Taxable and Nontaxable Compensation Linda Porada FPC, CPP email@example.com 847-507-6377
Overview • Gross Income and Wages • Fringe Benefits • Additional ER Provided Benefits • Other Payments • Withholding and Reporting Rules for ER provided benefits
IRC • All compensation an EE receives from an ER, no matter what form it takes, constitutes wages subject to federal income and employment taxes. • Such compensation is excluded from wages and exempt from taxation ONLY where the IRC provides a specific exclusion.
$ Gross Income • Gross Income • Includes compensation for services, including fees, commissions, fringe benefits, perks and other similar items • Includes all remuneration for employment, including the cash value of such, paid in any medium other than cash Wages and benefits are excluded from being taxable only when IRC provides a specific exclusion.
Fair Market Value IFBA = FMV – (EPA + AEL) • The amount of the benefit the ER must include as income to the EE IFBA: Includable fringe benefit amount FMV: Fair Market Value EPA: EE paid amount AEL: Amount excluded by law
Formula applied = Harry’s company pays $300.00 a month for his parking space. (Joe Citizen wanting purchase the same parking space would also pay $300.00 per month.) FMV = $300.00 Harry’s pays nothing towards the spot EPA = $0 Up to $240.00 per month of ER provided parking is excluded from income by law for 2012. AEL = $240.00 IFBA = $60.00 per month
Formula challenge = • Harry’s company pays $215.00 per month for a space that would cost Joe Citizen $300.00 per month • Harry contributes $35.00 per month for that spot. FMV = EPA = AEL = IFBA=
Challenge solved • FMV = $300.00 • EPA = $35.00 • AEL = $240.00 Includable Fringe Benefit Amount IFBA = $25.00 25.00 = 300.00 – (35.00 + 240.00)
Fringe Benefits • Nontaxable Fringe Benefits • No-additional-cost-services • Qualified Employer Discounts • Working Condition Fringe • De Minimis Fringe • Qualified Transportation • On-Premises Athletic Facilities • Qualified Retirement Planning Services • Qualified Moving Expense Reimbursement
No-Additional Cost Services • Regularly offered for sale to customers • No additional cost to employer • Current and former EE’s who left because of retirement or disability and their widow(er)s, spouses and dependent children. • Available on equal terms to all (cannot be in favor of highly compensated employees)
Highly compensated EE’s 5% owner of stock or capital or For 2012 received more than $115,000.00 in compensation from the ER during the preceding year
Qualified Employee Discounts • Discount cannot exceed gross profit % • Cannot exceed 20% off price to customers • Must be same line of business • Discount available to all in employees in group • Real Estate excluded • Current and former employees included
Working Condition Fringe • Employee’s use must relate to trade or business • Business deduction on personal tax return • Current employee, partner, director or independent contractor only • Employer must maintain records to substantiate deductions
Working Condition Fringes • Examples • Business use of company car/airplane • Chauffer/body guard • Dues/membership fees to professional orgs • Subscriptions to business periodicals • Job-related education • Goods used for product testing • Outplacement services
Working Condition Fringe Cont’d • Nondiscrimination rules do not apply • Tax preparation services are not a working condition fringe • Employer provided cell phones • IRS makes final determination • Substantiation that it is used primarily for business use is recommended.
De Minimis Fringes • Value is so small that accounting is unreasonable or impracticable • Frequency matters • Employee is anyone to whom the benefit is provided • Can never, never, never be cash! • Cash is cash and cash is taxable!
De Minimis Fringe Cont’d • Examples of De Minimis Fringe • Occasional typing of personal letters • Occasional use of copier • Occasional parties and picnics for all emp. • Occasional tickets to sporting events • Traditional holiday gifts w/ small value • Turkeys • Candy
More Examples • Occasional use of company telephones • Occasional meals or cab fare • Coffee and doughnuts • Frequency needs to be considered • No specific dollar maximum
De Minimis Fringe Cont’d • Rules to remember No specific dollar minimum • Nondiscrimination rules do not apply • Gift certificates and gift cards are not excludable • Readily ascertainable value – easily accounted for • Meal allowances: taxability varies • In-kind meals: for the benefit of the ER • Excluded from income • Tax filing services: Electronic filing and preparation
Qualified Transportation Fringes • Excluded from income if: • Transportation between home and work in commuter highway vehicle provided by employer • Transit passes, vouchers, tokens or fare cards up to $125/month • Parking provided on or near premises up to $240/month
Qualified Transportation Fringes Cont’d • Exclusion Limits • Monthly limit applies • Employees only • Public and Private sector alike • No written plan required
Qualified bicycle commuting reimbursement A “qualified bicycle commuting reimbursement” can be made to EE’s for reasonable expenses incurred by an EE who regularly uses a bicycle to commute to and from work. The maximum qualified bicycle commuting reimbursement is $20.00 per month. A qualified month is a month in which the EE does not receive any other qualified transportation fringe benefit and regularly uses a bicycle for a substantial portion of travel between her residence and place of work.
Knowledge • An EE’s parking garage is two blocks away from his down-town office. It costs $260.00 per month to rent a stall there, but the employee doesn’t mind because it’s convenient and his ER reimburses him for 100% of the costs. How much of his monthly parking is taxable?
On-premises Athletic Facilities • Must be located on premises • Facility is operated by the employer • All use is by employees, spouses and dependent children • Current and former employees • Is not a resort or residential facility
Qualified Retirement Planning Services • Employees and spouses • Retirement planning advice or information on qualified retirement plan (401K) • Can include advice outside plan • Does not include tax preparation, accounting or brokerage services • Cannot discriminate towards highly compensated
Personal Use of Employer Provided Vehicles • Business use is NOT Taxable • Personal Use is Taxable if not • De Minimis • Qualified Non-personal Use • Automobile Salespersons (pp 3-17, 3-18)
Accounting for vehicle use • If an EE uses a company provided vehicle for both business and personal travel, the EE MUST account to the ER for the business use. Everything else is considered personal use.
