COMPENSATION & BENEFITSIs it all Taxable & Income? Green Mountain Payroll Conference Presented By: Daniel Dycus, CPP
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
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
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)
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)
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
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
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
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
Non-Taxable Comp. & Benefits • Premium Only Plans • health • dental • etc • Working Condition Fringe • Commuter Fees • under $120 • Parking • under $230 • Accountable Business Expense
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
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
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.
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
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
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
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
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
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
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
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
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.
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.
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
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
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
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
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
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.
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.
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.
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
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
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
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
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
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
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
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
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
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
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
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
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)
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
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.
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
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
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