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COMPENSATION & BENEFITS Is it all Taxable & Income?

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  1. COMPENSATION & BENEFITSIs it all Taxable & Income? Green Mountain Payroll Conference Presented By: Daniel Dycus, CPP

  2. Outline • Definitions • Fair Market Value (FMV) • Imputed Income • Non-Taxable Comp & Benefits • Taxable Comp & Benefits • Fringe Benefits • Company Vehicles • Annual Lease Method • Cents per mile • Commuting Valuation Method • Bicycle Commuting • Life • Group Term Life (GTL) • Dependent GTL • Whole Life • Moving / Relocation • Educational Assistance • Adoption Assistance • Prizes & Awards • Accountable vs. Non-Accountable Plan • Meals & Lodging

  3. Outline • Advances and Overpayments • Back Pay • Bonuses • Commissions • Dependent Care • Grossing Up • Gifts • Golden Parachutes • Guaranteed Payments • Jury Duty • Leave Sharing • Loans • Military Pay • Severance or Dismissal Pay • Stocks & Stock Options • Tips • Uniform Allowance • Vacation Pay • Withholding – Payments after Death • Withholding & Reporting Rules

  4. Definitions • Wages: Any accession to wealth provided by the employer for services performed is considered wages and is subject to taxation. • Fringe Benefits: IRS and the IRC (Internal Revenue Code) has not definitively defined Fringe Benefits. • Fair Market Value: 3rd party value minus any after tax contributions and amount excludable by law • Benefit Amount = FMV – (EE paid Amt+ Amt Excludable by law)

  5. Definitions Continued • Imputed Income: fringe value added to gross pay that results in additional taxes, thus lessening the net pay. • Highly Compensated Employee (HCE):A 5% owner of stock or capitol at any time in the current or preceding year. OR An employee who received more than $110,000 in compensation during the preceding year (indexed annually)

  6. Fair Market Value • Non-cash items must be stated as “Fair Market Value”– FMV • Amount an employee would reasonably pay an unrelated third party • Employees perceived value of the benefit is not relevant • Amount the employer paid for the benefit is not a determining factor

  7. FMV Calculation • Employer Pays for parking space adjacent to the employer’s business • Monthly employer cost is $350. Same as any renter • Employee pays $25 per month for the space • IRC allows $230 per month excludable from income. • How much is taxable to the employee? • Space $350 per month • $25 Employee contribution • $230 Qualified amount • $255 Qualified and Employee contribution • $350 – 255 = $95Taxable

  8. Imputed Income • Imputing Income should be done as frequently as possible • No less than annually • By December 31 • Taxes are reported and paid at time of imputing • Taxes must be collected from the employee or paid by employer on their behalf • if ER pays it on the EE’s behalf it can be recorded as an AR entry and must be repaid by April 1 of the following year • If the EE does not repay, the taxes the ER has paid are now taxable income and have to be grossed up

  9. Imputed Income Calculation

  10. Non-Taxable Comp. & Benefits • Dependent Care • up to $5000 • Disability Benefits • attributable to EE contributions • Educational Asst. • Job related – no limit • Non-Job related up to $5250 under accountable plan • GTL • up to $50,000 • Company vehicle • business use • Moving Expenses • qualified • De Minimus Fringes • No Additional Cost Fringes • Health Savings Accounts • Long Term Care

  11. Non-Taxable Comp. & Benefits • Premium Only Plans • health • dental • etc • Working Condition Fringe • Commuter Fees • under $120 • Parking • under $230 • Accountable Business Expense

  12. Taxable Comp & Benefits • Wages • overtime • tips • Bonuses • Back-pay Awards • Severance • Gifts, Prizes & Awards • Exceptions – Years of Service & Safety Awards • Legal Services • Commuter Fees • over $120 • Parking • over $230 • Non-Accountable Reimbursement • Dependent Care • over $5000 • Sick pay & Disability • attributable to ER contributions

  13. Taxable Comp & Benefits • Educational Assistance – not job related • not an accountable plan • over $5250 • GTL • over $50,000 • Company vehicle • personal use • Non Qualified Moving Expenses • Commissions • Non-Cash Fringes • unless excluded by IRC

  14. Fringe Benefits • Focus is on exceptions and complications to compensation that is nontaxable or partially taxable • Most fringe benefits are generally taxable for FIT, SS, MED • Remember ALL compensation is considered taxable unless it can be specifically excluded according to the IRS.

