Chapter 4: Payroll Benefit Basics Payroll Source FPC Review Course 2014 Presented by: Mary Lou Sipple, CPP - PowerPoint PPT Presentation

Chapter 4: Payroll Benefit BasicsPayroll Source FPC Review Course 2014 Presented by: Mary Lou Sipple, CPP mlsipple@comcast.net

• 4.1 Fringe Benefits
• 4.2 Prizes and Awards
• 4.3 Company Vehicles
• 4.4 Group-Term Insurance
• 4.5 Deferred Compensation
• 4.6 Section 125 Flexible Benefit Plans

Taxable Compensation

• Back Pay Awards
• Bonuses, Overtime Pay, Regular Wages, Tips
• Sick pay and disability benefits
• Commissions
• Company Vehicle (personal use)
• Dismissal and Severance Pay or Final Vacation Pay
• Employer paid transit passes and transportation in a commuter highway vehicle in excess of $245/month
• Bicycle Commuters reimbursement in excess of $20/month
• Employer-paid parking greater than $245/month
• Fringe Benefits (unless specifically excluded)
• Gifts, Gift Certificates, Prizes and Awards
• Group Legal Services
• Group Term Life Insurance over $50,000
• Non-accountable reimbursed business expenses
• Noncash fringes, unless excluded by the Internal Revenue Code
• Non-Qualified Moving Expenses

Non-Taxable Compensation

• Dependent Child Care assistance (up to $5,000) under a Section 129 plan
• Company vehicle (Business use only)
• De minimis fringes
• Disability Benefits (employee contributions)
• Educational assistance for job-related courses (no limit)
• Group-term life insurance premium ($50,000 or less of coverage)
• Medical/Dental/Health plans (Employer Contributions)
• No additional cost fringes
• Qualified employee discounts on employer goods/services

Non-Taxable Compensation

• Qualified moving expenses
• Qualified transportation fringes ($245 Transit/$245 Car Pooling)
• Reimbursed business expenses (if accounted for in a timely manner)
• Working condition fringes which would be deductible if paid by employee
• Non-job-related education assistance up to $5,250 under a qualified plan
• Long-term care insurance
• Health Savings Accounts

Fair Market Value of Non-Cash Compensation

In general, the fair market value of a fringe benefit is determined on the basis of all the facts and circumstances. Specifically, the fair market value of a fringe benefit is the amount the employee would have paid a third party to buy or lease the fringe benefit. When determining the value of the benefit, keep the following two statements in mind:

• The employee’s perceived value of the benefit is not relevant.
• The amount the employer paid for the benefit is not

a determining factor.

Imputed Income

• Imputed Income represents the value of the benefits employees receive that must be included in the employee’s income.
• Imputing income reduces employees’ net pay by increasing taxes.
• Employee does not receive additional pay in the form of cash
• An example of Imputed Income is taxable Group Term Life Insurance

** Inputting should occur as frequently as possible.

Inputting only at year end could reduce the employees income drastically and result in little or no net pay.

Example of Imputed Income

An employee has $50.00 included in income for non-cash taxable fringe benefit. The employee’s salary is $1,500.00 for the monthly pay period. A calculation of the employee’s taxes follows:

Noncash Fringe Benefits

• Benefits must be recognized as income at least once a year, by December 31.
• Fringe Benefits as taxable income requires all income and employment taxes be withheld and deposited.
• Employers must collect the tax from the employee or pay the tax on behalf of the employee.

Nonreportable Fringe Benefits

In most cases these benefits are not reported on W2. Benefits are so small in value it is unreasonable or administratively impractical to account for.

Section 132 – De minimis (minimal) fringe benefits include:

• Occasional typing of a personal letter by a company administrative assistant
• Occasional personal use of the copies (<15% of total use of the machine)
• Occasional parties for employees
• Occasional tickets to the theater or sporting events
• Occasional supper money for working overtime
• Traditional holiday gifts like a turkey or a ham (Cash gifts or gift certificates that are treated like cash are taxable)
• Coffee or donuts furnished by the employer
• Use of company telephone for personal calls

No-Additional Cost Services

Employees can take advantage of employer services with no tax consequences when the services are sold to customers as part of the employer’s regular line of business in which the employee works.

Examples include:

• Free or reduced- price standby travel to employees of an airline company
• Free telephone service to employees of a telephone company

Qualified Employee Discounts

To be qualified, the property and services must be offered for sale to customers in the ordinary course of an employer’s line of business.

• The discount on property is not greater than the gross profit earned on the property at the price normally sold to customers or
• The discount on services is not greater than 20% of retail price

Working Condition Fringes

Work related items, when paid for by the employee, may be deducted from the employee’s individual tax return as a business expense. When these items are provided by the employer, they represent nontaxable compensation.

