employee compensation n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Employee Compensation PowerPoint Presentation
Download Presentation
Employee Compensation

Loading in 2 Seconds...

play fullscreen
1 / 68

Employee Compensation - PowerPoint PPT Presentation


  • 227 Views
  • Uploaded on

Employee Compensation. Chapter 4. Employee Compensation. All forms of compensation (including salaries, wages, bonuses, tips, and fringe benefits) are taxable as ordinary income to employees unless specifically excluded by a provision in the Code Employers can deduct all compensation expenses.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Employee Compensation' - vina


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
employee compensation1
Employee Compensation
  • All forms of compensation (including salaries, wages, bonuses, tips, and fringe benefits) are taxable as ordinary income to employees unless specifically excluded by a provision in the Code
  • Employers can deduct all compensation expenses
payroll taxes for employees
Payroll Taxes for Employees
  • FICA rate is 7.65%
    • 6.2% for Social Security + 1.45% for Medicare
    • Social security portion is only charged on the first $106,800 for 2010
payroll taxes for employers
Payroll Taxes for Employers
  • Employer withholds FICA tax from employee; employer matches employee FICA and forwards total to government
  • Employer can deduct employer’s share of tax
    • No deduction for employee’s share of tax
other payroll taxes
Other Payroll Taxes
  • Employers are also required to pay other types of payroll taxes such as federal and state unemployment taxes
  • FUTA rate is 6.2% on first $7,000
  • State unemployment taxes vary
  • These taxes are all deductible by the employer paying them
2010 payroll tax forgiveness
2010 Payroll Tax Forgiveness
  • 2010 Hiring Incentives to Restore Employment Act allows employers who hire qualified new employees after 2/3/10 and before 1/1/11 to elect to be exempt from Social Security tax for these employees
    • Employee must not have been employed for more than 40 hours in the last 60 days prior to beginning the new job
    • Employer must still pay the Medicare tax
employee vs independent contractor
Employee vs.Independent Contractor
  • Independent contractors (and other self-employed individuals) pay their own Social Security and Medicare taxes
    • This is called the self-employment tax
  • Workers considered employees (instead of an independent contractor) if the employer has the right to control and direct the end result and the means by which the result is accomplished
    • Rev. Rul. 87-41 provides 20-factor test
timing of compensation
Timing of Compensation
  • Salaries and bonuses are usually deductible by the employer when accrued
  • Exceptions
    • Compensation accrued but not paid within 2½ months of year-end is not deductible until paid
    • Compensation accrued to cash-basis related party not deductible until paid
related parties
Related Parties
  • Related parties include:
    • Family members (brothers, sisters, spouse, ancestors, and lineal descendants, but not in-laws)
    • A taxpayer and a corporation in which the taxpayer directly or indirectly owns more than 50% of the stock (indirect ownership includes stock owned by family members)
    • Other relationships such as partners/partnerships and beneficiaries/trusts
reasonable compensation
Reasonable Compensation
  • Reasonable compensation – amount similar business would pay for the services under similar circumstances
  • If a shareholder-employee’s salary is considered unreasonable, the excess can be reclassified by IRS as a nondeductible dividend
  • If unreasonable compensation is paid to a party related to a shareholder, the excess can be reclassified as a nondeductible dividend to the shareholder
excessive compensation
Excessive Compensation
  • Deductible compensation paid to CEO and 4 highest-paid officers of publicly-held corporations is limited to $1 million per year
  • This compensation limit does not include amounts that represent
    • Compensation based on individual performance goals (if approved in advance by outside directors)
    • Compensation paid on a commission basis
    • Employer contributions to a qualified retirement plan
    • Tax-free employee benefits
s corporations low salaries
S Corporations & Low Salaries
  • There is an incentive for an S corporation to pay an unreasonably low salary to a controlling shareholder-employee to minimize payroll taxes, as S corporation profits are not subject to payroll taxes
  • IRS can reclassify some of S corporation’s distribution as salary, requiring payment of additional employment taxes
employing children
Employing Children
  • Compensation paid to children is deductible if reasonable for the services actually performed
    • Wages paid to an employer’s child under age 18 are not subject to employment taxes (if not paid by a corporation)