  15. Fringe Benefits / Non-Reportable • IRC Section 132 Benefits • generally not reported on the employees Form W-2 • Section 132 Benefits include: • De minimis Fringe Benefits • minimal or occasional shows of gratitude • Occasional use of photocopier • show tickets • supper money while working overtime Cash, gift cards, gift certificates are always taxable

  16. Fringe Benefits / Non-Reportable • No Additional Cost Services • Provided to all employees • Benefit has to be in the line of business they work in • A product or services provided regularly to customers • Must not be discriminatory towards highly compensated employees • No substantial additional cost

  17. Fringe Benefits / Non-Reportable • Qualified Employee Discounts • Must be offered to customers in the ordinary course of the employers business • Discount is not greater than the gross profit of the normal price • Formula Used: Total Sales – COGS / Total Sales • The discount on services is not greater than 20% of the retail price • Must be available to all EE not only HCE or becomes taxable income

  18. Fringe Benefits / Non-Reportable • Working Condition Fringes- • Work related items provided by employer that if employee paid could be written off as business expense on their individual tax returns • The employee’s use must relate to the employer’s business or trade • The employer must maintain substantiation records and if the payment is involves cash excess must be returned within a reasonable period of time

  19. Fringe Benefits / Non-Reportable • Working Condition Fringes- • Examples • Business use of a company car or plane • Dues and membership fees for professional organizations • Employee’s subscriptions to business periodicals • Not considered a working condition fringe • Tax Preparation

  20. Fringe Benefits / Non-Reportable • Athletic Facilities • Must be on premises • Operated by the employer through its employees or another entity • Substantially all use of the facility is by: • Employees • Their Spouses • Their Dependent Children

  21. Fringe Benefits / Non-Reportable • Employer Provided Retirement Advice • Employer must maintain a retirement plan • Examples • 401(k) • 403(b) • Simplified Employee Pension (SEP) • SIMPLE • 457 Plans are not included in this benefit

  22. Fringe Benefits / Non-Reportable • Benefit can include • Retirement planning advice or information • Can be outside the plan itself • Retirement income planning • Benefit does not include • Tax preparation • Accounting or brokerage services • This benefit cannot be discriminatory

  23. Fringe Benefits / Non-Reportable • Qualified Transportation Fringes • For employees only • Some transportation choices can be excluded up to the limits • Examples • Transit Passes • Parking • “Employee” does not include partners, independent contractors, or 2% shareholders of an S corporation. • If cash is received for the fringe benefit, it is always taxable.

  24. Fringe Benefits / Non-Reportable • Excluded from income • Smart Cards • If the fare media value stored on the card is useable only as fare media for the applicable transit system and the amount is within the limit. • Terminal Restricted Debit Cards • A terminal restricted debit card qualifies as a transit system voucher if it can be used only at a merchant terminal at points of sale where only fare media for the applicable transit system can be purchased and the amount is within the limits. • MCC – Restricted Debit Cards • This card is generally considered taxable unless very specific criteria are met.

  25. Fringe Benefits / Non-Reportable • Vanpool - $120.00 monthly exclusion • Provided by employer • Commuter highway vehicle with at least six seats • Minimum of 80% of mileage must be for commuting from a residence to work • Must be at least 50% occupied • Transit Pass - $120.00 monthly exclusion • On mass transit-not necessarily public owned • Provided by any person in the business of transportation • Cannot be cash. . . Must be passes, vouchers that are readily available to employees • Qualified Parking - $230.00 monthly exclusion • FMV = amount of an “at arms-length” transaction for parking on or near premises or parking space near commuter transit • Can be discriminatory towards Highly Compensated Employees

  26. Fringe Benefits / Non-Reportable • Bicycle Commuting Reimbursement ($20 per month) • Can be used for: • Purchase of bicycle • Repair or improvement • Storage • Expenses are considered reasonable as long as the bicycle is used regularly to transport the employee from home to work

