IRS PAYROLL ISSUES

1
IRS PAYROLL ISSUES

• FGFOA Career Development Seminar
• January 18, 2008

2
Florida FSLG Specialists

• Central Florida (east)- Mae Whitlow
• [phone] mae.whitlow_at_irs.gov
• Central Florida (west)- Sheree Cunningham
  
• [phone] sheree.cunningham_at_irs.gov
• South Florida- Fernando (Fred) Echevarria
• [phone] fernando.echevarria_at_irs.gov

3
WHAT IS A FRINGE BENEFIT?

4
FRINGE BENEFITS

• ANY PROPERTY, SERVICE OR CASH (Other than
  Salary, Provided by Employer)
• TAXABLE UNLESS EXCLUDED SPECIFICALLY BY LAW
• Example Medical Premiums IRC 106

5
WHAT TO DO?

• Identify specific benefit provided to
  employee(s)
• Determine if benefit is excluded by law and
  
• Determine if benefit is fully taxable, or only
  partially.

6
Non-Taxable Fringe Benefits

• No additional cost service
• Qualified employee discounts
• Working condition fringe
• De minimis fringe
• Qualified transportation expenses
• Qualified Moving Expense Reimbursements

7
TAXABLE FRINGE BENEFITS

• INCLUDE in Employees wages and on W-2 (Never
  on 1099-MISC)
• Subject to Federal Withholding, Social Security
  and Medicare
• Even if benefit is received by/for spouse or
  child of employee

8
ACCOUNTABLE PLAN

• Business Connection
• Adequate accounting by employee in reasonable
  time period
• Excess reimbursement returned in a reasonable
  time period

9
NON-ACCOUNTABLE PLAN

• DOES NOT MEET ALL 3 REQUIREMENTS FOR AN
  ACCOUNTABLE PLAN
• BENEFIT IS FULLY TAXABLE WHEN PAID

10
NON-TRAVEL FRINGE BENEFITS

• Clothing
• Equipment
• Professional Licenses
• Awards
• Bonuses

11
Uniform Allowance

• Excluded from wages if clothing/uniform is
• Specifically required as a condition of
  employment AND
• Not adaptable to general usage as ordinary
  clothing

12
Clothing Provided By Employer

• Under what conditions is the value of work
  clothing provided by an employer nontaxable as
  wages?
• EE must wear the clothes as condition of
  employment AND
• The clothes are not suitable for everyday wear

13
Cell Phones

• Employers often provide employees with
• cellular phones and other equipment for use
  outside of the employers premises in the
  performance of official duties. These items
• (and others listed in IRC 280F) are considered
• listed property. Because the nature of the
• property lends itself to personal use, strict
• substantiation requirements are in place.

14
AWARDS ARE TAXABLE

• CASH PRIZES OR AWARDS are always taxable
• PERFORMANCE AWARDS are always taxable
• NON-CASH
• Use Fair Market Value

15
AWARDS EXCEPTIONS

• Certain Awards transferred to Charities
• Pulitzer, Nobel Peace Prize
• Certain Employee Achievement Awards
• Length of Service, Safety - Not Cash
• Nominal Holiday/Special Occasion Awards
• Coffee mugs, plagues, etc.

16
GIFT CARDS Taxable Fringe
Miscellaneous Items

• Technical Advice Memorandum
• To be excludable, the fringe must be
• Small in value
• Infrequent
• Administratively impracticable to oversee
• Gift coupon operates in the same way as gift
  certificate

17
EMPLOYER-PROVIDED AUTO
DOT
18
EMPLOYER-PROVIDED VEHICLE

• HOW DOES EMPLOYEE ACCOUNT FOR PERSONAL USE?
• Personal Use is taxable
• Verified Business Use is not taxable
• Employee can reimburse Employer for personal use

19
Personal Use

• IF NO RECORD KEPT
• Value of ALL use is taxable
• IF RECORD KEPT
• Only Personal Use is taxable

20
METHODS OF SUBSTANTIATION

• Safe harbor
• Qualified non-personal use vehicle
• Adequate records or other sufficient
  corroborating evidence