Valuation Methods • Employers can determine the fair market value of taxable personal use of a company-provided vehicle by using either - General Valuation Method - one of three Special Valuation (Safe Harbor) methods (pg 3-19) Once an ER begins to use a safe-harbor valuation method for a vehicle, they must continue using that method as long as the EE uses that vehicle.
Safe Harbor Methods • Annual lease value method • Cents-per-mile method • Commuting value method
Annual lease value method • Also called the Fair Market Valuation Method Table on page 3-21 The first step is to determine the fair market value of the vehicle on the first day the EE uses the vehicle. The annual lease value amount is then multiplied by the percentage of personal use. EXAMPLE Assume an EE uses a company car 50% for business. The car has a fair market value of $20,000.00. Taxable Compensation for person use of the car is $2800.00. ** FUEL NOT INCLUDED When the ER provides fuel for personal use, add the cost of fuel based on the personal mileage (at a rate of $0.055 per mile or actual expenses.)
Knowledge EE Amy has an employer provided car that she uses for both business and personal driving. Amy drove 17,000 for the year. 12,300 miles were for business. The car’s FMV is $16,200. What amount must be included as taxable income for the year?
Solution ALV of $16,200 car (from table) = $4600 Personal miles = Total miles – business use • = 17000 – 12300 Find the percentage of personal miles 4700 / 17000 = .2765 .2765 = 27.65% FMV of personal use = $4600 X 27.65% $1271.90
Cents-per-mile method • If a vehicle is valued under $15,900 (SUV valued under $16,700) The value of personal use can be determined by multiplying the personal miles by the business standard mileage rate. $ 0.555 per mile (55 and one half cents) - The ER must reasonably expect the vehicle to be used throughout the year for business, or - The vehicle must be driven at least 10,000 miles annually (including personal use) and be used primarily by employees.
Commuting Value Method • Include in the EE’s income $1.50 per one-way commute ($3.00 for a round trip) if the personal use of the company vehicle is: - Not by a “control employee” - Restricted in writing to driving between work and home - By an EE who commutes in the company vehicle due to noncompensatory business reasons. This method also applies to more than one EE commuting in the same vehicle or for company sponsored car-pools.
Business Use of personal vehicles • EE’s who use their personal vehicle for business use may be reimbursed at the Business Standard Mileage Rate $0.555 per mile for 2012 • Must be documented • Excess to that rate is taxable
Check your understanding • A Salesperson drives a company-owned vehicle valued at $12,000. In the year, he logs 10,000 miles for business travel and 5000 miles for personal use. Use the annual lease value method to calculate the value of his personal use of the vehicle. Page 3-21
$1200.00 • The salesperson uses the car two-thirds for business and one-third (5000 / 15000) for personal use. The lease value of a $12,000 automobile is $3600. $3600 times one-third = $1200.00
Other Taxable Fringe Benefits • Personal Use of Employer Provided Aircraft • General Valuation Rule • Non-commercial Flight Valuation Rule • Free or Discounted Commercial Flights • Discounts on Property or Services • Club Memberships • Working Condition Fringe? • Club vs. Organization
Additional Employer Provided Benefits • Life Insurance • Group-term life insurance • Whole life insurance • Split dollar life insurance • Owners
Group Term Life • The value of group-term life insurance provided to an EE in excess of $50,000 is taxable compensation. *Dependent group-term life insurance coverage of $2000 or less is excludable from income as a de minims benefit. If dependent group-term life is more than $2000 the entire amount is taxable and subject to all withholding.
GTL Key points • The value of excess GTL is exempt from Federal Income Tax withholding However, the amount is taxable on the EE’s individual tax return and must be reported on Form W-2 • Must withhold Soc Sec and Medicare • Exempt from FUTA • Calculated on EE’s age as of 12/31 of the year in which the benefit is taxable.
Imputed income • The value of excess GTL is an example of imputed income. Imputing income reduces employees’ net pay by increasing taxes.
Group Term Life Please use table on 3-28 Example 1 Employer paid life = 2 X Employee’s salary, Salary = $65,000, Age 59 on 12/31/11, Maximum coverage is $125,000 per plan Step 1: 2 x $65,000 = $130,000 Step 2: $125,000 – $50,000 = $75,000 Step 3: $75,000/$1000 = 75 units Step 4: 75 x $.43 = $32.25 Step 5: $32.25 per month in taxable income
Group Term Life Example 2 Employer paid life = 2 X Employee’s salary, Salary = $65,000, Age 59 on 12/31/11, Maximum coverage is $125,000 per plan, Employee pays $25/month after tax for coverage Step 1: 2 x $65,000 = $130,000 Step 2: $125,000 – $50,000 = $75,000 Step 3: $75,000/$1000 = 75 units Step 4: 75 x $.43 = $32.25 Step 5: $32.25 - $25.00 = $7.25 Step 6: $7.25 per month in taxable income
GTL Challenge On January 1st of 2012 Linda’s company provides Group Term Life benefit of $225,000.00 Linda’s birthday is 11/16/1978 How much is considered taxable for the month of January, 2012
Figure out Linda’s age as of 12/31/2012 34 years old Amount of coverage over $50,000 225,000 – 50,000 = 175,000 175,000 divided by 1000 = 175 175 X .08 = $14.00 per month in 2012 is taxable (regardless of which month)
Linda told a fib ! • Same coverage. • Linda’s birthday is really 11/16/1948
MATH IS FUN !! 175 X .66 = $115.50 per month is taxable