Module 4
A no-additional cost benefit is:
A NO-ADDITIONAL COST BENEFIT IS A NONTAXABLE BENEFIT PROVIDED BY AN EMPLOYER. THE BENEFIT MUST BE A SERVICE SOLD TO CUSTOMERS AND PROVIDED TO EMPLOYEES WITH NO SUBSTANTIAL COST TO THE EMPLOYER.
What wages and benefits received by an employee are subject to federal taxes and reporting?
All wages and benefits unless the Internal Code provides an exception
Wages paid in year after employee's death:
Amount is issued on form 1099-Misc to the beneficiary and is not taxable.
Commissions are:
COMMISSIONS ARE TAXABLE FOR INCOME, SOCIAL SECURITY, MEDICARE, AND FUTA TAXATION. COMMISSIONS ARE SUPPLEMENTAL WAGES.
Fringe benefits
Compensation other than wages provided to an employee, such as health and life insurance, vacations, employer-provided vehicles, public transportation subsidies, etc., that may be taxable or nontaxable. Benefits may be fully taxable, partially taxable, or tax-free to the employee as determined by IRS rules.
Advances and Overpayments
Must withhold FIT, FICA, FUTA If employee pays back the advance, they will receive refund once personal taxes are filed
Death Benefits
Paid under qualified plan = reported on 1099-R Paid under nonqualified plan = reported on 1099-MISC Benefits not subject to FICA
Withhold what taxes from GTL?
SOCIAL SECURITY AND MEDICARE TAXES ARE WITHHELD FROM GROUP-TERM LIFE INSURANCE.
Moving expense distance test is:
THE NEW WORKPLACE MUST BE AT LEAST 50 MILES FARTHER FROM THE OLD RESIDENCE THAN THE OLD WORKPLACE WAS FROM THE OLD RESIDENCE.
Employee dies after receiving their check but before cashing it:
The check should be voided and re-issued for the same net amount to the employee's representative. Amount is reported on the employee W-2.
Stock Options/ Purchases
Think 'employee purchase plans'
Non-Taxable Fringe Benefits are...
income received in the form of money, property or services that is excluded from income according to IRC Section 132. Examples: No-additional-cost services Qualified employee discounts Working condition fringes De minimis fringes Qualified transportation benefits On-premises athletic facilities Qualified retirement advice services Qualified moving expense reimbursements
Commuting Valuation
$1.50 per one way trip/commute from home to work or work to home
When using the cents-per-mile valuation method, the value of the vehicle cannot exceed the luxury vehicle value of how much in 2017?
$15,900.00 in 2017
Third Party Sick Pay
'Sick Days'- subject to FIT, FICA, FUTA Long-Term and Short-Term Disability Payments can be made by one or all of the following: -The Employer -Agent of Employer -A Third-party insurance company
Qualified Employee Discounts must meet these qualifications:
-Discount cannot exceed the gross profit % when goods are sold to customers -Discount on services not to exceed 20% (excess is taxable) -Goods/Services must be offered for sale to customers -Equally offered to employees; no favoritism to highly compensated employees -Real estate does not qualify for employee discount -'Employee' referring to current and former employees (who left for retirement, disability, widow)
Withholding Taxes From Non-Cash Benefits
-Add to regular wages for payroll period -Treat as supplemental wages (optional flat rate 25%) -If EE year-to-date supplemental wages exceed $1,000,000, the employer must use the mandatory flat rate (39.6%).
A group-term life insurance plan is not discriminatory if one of the following tests is met:
-At least 70% of all employees benefit from the plan -At least 85% of employees participating in the plan are not key employees -All participants belong to a classification that the IRS has determined to be nondiscriminatory -The plan is part of a qualified cafeteria plan under IRC Section 125
De Minimis Fringe Benefits
-Benefits that are small, and do not need to be accounted for. Frequency of benefit must be considered 'occasional' to qualify. Note: Gift certificates, gift cards, and similar items are considered cash by the IRS and cannot be excluded from income as a De Minimis Fringe Benefit. Examples: Occasional typing of personal letters. Occasional personal use of the company copier. Occasional parties or picnics for all employees. Occasional tickets to sporting events or the theater. Traditional holiday gifts of small value. Coffee and doughnuts provided to employees. T-shirts and water bottles (swag)
What is taxable income?
