1. Taxable and Nontaxable Compensation

2. Gross Income and Wages IRC §61
Starting point for determining a taxpayer’s federal tax bill
Includes compensation for services, including fees, commissions, fringe benefits, and similar items
All remuneration for employment, including cash value of all remuneration, including benefits, paid in any medium other than cash
Wages and benefits are generally included in income and subject to income and employment tax withholding, deposit, and reporting requirements unless the IRC says otherwise.

3. Taxable Compensation
Subject to federal income tax and the employer must withhold the tax from the employee’s pay and remit the withholding to the Internal Revenue Service (IRS).
Subject to employment taxes
Social security and Medicare taxes under the Federal Insurance Contributions Act (FICA)
Federal unemployment tax under the Federal Unemployment Tax Act (FUTA)

4. Fair Market Value (FMV)
Definition:
What it would cost an individual to purchase the benefit on the open market in an ‘arm’s length transaction’
Formula: (EPA + AEL) = y
FMV - y = IFBA
EPA = employee paid amount with after tax dollars
AEL = amount excluded by law
IFBA = includable fringe benefit amount

5. Nontaxable Fringe Benefits
IRC §132 exempts certain fringe benefits from inclusion in income
No-additional-cost services
Qualified employee discounts
Working condition fringes
De minimis fringes
Qualified transportation benefits
On-premises athletic facilities
Qualified retirement planning services
Qualified moving expense reimbursements
Not subject to federal income tax withholding or social security, Medicare, or FUTA taxes

6. No-additional-cost Services
Free service is one that is regularly offered for sale to customers, not employees, in the normal course of the employer’s line of business in which the employee works.
Employer bears no substantial additional cost, including lost revenue and additional labor, in providing the service to the employee.
The term ‘employee’ includes current and former employees who left because of retirement or disability and their widow(er)s, spouses, and dependent children.
Available on equal terms to each member of a group of employees who classification does not discriminate in favor of highly compensated employees

7. Qualified Employee Discounts
Discount on goods cannot exceed the gross profit percentage when the goods are sold to customers.
(Total Sales – Cost of Goods Sold) / Total Sales = Gross Profit Percentage
Discount of services cannot exceed 20%, excess is taxable income.
Discount must be offered for sale to customers in the employer’s line of business in which the employee works.
The term ‘employee’ includes current and former employees who left because of retirement or disability and their widow(er)s, spouses, and dependent children.
Available on equal terms to each member of a group of employees who classification does not discriminate in favor of highly compensated employees.

8. Working Condition Fringe
Employee’s use of the property or services must be related to the employer’s trade or business
Employee would be able to take a business deduction on his/her personal tax return if the employee paid for the benefit.
The term ‘employee’ includes current employee, partner, director, or independent contractor performing services for the employer.
Employer must maintain the required records to substantiate the business deductions.

9. Working Condition Fringe
Employer may offer without including FMV in employee’s income
Business use of a company car or airplane
Chauffeur or bodyguard provided for security protection
Dues and membership fees for professional organizations
Employee’s subscriptions to business periodicals
Job-related education
Goods used for product testing by employees
Use of demonstration automobile by a full-time car salesperson
Outplacement services
Employee use of business cell phone

10. De minimis Fringe
Value of the benefit is so small that accounting for it would be unreasonable or impracticable.
Employer must take into account the frequency with which the benefit is provided to all its employees
The term ‘employee’ means anyone to whom the benefit is provided
No specific dollar maximum or minimum assigned by the IRS.

11. De minimis Fringe
Employer may offer without including FMV in employee’s income
Occasional parties / picnics for all employees
Traditional holiday gifts with a small value and no cash or cash equivalents
Flowers, fruit or similar items provided under special circumstances
Coffee and doughnuts provided to employees
Occasional meals, supper money, or cab fare for employees who must work late
Operation by the employer of an eating facility on or near the employer’s premises if the facility does not operate at a lost

12. De minimis Fringe Not excluded from taxable income
Season tickets to sporting or theatrical events
Commuting use of an employer-provided car or other vehicle for more than 1 day a month
Membership in a private country club or athletic facility, regardless of the frequency with which the employee uses the facility
Use of the employer-owned or leased facilities for a weekend
Apartment, hunting lodge, boat, condo
Gift cards and certificates
Have ‘readily ascertainable’ value that can easily be accounted for

13. Qualified Transportation Fringes
Employer may offer without including FMV in employee’s income
Transportation between home and work in a commuter highway vehicle provided by the employer
Vehicle seats at least 6 adults other than the driver
80% of the vehicle’s mileage can be expected to be for commuting
½ of the vehicle’s seating capacity, excluding the driver, is used by employees
Excluded benefit is limited to $260 per month, excess is taxable income
Transit passes, vouchers, tokens, or fare cards
Parking provided on or near the employer’s premises or at a park and ride facility

