Accounts Payable & Payroll Compliance: Working Together to Minimize Reporting & Payment Mistakes

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1 Accounts Payable & Payroll Compliance: Working Together to Minimize Reporting & Payment Mistakes FEATURED FACULTY: Vicki M. Lambert, CPP, President and Academic Director, The Payroll Advisor (702)

2 Vicki M. Lambert, CPP, President and Academic Director, The Payroll Advisor Vicki M. Lambert, CPP is an adjunct faculty member at Brandman University in Southern California and is the creator of and instructor for their Practical Payroll Online program. She is also the President and Academic Director of The Payroll Advisor a firm specialized in the training of payroll professionals. With over three decades of hands-on experience in all facets of payroll functions as well as over 20 years as a trainer and author, Ms. Lambert is a sought-after and respected voice in the practice and management of payroll issues. She has conducted open market training seminars on payroll issues across the United States as well as serving as an in-house trainer for businesses such as Sun Microsystems, Fox Studios, Disney, County of Riverside and the City of Hesperia. Ms. Lambert currently produces and presents payroll related audio seminars, webinars and webcasts for clients and business groups throughout the country.

3 **Certificates of attendance and CEUs, when available, must be requested through the online evaluation.** Evaluation for Live Event: We d like to hear what you thought about the audio conference. Please take a moment to fill in the survey located here: Requests for continuing education credits and certificates of attendance must be submitted within 10 days of the live event. Evaluation for CD Recording: Please use the following link to submit your evaluation of the recorded event: Please note: All links are case sensitive Receive 1.5 recertification credit hours toward PHR and SPHR recertification through the Human Resource Certification Institute (HRCI)! For more information about certification or recertification, please visit the HRCI homepage at "The use of this seal is not an endorsement by the HR Certification Institute of the quality of the program. It means that this program has met the HR Certification Institute's criteria to be preapproved for recertification credit." APA Approved Provider: Receive 1.5 RCH by attending! Receive 1.5 CPE credits by attending the live Audio Conference! CCM is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, Web site: Program Level: Intermediate Prerequisites: This course is for participants with some exposure to the subject. Advanced Preparation: None Delivery: Group Live CPE Credits: 1.5 Recordings of the program do not qualify for CPE credits. For more information regarding administrative policies such as complaint and refund, please contact our offices at C4CM (2426).

4 1 About the Speaker 2 Vicki M. Lambert, CPP, is President and Academic Director of Vicki M. Lambert, LLC, a firm specializing in payroll education and training. Known as The Payroll Advisor, Ms. Lambert is Founder and Director of a website that provides unique and expert services for anyone dealing with the complexities and technicalities of the payroll process. As an adjunct faculty member at Brandman University, Ms. Lambert is the creator and instructor for the Practical Payroll Online payroll training program, which is approved by the APA for recertification credits. 1

5 What Is Our Focus For Today? 3 Sharing information all year long working together to ensure compliance Potential taxable payments could go either way Nontaxable but reportable payments Definitely nontaxable payments Definitely taxable payments Working with Payroll 4 Must be a year round relationship Begin collecting data as soon as year-end is over or even sooner Data should be collected and distributed monthly as a best practice Payroll creates the spreadsheet for the payment type sends to AP at the end of each month AP sends back to payroll by 15 th of following month with payments for that month 2

6 Example of Spreadsheet 5 For moving expenses the spreadsheet could look like this Employee Information Check Information Payment Breakdown Last Name First Name ID # Check Date Check # Payable To Check Amount Purpose of Payment Payment Amount Working with Payroll 6 Payroll should come to Accounts Payable Payroll is responsible for the reporting and taxation of wages therefore they should provide the spreadsheets they need to gather the info But AP needs to make sure they do 3

7 Working with Payroll 7 AP needs to keep payroll informed as well Payroll may not be aware of payment If AP is asked to make a onetime payment that is out of the norm payroll needs to know If it is a new type of payment payroll also needs to know Anything Off the Table? 8 Direct reimbursement of business expenses is the only thing off the table Unless it exceeds limits Everything else must be given to payroll Nothing is too small 4

8 Payroll Makes the Call 9 Payroll should make the call when it comes to the taxability or reportability of all payments They also get the personal penalties if the call is wrong Basically this is payroll s field of expertise so let them use this knowledge Payment Overview 10 Anything given to an employee may be a form of payment for the performance of services Someone must determine the taxation Usually FIT, FICA and FUTA and state equivalents but not always Subject of IRS Research Project 5

