee

ment is the reason for the coverage.for 2004 is an employee who meets either of the following

For this exclusion, a highly compensated employee fortests.2004 is an employee who meets either of the following

1) The employee was a 5% owner at any time during tests.the year or the preceding year.

1) The employee was a 5% owner at any time during2) The employee received more than $90,000 in pay for the year or the preceding year.the preceding year.

2) The employee received more than $90,000 in pay forYou can choose to ignore test (2) if the employee was not the preceding year.also in the top 20% of employees when ranked by pay for

You can choose to ignore test (2) if the employee was notthe preceding year.also in the top 20% of employees when ranked by pay forthe preceding year.Form W-2. Report the value of all dependent care assis-

tance you provide to an employee under a dependent careEmployee. For this exclusion, treat the following individu-

assistance program in box 10 of the employees Form W-2.als as employees.

Include any amounts you cannot exclude from theemployees wages in boxes 1, 3, and 5. A current employee.

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A former employee who retired, left on disability, or Determine your gross profit percentage based on allwas laid off. property you offer to customers (including employee cus-

tomers) and your experience during the tax year immedi- A leased employee who has provided services to

ately before the tax year in which the discount is available.you on a substantially full-time basis for at least a

To figure your gross profit percentage, subtract the totalyear if the services are performed under your pri-

cost of the property from the total sales price of the prop-mary direction or control.

erty and divide the result by the total sales price of the Yourself (if you are a sole proprietor). property.

A partner who performs services for a partnership. Exception for highly compensated employees. Youcannot exclude from the wages of a highly compensated

employee any part of the value of a discount that is notExclusion from wages. You can exclude up to $5,250 ofavailable on the same terms to one of the following groups.

educational assistance you provide to an employee underan educational assistance program from the employees All of your employees, orwages each year.

A group of employees defined under a reasonableAssistance over $5,250. If you do not have an educa- classification you set up that does not favor highly

tional assistance plan, or you provide an employee with compensated employees.assistance exceeding $5,250, you can exclude the valueof these benefits from wages if they are working condition For this exclusion, a highly compensated employeebenefits. Property or a service provided is a working condi- for 2004 is an employee who meets either of the followingtion benefit to the extent that if the employee paid for it, the tests.amount paid would have been deductible as a business ordepreciation expense. See Working Condition Benefits, 1) The employee was a 5% owner at any time duringon page 15. the year or the preceding year.

2) The employee received more than $90,000 in pay forthe preceding year.

You can choose to ignore test (2) if the employee was notEmployee Discountsalso in the top 20% of employees when ranked by pay for

This exclusion applies to a price reduction you give an the preceding year.employee on property or services you offer to customers inthe ordinary course of the line of business in which the Employee Stock Optionsemployee performs substantial services. However, it doesnot apply to discounts on real property or discounts on There are three classes of stock optionsincentive stockpersonal property of a kind commonly held for investment options, employee stock purchase plan options, and non-(such as stocks or bonds). statutory (nonqualified) stock options.

Generally, for income tax purposes, incentive stockEmployee. For this exclusion, treat the following individu-

options and employee stock purchase plan options areals as employees. excluded from wages both when the options are grantedand when they are exercised (unless the stock is disposed

A current employee.of in a disqualifying disposition). However, the spread

A former employee who retired or left on disability. (between the exercise price and fair market value of thestock at the time of exercise) is included in wages subject

A widow or widower of an individual who died whileto social security, Medicare, and Federal unemploymentan employee.(FUTA) taxes when the options are exercised. Income tax

A widow or widower of an employee who retired or withholding is not required at the time of exercise.left on disability. The spread on nonstatutory options normally is included

in wages for income tax purposes when the options are A leased employee who has provided services toexercised. (See Regulations section 1.83-7.) The spreadyou on a substantially full-time basis for at least aon nonstatutory options is also subject to social security,year if the services are performed under your pri-Medicare, and FUTA taxes, and income tax withholding atmary direction or control.

the time of exercise. A partner who performs services for a partnership.The IRS will not enforce the application of social secur-

ity, Medicare, and FUTA taxes at the time of exercise onExclusion from wages. You can generally exclude the the spread on incentive stock options and employee stockvalue of an employee discount you provide an employee purchase plan options until further guidance is issued. Infrom the employees wages, up to the following limits. addition, if stock acquired pursuant to the exercise of an

incentive stock option or employee stock purchase plan For a discount on services, 20% of the price you

option is subsequently sold in a disqualifying disposition,charge nonemployee customers for the service.

the income is not subject to income tax withholding. (How- For a discount on merchandise or other property, ever, the income should be reported to the employee or

your gross profit percentage times the price you former employee, generally in box 1 of Form W-2.) Seecharge nonemployee customers for the property. Notice 2002-47 for more information. You can find Notice

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2002-47 on page 97 of Internal Revenue Bulletin 2002-28 3) An individual who was formerly your employee underat www.irs.gov/pub/irs-irbs/irb02-28.pdf. (1) or (2), above.