14. Qualified Transportation Fringes
Bicycle commuting reimbursement – Suspended for

15. On-premises athletic facilities
Facility is located on the employer’s premises
Facility is operated by the employer through its employees or other entity
Substantially all use of the facilities is by employees, their spouses, and their dependent children
The term ‘employee’ includes current and former employees who left because of retirement or disability and their widow(er)s, spouses, and dependent children.
Facility is not a resort or other residential facility

16. Employer-provided vehicle usage
Business related purposes
Excluded from income as a working condition fringe benefit
Valuation methods for taxation on personal use
General valuation method
Special valuation method
Commuting valuation method
Annual lease valuation method
Company fleet valuation method
Vehicle cents-per-mile method

17. Employer-provided vehicle usage
Commuting valuation method
$1.50 per one-way commute
$3.00 per round trip commute
Vehicle cents-per-mile method
Business standard mileage rate = $0.545 per mile
Employee pays for fuel, reduce rate by $0.055 per mile

18. Employer-provided vehicle usage
Annual lease valuation method
Determine FMV of the care on the first day the vehicle is available to the employee
Locate the FMV in IRS Annual Lease Value Table
Calculate the percentage of personal miles driven during the year
Personal miles driven / total miles driven
Calculate the FMV of the employee’s personal use that is to be included in income
Annual lease value x percentage of personal miles driven

19. Annual Lease Value Calculation
Employee drives an employer-provided vehicle for both business and personal driving. The employee drove 17,000 miles during the year, 12,300 business miles and 4,700 personal miles. FMV of the car is $24, Calculate the taxable annual lease value.

20. Employer-provided aircraft usage
Valuation methods for taxation of personal use
General valuation method
Non-commercial flight valuation method
Free or discounted commercial flights
25% of airline’s highest unrestricted coach fare for that specific flight

21. Life Insurance Group-term life insurance Whole-life insurance
Employee group-term life insurance
Dependent group-term life insurance
Whole-life insurance
Split-dollar life insurance
Non-equity split-dollar life insurance arrangements
Equity split-dollar life insurance arrangements

22. Group-Term Life Insurance (GTL)
Value of coverage up to $50,000 is excluded from employee’s income
Entire amount excluded if:
Employer is beneficiary
Charitable organization is beneficiary
Employee terminates employment during the year due to permanent disability
W-2 Reporting: Box 12, Code C

23. Group-Term Life Insurance (GTL)
Non-discriminatory testing
At least 70% of all employees benefit from the plan
At least 85% of employees participating in the plan are not key employees
All participants belong to a non-discriminatory IRS classification
The plan is part of a qualified cafeteria plan
Former employees
Employer is required to include uncollected social security and Medicare taxes on the Form W-2 in Box 12, Code M and N respectively
Uncollected additional Medicare tax for former employees whose wages exceed $200,000 are not reported in Box 12, Code N

24. GTL Calculation
Employee was born April 23, The employer’s GTL plan provides her coverage equal to 2 times her annual salary. The employee’s salary on January 1st was $65, The employer’s plan has a maximum coverage of $125, The employee contributes $25 per month in after-tax dollars towards the insurance premiums. Monthly GTL taxable income?
$65,000 x 2 = $130,000
$125,000 - $50,000 = $75,000
$75,000 / 1000 = $ (employee will be 59 on Dec 31st)
.42 x 75 = $32.25
$ $25 = $7.25 per month taxable income

25. GTL Calculation Determine total amount of employee’s coverage
Employee’s coverage less $50,000 = excess coverage
Divide excess coverage amount by 1,000
Determine employee’s age as of Dec 31 of calendar year
Use IRS table – Uniform Premiums to calculate FMV of 1 month of excess insurance benefit per $1,000
Deduct any after-tax contribution by employee from value of insurance

26. Whole Life Insurance
Proceeds paid to designated beneficiary are included in income and subject to federal income tax withholding
If paid with after tax dollars - proceeds are nontaxable
If coverage is part of a plan intended to benefit employees, the proceeds are not subject to social security, Medicare, or FUTA tax
Calculating taxable income
Sum of:
The increase in the policy’s cash surrender value for the year, if the employee has a vested right to the cash value
The reasonable net premium cost of the current life insurance protection, the death benefit payable minus the cash surrender value at the end of the year

