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W-2’s & Other Tax Reporting

W-2’s & Other Tax Reporting. John M. Lauer, MST State & Local Government Tax Specialist Internal Revenue Service. Overview of Topics. Accountable Plans Medicare Premiums Paid Group Term Life Insurance Tuition Reimbursement over $5,250 iPads or other gifts Roth 403(b) plans

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W-2’s & Other Tax Reporting

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  1. W-2’s & Other Tax Reporting John M. Lauer, MST State & Local Government Tax Specialist Internal Revenue Service

  2. Overview of Topics • Accountable Plans • Medicare Premiums Paid • Group Term Life Insurance • Tuition Reimbursement over $5,250 • iPads or other gifts • Roth 403(b) plans • Death of an Employee

  3. Accountable Plans • What is an Accountable Plan? - An allowance or reimbursement policy under which amounts are nontaxable to the recipient if three requirements are met. • Business Connection • Adequate accounting w/in reasonable time • Excess amounts returned w/in reasonable time

  4. Accountable Plans Business Connection • Expense incurred in connection with services of an employee • Would otherwise be deductible on personal 1040 if Employer did not reimburse (Treas. Reg. 1.62-2(d)

  5. Accountable Plans Adequate Accounting • Date, time, place, amount, and business purpose • Receipts required unless under per diem plan [Treas. Reg. 1.274-5T(b)(2)] • Documentary Evidence

  6. Accountable Plans Timely Return of Excess • Must meet test of timeliness - Fixed Date Method - Periodic Statement Method - Other Reasonable Method

  7. Medicare B Premiums • IRC 106 • Exclusion from gross income • Employer-provided insurance coverage • Must be under accountable plan

  8. Medicare B Premiums • A school district reimburses the cost of Medicare B Premiums for retirees. Is this a taxable event? ANSWER: It depends on the facts & circumstances. • Accountable plan v. Non Accountable Plans • Acctble = tax free , Non-Acctble = taxable

  9. Group Term Life Insurance • IRC 79 • First $50,000 excluded from taxable income • Carried directly or indirectly • See tables in Treas. Reg. 1.79-3(d) • Subject to Social Security & Medicare withholding only (No FITW)

  10. Group Term Life continued • Carried Directly or Indirectly by an Employer: - Employer pays any cost of the insurance - Employer arranges for premium payments and premiums paid by at least one employee subsidize those paid by at least one other employee (“straddle rule”) • Benefit provided through redistributing rule

  11. Group Term Life continued • Does this apply even if the employees are paying the full cost of coverage? • ANSWER: YES, a benefit is still being provided. However, the employee would reduce the taxable benefit by the amount paid through the year.

  12. Group Term Life continued • What if the employer does not pay any part of the premium and they do not use redistributing of premium costs? Is there still a taxable event? • ANSWER: NO, the employees are paying their full amount and none of the employees’ premiums are being subsidized by others

  13. Group Term Life continued • If more than 1 insurer, then all policies must be analyzed separately • Coverage for spouse or dependents • $2,000 threshold, face amount of coverage • De Minimus • Use same tables and computation if the $2,000 is exceeded

  14. Group Term Life continued • If part of my spouses coverage is determined to be taxable, do I exclude the $2,000 threshold? • ANSWER: NO, The entire value is used in computing the taxable fringe benefit. Do not reduce it by the $2,000 threshold

  15. Group Term Life continued • COMPUTATION EXAMPLE: • John – 58 yrs old, still an employee participating in the plan, receives $150,000 of coverage for the full year • Step 1 – determine excess ($150k - $50k = $100k in excess) • Step 2 – refer to tables in Treas. Reg. 1.79-3(d) to determine cost per $1,000 per month

  16. Group Term Life continued • Step 3 – compute benefit • {$100k / $1,000 = $100} • {$100 x .43 = $43 per month} • {12 months x $43 = $516 for the year} • Step 4 – reduce benefit by amount paid out of pocket (ex: John paid $16 out of pocket for the year) {$516 - $16 = $500}

  17. Group Term Life continued • Step 5 – Report the $500 taxable fringe benefit on Form W-2 • Report benefit in box 12 and indicate correct code – $500, mark code “c” • If the employee is a retiree, use the same process, but mark code “m”

  18. Tuition Reimbursement • IRC 127(a)(2) • Requirements to be excludable: - written plan - no alternative benefit to education - $5,250 limit per employee - no discrimination (highly compensated)

  19. Tuition Reimbursement • Eligibility - Current Employees - Laid Off Employees - On Leave Employees - Employees retired on disability {Per Treas. Reg. 1.127-2(h)}