-The Internal Revenue Code (IRC) provides that all compensation an employee receives from an employer, cash or non-cash, unless excluded by law constitutes wages subject to federal income and employment taxes -Taxable income is subject to Federal Income Tax, Social Security, Medicare (FICA) and Federal Unemployment- The 3 F's -Cash income is taxed based on the amount paid to the employee -Non-cash income is taxed based on their Fair Market Value (FMV)
Employer provided lodging is excluded from the employee's income if:
-The lodging is on the employer's premises (including a camp provided by the employer near the worksite) or a remote location in a foreign country -The lodging is furnished for the convenience of the employer -The employee is required to accept the lodging as a condition of employment -Cash allowances are excluded for both meals or lodging but may qualify as a business expense
Employer Responsibilities:
-To meet their deposit obligations, employers may estimate the amount of fringe benefits to be included if their values are not yet certain. -If employers underestimate the amount of fringe benefits included or do not withhold and deposit enough taxes, they must pay the employees' share of social security and Medicare taxes. -Employers should report the taxable value of fringe benefits on the quarterly reporting form (Form 941) for the period in which the fringe benefits are considered paid.
Key Employee:
-corporate officers whose annual compensation is greater than $175,000 for 2017; limited to 50 officers, but in companies with fewer than 500 employees, no more than 10% may be treated as officers; -5% owners; and -1% owners whose annual earnings are greater than $150,000
Federal business standard mileage rate:
0.535 PER MILE. EMPLOYEES CAN BE REIMBURSED FOR BUSINESS MILES DRIVEN IN A PERSONAL VEHICLE UP TO $0.535 PER MILE WITHOUT TAXATION.
There are only two types of deductible moving expenses:
1. Transportation of household goods. All reasonable expenses incurred in packing and moving household goods and personal effects to the new residence and storing and insuring them while in transit are deductible. Employers can reimburse employees for the expenses or pay a moving company directly. 2. Expenses of traveling from old home to new home. All reasonable expenses incurred while traveling from the employee's old home to the new home, such as transportation and lodging during the trip, are deductible. However, there are no deductions allowed for meal expenses while traveling to a new residence. The mileage rate for moving expenses for 2017 is $0.17 per mile.
Vehicle Cents-Per-Mile Valuation
53.5 cents per mile when the employee pays for the fuel is the rate is reduced by 5.5 cents.
Nontaxable benefits defined in the IRC include qualified employee discounts (selling the company's services to employees at __% of what the services are sold to customers)
80
Fair Market Value (FMV) of non-cash income
= amount it would cost to purchase the benefit on the open market in an 'arms length transaction'. It is not the amount paid by the employer, nor is it the employee's perception of the value. IFBA = FMV - (EPA + AEL) IFBA = Includable Fringe Benefit Amount FMV = Fair Market Value EPA = Employee Paid Amount After Taxes AEL = Amount Excluded by Law Noncash benefits: Must be paid by December 31st each year Investment property, stock, and bonds considered paid when transferred
Nontaxable moving expenses require:
A QUALIFIED (NONTAXABLE) MOVING EXPENSE MUST MEET THE TIME AND DISTANCE TEST. NONTAXABLE MOVING EXPENSES ARE TRANSPORTATION OF THE HOUSEHOLD GOODS AND TRANSPORTATION TO THE NEW HOME.
A qualified employee discount is:
A QUALIFIED EMPLOYEE DISCOUNT IS A NONTAXABLE BENEFIT WHEN THE EMPLOYER SELLS A PRODUCT OR SERVICE TO AN EMPLOYEE AT A DISCOUNT. THE DISCOUNT IS LIMITED BASED ON THE TYPE OF PRODUCT OR SERVICE SOLD.