An employee who transfers his or her interest in non-4) A leased employee who has provided services to

statutory stock options to the employees former spouseyou on a substantially full-time basis for at least a

incident to a divorce is not required to include an amount inyear if the services are performed under your pri-

gross income upon the transfer. The former spouse, rathermary direction and control.

than the employee, is required to include an amount ingross income when the former spouse exercises the stock

Exception for S corporation shareholders. Do notoptions. See Revenue Ruling 2002-22 for details. You can

treat a 2% shareholder of an S corporation as an employeefind Revenue Ruling 2002-22 on page 849 of Internal

of the corporation. A 2% shareholder is someone who

Revenue Bulletin 2002-19 at www.irs.gov/pub/irs-irbs/ directly or indirectly owns (at any time during the year)irb02-19.pdf. more than 2% of the corporations stock or stock with moreFor more information about employee stock options, than 2% of the voting power.

see sections 421, 422, and 423 of the Internal RevenueCode and their related regulations. The 10-employee rule. Generally, life insurance is not

group-term life insurance unless you provide it to at least10 full-time employees at some time during the year.Group-Term Life Insurance Coverage

For this rule, count employees who choose not to re-This exclusion applies to life insurance coverage that ceive the insurance unless, to receive it, they must contrib-meets all the following conditions. ute to the cost of benefits other than the group-term life

insurance. For example, count an employee who could It provides a general death benefit that is not in-

receive insurance by paying part of the cost, even if thatcluded in income.employee chooses not to receive it. However, do not count

You provide it to a group of employees. See The an employee who must pay part or all of the cost of

10-employee rule below. permanent benefits to get insurance, unless that employeechooses to receive it.

It provides an amount of insurance to each em-ployee based on a formula that prevents individual Exceptions. Even if you do not meet the 10-employeeselection. This formula must use factors such as the rule, two exceptions allow you to treat insurance asemployees age, years of service, pay, or position. group-term life insurance.

Under the first exception, you do not have to meet the You provide it under a policy you carry directly or10-employee rule if all the following conditions are met.indirectly. Even if you do not pay any of the policys

cost, you are considered to carry it if you arrange for1) If evidence that the employee is insurable is re-payment of its cost by your employees and charge at

quired, it is limited to a medical questionnaire (com-least one employee less than, and at least one otherpleted by the employee) that does not require aemployee more than, the cost of his or her insur-physical.ance. Determine the cost of the insurance, for this

purpose, as explained under Coverage over the 2) You provide the insurance to all your full-time em-

limiton page 10. ployees or, if the insurer requires the evidence men-tioned in (1), to all full-time employees who provide

Group-term life insurance does not include the following evidence the insurer accepts.insurance.

3) You figure the coverage based on either a uniform Insurance that does not provide general death bene- percentage of pay or the insurers coverage brack-

fits, such as travel insurance or a policy providing ets.only accidental death benefits.

Under the second exception, you do not have to meet Life insurance on the life of your employees spouse the 10-employee rule if all the following conditions are met.

or dependent. However, you may be able to exclude You provide the insurance under a common planthe cost of this insurance from the employees

covering your employees and the employees of atwages as a de minimis benefit. See De Minimisleast one other employer who is not related to you.(Minimal) Benefits on page 6.

The insurance is restricted to, but mandatory for, all

Insurance provided under a policy that provides a your employees who belong to, or are representedpermanent benefit (an economic value that extendsby, an organization (such as a union) that carries onbeyond 1 policy year, such as paid-up or cash sur-substantial activities besides obtaining insurance.render value), unless certain requirements are met.

See Regulations section 1.79-1 for details. Evidence of whether an employee is insurable doesnot affect an employees eligibility for insurance orthe amount of insurance that employee gets.Employee. For this exclusion, treat the following individu-

als as employees.To apply either exception, do not consider employees

who were denied insurance for any of the following rea-1) A current common-law employee.sons.

2) A full-time life insurance agent who is a current statu-tory employee. They were 65 or older.

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They customarily work 20 hours or less a week or 5 Have not completed 3 years of service.

months or less in a calendar year. Are part-time or seasonal.

They have not been employed for the waiting period Are nonresident aliens who receive no U.S. sourcegiven in the policy. (This waiting period cannot be

earned income from you.more than 6 months.)

Are not included in the plan but are in a unit ofemployees covered by a collective bargaining agree-Exclusion from wages. You can generally exclude thement, if the benefits provided under the plan werecost of up to $50,000 of group-term life insurance from thethe subject of good-faith bargaining between youwages of an insured employee. You can exclude the same

and employee representatives.amount from the employees wages when figuring socialsecurity and Medicare taxes. In addition, you do not haveYour plan does not favor key employees as to benefits ifto withhold Federal income tax or pay FUTA tax on any

all benefits available to participating key employees aregroup-term life insurance you provide to an employee.also available to all other participating employees. Your

Exception for key employees. Generally, if yourplan does not favor key employees just because the

group-term life insurance plan favors key employees as toamount of insurance you provide to your employees is

participation or benefits, you must include the entire cost ofuniformly related to their pay.

the insurance in your key employees wages. (This excep-S corporation shareholders. Because you cannottion generally does not apply to church plans.) When

treat a 2% shareholder of an S corporation as an employeefiguring social security and Medicare taxes, you must alsofor this exclusion, you must include the cost of allinclude the entire cost in the employees wages. Includegroup-term life insurance coverage you provide the 2%the cost in boxes 1, 3, and 5 of Form W-2. However, you doshareholder in his or her wages. When figuring socialnot have to withhold Federal income tax or pay FUTA taxsecurity and Medicare taxes, you must also include theon the cost of any group-term life insurance you provide to

cost of this coverage in the 2% shareholders wages.an employee.Include the cost in boxes 1, 3, and 5 of Form W-2. How-For this purpose, the cost of the insurance is the greaterever, you do not have to withhold Federal income tax orof the following amounts.pay Federal unemployment tax on the cost of any

The premiums you pay for the employees insur- group-term life insurance coverage you provide to the 2%ance. shareholder.

