Title: CPP
1Taxable and Nontaxable Compensation
Linda Porada, CPP linda.porada_at_adp.com 847-507-63
77
2Overview
- Gross Income and Wages
- Fringe Benefits
- Additional ER Provided Benefits
- Other Payments
- Withholding and Reporting Rules for ER provided
benefits
3Internal Revenue Code
- All compensation an EE receives from an ER, no
matter what form it takes, constitutes wages
subject to federal income and employment taxes. - Such compensation is excluded from wages and
exempt from taxation ONLY where the IRC provides
a specific exclusion.
4Gross 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.
5Fair 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
6Formula 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 250.00 per month of ER provided parking is
excluded from income by law for 2014. - AEL 250.00
- IFBA 50.00 per month
7Formula 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
8Challenge solved
- FMV 300.00
- EPA 35.00
- AEL 250.00
- Includable Fringe Benefit Amount
- IFBA 15.00
- 15.00 300.00 (35.00 250.00)
9Fringe 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
10No-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)
11Highly compensated EEs
5 owner of stock or capital or For 2014 received
more than 115,000.00 in compensation from the ER
during the preceding year
12Qualified 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
13Working 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
14Working 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
15Working 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.
16De 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!
17De 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
18More Examples
- Occasional use of company telephones
- Occasional meals or cab fare
- Coffee and doughnuts
- Frequency needs to be considered
19De Minimis Fringe Contd
- Rules to remember
- No specific dollar maximum
- Nondiscrimination rules do not apply
- Gift certificates and gift cards are not
excludable - Readily ascertainable value easily accounted
for - Meal allowances taxability varies
- In-kind meals for the benefit of the ER
- Excluded from income
20Qualified Transportation Fringes
- Excluded from income if
- Transportation between home and work in commuter
highway vehicle provided by employer up to
130/month - Transit passes, vouchers, tokens or fare cards up
to 130/month - Parking provided on or near premises up to
250/month
21Qualified Transportation Fringes Contd
- Exclusion Limits
- Monthly limit applies
- Employees only
- Public and Private sector alike
- No written plan required
22Qualified 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.
23Knowledge
- 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 25On-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
26Qualified 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
27Personal 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)
28Accounting 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.
29Valuation 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 3-20)
- 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.
30Safe Harbor Methods
- Annual lease value method
- Cents-per-mile method
- Commuting value method
31Annual 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 personal 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 0.055 per mile or actual expenses.)
32Knowledge
- 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?
33Solution
- 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
34Cents-per-mile method
- The value of personal use can be determined by
multiplying the personal miles by the business
standard mileage rate. - 0.56 per mile (56 cents)
- - The ER must reasonably expect the vehicle to
be used throughout the year for business, or - - The vehicle must be driven at least 10,000
miles annually (including personal use) and be
used primarily by employees.
35Easy cheesy
Knowledge
- Employee Maggie drives 16,000 miles including
7600 personal miles. - If her ER pays for the gas
- FMV of personal use 7600 x .56 4256.00
- If Maggie pays for gas
- FMV of personal use 7600 x (0.56 - 0.055)
- 7600 x 0.505 3838.00
36Commuting 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.
37Business Use of personal vehicles
- EEs who use their personal vehicle for business
use may be reimbursed at the - Business Standard Mileage Rate
- 0.56 per mile for 2014
- Must be documented
- Excess to that rate is taxable
38Check 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
391200.00
- 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
40Other 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
41Additional Employer Provided Benefits
- Life Insurance
- Group-term life insurance
- Whole life insurance
- Split dollar life insurance
- Owners
42Group 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.
43GTL 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.
44Imputed income
- The value of excess GTL is an example of imputed
income. - Imputing income reduces employees net pay by
increasing taxes.