21
SAFE HARBOR METHOD

• Auto used solely for official business
• requires written policy
• Personal use permitted/commuting only
• requires written policy
• Vehicle used in farming
• business use is deemed 75
• Total (full) value inclusion
• 100 of annual lease value of vehicle is reported
  to employee as income

22
Qualified Non-Personal Use Vehicles personal
use is non taxable if all requirements are
met
23
QUALIFIED NON-PERSONAL-USE VEHICLES

• Clearly marked police and fire vehicles
• Unmarked vehicle used by law enforcement officer
  if the use is officially authorized
• Ambulance or hearse used for its specific purpose
• School bus

24
QUALIFIED NON-PERSONAL-USE VEHICLES (cont)

• Any vehicle designed to carry cargo with a loaded
  gross vehicle weight 14,000 lbs
• Delivery truck with seating for the driver, or
  the driver plus a folding jump seat
• A passenger bus with a capacity of at least 20
  passengers used for its specific purpose
• Tractor and other special purpose farm vehicles

25
QUALIFIED NON-PERSONAL USE VEHICLES

• Provided all requirements are met, the
  employees personal use of a qualified
  non-personal use vehicle will not result in
  taxable income to the employee.

26
ADEQUATE RECORDS

• Employees must substantiate
• Mileage per business trip
• Date
• Business purpose
• (Temp. Reg. 1.274-5T(b)(6))

Employees may substantiate business use by
maintaining mileage logs, account books, diaries,
or similar records.
27
VALUATION RULES FOR EMPLOYER-PROVIDED
TRANSPORTATION
28
GENERAL VALUATION RULEGross Income Computation

• Personal miles driven
• Total miles driven
• Percentage of personal use
• x FMV
• Value of personal use
• - Any amount paid by employee for personal
  use
• Taxable amount

29
SPECIAL VALUATION RULES

• Commuting rule
• Unsafe conditions commuting rule
• Cents-per-mile rule
• Lease value rule

30
SPECIAL VALUATION RULESELECTION - NOTIFICATION -
USE

• Election is made on auto by auto basis
• No IRS notification required
• Same rule not required for all autos
• Once used for an auto, should be used for all
  subsequent years for that auto
• May switch to commuting rule for any year that
  auto qualifies

31
COMMUTING VALUATION RULE

• Cannot be used by a control employee For
  government agencies, a control employee is
• Elected official
• Government employee whose compensation is equal
  to or exceeds Federal Government Executive Level
  V
• (139,600 for 2008)

32
COMMUTING VALUATION Conditions for Use

• Employer requires employee to use vehicle AND
• Bona fide non-compensatory reasons exist for
  requiring the employee to use the vehicle for
  commuting
• Written policy which prohibits personal use other
  than commuting or de minimis use
• Employee does not use vehicle for personal
  purposes, other than de minimis use or commuting
• Vehicle is owned or leased by employer

33
COMMUTING VALUATIONGross Income Computation

• 1.50 per one-way commute
• OR
• 3.00 per round-trip commute
• Included in employees gross income
• Reported on W-2
• Subject to ITW, FICA, and FUTA

34
UNSAFE CONDITIONS

• Unsafe conditions exist if a reasonable person
  would, under the facts and circumstances,
  consider it unsafe for the employee to walk to or
  from home, or to walk to or use public
  transportation at the time of day that the
  employee must commute.

35
CENTS-PER-MILE RULE Eligible Vehicles

• Vehicle must pass one of two tests
• Regular use test
• At least 50 of total annual mileage is for
  employers business or
• Used to transport at least 3 employees to and
  from work each workday
• Mileage test
• Vehicle driven at least 10,000 miles/year

36
CENTS-PER-MILE Maximum Vehicle Value

• Cannot be used if autos maximum vehicle value
  exceeds
• 15,100 in 2007

37
CENTS-PER-MILE Consistency Requirements

• Must begin using this rule the first day the
  vehicle is made available to any employee for
  personal use
• Must use this rule for all later years in which
  the vehicle qualifies
• Must continue to use this rule if you provide a
  replacement vehicle to the employee

38
CENTS-PER-MILE Items Included In Rate

• FMV of maintenance and insurance
• FMV of fuel provided by the employer
• If fuel is not provided by employer, the
  cents-per-mile rate may be reduced by no more
  than 5.5 cents per mile