    • Standard deduction for a single individual is $5,700 in 2010; this amount can be paid to a child without tax consequences
fringe benefits
Fringe Benefits
  • Tax-free fringe benefits are not taxable as income to the employee but are deductible by the employer
  • Most tax-free benefits are limited in dollar amount
  • If an employer pays an amount in excess of the limit (or pays for something that is not a qualified tax-free benefit), it is treated as taxable compensation (income to the employee and deductible by the employer)
group term life insurance
Group Term Life Insurance
  • Premiums on the first $50,000 of employer-paid group term life insurance coverage may be excluded from employee's gross income
  • Excess over $50,000 is included in income
    • Amount determined from IRS table based on employee's age at year end, rather than cost
group term life insurance1
Group Term Life Insurance
  • If the insurance plan is discriminatory, key employees must report gross income equal to the greaterof
    • Employer’s actual premiums paid or
    • Benefit determined from the table (without $50,000 exclusion)
health and accident insurance
Health and Accident Insurance
  • Value of insurance premiums paid by employers on behalf of employees and their families are tax-free
    • Self-insured discriminatory plans may result in taxable income to highly-compensated employees
dependent care benefits
Dependent Care Benefits
  • An employer can provide up to $5,000 ($2,500 if MFS) for the care of an employee's dependents during working hours through an on-site or off-site facility
    • Highly-compensated employees cannot exclude benefits if they are discriminatory
cafeteria plans
Cafeteria Plans
  • A qualified cafeteria plan allows an employer to offer employees the option of choosing cash or nontaxable fringe benefits
    • Exception to constructive receipt doctrine
  • If employee chooses cash, the cash is taxable
  • If employee chooses nontaxable fringe benefits, they are excludable
cafeteria plans1
Cafeteria Plans
  • Benefits can be funded with employer contributions or by employees voluntarily electing to reduce their salaries (allowing employees to obtain fringe benefits with before-tax dollars)
  • These plans are sometimes called flexible spending arrangements (FSA)
cafeteria plans2
Cafeteria Plans
  • Some nontaxable benefits that can be offered include coverage for medical and dental care, group-term life insurance up to $50,000, and dependent care assistance
  • Any amounts set aside in a flexible spending plan must be used before the end of the year or they are lost
meals and lodging
Meals and Lodging
  • Value of meals and lodging provided by an employer to an employee are excluded if:
    • Provided for the employer's convenience and
    • Provided on the employer's business premises and
    • Employee required to occupy the lodging to perform employment duties
  • If an employee is given a choice between additional compensation or meals and lodging, the value of any meals and lodging is taxable
no additional cost services
No-Additional-Cost Services
  • When an employer provides services for its employees and incurs no substantial additional cost (excess capacity services), employees can exclude the value of the services from gross income
    • Example: Free or discounted seats on an airplane when the employee does not displace a paying customer
no additional cost services1
No-Additional-Cost Services
  • This exclusion applies only to services received, not property
  • Only employees who work in the line of business that renders similar services are allowed to exclude the benefits (baggage handlers who work for an airline can fly free)
  • In addition to current employees, the exclusion is available to former employees, as well as spouse and dependents
employee discounts
Employee Discounts
  • Property or services provided to employee at below FMV treated as taxable income to employee, unless within the qualified employee discount limits
    • Only property and services offered to customers in the ordinary course of the employer's business qualify
    • Full discount excluded if discount does not exceed gross profit percentage times price charged to customers
    • For services, discount can’t exceed 20%
employee awards
Employee Awards
  • Employee awards generally are treated as taxable compensation
  • Exceptions for length of service or safety awards
    • Qualifying employee awards must be made with tangible property (no cash)
    • Average cost of qualified plan awards limited to $400, but individual awards can be as much as $1,600
de minimis fringe benefits
De Minimis Fringe Benefits
  • Employees who receive “de minimis” (very small in value) property or services from their employers can exclude the value from gross income
  • An amount is considered de minimis when the value is so small that accounting for it is unreasonable or impractical
    • Examples: coffee & doughnuts, company picnics, limited use of copy machine, etc.