The cost you figure using the table shown later Coverage over the limit. You must include in yourunder Coverage over the limit. employees wages subject to social security and Medicare

taxes the cost of group-term life insurance that is moreFor this exclusion, a key employee during 2004 is an than the cost of $50,000 of coverage, reduced by the

employee or former employee who is one of the following amount the employee paid toward the insurance. Report itindividuals. See section 416(i) for more information. as wages in boxes 1, 3, and 5 of the employees Form W-2.

Also, show it in box 12 with code C.1) An officer having annual pay of more than $130,000.

Figure the monthly cost of the insurance to include in the2) An individual who for 2004 was either of the follow- employees wages by multiplying the number of thousands

ing: of dollars of insurance coverage over $50,000 (figured tothe nearest $100) by the cost shown in the following table.a) A 5% owner of your business.Use the employees age on the last day of the tax year.

b) A 1% owner of your business whose annual pay You must prorate the cost from the table if less than a fullwas more than $150,000. month of coverage is involved.

Cost Per $1,000 of ProtectionA former employee who was a key employee uponFor 1 Month

retirement or separation from service is also a key em-ployee. Age Cost

Your plan does not favor key employees as to partici- Under 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .05pation if at least one of the following is true. 25 through 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .06

30 through 34 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .08 It benefits at least 70% of your employees. 35 through 39 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0940 through 44 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 At least 85% of the participating employees are not45 through 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15key employees.50 through 54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

It benefits employees who qualify under a set of 55 through 59 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43rules you set up that do not favor key employees. 60 through 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66

65 through 69 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27Your plan meets this participation test if it is part of a 70 and older . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.06

cafeteria plan (discussed in section 1) and it meets theparticipation test for those plans. You figure the total cost to include in the employees

When applying this test, do not consider employees wages by multiplying the monthly cost by the number of fullwho: months coverage at that cost.

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Example. Toms employer provides him with they need to live on your business premises to be able togroup-term life insurance coverage of $200,000. Tom is 45 properly perform their duties. Examples include employ-years old, is not a key employee, and pays $100 per year ees who must be available at all times and employees whotoward the cost of the insurance. Toms employer must could not perform their required duties without being fur-include $170 in his wages. The total cost of the insurance, nished the lodging.$360 ($.15 200 12), is reduced by the cost of $50,000 of It does not matter whether you must furnish the lodgingcoverage, $90 ($.15 50 12), and by the $100 Tom pays as pay under the terms of an employment contract or a lawfor the insurance. The employer includes $170 in boxes 1, fixing the terms of employment.3, and 5 of Toms Form W-2. The employer also enters$170 in box 12 with code C. Example. A hospital gives Joan, an employee of the

hospital, the choice of living at the hospital free of charge orCoverage for dependents. Group-term life insurance living elsewhere and receiving a cash allowance in additioncoverage paid by the employer for the spouse or depen-to her regular salary. If Joan chooses to live at the hospital,dents of an employee may be excludable from income as athe hospital cannot exclude the value of the lodging fromde minimis fringe benefit (see page 6). The part of thisher wages because she is not required to live at thecoverage that the employee paid on an after-tax basis ishospital to properly perform the duties of her employment.also excludable from income. For this purpose, the cost is

figured using the monthly cost table above.S corporation shareholder-employee. For this exclu-

Former employees. For group-term life insurance over sion, do not treat a 2% shareholder of an S corporation as$50,000 provided to former employees (including retirees), an employee of the corporation. A 2% shareholder isthe former employees must pay the employees share of someone who directly or indirectly owns (at any time dur-social security and Medicare taxes with their income tax ing the year) more than 2% of the corporations stock orreturns. You are not required to collect those taxes. Use stock with more than 2% of the voting power.the table above to determine the amount of social security

and Medicare taxes owed by the former employee for Mealscoverage provided after separation from service. Reportthose uncollected amounts separately in box 12 on Form

This section discusses the exclusion rules that apply to deW-2 using codes M and N. See the Instructions for

minimis meals and meals on your business premises.Forms W-2 and W-3.

De Minimis MealsLodging on Your Business Premises

This exclusion applies to any meal or meal money youYou can exclude the value of lodging you furnish to anprovide to an employee if it has so little value (taking intoemployee from the employees wages if it meets the follow-account how frequently you provide meals to your employ-ing tests.ees) that accounting for it would be unreasonable or ad-

It is furnished on your business premises. ministratively impracticable. The exclusion applies, forexample, to the following items. It is furnished for your convenience.

The employee must accept it as a condition of em- Coffee, doughnuts, or soft drinks.ployment.

Occasional meals or meal money provided to enableDifferent tests may apply to lodging furnished by educa- an employee to work overtime. (However, the exclu-tional institutions. See section 119(d) of the Internal Reve- sion does not apply to meal money figured on thenue Code for details. basis of hours worked.)

The exclusion does not apply if you allow your employee Occasional parties or picnics for employees andto choose to receive additional pay instead of lodging. their guests.

On your business premises. For this exclusion, your This exclusion also applies to meals you provide at anbusiness premises is generally your employees place of employer-operated eating facility for employees if the an-work. (For special rules that apply to lodging furnished in a nual revenue from the facility equals or exceeds the directcamp located in a foreign country, see section 119(c) of the costs of the facility. For this purpose, your revenue fromInternal Revenue Code and its regulations.)

providing a meal is considered equal to the facilitys directoperating costs to provide that meal if its value can beFor your convenience. Whether or not you furnish lodg-excluded from an employees wages as explained undering for your convenience as an employer depends on allMeals on Your Business Premises later.the facts and circumstances. You furnish the lodging to

your employee for your convenience if you do this for a If food or beverages you furnish to employeessubstantial business reason other than to provide the em- qualify as a de minimis benefit, you can deductployee with additional pay. This is true even if a law or an their full cost. The 50% limit on deductions for the

TIP

employment contract provides that the lodging is furnished cost of meals does not apply. The deduction limit on mealsas pay. However, a written statement that the lodging is is discussed in chapter 2 of Pub. 535.furnished for your convenience is not sufficient.