39
CENTS-PER-MILEGross Income Computation

• Total personal miles driven
• x Cents-per-mile rate (50.5 for 2008)
• Taxable amount
• Included in employees gross income Reported on
  his/her W-2
• Subject to ITW, FICA and FUTA

40
LEASE VALUATION RULEConsistency Requirements

• Begin using rule on first day you make vehicle
  available to employees
• EXCEPTION If you use the commuting or
  cents-per-mile rule first, you can change to
  lease value on first day you no longer use one of
  those rules
• Use for all later years
• Continue this rule if you provide a replacement
  vehicle

41
LEASE VALUE

• Use normal method to determine FMV
• or
• Use safe harbor method
• Purchased auto - use
• Cost (including sales tax, title, and other
  purchase expenses)
• Leased auto - use
• SRP (including purchase expenses) less 8 or
• Retail price as reported in nationally recognized
  source or
• Manufacturers invoice (including options) plus 4

42
LEASE VALUE

• Use Annual Lease Value Table
• Found in Pub 15-B
• Find FMV amount in column one
• Annual lease value is shown in column two
• Pub 15-B also contains formulas for computing
  daily lease values

43
LEASE VALUE

• Under the working condition fringe rules, the
  allocation between business and personal use is
  computed on a mileage basis.
• EXAMPLE If vehicle is driven 20,000 total miles
  but only 15,000 are for business, the vehicle was
  used 75 for business and 25 for personal use.
  Therefore, 25 of the lease value would be income
  to the employee who drove that vehicle

44
SPECIAL ACCOUNTING RULES (Automobiles)

• Employer can elect to defer withholding
• Employer can withhold at 25
• November and December benefits may be treated as
  paid in next year
• Employer can elect not to withhold FIT
• Employer must tell employee
• Employer includes in wages/ W-2

45
QUESTIONS ON EMPLOYER-PROVIDED VEHICLES?
46
EMPLOYEE-OWNED VEHICLE
47
MILEAGE ALLOWANCE

• Paid with respect to transportation expenses
  incurred by an employee in connection with
  his/her employment
• Reasonably calculated not to exceed the amount of
  actual or anticipated expenses and paid
• at applicable standard mileage rate
• under a flat rate or stated schedule
• in accordance with any other IRS-specified rate
  or schedule

48
TAX TREATMENT

• Tax treatment of mileage allowances depends on
  whether
• they are provided under an accountable plan
• the reimbursement exceeds the business standard
  mileage rate
• the business miles are timely substantiated
• Rev Proc 2000-48 contains guidance on the
  employment tax treatment of mileage allowances

49
AUTOMOBILE EXPENSES

• EMPLOYEE CAR USED FOR EMPLOYERS BUSINESS
• 2008 Federal Mileage Rate - .505
• At this rate or less Non-taxable to Employee
• Excess over this rate Taxable to Employee -
  only the excess amount
• If Employee chooses not to get reimbursed, cannot
  claim on personal tax return.
• Substantiation required

50
SUBSTANTIATION

• Employee reports to Employer
• Date, Purpose, Place of each trip
• Mileage at or near the time incurred
• Examples Diary, log, trip sheet, expense
  statement or similar record
• Commuting is always taxable - it is non-business
  travel

51
TRAVEL-RELATED FRINGE BENEFITS

• Per Diem Allowances
• for lodging, meals and/or incidentals
• for business related travel
• while away from home

52
MEAL ALLOWANCES WHILE TRAVELING ON BUSINESS

• MEALS AWAY FROM HOME
• OVERNIGHT
• Accountable Plan - Not taxable
• NOT OVERNIGHT
• Taxable as wages

53
Overnight Rule
Travel Expense
NO TAXABLE INCOME

• Must be away from tax home substantially longer
  than an ordinary days work
• Sleep or rest required to meet demands of work
• Specific time for rest not in IRC or Regs
• RevRuls 75-170 and 75-432
• IRS Pub 463

54
MEAL ALLOWANCES WHEN NOT TRAVELING

• Meals with business meetings -
• NOT taxable if
• clear business setting
• directly related
• Employer buys you lunch -
• Taxable as wages