transportation parking
Transportation & Parking
  • Exclusions limited:
    • Free or discounted parking (up to $230 per month in 2010)
    • Transit passes and special carpool commuting expenses (combined value of up to $230 per month)
    • Reimbursement of up to $20 per month for costs of commuting by bicycle
athletic facilities
Athletic Facilities
  • Employees (and their families) who use employer-provided athletic facilities that are located on the employer’s business premises can exclude the value of the benefit from gross income
  • Facilities include tennis courts, gymnasiums, and swimming pools
working condition fringe benefits
Working ConditionFringe Benefits
  • Working condition fringe benefits can be excluded from the employee’s gross income if the employee would have been entitled to a tax deduction if he had actually paid the expense
    • Examples: job-related education, professional membership dues
  • Discriminatory benefits can still be excluded
employee use of company owned cars
Employee Use ofCompany-Owned Cars
  • The value of an employee’s personal use of a company car is a taxable fringe benefit
  • In determining the amount of income to be taxed to the employee for personal use, there are 3 methods:
    • Lease value (from table)
    • Cents per mile rate (50¢ in 2010)
    • Commuting method (valued at $1.50 per one-way trip)
relocation expenses
Relocation Expenses
  • Qualified direct moving expenses include the reasonable cost of moving household belongings and family members from the old home to the new home by the shortest and most direct route
    • No dollar limit (but mileage rate if driving limited to 16.5¢ per mile)
    • Indirect expenses such as house-hunting or temporary living expenses do not qualify
relocation expenses1
Relocation Expenses
  • Moving expenses are deductible if they are related to assuming duties at a new place of business and both the distance and time requirements are met
    • Distance test - distance from old residence to new job must be at least 50 miles greater than the distance from old residence to old job
    • Even though a taxpayer is required to relocate, no deduction is allowed if the distance test is not met
relocation expenses2
Relocation Expenses
  • Time Test - taxpayer must work as an employee at the new location for 39 weeks during the 12 months following arrival
    • Self-employed person must work for 78 weeks during the 24 months following arrival
    • Exceptions allowed in event of death, disability, involuntary separation, or transfers for the employer’s benefit
  • Qualified moving expenses that are not reimbursed are deductible for AGI by employee
education assistance plans
Education Assistance Plans
  • Up to $5,250 a year of employer-provided educational assistance benefits can be excluded
  • Courses do not need to be job-related.
  • Excludable benefits are payments for tuition, fees, books, supplies, and equipment
job related education
Job-Related Education
  • No dollar limit if education expenses are related to the current job of the employee
    • Qualified educational expenses include tuition, fees, books, and transportation from job to class
    • Expenses that meet the minimum education requirements for the taxpayer’s job or qualify taxpayer for a new profession do not qualify for exclusion
    • If employee pays for expenses and is not reimbursed, employee can deduct qualified expenses as miscellaneous itemized deductions
other education provisions
Other Education Provisions
  • Qualified Tuition Reduction
    • Schools can provide a tuition waiver for employees and their immediate family members
    • Only undergraduate tuition can be waived as a tax-free benefit; graduate tuition waivers are taxable
  • Other education provisions discussed in Ch. 11
    • American opportunity credit ($2,500 maximum)
    • Lifetime learning credit ($2,000 maximum)
    • Deduction for up to $4,000 of tuition (if extended)
substantiating expenses
Substantiating Expenses
  • Accountable Plan - an employee provides adequate accounting to the employer and refunds to the employer any excess payments
    • Adequate Accounting - provides details concerning the time, date, place, business purposes, and the amount of the expense
    • If an employee makes an adequate accounting, and the reimbursement exceeds the deductible expenses, the employee must include the excess in income
substantiating expenses1
Substantiating Expenses
  • Nonaccountable plan does not require the employee to substantiate expenses or refund excess advanced funds
    • Employer must report all of the reimbursed expenses on employee’s W-2
    • Employees who receive advances in a nonaccountable plan must report details of both the reimbursement and the expenses