A working condition benefit is:
A WORKING CONDITION FRINGE BENEFIT IS A NONTAXABLE BENEFIT WHICH RELATES TO THE EMPLOYEE'S TRADE OR BUSINESS PROVIDED TO AN EMPLOYEE.
What is a §83(b) election?
A §83(B) ELECTION ALLOWS THE EMPLOYEE THE ABILITY TO HAVE THE FMV OF THE STOCK INCLUDED IN INCOME FOR INCOME, SOCIAL SECURITY, AND MEDICARE TAXES.ON THE DATE OF THE GRANT OF THE RESTRICTED STOCK.
How are allocated tips reported?
ALLOCATED TIPS ARE CALCULATED ON FORM 8027, EMPLOYER'S ANNUAL REPORT OF TIP INCOME, AND REPORTED ON THE EMPLOYEE'S FORM W-2 IN BOX 8.
Qualified Moving Expenses
Before any expenses of a job-related move can be considered deductible and reimbursements for them excluded from income, two tests must be met: 1) Distance test. The new workplace must be at least 50 miles farther from the employee's old residence than the previous workplace. If there was no previous workplace, the new workplace must be at least 50 miles from the employee's old residence. The distance measured by this test is the shortest of the most commonly used routes between the two points. 2) Time test. During the 12-month period immediately following the move, the employer must reasonably expect that the employee must work full-time for at least 39 weeks in the general location of the new workplace. This requirement does not apply if the employee cannot meet it because of death, disability, involuntary termination of employment, or transfer for the employer's benefit.
Moving expense time test is:
DURING THE 12-MONTHS AFTER THE MOVE, THE EMPLOYER REASONABLY EXPECTS THE EMPLOYEE TO WORK FULL-TIME FOR AT LEAST 39 WEEKS.
Dependent Care Assistance
Dependent care assistance paid by an employer is excludable from the employee's wages and is not subject to federal taxes up to $5,000 per family per year($2,500 for married individuals filing separately).
GTL Calculation
Determine employees total amount for GTL coverage Calculate excess benefit over 50K Divide excess by 1K Determine employee age as of December 31 of calendar year Use IRS Uniform Premium table to find FMV- multiply by answer in step 3 Deduct after-tax contributions
Employers may provide qualified transportation fringe benefits for:
EX parking not to exceed $255.00 per month Under IRS qualified transportation fringe benefit rules, transit passes, transportation in a commuter highway vehicle, and parking in excess of $255.00 per month are taxable. In addition, the IRS requires advances to be substantiated by the employee for qualified transportation fringe benefits and does not allow qualified transportation fringe benefits in a Sec. 125 Cafeteria Plan.
Back Pay Awards
Employee winning lawsuit or settlements against employer -Anti-discrimination -Labor-management -Wage-hour -Withhold FIT, FICA, FUTA
Group Term Life
Employees must pay federal income tax and FICA on the cost of group-term life insurance coverage above $50,000 Income tax withholding from payroll not required for amount over 50K, but FICA must be withheld Report W-2: Box 1, 3, 5, and 12C (Remember C for casket...we know, we know! Sorry!)
No-Additional-Cost Fringe Benefits
Example: Employee stays for free in a hotel room while on vacation, with the hotel company he works for. -To be considered non-taxable, must meet these qualifications: -The free service is one that is regularly offered for sale to customers in the normal course of the employer's "line of business" in which the employee works. -The employer bears no substantial additional cost (including lost revenue and additional labor) in providing the service to the employee. -The term "employee" includes current and former employees who have left because of retirement or disability and their widow(er)s, spouses, and dependent children. -The service is available on equal terms to each member of a group of employees whose classification does not discriminate in favor of highly compensated employees.
Annual Lease Valuation
FMV of personal use is determined by multiplying the ALV by the percentage of personal use. Note: The value of employer provided fuel is not accounted for in the ALV and must be included by using the actual cost of the fuel or an IRS approved rate of 5.5 cents per mile. The amount under this method is reported as taxable income in boxes 1, 3, and 5 on form W2.
