FEDERAL STATE AND LOCAL GOVERNMENTS and NH Government Finance Officers Assoc.

FEDERAL STATE AND LOCAL GOVERNMENTSand NH Government Finance Officers Assoc. Frank Lungarelli Internal Revenue Service Federal State and Local Government Office (603) 527-9325 frank.m.lungarelli@irs.gov October 7th, 2010

TAX EXEMPT/GOVERNMENT ENTITIES: • Federal, State and Local Governments • Indian Tribal Governments • Tax Exempt Bonds

FSLG Mission: • To provide government entities with top quality service • by helping them understand and comply with applicable tax laws, and • to protect the public interest by applying the tax laws with integrity and fairness to all

TOPICS: • FRINGE BENEFITS (Employee Reimbursements) • ACCOUNTABLE PLANS • EMPLOYEE VS. INDEPENDENT CONTRACTOR

WHAT IS A FRINGE BENEFIT?

FRINGE BENEFITS: • ANY PROPERTY, SERVICE OR CASH (Other than Salary, Provided by Employer) • TAXABLE UNLESS EXCLUDED SPECIFICALLY BY LAW • Example: Medical Premiums IRC 106

WHAT TO DO? • Identify specific benefit provided to employee(s); • Determine if benefit is excluded by law; and • Determine if benefit is fully taxable, or only partially.

Non-Taxable Fringe Benefits: • No additional cost service • Qualified employee discounts • Working condition fringe • De minimis fringe • Qualified transportation expenses • Qualified Moving Expense Reimbursements

TAXABLE FRINGE BENEFITS: • INCLUDE in Employee’s wages and on W-2 (Never on 1099-MISC) • Subject to Federal Withholding, Social Security and Medicare • Even if benefit is received by/for spouse or child of employee

ACCOUNTABLE PLAN • Business Connection • Adequate ‘accounting’ by employee in reasonable time period • Excess reimbursement returned in a reasonable time period

NON-ACCOUNTABLE PLAN: • DOES NOT MEET ANY OR ANY ONE OF THE 3 REQUIREMENTS FOR AN ACCOUNTABLE PLAN • BENEFIT IS FULLY TAXABLE WHEN PAID

NON-TRAVEL FRINGE BENEFITS: • Clothing • Equipment • Professional Licenses • Awards • Bonuses

AWARDS ARE TAXABLE • CASH PRIZES OR AWARDS are always taxable • PERFORMANCE AWARDS are always taxable • NON-CASH: • Use Fair Market Value

AWARDS EXCEPTIONS: • Certain Awards transferred to Charities • Pulitzer, Nobel Peace Prize • Certain Employee Achievement Awards • Length of Service, Safety - Not Cash • Nominal Holiday/Special Occasion Awards • Coffee mugs, plagues, etc.

REMEMBER: • If the benefit is taxable: • Determine the Value of the benefit • Include it in Wages and W-2

TRAVEL-RELATED FRINGE BENEFITS: • Per Diem Allowances • for lodging, meals and/or incidentals • for business related travel • while away from home

MEAL ALLOWANCES WHILE TRAVELING ON BUSINESS: • MEALS AWAY FROM HOME: • OVERNIGHT • Accountable Plan - Not taxable • NOT OVERNIGHT • Taxable as wages

MEAL ALLOWANCES WHEN NOTTRAVELING: • Meals with business meetings - • NOT taxable if: • clear business setting • directly related • Employer buys you lunch - • Taxable as wages

AUTOMOBILE EXPENSES: • EMPLOYEE CAR USED FOR EMPLOYER’S BUSINESS: • 2010 Federal Mileage Rate - $.50 • At this rate or less: Non-taxable to Employee • Excess over this rate: Taxable to Employee - only the excess amount • If Employee chooses not to get reimbursed, cannot claim on personal tax return. • Substantiation required

SUBSTANTIATION: • Employee reports to Employer: • Date, Purpose, Place of each trip • Mileage ‘at or near the time’ incurred • Examples: Diary, log, trip sheet, expense statement or similar record • Commuting is always taxable - it is non-business travel

EMPLOYER-PROVIDED VEHICLE: • HOW DOES EMPLOYEE ACCOUNT FOR PERSONAL USE? • Personal Use is taxable • Verified Business Use is not taxable • Employee can reimburse Employer for personal use

Personal Use: • IF NO RECORD KEPT: • Value of ALL use is taxable • IF RECORD KEPT: • Only Personal Use is taxable

VALUING PERSONAL USE - THREE RULES: • Automobile Lease Valuation Rule • Cents-Per-Mile Rule • Commuting Rule

EMPLOYEE OR INDEPENDENT CONTRACTOR? • Determine Worker Status • Fringe benefit rules apply • Accountable Plan rules apply • Report payments on information return: • W-2 for Employee • 1099-MISC for Independent Contractor

The IRS looks atTHREE FACTORS TO DETERMINE WORKER STATUS: • BEHAVIORAL CONTROL • FINANCIAL CONTROL • RELATIONSHIP OF PARTIES

BEHAVIORAL RELATIONSHP: • IF the firm provides instructions: • on how to do the job, • what hours to work, what days, etc. , • the worker is most likely an employee.

FINANCIAL CONTROL: • If the firm provides an office, • all office supplies, computer • and other business equipment to the worker, • the worker is an employee.

RELATIONSHIP OF THE PARTIES: • If the firm provides benefits: • health insurance, life insurance, • retirement benefits, 40l(k) plan, 403(b) • the worker is an employee.

INDEPENDENT CONTRACTOR • Offers services to public • Operates own business • Bills for services • Doesn’t have to personally perform work

COMMON MISCONCEPTIONS: • EMPLOYEES CAN BE: • Part-time workers • Temporary workers • Probationary period • Workers who say they are Independent Contractors

REPORTING FOR EMPLOYEES: • All Compensation: W-2 • Awards • Backpay • Bonuses • Severance Pay • Taxable Fringe Benefits

REPORTING FOR INDEPENDENT CONTRACTORS: • ALL COMPENSATION FOR SERVICES: • On 1099-MISC • If Non-Accountable Plan: • Include Reimbursed Expenses on 1099

Need More Information? • FSLG NH Contact Frank Lungarelli, frank.m.lungarelli@irs.gov, 603-527-9325 • For sec. 218 issues contact your NH State Social Security Admin. - Susan Gifford, SGifford@dhhs.state.nh.us • General Tax questions http://irs.gov • FSLG site http://irs.gov/govt/fslg (Subscribe to the FSLG Newsletter) • FSLG (Current July ‘10) Newsletter http://www.irs.gov/govt/fslg/article/0,,id=103384,00.html • Useful Publications ALL available on line – http://irs.gov • Pub 15-A, Employer’s Supplemental Tax Guide • Pub 15-B, Employer’s Guide to Fringe Benefits • Pub 1281, Backup Withholding for Missing & Incorrect Name/TIN • Pub 963, Federal-State Reference Guide • Pub 1776, Independent Contractor or Employee…

THANK YOU!

FEDERAL STATE AND LOCAL GOVERNMENTS and NH Government Finance Officers Assoc.