    • Employee’s deductions are subject to 2% AGI floor for miscellaneous itemized deductions
restricted stock
Restricted Stock
  • Value not taxed until stock vests
    • Employee recognizes ordinary income = FMV of stock when vested
    • Dividends taxed as ordinary income prior to vesting
  • Election to accelerate income made by recognizing income = FMV in year of receipt
    • No deduction for loss if forfeited
stock options
Stock Options
  • Option – right to purchase stock at guaranteed strike price for a specific time
  • Grant date – date option offered to individual
  • Exercise date – date option used to purchase stock
  • Bargain element – difference between strike price and FMV of stock
nonqualified stock options
Nonqualified Stock Options
  • Employee recognizes ordinary income equal to the bargain element on the date the NQSO is exercised
    • Employer gets matching compensation deduction for bargain element
    • Employee’s basis for stock is cash paid + income recognized
incentive stock options
Incentive Stock Options
  • ISOs provide more favorable treatment for employee
    • ISOs do not trigger any income recognition at the date of grant or exercise
    • Income is recognized only upon the sale of the stock, usually as long-term capital gain
    • But bargain element is an individual AMT adjustment
  • Employer receives no compensation deduction
phantom stock and sars
Phantom Stock and SARs
  • Phantom stock plan - deferred compensation is hypothetically invested in shares of company’s stock
    • At the end of deferral period (such as at retirement), the employer pays the employee the FMV of the phantom shares
  • Stock appreciation right (SAR) plan - employees are given the right to receive a cash payment equal to the appreciation in value of employer’s stock for a certain period of time
    • Employees recognize income only when rights are exercised
qualified deferred compensation plans
Qualified Deferred Compensation Plans
  • Funded plans that receive favorable tax treatment:
    • Employer contributions are deducted as they are paid into the trust
    • Earnings on these contributions accumulate tax-free until withdrawn
    • Benefits are taxable to the employee only when actually received
distributions
Distributions
  • When funds are withdrawn, taxes must be paid by employee on
    • All earnings
    • All employer contributions
    • All pre-tax (deductible) employee contributions
  • Employee must begin distributions by age 70½
distributions1
Distributions
  • Premature withdrawals - 10% penalty (in addition to income tax) for taking distributions before age 59½
  • A taxpayer may roll over all or part of a distribution within 60 days without paying any tax or penalty on the distribution
    • Lump sum distributions are subject to 20% withholding unless there is a direct trustee to trustee transfer
types of plans
Types of Plans
  • Defined Benefit – provides fixed benefit at retirement
    • Employer assumes the risk that the plan assets will be sufficient to pay benefits
  • Defined Contribution - amounts contributed are determined according to a formula
    • Employee’s benefit is dependent upon employer’s contributions and the actual earnings in the individual account
401 k plans
401(k) Plans
  • Employees can elect to have employer contribute part of their salary to plan on pretax basis
    • In 2010, up to $16,500 plus extra $5,500 if age 50 or older
  • Flexibility - employee can elect each year to have a different amount contributed
  • Employer may match some of the contributions
other plans
Other Plans
  • Employee stock ownership plans (ESOPs)
  • Simplified employee pension plans (SEPs)
  • Savings incentive match plans for employees (SIMPLE)
  • SIMPLE 401k plans
nonqualified deferred compensation
Nonqualified Deferred Compensation
  • Advantages - no dollar limits and can be offered on a discriminatory basis
  • Employer receives a deduction only upon the actual payment of benefits to the employee
  • Employee recognizes income upon the actual receipt of these benefits
nonqualified deferred compensation1
Nonqualified Deferred Compensation
  • Employer accrues liability on financial statements, but no cash is set aside
  • If the employer’s business fails, the employee is merely an unsecured creditor
individual retirement accounts ira
Individual Retirement Accounts (IRA)
  • Individuals can contribute up to $5,000 ($6,000 if age 50 or older) or earned income if less
  • A married taxpayer can contribute for a nonworking spouse
  • Qualified contributions are deductible for AGI
  • Deductions not allowed if the individual is a participant in an employer-sponsored retirement plans, unless AGI is below certain limits
ira phaseout limits
IRA Phaseout Limits
  • Deductible contribution phased out in 2010 for AGI over a range
    • Single $56,000 - $66,000
