TAXABILITY OF FRINGE BENEFITS What is a Fringe Benefit? When Is It Taxable? Presented By: Tammie Downey, CPP Vice President, WPA APA AVP / Assistant Payroll Manager, First Commonwealth Bank 7/8/2015Western PA Chapter of the APA

Let’s Define a Fringe Benefit Cash Cash equivalent items (i.e., gift cards/certificates) Property Services In addition to regular wages 7/8/2015

Let’s Define Taxable Subject to withholding and reported on the W-2 in the year the benefit was provided 7/8/2015

Are Fringe Benefits Taxable? Taxable to employee unless specifically excluded 7/8/2015

How are Non-Cash Fringe Benefits Valued? Fair Market Value (FMV): What would it cost employee to buy benefit from an unrelated third party? 7/8/2015

Let’s Define a Working Condition Fringe Benefit Property or service that employee would have been entitled to deduct on a 1040 if employer hadn’t provided it 7/8/2015

Working Condition Fringe Benefit Must relate to employer’s business Employee could have deducted expense on 1040 Employee must substantiate business use 7/8/2015

Let’s Define De Minimis Fringe Benefit Property or service Small in value Not provided to employee regularly 7/8/2015

How are de minimis fringe benefits reported? If the benefits qualify for exclusion No reporting is necessary If the benefits are taxable They should be included in wages on Form W-2 They are subject to income tax withholding 7/8/2015

Let’s Define A Per Diem Payment Method of reimbursing employees for business expenses for overnight travel Lodging Meals and incidental expenses (M&IE) Rates vary by city Federal Per Diem rates can be found at If rules are met, the reimbursement is tax free Accountable plan rules are followed Per diem reimbursement is at or below federal rates Receipts are not required 7/8/2015

Lodging Per Diem Use rate of city where you spend the night Room tax and energy charges are not part of lodging-they’re reimbursed separately 7/8/2015

M&IE Per Diem Meals Tips for food and luggage handling Laundry and dry cleaning for travel of less than 4 consecutive nights 7/8/2015

Per Diem – Other Rules Prorate M&IE for days employee departs and returns Employer may pay other tax-free business expenses in addition to per diem: Room taxes Cab Telephone charges Laundry 7/8/2015

Let’s Look At Accountable Plan Rules Publication 463, Travel, Entertainment, Gift, and Car Expenses Employee is given allowance or reimbursement Amounts are non-taxable, if certain rules are met Business connection Directly related to trade or business Deductible on 1040 Adequate accounting Verify Date, Time, Place, Amount, and Business Purpose Excess returned on a timely basis Within a reasonable period of time Determination of the length of a reasonable period of time will depend on the facts and circumstances 7/8/2015

What is a Non-Accountable Plan? Does not meet ALL 3 RULES for Accountable Plans 7/8/2015

Commonly Provided Fringe Benefits Cell Phones No longer considered listed property Payments In Lieu of Insurance Receipts for insurance or medical expenses Non-taxable – No reporting required Cash Payments – No Accounting Fully taxable W-2 reportable Box 1 – Gross Compensation Box 3 – SSA Wages Box 5 – Medicare Wages 7/8/2015

Commonly Provided Fringe Benefits Moving Expenses IRC Section 132(g) Allows employer to reimburse employee IRC Section 217 Allows individual to deduct certain expenses Not taxable to employee if They’re paid under an Accountable Plan Meet specific tests under IRC 217 Individual must be an employee who incurs the expenses Expenses must: Closely relate to starting work at new job location Be allowed under section 217 Meet time and distance tests 7/8/2015

Commonly Provided Fringe Benefits Moving Expenses – Travel Costs Non-taxable travel costs: Moving other members of household Airfare, car Lodging while travelling Parking fees, tolls Non-taxable moving costs – household goods and personal effects: Packing, crating, transporting Shipping car(s) Shipping pet(s) Storage & insurance (30 consecutive days) 7/8/2015

Commonly Provided Fringe Benefits Moving Expenses – Reimbursements Reimbursements are not included in income if: The reimbursed expenses qualify under IRC 217 They are paid in the same calendar year they are deducted 7/8/2015

Commonly Provided Fringe Benefits Meal Allowances and Reimbursements Meals while traveling Tax-exempt requirements: Must be away from tax home over night or long enough to require substantial sleep or rest No set number of hours or miles away Substantiation required Meals while not traveling De minimis meal allowances Meals with meetings or entertainment Tax-exempt if meal meets test: Directly Related test or Associated With test 7/8/2015

Commonly Provided Fringe Benefits Meal Allowances and Reimbursements Directly Related Meals are tax-exempt Business meetings, conventions, conferences Service club or professional meetings i.e., Rotary, Finance Officers Association, CPA, WPA APA Associated With Test Meals with clear business purpose Substantial business discussion immediately before or after a meal 7/8/2015

Commonly Provided Fringe Benefits De Minimis Meals are tax-exempt if meal is: Small in value and occasional Not provided regularly or often Provided so employee can work overtime Generally, must be consumed during overtime Not based on number of hours worked 7/8/2015

Commonly Provided Fringe Benefits Meal Allowance and Reimbursements Meals consumed en route to daily business events are not exempt Breakfast and dinner while traveling to and from a daily convention or conference would not be exempt If not staying at a hotel, there is no tax exempt meal reimbursement while traveling to and from event If everyone is responsible for their own arrangements during a lunch break, the reimbursement for lunch is fully taxable 7/8/2015

Commonly Provided Fringe Benefits Employee’s Car Reimbursed business use is non-taxable if AT or BELOW Federal Mileage Rate cents/mile 7/8/2015

Commonly Provided Fringe Benefits Employer Provided Vehicles See Publication 15-B for valuation rules on employer provided vehicles Qualified non-personal use vehicle By its design is unlikely to have personal use Clearly marked police and fire vehicles School buses Unmarked law enforcement vehicles Special purpose vehicles; i.e., snow plows Vans and pickups must be modified to qualify Use is tax-exempt 7/8/2015

Fringe Benefit Code Sections A Few Examples: IRC 119, Meals and Lodging IRC 127, Educational Assistance IRC 132, General Fringe Benefit Section 7/8/2015

Where To Find Helpful Information Educational Resources Publication 15, Employer’s Tax Guide (Circular E) Publication 15-A, Employer’s Supplemental Tax Guide Publication 15-B, Fringe Benefit Tax Guide Publication 463, Travel, Entertainment, Gift, and Car Expenses Publication 521, Moving Expenses Publication 525, Taxable and Nontaxable Income Publication 563, Federal-State Reference Guide Publication 1542, Per Diem Rates Publication 5137, Fringe Benefit Guide 7/8/2015

THANK YOU Questions? Additional Discussion? 7/8/2015