1. Taxable and Nontaxable Compensation
Chapter 3
Taxable and Nontaxable Compensation
Carmela Miller, CPP

2. Content Overview Gross Income and Wages
Fringe Benefits under the IRC Code
Additional Employer Provided Benefits
Other Payments
Advances and Overpayments Guaranteed Wage Payments
Awards Conventions Leave-Sharing Plans Strike Benefits
Back Pay Death Benefits Loans to Employees
Bonuses Dependent Care Assistance Programs
Commissions Director’s Fees Out placement Services
Gifts Disaster Relief Payments Retroactive Wage Payments
Jury Duty GROSS UPS Security Provided to Employees
Military Pay Golden Parachute Payments Severance Stocks
Supplemental Unemployment Benefits Uniform Vacation Pay
Withholding and Reporting Rules

3. Gross Income
Gross Income is defined as a starting point for the Federal tax bill, which includes all compensation for services including fees, commissions, fringe benefits.
This list is not all inclusive it could be any compensation paid to an employee.
Not all compensation is paid in the form of cash but it could be the cash equivalent of a fringe benefit the employee received.

4. Taxable means that it is subject to Federal tax and employer must withhold tax from the employees pay check and submit it to the IRS. Other Employment taxes include: Medicare Both Employee and Employer Social Security Both Employee and Employer FUTA – Federal Unemployment Tax (Usually only Employer Paid) SUTA – State Unemployment Tax – Employer Paid

5. IFBA – FMV – (EPA + AEL) Fair Market Value
IFBA – Includable Fringe Benefit Amount
FMV – Fair Market Value
EPA – Employee-Paid Amount (with after tax dollars)
AEL – Amount excluded from law
See example in book

6. Formula Example IFBA = $45.00 PER MONTH FMV = $300.00
Harry’s company pays $ per month for parking. This is the same rate for everyone.
FMV = $300.00
Harry does not pay anything for Parking
EPA = $0.00
Up to $ per month of Employer Paid Parking is excluded from income by law for 2016
AEL = $255.00
IFBA = $45.00 PER MONTH

7. Example 2
Sally’s company pays $ per month for a space that would cost everyone else $300.00
Sally contributes $35.00 per month for that spot.
What is:
FMV =
EPA =
AEL =
IFBA =

8. Solution
FMV = $300.00
EPA = $35.00 (Employee Paid Amount)
AEL = $ (Amount Excluded from Law)
IFBA = $10.00 (Includable Fringe Benefit Amt)
$10.00 = 300 – ( )

9. Fringe Benefits
Per the Internal Revenue Code some are taxable and others are non-taxable.
Non-taxable are not subject Federal, Social Security, Medicare or FUTA.
No Additional-Cost Services
Qualified Employee Discounts
Working Conditions Fringe
De Minimis Fringe
Qualified Transportation Benefits
On-Premise Athletic Facilities
Qualified Retirement Planning Services
Qualified Moving Expense Reimbursements

10. No Additional Cost Services
The Following conditions must be met:
Free Service is regularly offered to Customers in an employers normal course of business.
Employer bears no substantial additional cost in providing the benefit.
Term employee includes both current and past employees who left for retirement or disability. It should also include their widow(s), spouses and children. For the purpose of transportation their parent may also be included.

11. Highly Compensated Employees
Was a 5% owner of employers stock or capital anytime in current or previous year.
For 2016, Received $120,000 in compensation from the employer in the preceding year.
(this is indexed at 5,000 per year)
If the employer wishes he can limit the second one to the top 20% of employees.

12. Qualified Employee Discounts
The discount on goods cannot exceed the gross profit % when the goods are sold to the customers (not the employees)
Gross Profit % is (Total Sales-Cost of Goods) + Total Sales
Discounts cannot exceed 20% of price at which services are offered to customers. If it exceeds the difference is taxable.
Goods and Services must be offered to customers in the normal line of business.

