CPP – FPC Fall Study Group

1
Taxable and Nontaxable Compensation
Linda Porada FPC, CPP linda.porada_at_adp.com 847-50
7-6377
2
Overview

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

3
IRC

• 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.

4
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.

5
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

6
Formula applied ?

• Harrys 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 300.00
• Harrys pays nothing towards the spot
• EPA 0
• Up to 230.00 per month of ER provided parking is
  excluded from income by law for 2011.
• AEL 230.00
• IFBA 70.00 per month

7
Formula challenge ?

• Harrys 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

8
Challenge solved

• FMV 300.00
• EPA 35.00
• AEL 230.00
• Includable Fringe Benefit Amount
• IFBA 35.00
• 35.00 300.00 (35.00 230.00)

9
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

10
No-Additional Cost Services

• Regularly offered for sale to customers
• No additional cost to employer
• Current and former EEs 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)

11
Highly compensated EEs
5 owner of stock or capital or For 2011 received
more than 110,000.00 in compensation from the ER
during the preceding year
12
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

13
Working Condition Fringe

• Employees 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

14
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

15
Working Condition Fringe Contd

• 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.

16
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!

17
De Minimis Fringe Contd

• 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

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More Examples

• Occasional use of company telephones
• Occasional meals or cab fare
• Coffee and doughnuts
• Frequency needs to be considered
• No specific dollar maximum

19
De Minimis Fringe Contd

• Rules to remember
• No specific dollar minimum
• 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
• Tax filing services Electronic filing and
  preparation

20
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 230/month
• Parking provided on or near premises up to
  230/month

21
Qualified Transportation Fringes Contd

• Exclusion Limits
• Monthly limit applies
• Employees only
• Public and Private sector alike
• No written plan required

22
Qualified bicycle commuting reimbursement
A qualified bicycle commuting reimbursement can
be made to EEs 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.
23
Knowledge

• An EEs 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 doesnt
  mind because its convenient and his ER
  reimburses him for 100 of the costs. How much
  of his monthly parking is taxable?

24

• 30.00

25
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

26
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

27
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)

28
Accounting for vehicle use

• 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.

29
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.

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Safe Harbor Methods

• Annual lease value method
• Cents-per-mile method
• Commuting value method

31
Annual lease value method

• Also called the Fair Market Valuation Method
• Table 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.
• EXAMPLE
• Assume an EE uses a company car 50 for
  business. The car has a fair market value of
  20,000.00.
• Taxable Compensation for person use of the car
  is 2800.00.
• FUEL NOT INCLUDED
• When the ER provides fuel for personal use, add
  the cost of fuel based on the personal mileage
  (at a rate of 0.55 per mile or actual expenses.)

32
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 cars FMV is 16,200. What amount
  must be included as taxable income for the year?

33
Solution

• ALV of 16,200 car (from table) 4600
• Personal miles Total miles business use
• 17000 12300
• Find the percentage of personal miles
• 4700 / 17000 .2765
• .2765 27.65
• FMV of personal use 4600 X 27.65
• 1271.90

34
Cents-per-mile method

• If a vehicle is valued under 15,300
• (SUV valued under 16,200)
• The value of personal use can be determined by
  multiplying the personal miles by the business
  standard mileage rate.
• 0.51 per mile
• - 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.

35
Commuting Value Method

• Include in the EEs 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.

36
Business Use of personal vehicles

• EEs who use their personal vehicle for business
  use may be reimbursed at the
• Business Standard Mileage Rate
• 0.51 per mile for 2011
• Must be documented
• Excess to that rate is taxable

37
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

38
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

39
Other Taxable Fringe Benefits

• 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

40
Additional Employer Provided Benefits

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

41
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.

42
GTL Key points

• The value of excess GTL is exempt from Federal
  Income Tax withholding
• However, the amount is taxable on the EEs
  individual tax return and must be reported on
  Form W-2
• Must withhold Soc Sec and Medicare
• Exempt from FUTA
• Calculated on EEs age as of 12/31 of the year in
  which the benefit is taxable.

43
Imputed income

• The value of excess GTL is an example of imputed
  income.
• Imputing income reduces employees net pay by
  increasing taxes.

44
Group Term Life

• Please use table on 3-28
• Example 1
• Employer paid life 2 X Employees salary,
  Salary 65,000, Age 59 on 12/31/11, 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

45
Group Term Life

• Example 2
• Employer paid life 2 X Employees salary,
  Salary 65,000, Age 59 on 12/31/11, 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

46
GTL Challenge

• On January 1st of 2011 Lindas company provides
  Group Term Life benefit of 225,000.00
• Lindas birthday is 11/16/1978
• How much is considered taxable for the month of
  January, 2011

47

• Figure out Lindas age as of 12/31/2011
• 33 years old
• Amount of coverage over 50,000
• 225,000 50,000 175,000
• 175,000 divided by 1000 175
• 175 X .08 14.00 per month in 2011 is taxable
  (regardless of which month)

48
Linda told a fib !

• Same coverage.
• Lindas birthday is really 11/16/1948

49
MATH IS FUN !!

• 175 X .66 115.50 per month is taxable

50
Break
51
Qualified Moving Expenses

• ERs reimbursement or payment of EEs moving
  expenses is an excludable fringe benefit when
• ?Distance from EEs new workplace to old
  residence must be at least 50 miles farther than
  the distance from the EEs 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

52
Deductible moving expenses that are defined in
IRC 217 and are excluded from income when
reimbursed with no dollar limitations

• Expenses incurred moving household goods and
  personal effects from EEs 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 0.19 per mile
  without incurring taxation.
• These expenses include lodging but not meals.