    • Married filing jointly $89,000 - $109,000
      • Zero if married filing separately
    • If spouse an active participant, phaseout over AGI of $167,000 - $177,000
roth ira
Roth IRA
  • Taxpayers may make nondeductible contributions to a Roth IRA
  • Contributions phase out if AGI between
    • $105,000 - $120,000 if single
    • $167,000 -$177,000 if married filing joint return
  • Contributions to Roth and the regular IRA cannot exceed a total of $5,000 ($6,000 if age 50 or older)
roth ira1
Roth IRA
  • Primary advantage of Roth IRA – able to withdraw earnings & contributions tax-free
  • Distributions from Roth IRAs are not subject to minimum distribution rules
    • Do not have to begin by age 70½
    • But cannot be made for first 5 years and taxpayer must usually be at least age 59½
self employment taxes
Self-Employment Taxes
  • Self-employed individuals must pay both the employer’s and the employee’s share of FICA taxes for a combined rate of 15.3%
    • 12.4 % (6.2% x 2) for Social Security on income up to $106,800 in 2010
    • 2.9% (1.45% x 2) for Medicare – no income limit
self employment taxes1
Self-Employment Taxes
  • Tax computed on Schedule SE
  • Self-employed individuals are also allowed a deduction for AGI for the employer’s half of self-employment taxes
    • Calculated by multiplying net income from self-employment by 92.35% (100% - 7.65%) before calculating SE tax
  • There is no deduction for the employee’s half of the taxes
fringe benefits for self employed
Fringe Benefits forSelf-Employed
  • Self-employed individuals (including sole proprietors, partners, and greater than 2% shareholders of S corporations) do not qualify for most fringe benefits on a tax-free basis
  • Special deduction for AGI applies to health insurance for self-employed individuals
retirement plans for self employed
Retirement Plans for Self-Employed
  • Keogh (HR 10) plan has limits on contributions similar to corporate retirement plans
    • Contributions are deductible forAGI
    • Extending return due date also extends deadline for making contributions to plan
    • Earnings and deductible contributions fully taxed when withdrawn
  • May also contribute to an IRA unless limitations apply
foreign earned income
Foreign Earned Income
  • Qualifying earned income includes most income earned from working in a foreign country including salary, bonuses, allowances and noncash benefits
    • U.S. government employees not eligible
  • Exclusion is $91,500 per year for 2010
  • Taxpayer must be a bona fide resident of a foreign country for entire year or be physically present in a foreign country for 330 full days during a period of 12 consecutive months
foreign housing exclusion
Foreign Housing Exclusion
  • A taxpayer who qualifies for the foreign earned income exclusion may also exclude a portion of excess housing costs provided by the employer
    • House costs in excess of a base amount (16% of the maximum foreign earned income exclusion) are eligible
    • The upper limit is 30% of the foreign earned income exclusion
    • For 2010, up to $12,810 of housing costs can be excluded
foreign tax credit
Foreign Tax Credit
  • Employees who do not qualify for the exclusion include the income in taxable income and claim a tax credit (or a deduction) for taxes paid to the foreign government
    • The foreign tax credit cannot exceed the amount of U.S. tax that would have been paid on the foreign income
    • The foreign tax credit is generally more advantageous than the deduction
tax reimbursement plans
Tax Reimbursement Plans
  • To encourage employees to accept foreign assignments, some employers agree to pay the employee’s taxes as part of their compensation package
  • If the employer pays any of the employee’s taxes, this results in additional compensation income for the employee
tax reimbursement plans1
Tax Reimbursement Plans
  • Typical reimbursement arrangements include
    • Tax Protection Plans – the employee is reimbursed for any U.S. or foreign taxes paid in excess of the tax liability that would have been incurred had the employee remained in the U.S.
      • The employer pays any excess tax but the employee benefits from any tax savings from low-tax countries
    • Tax Equalization Plans – the employee will pay the same net tax liability that would have been paid had the employee stayed in the U.S.
      • The employer pays any excess tax but also keeps any tax savings from low-tax countries
tax treaties
Tax Treaties
  • Treaties generally provide tax exemptions to residents of one treaty country on short-term assignments to the other country
    • A typical treaty allows no more than 183 days presence in a year before being subject to tax
    • Treaties frequently exempt teachers and students from foreign income tax