Employee. For this exclusion, treat any recipient of a deCondition of employment. Lodging meets this test if youminimis meal as an employee.require your employees to accept the lodging because

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Employer-operated eating facility for employees. An However, a written statement that the meals are furnishedemployer-operated eating facility for employees is an eat- for your convenience is not sufficient.ing facility that meets all the following conditions.

Meals excluded for all employees if excluded for You own or lease the facility. more than half. If more than half of your employees who

are furnished meals on your business premises are fur- You operate the facility. (You are considered to op-

nished the meals for your convenience, you can treat allerate the eating facility if you have a contract with

meals you furnish to employees on your business prem-another to operate it.)ises as furnished for your convenience.

The facility is on or near your business premises.Food service employees. Meals you furnish to a res-

You provide meals (food, drinks, and related serv- taurant or other food service employee during, or immedi-ices) at the facility during, or immediately before or ately before or after, the employees working hours areafter, the employees workday. furnished for your convenience. For example, if a waitress

works through the breakfast and lunch periods, you canexclude from her wages the value of the breakfast andExclusion from wages. You can generally exclude thelunch you furnish in your restaurant for each day shevalue of de minimis meals you provide to an employeeworks.from the employees wages.

Exception for highly compensated employees. You Example. You operate a restaurant business. You fur-cannot exclude from the wages of a highly compensated nish your employee, Carol, who is a waitress working 7employee the value of a meal provided at an employer- a.m. to 4 p.m., two meals during each workday. Youoperated eating facility that is not available on the same encourage but do not require Carol to have her breakfastterms to one of the following groups. on the business premises before starting work. She must

have her lunch on the premises. Since Carol is a food All of your employees.

service employee and works during the normal breakfast A group of employees defined under a reasonable and lunch periods, you can exclude from her wages theclassification you set up that does not favor highly value of her breakfast and lunch.compensated employees. If you also allow Carol to have meals on your business

premises without charge on her days off, you cannot ex-For this exclusion, a highly compensated employee for clude the value of those meals from her wages.

2004 is an employee who meets either of the followingEmployees available for emergency calls. Meals youtests.

furnish during working hours so an employee will be avail-1) The employee was a 5% owner at any time during able for emergency calls during the meal period are fur-

the year or the preceding year. nished for your convenience. You must be able to showthat these emergency calls have occurred or can reasona-2) The employee received more than $90,000 in pay forbly be expected to occur.the preceding year.

You can choose to ignore test (2) if the employee was notExample. A hospital maintains a cafeteria on its prem-also in the top 20% of employees when ranked by pay for ises where all of its 230 employees may get meals at no

the preceding year. charge during their working hours. The hospital furnishesmeals to have 120 employees available for emergencies.Each of these employees is, at times, called upon toMeals on Your Business Premisesperform services during the meal period. Although thehospital does not require these employees to remain onYou can exclude the value of meals you furnish to anthe premises, they rarely leave the hospital during theiremployee from the employees wages if they meet themeal period. Since the hospital furnishes meals on itsfollowing tests.premises to its employees so that more than half of them

They are furnished on your business premises. are available for emergency calls during meal periods, thehospital can exclude the value of these meals from the They are furnished for your convenience.wages of all of its employees.

This exclusion does not apply if you allow your employee Short meal periods. Meals you furnish during workingto choose to receive additional pay instead of meals. hours are furnished for your convenience if the nature of

your business restricts an employee to a short meal periodOn your business premises. Generally, for this exclu-(such as 30 or 45 minutes) and the employee cannot besion, the employees place of work is your business prem-expected to eat elsewhere in such a short time. For exam-ises.ple, meals can qualify for this treatment if your peak wor-

For your convenience. Whether you furnish meals for kload occurs during the normal lunch hour. However, theyyour convenience as an employer depends on all the facts do not qualify if the reason for the short meal period is toand circumstances. You furnish the meals to your em- allow the employee to leave earlier in the day.ployee for your convenience if you do this for a substantial

Example. Frank is a bank teller who works from 9 a.m.business reason other than to provide the employee withto 5 p.m. The bank furnishes his lunch without charge in aadditional pay. This is true even if a law or an employmentcafeteria the bank maintains on its premises. The bankcontract provides that the meals are furnished as pay.

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furnishes these meals to Frank to limit his lunch period to Moving household goods and personal effects from

30 minutes, since the banks peak workload occurs duringthe former home to the new home, and

the normal lunch period. If Frank got his lunch elsewhere, it Traveling (including lodging) from the former homewould take him much longer than 30 minutes and the bank

to the new home.strictly enforces the time limit. The bank can exclude thevalue of these meals from Franks wages.

Deductible moving expenses do not include anyProper meals not otherwise available. Meals you fur-expenses for meals and must meet both the dis-nish during working hours are furnished for your conve-tance test and the time test. The distance test isnience if the employee could not otherwise eat proper CAUTION

!met if the new job location is at least 50 miles farther frommeals within a reasonable period of time. For example,the employees old home than the old job location was.meals can qualify for this treatment if there are insufficientThe time test is met if the employee works at least 39eating facilities near the place of employment.weeks during the first 12 months after arriving in the gen-

Meals after work hours. Meals you furnish to an em- eral area of the new job location.ployee immediately after working hours are furnished for For more information on deductible moving expenses,your convenience if you would have furnished them during see Publication 521, Moving Expenses.working hours for a substantial nonpay business reasonbut, because of the work duties, they were not eaten during Employee. For this exclusion, treat the following individu-working hours. als as employees.