Examples include:

• Business use of a company car or plane
• Subscriptions to business periodicals
• Fees to join professional organizations
• Attendance at a job-related seminar
• Good used by employees for product testing
• Cell phone provided primarily for business purposes

Use of Athletic Facilities

The facility must be located on the employer’s premises and operated by the employer. If the facility is made available to the public, the exclusion does not apply.

Employer Provided Retirement Advice

Qualified retirement planning services may be provided to an employee by an employer maintaining a qualified plan.

Qualified Moving Expense Reimbursements

An employer’s reimbursement or payment of an employee’s moving expenses is an excludable fringe benefit when the following rules are met:

• The distance from the employee’s new workplace to his old workplace must be at least 50 miles farther than the distance from the employee’s old workplace to his old residence.
• The employee must work full-time in the general location of their new principal place of work at least 39 weeks during the 12 months immediately following the move.
• The reimbursements should be made under rules similar to those relating to an accountable business expense reimbursement plan.

Deductible Moving Expenses with No Dollar Limitation include:

• Moving household goods and personal effect from the employee’s old residence to the new residence.
• Traveling from the old resident to the new residence. Mileage Rate cannot exceed $0.24 ( for 2013) per mile. These expenses include lodging but NOT meals.

Taxable Moving Expenses are reported on Form W-2 in Boxes 1, 3 and 5 but not in Box 12.

Qualified Moving Expenses paid directly to the employee are reported on Form W-2 in Box 12, Code P.

Prizes and Awards

Prizes and Awards are included in the employee’s taxable compensation.

Length of Service and Safety Awards may be excluded from income if the

awards follow certain guidelines.

For nonqualified plans, employees can receive an award

costing the employer $400 in a calendar year.

For qualified plans, all awards made to a single employee

cannot cost the employer more than $1,600 in a calendar

year, with the average cost of all individual awards to all employees

not exceeding $400.

• Business use of a vehicle is nontaxable
• Personal usage is taxable
• Accounting procedures for properly taxing company vehicles require proper documentation

Employee records should include:

• Business miles driven
• Date of trip
• Purpose of trip
• Expenses incurred

Reporting Requirements – Personal Usage

• Federal tax is optional
• Social Security and Medicare must be withheld
• Must be reported on the W2
• Required to be reported at least once a year
• Personal Usage provided in November and December may be reported as paid in the next year

Valuation Method

3 Safe Harbor Methods

• Annual Lease Value Method
• Cents Per Mile Method
• Commuting Value Method

Once a method has been chosen, it MUST be used the entire time the employee has usage of the vehicle.

Annual Lease Method

• Find the cars fair market value
• Use the table to find the Annual Lease Value (ALV)
• Divide the personal miles driven by the total driven
• Multiply the FMV by the personal miles driven.

REMEMBER: If the employee has the car less than a year and more than 30 days you MUST pro-rate to get the Annual Lease Value (ALV)

PRO-RATE FORMULA: ALV (number of days driven/365)

Cents Per Mile Method

• 2013 $0.565
• Vehicle put in service in 2013
• Vehicle under $16,000 value or SUV under $17,000 value
• Fleet Vehicle under $21,200 or Fleet SUV under $22,300
• Qualifications
• Business expectations use throughout the year
• Vehicle must be driven 10,000 miles annually (including personal use) and be used primarily by employees

Commuting Valuation Method

• Include $1.50 one way or $3.00 roundtrip if company vehicle is (includes car pools):
• Not by a “Control Employee”
• Restricted to driving between work and home
• Non-compensatory business reasons

Group Term Life

• Group Term Life > $50,000 is taxable income
• Exempt from Federal Income Tax Withholding
• Taxable for Social Security and Medicare, even when an employee pays for this benefit using pretax dollars as part of a cafeteria plan
• Exempt from FUTA – Federal Unemployment Tax
• Calculate the value of excess Group Term Life Insurance using the IRS Table

Calculating the Value of Excess Group Term Life

• Determine the Amount of Coverage
• Amount of Coverage minus $50,000 = Excess Coverage
• Excess Coverage/1,000 x Table Value =Taxable Value per Month
• Taxable Value minus Employee After Tax contributions = Taxable Value of Group Term Life per Month

EXAMPLE: Employee age 32

• Coverage 30,000 x2 = $60,000 Amount of Coverage
• $60,000 - $50,000 = $10,000 Excess Coverage
• $10,000/$1,000 x .08 = $ 0.80 (.08 taken from chart)
• $0.80 Benefit Value per Month
• $0.80 - $0.00 (Employee Contribution) = $0.80 Taxable Value of Group Term Life per Month