13. Qualified Employee Discounts Cont.
The discount if offered on equal terms no matter who they are and do not favor HCE.
Real Estate does not qualify.
Personal Property held for investment like stock and bonds Do Not Qualify.

14. Working Condition Fringes
The employee’s use of property or services must be related employer’s trade or business.
Employee would be able to take a tax deduction on personal taxes if they paid for it.
Employee must keep accurate records.
Any excess of funds must be returned to employer within a reasonable time.
Examples of included are: Company car or Airplane, Chauffer or Bodyguard, membership fees like APA, Job-Related Education, etc.

15. Cell Phones
Cell phone provided by employer for business use is considered a non-taxable fringe benefit.
Personal use of the this cell phone is considered to be excludable de minimis fringe benefit.
Substantial NonCompensatory Business Reasons include:
Need to reach employee at all times
Employee needs to speak to clients when away from office
Employee needs to speak to clients in other time zones.

16. Personal Cell Phone
Employee must maintain accurate records of business use on their personal phone
Employer needs to compensate employee for use of their phone.
Use must be reasonably calculated.
Must not replace employee previous wages

17. De Minimis Fringe Benefits
Occasional Personal use of typewriter
Personal use of Copier no more than 15% of total use
Occasional Parties or Picnics for Employees
Occasional tickets to events
Traditional Holiday gifts, with a small value
Coffee and doughnuts
Occasional use of work phones
Occasional meals, transportation for working late
Non Discrimination Rules Apply
NEVER CASH! CASH IS TAXABLE!

18. Rules to Remember for Fringe Benefits
No Specific Dollar Maximum
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 Employer
Excludable from income

19. Qualified Transportation
Excluded from income if:
Transportation between home and work in commuter highway vehicle provided by the employer is up to $255.00/month
Vehicle must seat at least 6 adults and a driver
At least ½ of vehicle seating is used by employees excluding driver
At least 80% of vehicle’s mileage can be expected for commuting
Transit Passes, vouchers, tokens, fare cards up to $255.00
Parking on or near premises up to $255.00
Example on page 3-12

20. Qualified Bicycle Commuting
A Qualified bicycle commuting reimbursement can be made to an Employee for reasonable expenses incurred by an Employee who regularly uses a bicycle to commute to and from work.
A qualified month is a month in which the EE does not receive any other qualified transportation fringe benefits and Regularly uses a bicycle for a substantial portion of travel.
$20.00 per month

21. Knowledge Check Point
An employee parks in a garage that is 2 blocks away from work because he likes the location. It costs $300 per month. His employer reimburses the employee at 100% for this.
How much of his monthly parking is taxable?

22. Answer
Answer is $45.00

23. On Premise Athletic Facilities
To be Free of Charge without including the Fair Market Value the following conditions must be met:
Must be located on Employer Premises
Facility is operated by Employer
Substantially all use of the facility is by employees, spouses and their dependent children
Includes current and former employees
Is not a resort or residential Facility

24. Qualified Retirement Planning Services
All Employees and spouses equally – Does not exclude HCE (Highly Comp Employee) if they receive the same service as others
Retirement planning advice or information on qualified retirement plan (401K)
Does NOT include tax preparation, accounting or brokerage services.

25. Personal Use of Employer Provided Vehicles
Must separate Business from Personal Use Business use NOT Taxable
Personal use is Taxable if not:
De Minimis
Automobile Salespersons
Qualified Non-Personal Use
Design designates that it is unlikely to be used for business
Pages 3-17 and 3-18

26. Valuation Methods
Employers can determine the FMV of the taxable portion of the personal use of a company provided vehicle by using either
General Valuation Method
One of 3 Special Valuation (Safe Harbor) Methods
Pg 3-20
** Once you begin to use a Safe –Harbor valuation method for a vehicle, they must continue using that method for as long as the Employee uses that vehicle.