27. Moving Expenses
This Fringe Benefit is suspended for tax years
All reimbursement is considered Taxable

28. Educational Assistance
Job-related education
Considered working condition fringe
Non job-related education
American Taxpayer Relief Act of 2012
Extended the income exclusion under IRC §127 up to $5,250 per year
Undergraduate and graduate education assistance provided by employer
Assistance provided over limit is subject to federal income tax withholding, social security, Medicare, and FUTA taxes

29. Business Travel Reimbursements
Accountable plan
Excluded from income
Key: Business connection and substantiated expenses
Advances allowed 30 days prior to travel
Expenses must be substantiated within 60 days of travel
Nonaccountable plan
Included in income
Amounts not substantiated becomes taxable income
Amounts paid exceeding expenses becomes taxable income
W-2 Reporting: Box 12, Code L

30. Business Travel Reimbursements
Per diem
Paid per diem allowance per day of travel
Deemed substantiated if amount does not exceed IRS established federal per diem rates
Lodging per diem does not include taxes which can be claimed as miscellaneous expense
Incidentals are reimbursed separately
High-low per diem substantiation methods
Employer may use the high-low rate instead of the individual federal rate of the locality of travel as long as the allowance is for lodging, meal, and incidental expenses and within CONUS

31. Employer-provided Meals / Lodging
Value of the meals are excluded from employee’s income
Furnished on employer’s business premises
Furnished for the convenience of the employer
Employer-provided lodging
Value of the lodging is excluded from employee’s income
Furnished on the employer’s business premises
Employee is required to accept the lodging as a condition of employment

32. Adoption Assistance Small Business Job Protection Act of 1996
IRC §23
Allows individuals to take an income credit for qualified adoption expenses
IRC §137
Excludes from employee’s income employer-provided adoption assistance that is furnished under an adoption assistance program in connection with the employee’s adoption of an eligible child
Dollar Limitation: $13,810 per child over all taxable years related to the particular adoption
Income Limitation: phased out when adjusted gross income reaches $247,140
W-2 reporting: Box 12, Code T

33. Advances and Overpayments
Included in income for the payroll period when received
Subject to federal income tax withholding, social security, Medicare, and FUTA taxes
Repayment Options
Repayment made in small calendar year
Repayment made in a subsequent calendar year
Repayment made in a subsequent calendar year as gross up

34. Awards and Prizes Qualified plan awards – excluded from income
Length of service: starting at 5 years, in 5 year increments
Safety Awards: less than 10% of employees receiving the award are not managers, administrators, professional employees, or clerical employees
Nonqualified plan awards – included in income
Length of service: before 5 years, increments closer than every 5 years
Safety Awards: 10% or more of employees receiving the award are managers, administrators, professional employees, or clerical employees
Civic and charitable awards – excluded from income
Employee did not seek out the award and turns it over to charity / govt.
Not a condition on performing future services

35. Back pay awards
Employee wins a lawsuit or settlement against the employer
Actual wages are subject to federal income tax withholding, social security, Medicare, and FUTA taxes
Compensatory, Consequential, Liquidated, and Punitive damages
Not subject to tax withholding
Reported on Form 1099-MISC, Box 3
Payments to attorney’s
Reported on Form 1099-MISC
Notify SSA of back pay. SSA will require document to move the current year W-2 into the appropriate tax year when actually earned

36. Dependent Care Assistance Programs
Maximum exclusion: $5,000 or the employee’s earned income for the year, whichever is less
Payments above the maximum exclusion are subject to federal income tax withholding, social security, Medicare, and FUTA taxes.
Must pay for or provide services that are necessary so that the employee receiving the benefit can work
Child must be under the age of 13 or other dependent who cannot care for herself or himself
Expenses are treated as incurred when the care is provided, not when payments are made to the employee or 3rd party
W-2 Reporting: Benefit value = Box 10; Taxable amounts = Boxes 1,3,5

37. Employer-paid Taxes (Grossing Up)
When the employer pays the employee’s taxes, the amount paid is an employer-provided benefit
Taxes paid on the employee’s behalf is taxable income to the employee
IRS has approved a procedure known as “grossing up” to calculate the gross payment the employee must receive when the employer pays the employee’s taxes.
Gross up formulas use tax withholding percentages
Different formulas account for social security cap and additional Medicare tax withholdings

38. Equipment Allowance
Allowance paid to employees who use their own tools or heavy equipment on the job
Not subject to federal income tax withholding, social security, Medicare, or FUTA Taxes
Allowance payments are kept separate from the employee’s wages
Allowance paid to employees regardless of whether they use the employer’s tools or their own
Subject to federal income tax withholding, social security, Medicare, or FUTA Taxes
Tool and equipment plans are nonaccountable plans = taxable income to employee