  27. Company Vehicles • Can be both Taxable and Nontaxable • Personal Use – Taxable • Business Use – Nontaxable • Requirement for proper Accounting for taxation • Business miles driven • Date of trip • Purpose of trip • Expenses incurred

  28. Company Vehicles • Reporting Requirements for Personal Usage • Federal tax is optional- but if not withheld the employee must be notified by January 31 or 30 days after the vehicle is assigned • SS/MED must be withheld, if employee terminates prior to posting, employer becomes responsible for both employee and employer withholding • EE portion must be grossed up

  29. Company Vehicles • Must be reported on the W2 • Must be reported at least once a year– more frequently is best practice • Fringe provided in November and December may be reported in following year. • This means that if the expense was incurred in Nov or Dec 2010 you can report it when you do the 2011 Form W2’s. 29

  30. Company Vehicles • Automobile Salesperson Exclusion • Employer must have a written plan/policy • Prohibits use outside of normal business hours other than by full time salespeople • Prohibits use for personal vacation trips • Prohibits use outside of the sales area • Prohibits storage of personal possessions in the vehicle • Limits total use (by mileage) of the vehicle outside of normal working hours to commuting between home and work plus an additional 10 miles or less each day.

  31. Company Vehicles • Simplified method for partial exclusion • Salesperson meets all requirements with the exception of the 10 mile rule. • Employer can use this method for taxation. • The employer must have a written policy that prohibits the personal use and prohibits the storage of personal property. • The ER must reasonably believe that the automobile salesperson has complied with the policy • The employer must impute (at least monthly) the appropriate amount from the table below and maintain substantiating records.

  32. Company Vehicles • Accounting for Vehicle Use • Valuation Method • General valuation method or 3 safe harbor methods may be used • General Valuation • FMV of the vehicle if purchased or leased in the geographical area. • Once a safe harbor is used it must be carried through as the method as long as the employee has the vehicle.

  33. Company Vehicles • Safe Harbor Method 1 – Annual Lease Method • Amount as determined in the annual lease charts is accessed for comparable auto and the amount is multiplied by the percentage of personal use for the vehicle • Lease amounts over $59,999 are equal to 25% of the FMV plus $500 • Company provided fuel adds .055 cents per mile to imputed amount • Same driver can only hold lease value for 4 years • New driver allows for recalculating the value

  34. Annual Lease Method Steps • Step 1. Find the cars fair market value • Step 2. Use the table to find the Annual Lease Value (ALV) • Step 3. Divide the personal miles driven by the total miles driven • Step 4. Multiply the ALV by the percentage of personal miles driven. • This is what is to be imputed into income. • Car issued less than one year, but more than 30 days • You must prorate the ALV • Formula = ALV * number of days driven / 365 days

  35. Annual Lease Value Calculation • Employer has been issued an employer provided car • Employee drive the car for the entire year • Employee uses the car for both personal and business use • During the year, the employee drive the car a total of 27,950 miles • 17,830 were business • 10,120 were personal • The cars FMV is $14,900

  36. Annual Lease Value Calculation • The FMV of the car = $14,900 • Annual Lease Value from the ALV Table = $4,100 • Formula Personal Miles / Total Miles = % of personal use 10,120 Miles / 27,950 Miles = .36 or 36% 36% of the miles were personal FMV Table * % of Personal Use = Imputed Income 4,100 ALV * 36% Personal Use = $1,476.00

  37. Company Vehicles • Safe Harbor Method 2 – Cents Per Mile Method • 51 Cents per mile (Employer pays for gas) – Jan 1 – Jun 30 • 55 Cents per mile (Employer pays for gas) – Effective July 1 • 49.5 Cents per mile (Employee pays for gas) – Effective July 1 • You can deduct up to 5.5 cents for employee paid gas • Qualifications • Employer must expect vehicle to be used by the employee throughout the year for business • Vehicle must be driven at least 10,000 miles annually, including personal use and used primarily by employees

  38. Company Vehicles • Vehicle FMV Limits • Vehicle Placed in Service 2010 • Under $15,300 from Blue Book • Truck or Van Place in Service 2010 • Under $16,000 value from Blue Book