53
Nonqualified Moving Expenses

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

Any reimbursed or ER paid moving expenses not
meeting the qualified moving expense
reimbursement requirements are included in the
EEs income and are subject to employment taxes
and income tax withholding. They must be
reported in Boxes 1, 3, and 5 of the EEs 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.
54
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 0.19 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?

55

• 5000.00 for moving household goods
• plus
• 300.00 for mileage (at 0.19 per mile)
• and lodging for travel
• 5300.00 are excluded from income and not taxable

56
Educational Assistance

• Job-Related
• - No Limit
• Non Job-Related
• - Up to 5,250

57
Group Legal
TAXABLE !! All group legal services payments are
included in the EEs income and are subject to
federal income tax withholding and social
security, Medicare and FUTA taxes.
58
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

59
Business Travel Expenses Contd

• 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 method
• ER 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

60
Taxation and reporting requirements

• Accountable Plan
• ER reimbursement for actual, substantiated EE
  business expenses under an accountable plan are
  NOT included in an EEs 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, subject to the 50 limit
  for meal and entertainment expenses and the 2
  floor for miscellaneous deductions.

61
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

62
Adoption Assistance

• Dollar Limitation - 13,360 / eligible child
• Income Limitation- phase out starts at 185,210
• - totally lost over 225,210
• Eligible Child- under 18 yrs old or physically or
  mentally incapable of caring for self
• Qualified Expenses- Reasonable and necessary
• Exclude from FIT butsubject to Soc Sec, Medicare
  and FUTA. Reported in Boxes 3 and 5
• W2, Box 12, Code T (Toddler)

63
Advances and Overpayments

• Must be included in the EEs income for the
  payroll period when received.
• FIT withheld
• If 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 taxes
• If EE repays after ER filed Qtrly Form 941, ER
  must refund any over-withheld Soc Sec and
  Medicare taxes to EE.
• FUTA
• ER may be able claim refund of overpaid FUTA if
  EE earned less than
• 7000.00

64
Gross repayments

• Because an ER cannot collect the prior years
  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.

65
Awards and Prizes

• Prizes and awards given to EEs are generally
  included in the EEs taxable compensation and
  require withholding. HOWEVER
• Length of Service
• and
• Safety Awards
• May be excluded from income if the awards follow
  certain guidelines.
• For nonqualified plans, EEs 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 EEs not exceeding
  400.00

66
Time is on our side.

• 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.

67

• 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.

68
Additional Payments

• Bonuses
• Commissions
• Conventions
• Dismissal or Severance pay
• Death Benefits
• Reported on Form 1099
• Not subject to social security or Medicare

69
Other Payments Contd

• 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

70

• Employer Paid Taxes (Gross-Up)

Gross Amount of Earnings Desired Net Payment /
(100 - Total Tax )
Desired Net 5,000.00
1. Gross Amount of Earnings 5,000 / (100 -
Total Tax )
2. 25 Federal Income Tax Supplemental Tax
Rate 4.2 Social Security 1.45
Medicare 30.65 Total Tax
3. Gross Amount of Earnings 5,000 / (100 -
30.65 )
4. Gross Amount of Earnings 5,000 / 69.35
5. Gross Amount of Earnings 7,209.81
71
Knowledge

• Generosity Inc wants to give EE Linda a 6000.00
  year end bonus in 2011. 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 2011 and
  the state supplemental wage withholding rate is
  3.5.

72

• Total tax 25 FIT 3.5 SIT 4.2 SS
  1.45 Med
• Total tax 34.15
• Gross-up rate 100 - 34.15 65.85
• Gross earnings 6000 / 65.85 9111.62
• FITW 25 x 9111.62 2277.90
• SITW 3.5 x 9111.62 318.91
• SS 4.2 x 9111.62 382.69
• Med 1.45 x 9111.62 132.12
• To check
• 9111.62 - 2277.90 - 318.91 - 382.69 - 132.12
  6000.00

73
Remember

• Always check your answer by reversing the
  operation.

Be aware of the social security wage
base 106,800.00
74
Other Payments Contd

• Equipment Allowance
• Not included in the EEs wages and not subject to
  FIT, SS, Med or FUTA
• Gifts
• Included in the EEs income and subject to all
  taxes (except if theyre a de minimis fringe)
• Golden Parachute Payments
• Guaranteed Wage Payments

75
Other Payments Contd

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

76
Other Payments Contd

• Security Provided to Employees
• Severance or Dismissal Pay
• Stocks

77
Stocks and Stock Options

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

78
Other Payments Contd

• Strike Benefits
• Supplemental Unemployment Benefits

And just in case you thought we were nearly
finished.
79
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
• Employers Annual Return of Tip Income
• and Allocated Tips

80
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.

81
Other Payments Contd

• Uniform Allowances
• Vacation Pay
• Wages Paid After Death
• In same year
• In subsequent year

82
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

83
Questions ?
84
Sources Tracie Sawade, CPP 2010
Presentation Payroll Source Payroll Practice
Fundamentals www.irs.gov