39. Golden Parachute Payments
IRC definition: compensation paid to an officer, shareholder, or highly compensated employee only after a change in corporate ownership or control that is at least 3 times the employees average compensation during the 5 most recent years.
The excess parachute payment is the portion that exceeds the employee’s 5 year average compensation
Entire parachute payment is subject to federal income tax withholding, social security, and Medicare taxes.
Excess parachute payment is subject to a 20% excise tax the employer must withhold
W-2 Reporting for excise tax withheld: Box 12, Code K

40. Loans to Employees
The difference between the interest charged to the employee and the applicable federal interest rate must be included in the income of the employee on any day in which the combined amount of all outstanding loans between the employer and the employee is more than $10,000
Subject to social security, Medicare, and FUTA taxes only
Debt forgiveness: entire balance become income subject to federal income tax withhold, social security, Medicare, and FUTA taxes in year forgiven
If forgiven periodically, the amount forgiven becomes taxable as forgiven

41. Military Pay – Differential Pay
Heroes Earnings Assistance and Relief Tax Act of 2009
Payments taxes as supplemental wages
Definition:
Payment made for any period during which the employee is performing service in the uniformed services while on active duty for more than 30 days
Represents all wages that the employee would have received from the employer if the employee were performing services for the employer
Makes the employee wages “whole” while on active duty

42. Military Pay – Differential Pay
Taxation:
Provided while the employee is on temporary assignment with the state National Guard or the Armed Forces Reserve
Subject to social security, Medicare, and FUTA taxes
Provided while the employee is on active service with the U.S. Armed Forces or on an indefinite assignment with the state National Guard
Not subject to social security, Medicare, and FUTA taxes
Deferrals continue from any differential pay paid by employer into defined contribution retirement plans under §401(k), §403(b), §457(b)
Employees returning from active service can also make retro-active deferrals for the time spent in the service when they made no deferrals

43. Stocks
Employee receives company stock instead of cash as compensation for services rendered
FMV of stock when transferred to employee without restriction is taxable income
Watch transfers of stock during a divorce
Taxable income could be required to be calculated

44. Stock Options Qualified stock options Nonqualified stock options
Incentive stock options (ISO)
Employer gives option to buy stock at a set price for a period of time
Generally not taxed if complies with stock holding period
Employee stock purchase plans (ESPP)
Generally not taxes if complies with stock holding period
Nonqualified stock options
Exercised without conditions
Income equal to the excess value of the stock when exercised over the value paid by the employee
W-2 Reporting: Box 12, Code V

45. Tips
Provided voluntarily by customers are taxable wages to the employee receiving them
Cash tips received directly from customer
Tips from customers who leave a tip on an electronic payment method
Value of any noncash tips
Amounts paid out through tip pools, tip splitting, or tip sharing arrangement
Service charges are not tips

46. Tips Employees must report tip income to employer
Qualify when receive at least $20 a month
Reportable by the 10th of the next month on Form 4070
Employee’s Report of Tips to Employer
Electronic tip reporting allowed by IRS
Withholding on tip income
Subject to federal income tax withholding, social security, Medicare, and FUTA taxes
Uncollected social security and Medicare tax withholding
W-2 Reporting: Box 12, Code A and B respectively
Employer must pay their portion in full

47. Tips Employer Reporting Form 4137 Form 8846 Form 8027 Form 8027-T
Social Security and Medicare tax on Unreported Tip Income
Form 8846
Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
Form 8027
Employer’s Annual Return of Tip Income and Allocated Tips
Form 8027-T
Transmittal of Employer’s Annual Return of Tip Income and Allocated Tips

48. Wages paid after Death Employee dies before cashing paycheck
Reissue the check to the employee’s personal representative for the same net amount
Check state laws before reissuing

49. Wages paid after Death
Wages paid after employees dies and in the same year
Payable to employee’s estate or legal representative
Not subject to federal income tax withholding
Subject to social security, Medicare, and FUTA taxes
Annual Statement Reporting:
W-2 Reporting: Income paid
Boxes 3 and 5
W-2 Reporting: Taxes withheld
Boxes 4 and 6
1099-MISC Reporting: Income paid
Box 3
Reportable to employee’s estate or legal representative

50. Wages paid after Death Wages paid after the year of death
Payable to employee’s estate or legal representative
Not subject to federal income tax withholding, social security, Medicare, or FUTA taxes
Annual Statement Reporting:
Form 1099-MISC
Box 3

51. DO YOU KNOW???
What is the maximum amount of GTL an employer can provide an employee’s dependents without its value becoming tax to the employee?
Name 2 types of deductible moving expenses
What is a golden parachute payment?
What is the acronym FMV?
What is the business standard mileage rate for 2018?
What is the moving mileage rate for 2018?