27. Safe Harbor Methods Annual Lease Value Method
Also called the FMV Method there is a table on page 3-22
Need to figure out the FMV on the first day the Employee uses the vehicle. You then multiply the Annual Lease Value x % of use.
Cents per mile method
Take the personal miles by the business standard mileage rate .55 for Vehicle must be driven at least 10,000 miles annually and used primarily by employees.
Commuting value method
Include in the Employee’s income $1.50 per one way commute or $3.00 per round trip fi the personal use of the company vehicle is :
Not by a Controlled Employee
Restricted in writing to driving between work and home
By an Employee who commutes in the company vehicle to noncompensatory business reasons.
This applies to car pools when there are more than one employee.

28. ALV Method Example of the Annual Lease Method (ALV)
Employee “A” uses a company car 50% for business. The car FMV = $20,000
Taxable Comp for the Personal use is $
Using table on pg 3-22 you will see that the ALV value for 20,000 = 5,600
5600x50% =
**Fuel is not included for person use. If included the Fuel rate is .55 per 2016

29. Knowledge Check
Employee Bob has a company car that she uses for both business and personal use
Amy drove 17,000 total and 12,300 miles were for business. The car FMV is 16,200.
What amount should be included in his taxable income for the year?

30. Answer ALV = 4,600 Personal Miles = Total Miles – business miles
4700 =
% of personal use
4700/17000=.2765 or 27.65%
FMV of personal use = 4600x27.65%
$1,271.90

31. Knowledge Check for Cents per Mile
Employee Tina drives 16,000 miles including 7,600 personal miles.
Her employer pays for the gas:
FMV of personal use = 7600 x .55 = $4,180
If Tina pays for gas:
FMV of personal use =7600 x( ) =
7600 x .485 =3,686

32. Helpful Hints
ALV = Annual Lease Value Method assumes the employee pays for the fuel. *If employer pays you need to ADD .55 per mile Cents per mile method assumes the employer pays for the fuel *If employee pays you need to SUBTRACT .485 per mile

33. Business Use of Personal Vehicles
Employees who use their vehicle for business use may be reimbursed at the
Business Standard Mileage Rate
$ 0.54 cents per mile for 2016
Must be documented
Excess to that rate is taxable

34. 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
Life Insurance
GTL, Whole Life, Split Dollar Life Ins and Owners

35. GTL Group Term Life Insurance
The value of GTL provided to an Employee in excess of $50,000 is a taxable Compensation.
Excess is exempt from FITW
Reported on W2
Exempt from FUTA
Calculated on Employee’s age as of 12/31 of the year that the benefit is taxable.
Reduces Employee Income by increasing the taxes on the GTL.
Dependent GTL in excess of $2,000 is fully taxable and subject to all withholding.

36. GTL Example 1
Using table on pg 3-29 Example – Employer paid life = 2 x Salary Salary = $65,000, Age 59 on 12/31/16 Maximum coverage per plan is $125,000. Step 1 – 2x65,000= $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 is the taxable income

37. GTL Example 2 Employer Paid = 2x Salary
Salary 65,000, Age 59 on 12/31/16
Max coverage is $125,000
Employee pays $25/mo after tax coverage
Step 1 2 x 65,000= 130,000
Step ,000-50,000 = 75,000
Step 3 75,000/1000 = 75 units
Step x .43 = 32.25
Step – = 7.25
Step per month is the taxable amount

38. GTL Problem
On January 1st of 2016 Linda’s company provides GTL benefit of $225,000.00
Linda’s birthday is 11/16/1980
How much is considered taxable for the month of February 2016?

39. Figure out Linda’s age as of 12/31/2016 = 39 yrs
Amount of Coverage of 50,000 = 175,000 (225,000-50,000)
175,000/1000 = 175
175 x .09 = $15.75 per month in 2016
The month does not matter watch these words in problems

41. Qualified Moving Expenses
Distance and Time Test:
Employers reimbursement or payment for Employee’s moving expense is an excludable fringe benefit when:
Distance from Employees old residence and new workplace Is at least 50 miles farther distance from the Employee’s old workplace to her old residence.
Employee must work full time for at least 39 weeks during the 12 months immediately following the move.
Documentation is necessary

42. IRC 217 Defined Deductible Expenses
Deductible Expenses that are defined in IRC 217 are excluded from income when reimbursed with no dollar limitations as long as they are Reasonable.
Expenses incurred moving household goods and personal effects from old residence to new
Expenses incurred by the employee and employee’s family for traveling from the old residence to new [Meals Excluded] . Lodging Included
Mileage rate is .19 as if January 2016.