Job Related Education Assistance
If related to job, it is excluded from income If: -The courses are not necessary to meet the minimum education requirements of the current job -The courses are not taken to qualify the employee for a promotion or transfer to a different type of work -The education is related to the employee's current job and helps maintain or improve the knowledge and skills required for that job. If requirements change while the employee is working, employer-paid education designed to meet the new requirements is a working condition fringe benefit.
Non-Job Related Education Assistance
IRC Section 127 provides an income exclusion of $5,250 per year for non-job-related educational assistance provided by an employer to an employee. Assistance over $5,250 per year is fully taxable to the employee.
Qualified Transportation Example:
Karen is given a transit pass each month by her employer to take the bus to work. The price of the transit pass is $300.00. Karen does not pay her employer for any portion of the pass. The amount included in Karen's income each month is determined as follows: Includable Fringe Benefit Amount = Fair Market Value - (Employee Paid Amount + Amount Excluded By Law) IFBA = FMV - (EPA+AEL) IFBA= $300 - (0+255) = $45 $45 is included in her income as taxable
Awards and Prizes Income/Exclusion
Length of service/ safety achievement awards are not taxable Civic and Charitable award are generally not taxable (must meet below requirements) -The recipients do not actively seek the awards. -The awards are not conditioned on performing future services. -The recipients turn the awards over to a governmental or charitable organization designated before the awards are used by the recipients. Prizes for retail salespeople -Must be reported on W-2 -Do not need to withhold FIT, but subject to Social Security, Medicare, and FUTA
Commissions
Per IRS regulations, commissions are supplemental wages. Optional Flat Rate Method or Aggregate Method when wages < $1,000,000
Qualified transportation benefits:
QUALIFIED TRANSPORTATION BENEFITS ASSIST EMPLOYEES' TRAVEL TO AND FROM WORK, SUCH AS TRANSPORTATION IN COMMUTER HIGHWAY VEHICLES, TRANSIT PASSES, PARKING, AND BICYCLE COMMUTING.
Nondiscrimination Testing for GTL
Tax benefits of GTL not available for 'key' employees if the plan is in favor of such employees
The value of the personal use of a company vehicle is subject to what taxes?
Social Security and Medicare tax withholding. It is the employer's option whether to withhold federal income tax.
When qualified for the special commuting valuation method Commuting valuation rate is:
THE COMMUTING VALUATION RATE FOR PERSONAL USE OF COMPANY VEHICLES IS $1.50 PER TRIP OR $3.00 PER DAY.
Formula for taxable benefits:
THE FORMULA FOR TAXABLE BENEFITS IS THE FAIR MARKET VALUE LESS AMOUNTS EXCLUDED BY LAW LESS ANY AMOUNTS PAID FOR THE BENEFIT WITH AFTER-TAX DOLLARS.
What taxes are withheld from tips?
THE IRS HAS DEFINED THE PRIORITY FOR THE WITHHOLDING OF TAXES FROM TIPS AS SOCIAL SECURITY AND MEDICARE FROM TIPS FIRST, THEN INCOME TAX FROM TIPS.
Stock purchase plan taxation:
THE LESSER OF THE DIFFERENCE BETWEEN THE OPTION PRICE AND FMV ON PURCHASE DATE OR OPTION PRICE AND FMV ON SALE DATE IS TAXABLE FOR FEDERAL INCOME TAX.
Cents-per-mile valuation rate is:
THE VEHICLE CENTS-PER-MILE VALUATION RATE FOR PERSONAL USE OF COMPANY VEHICLES IS $0.535 PER MILE.
Tips are deemed paid:
TIPS ARE DEEMED PAID WHEN THE EMPLOYEE REPORTS THE TIPS TO THE EMPLOYER.
GTL Taxes
The IRC does not require employers are withhold federal income tax on the value of group-term life insurance in excess of $50,000. Employers are required to withhold social security and Medicare taxes from excess group-term life insurance, but are not required to include excess group-term life insurance in wages subject to FUTA tax. Codes M and N are used to report uncollected social security and Medicare taxes only when the employee's GTL continues after termination, typically due to disability or retirement. Employers who fail to withhold social security and Medicare taxes on an employee's excess GLT are responsible for paying the taxes.