Meals you furnish to promote goodwill, boost mo- A current employee.

rale, or attract prospective employees. Meals you fur- A leased employee who has provided services tonish to promote goodwill, boost morale, or attract

you on a substantially full-time basis for at least aprospective employees are not considered furnished for

year if the services are performed under your pri-your convenience. However, you may be able to exclude mary direction or control.their value as discussed under De Minimis Meals onpage 11.

Exception for S corporation shareholders. Do notMeals furnished on nonworkdays or with lodging. treat a 2% shareholder of an S corporation as an employee

You generally cannot exclude from an employees wages of the corporation. A 2% shareholder is someone whothe value of meals you furnish on a day when the employee directly or indirectly owns (at any time during the year)is not working. However, you can exclude these meals if more than 2% of the corporations stock or stock with morethey are furnished with lodging that is excluded from the than 2% of the voting power.employees wages as discussed under Lodging on YourBusiness Premises on page 11. Exclusion from wages. You can generally exclude quali-

fying moving expense reimbursements you provide to anMeals with a charge. The fact that you charge for theemployee from the employees wages. If you paid themeals and that your employees may accept or decline thereimbursements directly to the employee, report themeals is not taken into account in determining whether or

amount in box 12 of Form W-2 with the code P. Do notnot meals are furnished for your convenience.report payments to a third party for the employees movingexpenses or the value of moving services you provided in

S corporation shareholder-employee. For this exclu-kind.

sion, do not treat a 2% shareholder of an S corporation asan employee of the corporation. A 2% shareholder is

No-Additional-Cost Servicessomeone who directly or indirectly owns (at any time dur-ing the year) more than 2% of the corporations stock or

This exclusion applies to a service you provide to anstock with more than 2% of the voting power.employee if it does not cause you to incur any substantialadditional costs. The service must be offered to customers

Moving Expense Reimbursements in the ordinary course of the line of business in which theemployee performs substantial services.

This exclusion applies to any amount you give an em- Generally, no-additional-cost services are excess ca-ployee, directly or indirectly (including services furnished in pacity services, such as airline, bus, or train tickets; hotel

kind), as payment for, or reimbursement of, moving ex- rooms; or telephone services provided free or at a reducedpenses. You must make the reimbursements under rules price to employees working in those lines of business.similar to those described in chapter 13 of Pub. 535 forreimbursements of expenses for travel, meals, and enter-

Substantial additional costs. To determine whether youtainment under accountable plans. incur substantial additional costs to provide a service to an

The exclusion applies only to reimbursements of mov- employee, count any lost revenue as a cost. Do not reduceing expenses that the employee could deduct if he or she the costs you incur by any amount the employee pays forhad paid or incurred them without reimbursement. How- the service. You are considered to incur substantial addi-ever, it does not apply if the employee actually deducted tional costs if you or your employees spend a substantialthe expenses in a previous year. amount of time in providing the service, even if the time

Deductible moving expenses include only the reasona- spent would otherwise be idle or if the services areble expenses of: provided outside normal business hours.

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Reciprocal agreements. A no-additional-cost service For this exclusion, a highly compensated employee for2004 is an employee who meets either of the followingprovided to your employee by an unrelated employer maytests.qualify as a no-additional-cost service if all the following

tests are met:1) The employee was a 5% owner at any time during

The service is the same type of service generally the year or the preceding year.provided to customers in both the line of business in

2) The employee received more than $90,000 in pay forwhich the employee works and the line of businessthe preceding year.in which the service is provided.

You can choose to ignore test (2) if the employee was not You and the employer providing the service have a

also in the top 20% of employees when ranked by pay forwritten reciprocal agreement under which a group of the preceding year.employees of each employer, all of whom performsubstantial services in the same line of business,

Retirement Planning Servicesmay receive no-additional-cost services from theother employer.

You may exclude from an employees wages the value of Neither you nor the other employer incurs any sub- any retirement planning advice or information you provide

stantial additional cost either in providing the service to your employee or his or her spouse if you maintain aor because of the written agreement. qualified retirement plan. In addition to employer plan ad-

vice and information, the services provided may includegeneral advice and information on retirement. However,Employee. For this exclusion, treat the following individu-the exclusion does not apply to services for tax prepara-als as employees.tion, accounting, legal, or brokerage services.

1) A current employee.

Transportation (Commuting) Benefits2) A former employee who retired or left on disability.This section discusses exclusion rules that apply to bene-3) A widow or widower of an individual who died whilefits you provide to your employees for their personal trans-an employee.portation, such as commuting to and from work. These

4) A widow or widower of a former employee who re- rules apply to the following transportation benefits.tired or left on disability.

De minimis transportation benefits.5) A leased employee who has provided services to

Qualified transportation benefits.you on a substantially full-time basis for at least ayear if the services are performed under your pri- Special rules that apply to demonstrator cars and qualifiedmary direction or control. nonpersonal-use vehicles are discussed under Working

Condition Benefits on page 15.6) A partner who performs services for a partnership.