  39. Cents Per Mile Calculation • Employee is issued and employer provided car • Issued for the entire year • Employer paid for the gas • Employee uses the car for both personal and business use • Employee drive the car 17,945 miles • 11,945 miles for business • 6,000 miles for personal • The FMV of the car is $14,000

  40. Cents Per Mile Calculation • FMV is below the limit of $15,300 • Miles drive were above the minimum of 10,000 • Employer paid for the gas • Use the rate of .55 Cents per mile (Employer pays gas) • Use the rate of 49.5 Cents per mile (Employee pays for gas) • You can deduct up to 5.5 cents for employee paid gas • Formula Personal Miles * Rate = Imputed Income 6,000 miles * .55 cents = $3,30.00 Gas Reduction 6,000 miles * .495 cents = $2,970.00

  41. Company Vehicles • Safe Harbor Method 3 – Commuting Valuation Method • Include $1.50 per one way commute - $3.00 round trip if personal use of the company vehicle is: • Not by a controlled employee • Corporate Officer earning at least $95,000 in 2011 • A Director • Earns at least 195,000 in 2011 • Is a 1% owner OR • Not a highly compensated employee • 5% during the year or preceding year • Greater than $110,000 in pay during the preceding year

  42. Company Vehicles • Restricted for usage between work & home – no personal use allowed • A written policy is required • An employee who commutes in company vehicle due to non-compensatory business reasons • Car pool with company car provides each passenger with the $3.00 round trip amount

  43. Commuting Valuation Calculation • Employee is issued a company vehicle • Employee uses it for business purposes only, except for driving home each day. • Employee drives 16,000 mile during the year • The card FMV is $14,000.00 • Employee drive to and from work 260 days during the year • The company has a specific policy that dictates the use of the vehicle • The employee is not a control employee

  44. Commuting Valuation Calculation • Employee is not a control employee • The vehicle is covered under a written policy • Vehicle is only driven for business use • The Commuting Valuation method can be use • Formula Days Driven * Commute Value = Imputed Income 260 round trip * 3.00 round trip = $780.00 • Without a written plan this method cannot be used

  45. Group Term Life (GTL) • GTL Greater than $50,000 is taxable income • Over $50,000 is taxable for: • Federal Income Tax • Exempt from withholding • Taxes paid on Federal return (Form 1040) • Social Security & Medicare • If not withheld from the employee, the employer must pay • Exempt from: • Federal Unemployment Tax (FUTA)

  46. Group Term Life (GTL) • Must have the GTL Chart to calculate the value • Show the monthly amount for $1,000 worth of coverage • Amounts increase with age • Age is determined by the last day of the year (12/31) • Imputed Income is the amount the employer pays above the excludable limit

  47. GTL Calculation • Determine the value of the excess GTL • What is the total amount of coverage • Amount excludable ($50,000) • Amount of coverage - $50,000 = Taxable Monthly Value • Taxable Value – employee after tax contribution = Taxable Value of GTL per month. • Pretax employee contributions do not reduce the taxable value • After tax contributions cannot reduce the taxable value below Zero.

  48. GTL Calculation • Company offers GTL to it’s employees at 3 times their annual base salary • The premium is paid partially by the employer and partially by the employee • The employee premium is not part of a section 125 plan, therefore it is not pretax • The employee portion is $5.00 per month • Employee is 39 years old as of 12/31 • Annual salary $70,000

  49. GTL Calculation • Amount of coverage $70,000 * 3 = $210,000 • Amount of coverage – excludable = Excess Coverage $210,000 - $50,000 = $160,000 • Excess Coverage / $1,000 (coverage per table = Factor $160,000 / 1000 = 160 • Get the cost per $1,000 from the table • Multiply the factor by the rate 160 * .09 = $14.40 Benefit Value

  50. GTL Calculation • Take the benefit value and subtract the employee contribution $14.40 – $5.00 = $9.40 • $9.40 is the Taxable Value of the GTL per month • If the employee deduction is pretax, then you do NOT subtract the employee contribution from the Taxable Value. • This would make Taxable Value of GTL per month to be $14.40