Taxable and Nontaxable Compensation

1. Taxable and Nontaxable Compensation Tracie Sawade, CPP

2. Overview • Gross Income • Fringe Benefits (IRC) • Taxable Employer Provided Benefits • Nontaxable Fringe Benefits • Questions

3. Gross Income $ • Gross Income • Included wages and benefits • Excluded benefits • Income and Employment Taxes • Fair Market Value • IFBA = FMV – (EPA + AEL)

4. 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

5. No-Additional Cost Services • Regularly offered for sale to customers • No additional cost to employer • Current and former employees • Available on equal terms to all (cannot be in favor of highly compensated employees)

6. 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

7. 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

8. 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

9. Working Condition Fringe Cont’d • Nondiscrimination rules do not apply • Tax preparation services are not a working condition fringe • Club dues (for other than professional orgs) and spousal travel are excluded • Section 162 of IRC • May still qualify when substantiation is provided

10. De Minimis Fringe • 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!

11. 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

12. De Minimis Fringe Cont’d • More Examples • Coffee and doughnuts • Occasional use of company telephones • Occasional meals or cab fare for late workers • Cab fares for working other than normal shift

13. De Minimis Fringe Cont’d • Rules to remember • No specific dollar minimum • Gift certificates and gift cards are not excludable • Readily ascertainable value – easily accounted for • Meal allowances • In-kind meals • Tax filing services

14. 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 $230/month • Parking provided on or near premises up to $230/month

15. Qualified Transportation Fringes Cont’d • Exclusion Limits • Monthly limit applies • Employees only • Public and Private sector alike • No written plan required

16. Qualified Transportation Fringes Cont’d • Cash reimbursement and substantiation • Salary reduction plans • Determining the value of qualified parking • Rules for vanpools • Determining the value of transit passes • Determining, withholding and reporting excess benefits • Qualified non-personal use vehicles

17. 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

18. 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

19. Personal Use of Employer Provided Vehicles • Personal Use is Taxable if not • De Minimis • Qualified Non-personal Use • Automobile Salespersons

20. Personal Use of Employer Provided Vehicles Cont’d • Simplified full exclusion • Simplified partial exclusion • $0-$14,999 $3/day • $15,000-$29,999 $6/day • $30,000-$44,999 $9/day • $45,000-$59,999 $13/day • $60,000-$74,999 $17/day • $75,000 and above $21/day

21. Personal Use of Employer Provided Vehicles Cont’d • Accounting for Use – Valuation Methods • General Valuation Method • Special Valuation Methods • Commuting Valuation Method • Annual Lease Valuation Method • Vehicle cents-per-mile Method

22. 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

23. Taxable Employer Provided Benefits • Life Insurance • Group-term life insurance • Whole life insurance • Split dollar life insurance • Owners

24. Group Term Life Example 1 Employer paid life = 2 X Employee’s salary, Salary = $65,000, Age 59 on 12/31/10, 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

25. Group Term Life Example 2 Employer paid life = 2 X Employee’s salary, Salary = $65,000, Age 59 on 12/31/10, 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

26. Qualified Moving Expenses • Recent regulations have significantly altered what is considered taxable and non-taxable for moving expenses • Easier to discuss what is taxable • Remember – you and your stuff

27. Moving Expenses • Deductibility • Distance Test • Time Test • Deductible (qualified, nontaxable) moving expenses • Transportation of Household Goods • Expenses of traveling from old residence to new residence (excluding meals)

28. Moving Expenses Cont’d • Nondeductible (nonqualified, taxable) moving expenses • Meals while in transit • House hunting trips • Real estate expenses • Reporting of moving expenses • Deductible • Nondeductible

29. Educational Assistance • Job-Related • Non Job-Related • $5,250 exclusion Group Legal Services

30. Business Travel Expenses • Away from home • Temporary • Daily Transportation Expenses • Accountable Plan • Business Connection • Substantiation • Returning Excess Amounts

31. Business Travel Expenses Cont’d • Substantiation vs. Per Diem allowance • M&IE-only per diem • Incidentals only per diem • High-low substantiation method • Prorated per diems • Mileage allowances • Flat rate

32. Business Travel Expenses Cont’d • Nonaccountable Plan • Frequent Flyer Miles • Spousal and family travel expenses • Taxation and reporting requirements

33. Employer Provided Meals and Lodging • Employer Provided Meals • Furnished on employer premise • For the convenience of the employer • Employer Provided Lodging • On the employer premises • For the convenience of the employer • Required as a condition of employment

34. Adoption Assistance • Dollar Limitation • Income Limitation • Eligible Child • Qualified Expenses • Program Requirements • Exclude from FIT but… • W2, Box 12, Code T

35. Advances and Overpayments • FIT withheld • SS and Medicare taxes • FUTA • Gross repayments versus net • Subsequent calendar year

36. Awards and Prizes • Based on… • Length of Service • Safety Achievement • Civic and Charitable Awards • Prizes for Retail Salespeople

37. Back Pay Awards • Taxable? • What portion is W-2 wages? • Interest • Attorney fees • Reporting back pay awards • IRS versus SSA • Information required to SSA

38. Other Payments Cont’d • Bonuses • Commissions • Conventions • Death Benefits • Dependent Care Assistance • $5,000 exclusion limitation

39. Other Payments Cont’d • Directors’ Fees • Disaster Relief Payments • May be tax free • Employer Paid taxes • Bonus • Award • Noncash anything

40. Gross Amount of Earnings = Desired Net Payment / (100% - Total Tax %) Desired Net = $5,000.00 Employer Paid Taxes (Gross-Up) 1. Gross Amount of Earnings = $5,000 / (100% - Total Tax %) 2. 25% = Federal Income Tax Supplemental Tax Rate 6.2% = Social Security 1.45% = Medicare 32.65% = Total Tax % 3. Gross Amount of Earnings = $5,000 / (100% - 32.65 %) 4. Gross Amount of Earnings = $5,000 / 67.35% 5. Gross Amount of Earnings = $7,423.90

41. Other Payments Cont’d • Equipment Allowance • Gifts • Golden Parachute Payments • Guaranteed Wage Payments

42. Other Payments Cont’d • Jury Duty Pay • Leave Sharing Plans • Loans to Employees • Military Pay • Outplacement Services • Retroactive Wage Payments

43. Other Payments Cont’d • Jury Duty Pay • Leave Sharing Plans • Loans to Employees • Military Pay • Outplacement Services • Retroactive Wage Payments

44. Other Payments Cont’d • Security Provided to Employees • Severance or Dismissal Pay • Stocks

45. Stocks and Stock Options • Stocks and Stock Options • Stock as compensation • Stock Options • Incentive Stock Options • Stock Purchase Plan • Non Qualified Stock Options • Tax Treatment • Written Statement

46. Other Payments Cont’d • Strike Benefits • Supplemental Unemployment Benefits • Tips • Withholding on tip income • When tips are deemed paid • ER share of FICA • Tax credit

47. Other Payments Cont’d • Uniform Allowances • Vacation Pay • Wages Paid After Death • In same year • In subsequent year

48. Withholding and Reporting for Employer Provided Benefits • Cash Fringe Benefits • Non Cash Fringe Benefits • Withholding Methods • Imputed Income • Gross Up • Special Accounting Rule • W2 Requirements

49. Questions ?

50. Contact Information: Tracie Sawade, CPP tsawade@sbcglobal.net 847-464-1416