Treat services you provide to the spouse or dependentDe Minimis Transportation Benefitschild of an employee as provided to the employee. For this

fringe benefit, dependent child means any son, stepson, You can exclude the value of any de minimis transportationdaughter, or stepdaughter who is a dependent of the em- benefit you provide to an employee from the employeesployee, or both of whose parents have died and who has wages. A de minimis transportation benefit is any transpor-not reached age 25. Treat a child of divorced parents as a tation benefit you provide to an employee if it has so littledependent of both parents. value (taking into account how frequently you provide

Treat any use of air transportation by the parent of an transportation to your employees) that accounting for itwould be unreasonable or administratively impracticable.employee as use by the employee. This rule does notFor example, it applies to occasional transportation fareapply to use by the parent of a person considered anyou give an employee because the employee is workingemployee because of item (3) above.overtime if the benefit is reasonable and is not based onhours worked.

Exclusion from wages. You can generally exclude thevalue of a no-additional-cost service you provide to an

Employee. For this exclusion, treat any recipient of a deemployee from the employees wages.minimis transportation benefit as an employee.

Exception for highly compensated employees. Youcannot exclude from the wages of a highly compensated

Qualified Transportation Benefitsemployee the value of a no-additional-cost service that isnot available on the same terms to one of the following

This exclusion applies to the following benefits.groups.

A ride in a commuter highway vehicle between the All of your employees, or

employees home and work place. A group of employees defined under a reasonable

A transit pass.classification you set up that does not favor highlycompensated employees. Qualified parking.

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The exclusion applies whether you provide only one or a However, if you provide a local transportation benefit othercombination of these benefits to your employees. than by transit pass or commuter highway vehicle, or to a

person other than an employee, you may be able to ex-Qualified transportation benefits can be provided directly

clude all or part of the benefit under other fringe benefitby you or through a bona fide reimbursement arrange-

rules (de minimis, working condition, etc.).ment. However, cash reimbursements for transit passesqualify only if a voucher or a similar item that the employee

Exclusion from wages. You can generally exclude thecan exchange only for a transit pass is not readily availablevalue of transportation benefits that you provide to anfor direct distribution by you to your employee. A voucher isemployee during 2004 from the employees wages up toreadily available for direct distribution only if an employeethe following limits.can obtain it from a voucher provider that does not impose

fare media charges or other restrictions that effectively $100 per month for combined commuter highwayprevent the employer from obtaining vouchers. See Regu- vehicle transportation and transit passes.lations section 1.132-9 for more information.

$195 per month for qualified parking.You can exclude qualified transportation fringe benefitsfrom an employees wages even if you provide them in

Benefits more than the limit. If the value of a benefitplace of pay. For information about providing qualifiedfor any month is more than its limit, include in thetransportation fringe benefits under a compensation reduc-employees wages the amount over the limit minus anyt i on ag r eemen t , see Regu la t i ons sec t i onamount the employee paid for the benefit. You cannot1.132-9(b)(Q-11).exclude the excess from the employees wages as a de

Commuter highway vehicle. A commuter highway vehi- minimis transportation benefit.cle is any highway vehicle that seats at least 6 adults (notincluding the driver). In addition, you must reasonably More information. For more information on qualifiedexpect that at least 80% of the vehicle mileage will be for transportation benefits, including van pools, and how to

transporting employees between their homes and work determine the value of parking, see Regulations sectionplace with employees occupying at least one-half of the 1.132-9.vehicles seats (not including the drivers).

Tuition ReductionTransit pass. A transit pass is any pass, token, farecard,voucher, or similar item entitling a person to ride, free of

An educational organization can exclude the value of acharge or at a reduced rate, one of the following:qualified tuition reduction it provides to an employee from

On mass transit. the employees wages.

A tuition reduction for undergraduate education gener- In a vehicle that seats at least 6 adults (not includingally qualifies for this exclusion if it is for the education ofthe driver) if a person in the business of transportingone of the following individuals.persons for pay or hire operates it.

Mass transit may be publicly or privately operated and 1) A current employee.includes bus, rail, or ferry.

2) A former employee who retired or left on disability.Qualified parking. Qualified parking is parking you pro- 3) A widow or widower of an individual who died whilevide to your employees on or near your business premises. an employee.It includes parking on or near the location from which your

4) A widow or widower of a former employee who re-employees commute to work using mass transit, com-tired or left on disability.muter highway vehicles, or carpools. It does not include

parking at or near your employees home. 5) A dependent child or spouse of any individual listedin (1) through (4) above.Employee. For this exclusion, treat the following individu-

als as employees. A tuition reduction for graduate education qualifies forthis exclusion only if it is for the education of a graduate

A current employee.student who performs teaching or research activities for

A leased employee who has provided services to the educational organization.you on a substantially full-time basis for at least a For more information on this exclusion, see Pub. 970,

year if the services are performed under your pri- Tax Benefits for Education.mary direction or control.

Working Condition BenefitsException for S corporation shareholders. Do nottreat a 2% shareholder of an S corporation as an employee

This exclusion applies to property and services you pro-of the corporation. A 2% shareholder is someone whovide to an employee so that the employee can perform hisdirectly or indirectly owns (at any time during the year)or her job. It applies to the extent the employee couldmore than 2% of the corporations stock or stock with morededuct the cost of the property or services as a businessthan 2% of the voting power.expense or depreciation expense if he or she had paid forit. The employee must meet any substantiation require-Relation to other fringe benefits. You cannot exclude aments that apply to the deduction. Examples of workingqualified transportation benefit you provide to an employee

under the de minimis or working condition benefit rules. condition benefits include an employees use of a company

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car for business and job-related education provided to an hicle is any vehicle the employee is not likely to use moreemployee. than minimally for personal purposes because of its de-

This exclusion also applies to a cash payment you sign. Qualified nonpersonal-use vehicles generally includeprovide for an employees expenses for a specific or prear- all of the following vehicles.ranged business activity for which a deduction is allowable

Clearly marked police and fire vehicles.to the employee. You must require the employee to verifythat the payment is actually used for those expenses and Unmarked vehicles used by law enforcement officersto return any unused part of the payment. if the use is officially authorized.