45Group Term Life
- Please use table on 3-29
- Example 1
- Employer paid life 2 X Employees salary,
Salary 65,000, Age 59 on 12/31/14, 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
46Group Term Life
- Example 2
- Employer paid life 2 X Employees salary,
Salary 65,000, Age 59 on 12/31/14, 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
47GTL Challenge
- On January 1st of 2014 Lindas company provides
Group Term Life benefit of 225,000.00 - Lindas birthday is 11/16/1980
- How much is considered taxable for the month of
January, 2014
48- Figure out Lindas age as of 12/31/2014
- 34 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 2014 is taxable
(regardless of which month)
49Linda told a fib !
- Same coverage.
- Lindas birthday is really 11/16/1950
50MATH IS FUN !!
- 175 X .66 115.50 per month is taxable
51 Break
52Qualified 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
53Deductible moving expenses that are defined in
IRC 217 are excluded from income when reimbursed
with no dollar limitationsas long as they are
REASONABLE
- 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 0.235 per mile
without incurring taxation. - These expenses include lodging but not meals.
54Nonqualified 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.
55Knowledge
- 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 0.235 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?
56- 5000.00 for moving household goods
- plus
- 300.00 for mileage (at 0.235 per mile)
-
- 5300.00 are excluded from income and not taxable
- The remaining 6250.00 is taxable.
57Educational Assistance
- Job-Related
- - No Limit
- Non Job-Related
- - Up to 5,250
58Group 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.
59Business Travel Expenses
- Away from home (overnight)
- and
- Temporary
- - Daily Transportation Expenses
- may not be taxable
- Accountable Plan
- Business Connection
- Substantiation
- Returning Excess Amounts
- Timely
60Business 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
61Taxation 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.
62Employer 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
63Adoption Assistance
- Dollar Limitation - 13,190 / eligible child
- Income Limitation- phase out starts at 197,880
- - totally lost over 237,880
- 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)
64Advances 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
65Gross 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.
66Awards 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
67Time 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.
68- 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.
69Additional Payments
- Bonuses
- Commissions
- Conventions
- Dismissal or Severance pay
- Death Benefits
- Reported on Form 1099
- Not subject to social security or Medicare
70Other 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
71- 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 6.2 Social Security 1.45
Medicare 32.65 Total Tax
3. Gross Amount of Earnings 5,000 / (100 -
32.65 )
4. Gross Amount of Earnings 5,000 / 67.35
5. Gross Amount of Earnings 7423.90
72Knowledge
- Generosity Inc wants to give EE Linda a 6000.00
year end bonus in 2014. 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 2014 and
the state supplemental wage withholding rate is
3.5.
73- Total tax 25 FIT 3.5 SIT 6.2 SS
1.45 Med - Total tax 36.15
- Gross-up rate 100 - 36.15 63.85
- Gross earnings 6000 / 63.85 9397.02
- FITW 25 x 9397.02 2349.26
- SITW 3.5 x 9397.02 328.90
- SS 6.2 x 9397.02 582.62
- Med 1.45 x 9397.02 136.25
- To check
- 9397.02 - 2349.26 - 328.90 - 582.62 - 136.25
5999.99
74Remember
- Always check your answer by reversing the
operation.
Be aware of the social security wage base for
2014 117,000
75Other 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
76Other Payments Contd
- Jury Duty Pay
- Leave Sharing Plans
- Loans to Employees
- Military Pay
- Outplacement Services
- Retroactive Wage Payments
77Other Payments Contd
- Security Provided to Employees
- Severance or Dismissal Pay
- Stocks
78Stocks 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
79Other Payments Contd
- Strike Benefits
- Supplemental Unemployment Benefits
And just in case you thought we were nearly
finished.
80TIPS
- 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
81Effective 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.
82Other Payments Contd
- Uniform Allowances
- Vacation Pay
- Wages Paid After Death
- In same year
- In subsequent year
- Make sure to check state law prior to any
payouts
83Withholding and Reporting for Employer Provided
Benefits
- Cash Fringe Benefits
- Non Cash Fringe Benefits
- Withholding Methods
- Imputed Income
- Gross Up
- Special Accounting Rule
- Reporting Requirements
84Questions ?
85Sources Tracie Sawade, CPP 2010
Presentation Payroll Source Payroll Practice
Fundamentals www.irs.gov