55
Class C Meal Reimbursements
Travel Expense

• Allowed by Florida Statute 112.061
• Should be reported as wages or other compensation
  if no overnight travel expenses are incurred
• Ref IRC 162(a)(2)
• Pub 463
• RevRuls 75-170 and 75-432
• Regs. 1.274-2(c) and (d)

56
Combined Business and Personal Travel
Travel Expense

• If a trip involves both business and personal
  travel, a portion of the travel expenses may not
  be deductible.
• Domestic travel
• Regs 1.162-2(b)(1)
• Foreign travel
• Regs 1.162-2(b)(1)
  
  Regs 1.274-4

57
EMPLOYEE OR INDEPENDENT CONTRACTOR?

• Determine Worker Status
• Fringe benefit rules apply
• Accountable Plan rules apply
• Report payments on information return
• W-2 for Employee
• 1099-MISC for Independent Contractor

58

• Employee
• or
• Independent Contractor ???

59

I cant be an employee Can I?
60
EMPLOYEE DEFINED

• IRC 3121(d) and Reg. 31.3121(d)-1
• Any individual under usual common law rules

61
EMPLOYEE (Continued)

• Any individual who performs services that are
  included under an agreement entered into under
  Section 218 of Social Security Act
• ENTERED INTO BETWEEN GOVERNMENTAL AGENCY AND THE
  SOCIAL SECURITY ADMINISTRATION

62
COMMON LAW STANDARD

• Employer-employee relationship exists when the
  business for which the services are performed has
  the right to direct and control the worker who
  performs the services

63
COMMON LAW (Continued)

• Worker is subject to the will and control of the
  business
• not only as to what work shall be done but also
• how work shall be done
• Continued

64
Categories of Evidence

• Facts that provide evidence of the degree of
  control and independence fall into three
  categories.

• Behavioral Control
• Financial Control
• Relationship of the
• Parties

65
BEHAVIORAL RELATIONSHP

• IF the firm provides instructions
• on how to do the job,
• what hours to work, what days,
• etc.,
• the worker is most likely an employee.

66
FINANCIAL CONTROL

• If the firm provides an office,
• all office supplies, computer
• and other business equipment to the worker,
• the worker is an employee.

67
RELATIONSHIP OF THE PARTIES

• If the firm provides benefits
• health insurance, life insurance,
• retirement benefits, 40l(k) plan, 403(b)
• the worker is an employee.

68
FIRE DEPARMENT ENTITY EMPLOYEES

• Volunteer Firefighters
• EMTs
• All Groups under a Section 218 Agreement
• Workers covered under Public Retirement System

69
WAGES INCLUDE

• Per Diems or Per Call payments
• No exclusion for small amount of earnings
• On-call pay considered wages

70
Off Duty Services
Proper Reporting of Wages

• Does Employer-employee relationship exist?
• Who controls payment?

71
School Districts - Additional Duties

• Coaches
• Gate attendants
• Concession Workers
• Mentors

72
INDEPENDENT CONTRACTOR

• Offers services to public
• Operates own business
• Bills for services
• Doesnt have to personally perform work

73
COMMON MISCONCEPTIONS

• EMPLOYEES CAN BE
• Part-time workers
• Temporary workers
• Probationary period
• Workers who say they are Independent Contractors

74
Consequences of Misclassification of Employees

• If you misclassify an employee as an
  independent contractor, you may be held liable
  for the workers payroll taxes.

75
REPORTING FOR EMPLOYEES

• All Compensation W-2
• Awards
• Back pay
• Bonuses
• Severance Pay
• Taxable Fringe Benefits

76
REPORTING FOR INDEPENDENT CONTRACTORS

• ALL COMPENSATION FOR SERVICES
• On 1099-MISC
• If Non-Accountable Plan
• Include Reimbursed Expenses on 1099

77
Independent Contractor vs. Employee

• Publication 1779 Provides factors used to help
  determine worker status as either an independent
  contractor or an employee
• Publication 1976 Contains information on Section
  530 Relief
• SS-8 Can be filed by firm or worker with
  Internal Revenue Service to determine worker
  status

78
IRS CONTACTS

• IRS INFORMATION
• 1-800-829-1040
• IRS PUBLICATIONS
• 1-800-829-3676
• INTERNET
• www.irs.gov

79
QUESTIONS ?