43. NonQualified Moving Expenses
Non Deductible or Taxable Moving Expenses
Meals while in transit
House hunting trips
Real Estate Expenses
*If the Employer pays these non-qualifed expenses you will see the inputted income on your W2 in boxes 1,3 and 5.
*Qualified expenses will be reported on the W2 in Box 12, Code P

44. Knowledge Test
Employee Transferred from Miami to Dallas, company agreed to pay 100% of his moving expenses. He claimed the following expenses that the company paid in full for. $5,000 Moving Household Goods $ 300 Mileage/lodging for traveling at .19per mile $ 50 Meals en route to new location $2,200 Pre-Move house-hunting expenses and temporary living expenses. $3,000 Expenses related to purchase, sale or lease of primary residence. $1,000 Real Estate Taxes How much of these expenses are excluded from income?

45. $5,000 Household Goods 300 Mileage $5,300 Total Excludable The remaining $6,250.00 is TAXABLE

46. Educational Assistance
Job-Related No Limit
Non Job Related
Up to $5,250 Anything above this will be subject to payroll taxes.

47. Group Legal
TAXABLE All group legal services payments are included in the Employee’s income and are subject to Federal income tax withholding and Social Security, Medicare and FUTA taxes.

48. Business Travel Expenses
Away from home overnight
Temporary is no more than 1 year
Daily Transportation Expenses
Accountable Plan
Business Connection
Substantiation
Returning Excess Amounts
Timely

49. Safe Harbors for Business Travel
The IRS provides 2 Safe Harbor Methods for requiring substantiation and the return of excess amounts with a reasonable time
Fixed-Date Method
If an advance is provided no more that 30 days before an expense incurred, substantiate with 60 days and excess returned within 120 days.
Periodic Statement Method
Employer Issued Statement
At least Qtrly
Detail Amounts Paid
Substantiate and Return Excess within days

50. Taxing and Reporting Requirements
Accountable Plan
Employer reimbursement for actual, substantiated employee business expenses under their accountable plan are NOT included in Employee's income and are not subject to FIT, SS, Med or FUTA.
Employer reimbursements under a NON-Accountable plan MUST be included in Employee Income.
*Employee can take a deduction on personal income tax return.

51. Employer Provided Meals and Lodging
Meals – Non-Taxable Provided on Employer Premises Convenience of Employer Lodging – Non-Taxable On Employer Premises Required as a condition of employment

52. Adoption
Dollar Limitation - $13,460 per eligible child(2016) Income Limitation – Phase Out starts $201,920 and is totally lost when you reach $241,920 Eligible Child – Under 18 yrs old, or Physically/Mentally incapable for caring for self. Qualified Expenses – Reasonable and Necessary Exclude from FIT Subject to SS, Medicare and FUTA W2, Box 12 with code T (think T for Toddler)

53. Advances and Overpayments
Include in Employee’s income for the pay period they received it.
Pay Back Same Year – Exclude from W2
Repayment in Later Year – Cannot be excluded will have to be reconciled on Personal Tax Return
FUTA – Employer may be able to claim refund if employee earned less than $7,000.