NOTE: Pretax contributions do not reduce the taxable value

After tax contributions cannot reduce the taxable value below $0

Dependent Group Term Life Insurance

• Dependent Group Term Life Coverage < $2,000
• Is excludable from Income
• Dependent Group Term Life Coverage > $2,000
• The entire amount is taxable and subject to all withholding
• Exempt from FUTA – Federal Unemployment Tax

Deferred Compensation Plans

Qualified Plans

Non-Qualified Plans

401(K)

403 (b)

457 (b)

Qualified Plans

• “Qualified” means not taxable
• Deferral of current income until retirement
• Qualified plans must meet provisions of Section 401 of the Internal Revenue Code
• Be written and communicated to all employees
• Exclusive benefit for employees or their beneficiaries
• Nontransferable, Nonforfeitable (that is Vested)
• Satisfy eligibility and minimum vesting of employees’ interest in the plan
• Cannot discriminate in favor of Officers, Shareholders or Highly Compensated Employees
• Benefits can vary based on length of service

401(k) – Qualified Plan

Cash or Deferred Arrangements or Salary Reduction Plans

• 2013 Maximum contribution $ 17,500
• Catch Up Contribution (Age 50+) $ 5,500
• Non-Taxable for Federal or State Income Tax (except in Pennsylvania)
• 401(k) Taxable for Social Security and Medicare
• Annual maximum on all plans combined is $51,000 in 2013 or 100% of eligible compensation whichever is less
• Employer Options
• Plans may offer:
• Employer matching funds
• Ceilings for contributions
• Automatic enrollment

403(b) Plan

A retirement savings program for tax-exempt

organizations such as Public Schools, Colleges and

Universities, Religious Groups and Public Charities.

• 2013 Maximum Contributions $17,500
• Catch Up Contribution (Age 50+) $ 5,500
• 403(b) Taxable for Social Security and Medicare
• Annual maximum on all plans combined is $51,000 in 2013 or 100% of eligible compensation whichever is less
• 2 plans available
• Tax Sheltered Annuities (TSAs)
• Tax deferred annuity issued by a life insurance company
• Tax Sheltered Custodial Accounts (TSCAs)
• Invested in mutual funds held by a qualifying custodian

457(b) Plan

Deferral of Wages for Governmental Employees

and some tax exempt organizations

• 2013 Max Contribution (Age 50+) $17,500
• Catch Up Contribution $ 5,500
• Not subject to Federal Income Tax
• Taxable for Social Security and Medicare
• Treated in some ways as a non-qualified plan

Non-Qualified Plan

• No discrimination requirements
• Plans are a written promise by employer to pay a given amount at a later date
• Usually not Federal Income Taxable
• Usually Social Security and Medicare Taxable

NOTE: Get legal advice about how to treat Non-

Qualified Deferred Compensation

• Qualified “cafeteria plans” fall under Section 125 of the Internal Revenue Code.
• Employees are allowed to select the type of tax free benefits they need.
• Benefits may be changed during the plan year only when there is a change in status, when the coverage or premiums change significantly, or when the employee leaves the company.
• Change in status can include: marriage, divorce, death of spouse or dependent, birth or adoption, or a change in employment.

Benefit menu must include at least two benefits

allowing the employee to receive cash or one or

more qualified (non-taxable benefits).

• Medical/Dental Coverage – Employee, Spouse, Family
• Long Term Care Insurance
• Group Term Life Insurance
• Disability/Accident Coverage
• Dependent Care – Limited to $5,000 or $2,500 if Married and Filing Separately

Qualified (non-taxable benefits) continued:

• Adoption Assistance
• Vacation Choices
• Cash or Deferred Arrangement (CODA)
• (Only 401(k) plans; 403(b) and 457(b) plans cannot be included)
• 2 separate reimbursement or Flexible Spending Accounts
• One to pay for qualified expenses
• Another for Dependent Care
• Health Savings Accounts

Section 125 Tax Implications

• The contributions are with pretax dollars, no amount is withheld for federal income tax
• Cafeteria plan contributions are not subject to Social Security tax or Medicare tax, with the exception of 401(k) plan contributions
• Cash benefits taxable – any benefits converted to cash become taxable income to the employee at the time the cash is received

Flexible Spending Accounts

• Health Care Expenses
• Dependent Care Expenses

Use it or Lose it

Uniform Coverage Requirement

• Employers must reimburse health care related flexible spending account claims up to the employee’s annual election even if the claim exceeds the employee’s account balance

Employer Options

• Employers can utilize the remaining balances at the end of a plan year for overhead and administrative costs for the plan