Golden Parachute
The entire payment is subject to FIT, SS (up to the applicable limit), and Med. Any excess amount (over the employee's five-year average compensation) is also subject to a 20% excise tax. The excise amount withheld is reported on form W-2 in Box 12 with code K.
Working Condition Fringe Benefits
The following conditions must be met: -Employee's use of property or service must relate to employer's trade or business -Employee would be able to take a business tax deductions on his or her personal tax return if the employee paid for the benefit -Employers must maintain records to substantiate. -Current employee's, partners, directors or Independent Contractors only Examples: -Business use of the company car or airplane -Chauffeur or bodyguard for security -Professional dues and membership fees, such as APA dues -Employees' subscriptions to business periodicals -Job-related education, such as a course at APA's -Payroll Learning Centers -Goods used for product testing for employees -Use of a demonstration automobile by a full-time car salesperson -Distinctively marked casual items of clothing issued as uniforms to police officers and firefighters -Outplacement services -Business use of cell phones provided primarily for business purposes
Adoption Assistance
The maximum exclusion amount for qualified adoption expenses for the current year is $13,570 per eligible child over all taxable years related to the particular adoption.
Employee is paid wages following his death but in the same calendar year:
The wages are not subject to FIT but are taxable for FICA and FUTA. The amounts will display on the employee W-2 and the taxable amount should also be in Box 3 of the Form 1099-Misc in the name of the beneficiary.
Qualified Transportation Fringe Benefit
Transportation between home and work in a commuter highway vehicle provided by the employer (e.g., van pool) if: the vehicle seats at least 6 adults other than the driver; at least 80% of the vehicle's mileage can be expected to be for commuting; and at least 50% of the vehicle's seating capacity (excluding the driver) is used by employees; Transit passes, tokens, or fare cards, or reimbursement for them by the employer Parking provided on or near the employer's premises or at a "park and ride" facility from which the employee uses mass transportation, a van pool, or a car pool to get to work Providing up to $20 per month to employees who commute to work on a bicycle *The excluded benefit is limited to a value of $255 per month in 2017 for transportation. You will see this in a calculation!
Stock Awards
This is stock as compensation (think promotion)
Length of service award
Under IRS rules, a length of service award can exclude up to $400 for an award that is tangible personal property provided in a nonqualified plan. If the value of the award is greater than $400, the amount in excess of $400 is taxable.
Qualified transportation fringe benefits are subject to which taxes?
Under IRS rules, qualified transportation fringe benefits provided by an employer are not taxable if less than $255.00 per month. However, amounts in excess of $255.00 per month are subject to income, social security and Medicare tax withholding.
Personal Use of Company Vehicle
Use of vehicle outside of business need is taxable income to the employee. Different methods may be used to determine taxable amount: -General Valuation Method- -Special Valuation Methods -Commuting Valuation -Annual Lease Valuation -Vehicle Cents-Per-Mile Valuation
What are allocated tips?
WHEN ALL EMPLOYEES REPORTED TIPS ARE NOT EQUAL TO OR GREATER THAN 8% OF SALES SUBJECT TO TIPS, THE EMPLOYER IS REQUIRED TO ALLOCATE TIPS. THE ALLOCATED TIPS WILL BRING THE REPORTED TIPS TO 8%.
Under IRS rules, the value of the personal use of a company vehicle...
must be included in income at least once a year. It is the employer's option whether to withhold income tax.
IRC Sec. 132 defines the following nontaxable fringe benefits:
no-additional-cost services, qualified employee discounts, de minimis benefits, working condition fringe benefits, qualified transportation fringe benefits, qualified moving expenses, and qualified retirement planning services.
General Valuation Method
the FMV of a company-provided vehicle is the amount an individual would pay to lease the same or comparable vehicle in the same geographic area for the same length of time.