54. Awards and Prizes
Prizes and Awards are usually included in Employees taxable compensation and require withholding.
Exceptions:
Length of Service Award 5 yr or more at 5 yr intervals
Safety Awards No more than10% of employees, No management, professional or clerical. FT employee with min 1 yr of service
Guidelines:
Non-Qualified Plans – Cost $400 per calendar yr
Qualified Plans - $1,600 max for year with individuals no more than $400

55. Additional Payments Bonuses Commissions Conventions
Dismissal or Severance Pay
Dependent Child Care Assistance – Nontaxable
Section 129 up to $5,000
Directors Fees (non-employee) Not wages
1099 Misc
Disaster Relief Payments – May be tax free
Death Benefits
Reported on Form 1099, not subject to SS or Medicare

56. Gross UP’s Employer Paid Taxes are Grossed up for Desired NET = $5,000
Gross Amount = $5,000
25% - Federal Tax Supplemental Tax Rate
6.2 % - Social Security Tax
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

57. Atlas Company wants to give you a $6,000 year end bonus in 2016
Atlas Company wants to give you a $6,000 year end bonus in They want you to receive this amount after taxes are taken out and want to pay your taxes. You have already made 80,000 so far in Your state tax is 3.5% rate.
Calculate the Gross payment and the amounts that must be withheld

58. Total Tax% = 25% FIT + 3. 5% SIT +6. 2% SS + 1
Total Tax% = 25% FIT + 3.5% SIT +6.2% SS % MED Total Tax % = 36.15% Gross Up Rate = 100% % = 63.85% Gross Earnings = $6,000/63.85% = $9, FITW = 25% x = $2, SITW = 3.5% x = $ SS = 6.2% x = $ MED = 1.45% x = $ To Check: $ =$

59. Remember
Always check your answer by Reversing the Operation Social Security Wage Base for 2016 is $118,500 Why is the SS wage base important?

60. Gross Up
Bob’s boss wants to give him a $5,000 bonus grossed up. Bob already has wages of $117,000 for State supplemental rate is 3.5% What is Bob’s gross up amount and rate?

61. SS Limit for ,500-$117,000=$ X 6.2% = $93.00 Add SS to desired net = $5, =$5,093 Add remaining % 25% FIT % Med + 3.5% Med = 29.95% Gross Up Rate = 100% % = 70.05% $5,093.00/70.05% = $7, Double Check your work!

62. More Other Payments
Equipment Allowance – Subject to FIT, SS, Med & FUTA--- Not included in EE wages
Gifts –Included in income and subject to all tax
Golden Parachute Payments
Guaranteed Wage Payments
Jury Duty
Leave Sharing Plans
Loans to Employees
Military Pay
Outplacement Services
Retroactive Wage Payments - Taxable

63. Payments Cont. Security Provided to Employees
Severance or Dismissal Pay – Taxable
Strike Benefits
Supplemental Unemployment Benefits
Stock and Stock Options
Stock as compensation
Stock Options
Incentive Stock Options
Employee Stock Purchase Plan
Non-Qualified Stock Options
Tax Treatment
Written Statement

64. Tips Special Rules apply towards tips
Withholding on tip income >$20/mo taxable
Tips are deemed paid when reported to Employer
Tip Credit
Tip Credit is used to reduce the Employee hourly rate only if the employee regularly receives more than $30/mo in tips
Form 8846 – Credit for Employer SS and Medicare Taxes Paid on Certain Employee Tips
Form 8027 Employer's Annual Return of Tip Income and Allocated Tips

65. Federal Minimum Wage - $7.25
Tip Credit - $5.12
Minimum Cash Wage -$2.13
Actual Tips received and cash wage must equal minimum wage.

66. More Other Payments Cont’d
Uniform Allowances – Not considered wages if it is required as a condition of employment and cannot be worn as street clothes.
Vacation Pay
Wages Paid After Death
Depends on when the wages are paid in relation to the employee’s death. Check state laws prior to any payouts.

67. Employee dies after receiving their check but before cashing it the check should be issued for the same net amount to the Employee’s Estate. The amount is reported on the W2
Employee dies before wages are paid but in same calendar year. You make the wages paid to the estate and they are not subject to FIT but are taxable for SS, Med and FUTA
Deceased employee paid in year following their death, amount is not subject to taxes and should be reported in Box 3 on 1099 MISC payable to the Estate.