  20. Tuition Reimbursement • Qualifying Expenses: - Tuition, Books, Supplies, & Equipment for class • Does not cover supplies/equipment that may be kept after the course is over [IRC 127(c)(1)]

  21. Tuition Reimbursement • How do you treat tuition reimbursements in excess of $5,250? ANSWER: Include the excess as a taxable fringe benefit subject to the proper tax withholdings. • W-2 Boxes 1, 3, 5 wages subject to applicable withholdings

  22. Awards & Gifts • IRC 74(c) • Government Employers may provide awards and prizes to employees. These awards/prizes are taxable unless specifically excluded by the IRC. • Nontaxable Awards IRC 74(b), 74(e)(4), & 74(c) • CASH PRIZE/AWARDS = TAXABLE

  23. Awards & Gifts continued • IRC 74(b) – awards or prizes transferred to charities • Requirements: - past achievement - selected w/o entering contest - no future conditions attached - transferred to charity prior to receipt

  24. Awards & Gifts continued • IRC 74(e)(4) – de minimus awards & prizes • Ex: nominal gifts for b-days, holiday turkeys, performance awards of little value • If the award exceeds either the value or frequency limitations, then the entire award is a taxable fringe benefit. (it is not just the amount that exceeds the threshold) • Per Treas. Reg. 1.132-6(d)(4)

  25. Awards & Gifts continued(de minimus explanation) • De Minimus threshold • NO set dollar amount • Courts have determined various amounts • Acceptable de minimus fringes have ranged from $15 to $23 • Gift cards generally taxable (especially if there’s multiple uses)

  26. Awards & Gifts continued • IRC 74(c) – certain employee achievement awards • See Prop. Treas. Reg. 1.274-8(2)(b)(iv) for listing of items which are not excluded • Length of service – 1st 5 yrs & every 5 yrs • Safety Achievement – EE’s less than 1 yr, < 10% of eligible EE’s

  27. Awards & Gifts continued • If the award or gift does not fall into the nontaxable exclusion, then the amount/value is reported as a taxable fringe benefit • Include this amount in Box 1 wages of the W-2 • This amount is subject to SS and MED, unless the employee’s position is not covered by SS and MED

  28. Roth 403(b) Plans • Traditional 403(b) plans – tax sheltered annuities - reduces your current taxable income - tax deferral - Form W-2, box 12, code E

  29. Roth 403(b) Plans • ROTH 403(b) plans - elective contributions included in gross income and taxed now - tax free distributions during retirement under certain conditions - Form W-2, box 12, code BB (important distinction)

  30. Roth 403(b) Plans • Irrevocable designations • Traditional + Roth • 2012 Elective Deferral Limits = $17,000 • 2012 Catch up Contributions = $5,500 • IRC 402(g)

  31. Roth 403(b) Plans • Designated Roth Account • Employer/Plan Administrator responsible for tracking Roth contributions, gains & losses until account balance is completely distributed • Keep separate • IRC 402(a) - separate account requirement

  32. Deceased Employee • Must report accrued wages, vacation, and other compensation after the date of death • Payment made in same year of death, then wages are subject to Social Security & Medicare withholdings, NO FITW • Payment made in the year following, then no tax withholdings are necessary

  33. Deceased Employee EXAMPLE • Before Employee A’s death on June 15, 2012, A was employed by Employer X and received $10,000 in wages in which FIT of $1,500 was withheld. When A died, Employer X owed A $2,000 in wages and $1,000 in accrued vacation pay (Total of $3,000). $3,000, LESS SS & MED W/H, was paid to A’s estate in July 2012.

  34. Deceased Employee EXAMPLE CONTINUED Because Employer X made the final payment in year of death, SS & MED withholdings apply. • FORM W-2 • Box 1 - $10,000; Box 2 - $1,500; Box 3 - $13,000, Box 4 – applicable SS W/H; Box 5 - $13,000; Box 6 – applicable MED W/H

  35. Deceased Employee • Must also report the final payment on Form 1099-MISC, box 3, to the estate or beneficiary whether or not the payment was made in year of death or after (Rev. Rul. 86-109, 1986-2 C.B. 196) • Death and retirement benefits – 1099-R

  36. Resources • http://www.irs.gov/govt/fslg/index.html • http://www.socialsecurity.gov/employer/ • IRS Monthly Phone Forums • Online Webinars • FSLG Directory

  37. THE END THANKS FOR YOUR ATTENDANCE!

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