For information on deductible employee business ex- An ambulance or hearse used for its specific pur-penses, see Unreimbursed Employee Expenses in Pub.

pose.

529, Miscellaneous Deductions.The exclusion does not apply to the following items. Any vehicle designed to carry cargo with a loadedgross vehicle weight over 14,000 pounds.

A service or property provided under a flexiblespending account in which you agree to provide the Delivery trucks with seating for the driver only, or theemployee, over a time period, a certain level of un- driver plus a folding jump seat.specified noncash benefits with a predetermined

A passenger bus with a capacity of at least 20 pas-cash value.sengers used for its specific purpose.

A physical examination program you provide, even if School buses.mandatory.

Tractors and other special-purpose farm vehicles. Any item to the extent the employee could deduct its

cost as an expense for a trade or business otherPickup trucks. A pickup truck with a loaded gross vehi-than your trade or business.

cle weight of 14,000 pounds or less is a qualified

nonpersonal-use vehicle if it has been specially modifiedEmployee. For this exclusion, treat the following individu- so it is not likely to be used more than minimally forals as employees. personal purposes. For example, a pickup truck qualifies if

it is clearly marked with permanently affixed decals, spe- A current employee.

cial painting, or other advertising associated with your A partner who performs services for a partnership. trade, business, or function and meets either of the follow-

ing requirements. A director of your company.

An independent contractor who performs services 1) It is equipped with at least one of the following items.for you.

a) A hydraulic lift gate.

b) Permanent tanks or drums.Vehicle allocation rules. If you provide a car for anemployees use, the amount you can exclude as a working c) Permanent side boards or panels that materiallycondition benefit is the amount that would be allowable as

raise the level of the sides of the truck bed.a deductible business expense if the employee paid for itsd) Other heavy equipment (such as an electric gen-use. That is, if the employee uses the car for both business

erator, welder, boom, or crane used to tow auto-and personal use, the value of the working condition bene-mobiles and other vehicles).fit is the part determined to be for business use of the

vehicle. See Business use of your car under Personal2) It is used primarily to transport a particular type ofExpenses in chapter 1 of Pub. 535. Also, see the special

load (other than over the public highways) in a con-rules for certain demonstrator cars and qualifiedstruction, manufacturing, processing, farming, min-nonpersonal-use vehicles discussed below.ing, drilling, timbering, or other similar operation forHowever, instead of excluding the value of the workingwhich it was specially designed or significantly modi-condition benefit, you can include the entire annual leasefied.value of the car in the employees wages. The employee

can then claim any deductible business expense for theVans. A van with a loaded gross vehicle weight ofcar as an itemized deduction on his or her personal income

14,000 pounds or less is a qualified nonpersonal-use vehi-tax return. This option is available only if you use the leasecle if it has been specially modified so it is not likely to bevalue rule (discussed in section 3) to value the benefit.used more than minimally for personal purposes. For ex-

Demonstrator cars. All of the use of a demonstrator car ample, a van qualifies if it is clearly marked with perma-by your full-time auto salesperson generally qualifies as a nently affixed decals, special painting, or other advertisingworking condition benefit if the use is primarily to facilitate associated with your trade, business, or function and has athe services the salesperson provided for you and there seat for the driver only (or the driver and one other person)are substantial restrictions on personal use. For more and either of the following items.information and the definition of full-time auto salesper-son, see Regulations section 1.132-5(o). Permanent shelving that fills most of the cargo area.

An open cargo area and the van always carriesQualified nonpersonal-use vehicles. All of anmerchandise, material, or equipment used in youremployees use of a qualified nonpersonal-use vehicle is atrade, business, or function.working condition benefit. A qualified nonpersonal-use ve-

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Education. Certain job-related education you provide to amount you can exclude is limited. See Including taxablean employee may qualify for exclusion as a working condi- benefits in pay on page 2.tion benefit. To qualify, the education must meet the same In most cases, you must use the general valuation rulerequirements that would apply for determining whether the to value a fringe benefit. However, you may be able to useemployee could deduct the expenses had the employee a special valuation rule to determine the value of certainpaid the expenses. The education must meet at least one benefits.of the following tests. This section does not discuss the special valuation rule

used to value meals provided at an employer-operated The education is required by the employer or by law

eating facility for employees. For that rule, see Regulationsfor the employee to keep his or her present salary,

section 1.61-21(j). This section also does not discuss thestatus, or job. The required education must serve a

special valuation rules used to value the use of aircraft. Forbona fide business purpose of the employer. those rules, see Regulations sections 1.61-21(g) and (h). The education maintains or improves skills needed

in the job. General Valuation Rule

However, even if the education meets one or both of the You must use the general valuation rule to determine theabove tests, it is not qualifying education if it: value of most fringe benefits. Under this rule, the value of a

fringe benefit is its fair market value. Is needed to meet the minimum educational require-

ments of the employees present trade or business,Fair market value. The fair market value (FMV) of a fringe

orbenefit is the amount an employee would have to pay a

Is part of a program of study that will qualify the third party in an arms-length transaction to buy or leaseemployee for a new trade or business. the benefit. Determine this amount on the basis of all the

facts and circumstances.

Neither the amount the employee considers to be theOutplacement services. An employees use of outplace- value of the fringe benefit nor the cost you incur to providement services qualifies as a working condition benefit if

the benefit determines its FMV.you provide the services to the employee on the basis ofneed and you get a substantial business benefit from the Employer-provided vehicles. In general, the FMV of anservices distinct from the benefit you would get from the employer-provided vehicle is the amount the employeepayment of additional wages. Substantial business bene- would have to pay a third party to lease the same or similarfits include promoting a positive business image, maintain- vehicle on the same or comparable terms in the geo-ing employee morale, and avoiding wrongful termination graphic area where the employee uses the vehicle. Asuits. comparable lease term would be the amount of time the

Outplacement services do not qualify as a working con- vehicle is available for the employees use, such as adition benefit if the employee can choose to receive cash 1-year period.or taxable benefits in place of the services. If you maintain Do not determine the FMV by multiplying aa severance plan and permit employees to get outplace- cents-per-mile rate times the number of miles driven un-ment services with reduced severance pay, include in the

less the employee can prove the vehicle could have beenemployees wages the difference between the unreduced leased on a cents-per-mile basis.severance and the reduced severance payments.

Cents-Per-Mile RuleExclusion from wages. You can generally exclude thevalue of a working condition benefit you provide to an

Under this rule, you determine the value of a vehicle youemployee from the employees wages.provide to an employee for personal use by multiplying the

Exception for independent contractors. You cannot standard mileage rate by the total miles the employeeexclude the value of parking or the use of consumer goods drives the vehicle for personal purposes. Personal use isyou provide in a product testing program from the compen- any use of the vehicle other than use in your trade orsation you pay to an independent contractor who performs business. This amount must be included in the employeesservices for you. wages or reimbursed by the employee. For 2004, the

standard mileage rate is increased to 37.5 cents a mile.Exception for company directors. You cannot ex-You can use the cents-per-mile rule if either of theclude the value of the use of consumer goods you provide

following requirements is met.in a product testing program from the compensation youpay to a director. You reasonably expect the vehicle to be regularly

used in your trade or business throughout the calen-dar year (or for a shorter period during which youown or lease it).3. Fringe Benefit Valuation

The vehicle meets the mileage test.Rules

This section discusses the rules you must use to determine Maximum automobile value. Youcannotusethe value of a fringe benefit you provide to an employee. the cents-per-mile rule for an automobile (anyYou must determine the value of any benefit you cannot 4-wheeled vehicle, such as a car, pickup truck, orCAUTION

!exclude under the rules in section 2 or for which the van) if its value when you first make it available to any

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employee for personal use is more than an amount deter- employee and the vehicle qualifies, except that youmined by the IRS as the maximum automobile value for the can use the commuting rule for any year duringyear. For example, you cannot use the cents-per-mile rule which use of the vehicle qualifies. However, if thefor an automobile that you first made available to an em- vehicle does not qualify for the cents-per-mile ruleployee in 2003 if its value at that time was more than during a later year, you can use for that year and$15,200. The maximum automobile value for 2004 will be thereafter any other rule for which the vehicle thenpublished in a revenue procedure in the Internal Revenue qualifies.Bulletin early in 2004. If you and the employee own or

You must continue to use the cents-per-mile rule iflease the automobile together, see Regulations section

you provide a replacement vehicle to the employee1.61-21(e)(1)(iii)(B).

and your primary reason for the replacement is to

reduce Federal taxes.Vehicle. For the cents-per-mile rule, a vehicle is any mo-torized wheeled vehicle, including an automobile, manu-

Items included in cents-per-mile rate. Thefactured primarily for use on public streets, roads, andcents-per-mile rate includes the value of maintenance andhighways.insurance for the vehicle. Do not reduce the rate by the

Regular use in your trade or business. A vehicle is value of any service included in the rate that you did notregularly used in your trade or business if at least one of provide. (You can take into account the services actuallythe following conditions is met. provided for the vehicle by using the General Valuation

Rule on page 17.) At least 50% of the vehicles total annual mileage isFor miles driven in the United States, its territories andfor your trade or business.

possessions, Canada, and Mexico, the cents-per-mile rate You sponsor a commuting pool that generally uses includes the value of fuel you provide. If you do not provide

the vehicle each workday to drive at least 3 employ- fuel, you can reduce the rate by no more than 5.5 cents.ees to and from work.

For special rules that apply to fuel you provide for milesdriven outside the United States, Canada, and Mexico, see The vehicle is regularly used in your trade or busi-Regulations section 1.61-21(e)(3)(ii)(B).ness on the basis of all of the facts and circum-

The value of any other service you provide for a vehiclestances. Infrequent business use of the vehicle,is not included in the cents-per-mile rate. Use the generalsuch as for occasional trips to the airport or betweenvaluation rule to value these services.your multiple business premises, is not regular use

of the vehicle in your trade or business.

Commuting RuleMileage test. A vehicle meets the mileage test for a calen-

Under this rule, you determine the value of a vehicle youdar year if both of the following requirements are met.provide to an employee for commuting use by multiplying

The vehicle is actually driven at least 10,000 miles each one-way commute (that is, from home to work or fromduring the year. If you own or lease the vehicle only work to home) by $1.50. If more than one employee com-part of the year, reduce the 10,000 mile requirement mutes in the vehicle, this value applies to each employee.

proportionately. This amount must be included in the employees wages orreimbursed by the employee.

The vehicle is used during the year primarily byYou can use the commuting rule if all the followingemployees. Con

Documents

US Internal Revenue Service: p15b--2004