9 Employment Tax National Research Program Initiative ( ET NRP) 11 Focus on fringe benefits paid out of accounts payable Use of company property including vacation homes, country club memberships and vehicles Auditing 6,000 employers over 3 year period Employers were chosen at random Round 3 is finishing up IRS will take prior action into account when assessing penalties Non NRP audits are using the same exhaustive list Taxing and Reporting Non-payroll Payments 12 Can be added to the payroll at any time Most non-payroll payments are added to the payroll for taxation and reported as imputed income Income recognized but not received through the payroll department Add to the gross calculate and withhold taxes deduct before calculating net of check 6

10 Determining the Taxation 13 First thing to remember! CASH or ITS EQUIVALENT IS ALWAYS TAXABLE! De Minimis 14 Any property or service provided to an employee that has so little value that accounting for it would be unreasonable or administratively impractical Have to take into account how often and to how many employees it is given No De Minimis on CASH or its equivalent! Doesn t matter who pays for it 7

11 De Minimis Examples 15 Occasional use of company copier Occasional company party Occasional tickets to sports events or shows not given as an award everybody goes Occasional Meals for working overtime Coffee, donuts or soft drinks Relocation 16 Excluded if qualified under section 132 Must meet time and distance tests Time Test: Employee works at least 39 weeks during the first 12 months in new job location area Distance Test: New job location is at least 50 miles farther from the employee s old home than the old job location was The Payroll Advisor Tues., September 11,

12 Relocation Expenses 17 Qualified expenses include: Moving household goods one way one time Moving household members one way one time Everything else is taxable/reportable Report nontaxable paid to employee box 12 code P Example: 18 The company relocated Paul from City A to City B in the first quarter of this year and paid for the move. 9

13 Example of AP Payments 19 United Van Lines to move household goods from City A to City B $21,642 American Airlines to fly Paul and his family members from City A to City B one way one time $3, American Airlines to fly Paul home to City A while family was still living in old home $ Oak Park Apartments for temporary quarters for Paul while his family remained in City A and prepared for the move $2,600 Paul to reimburse him for meals while staying at Oak Park Apartments $364 Ours (and the IRS s) Questions Are 20 Does the move qualify under Section 132? What is taxable income to Paul? What is reported on Form W-2 but not taxed? What is not reported and nontaxable? AP reports to Payroll the following 10

14 Spreadsheet from AP for March 21 Employee Information Check Information Payment Breakdown Last Name First Name ID # Check Date Check # Smith Paul /15/ Payable To Check Amount Purpose of Payment Payment Amount American Airlines $7, Fly Paul back and forth to visit family $3, Fly Paul and his family to new job $3, /20/ Oak Park Apts $2, Temp quarters for employee during move $2, United Van 3/25/ Lines $21, Move household goods for employee $21, /30/ Paul Smith $ Reimburse employee for meals while in temporary lodging at Oak Park Apts $ Total for Employee $31, Does the Move Qualify? 22 The company relocated Paul from City A to City B this year and paid for the move. He moved in February and still lived in City B at year s end. Time Test is Passed Paul s commute from his old home to his old job in City A was 21 miles. City B is located 425 miles from his old home.-- Distance Test is Passed 2012 The Payroll Advisor Tues., September 11,

15 And the Taxation Answer is 23 United Van Lines to move household goods from City A to City B $21,642 Nontaxable and non-reportable American Airlines to fly Paul and his family members from City A to City B one way one time $3, Nontaxable and non-reportable American Airlines to fly Paul home to City A while family was still living in old home $ Taxable payroll needs Oak Park Apartments for temporary quarters for Paul while his family remained in City A and prepared for the move $2,600 Taxable payroll needs Paul to reimburse him for meals while staying at Oak Park Apartments $364 Taxable payroll needs Payroll Would Handle As 24 Add $ as taxable income to Paul s gross wages in April and withhold FIT, FICA and all state applicable taxes. The payment to United Van Lines is ignored as nontaxable and non-reportable The Payment to American Airlines for the one time family flight is ignored as it is nontaxable and non-reportable Nothing is added to Box 12 Code P 12

16 Auto Reimbursements 25 Falls under Per Diems or Accountable Plans 2013 per diem rate: is 56.5 cents per mile Must have a log Must list all requirements Nature of trip Actual Mileage Auto allowances fall under same rule Business Use Personal Vehicle 26 Acme Tile Company has 20 employees on its sales staff Each sales person must call on 20 to 30 customers per week Sales staff uses their own personal vehicles to make these calls Acme pays each sales person a $500 per month auto allowance to cover the costs of using their own vehicles This payment is made on the 15th of each month and paid through the accounts payable department. 13

17 Business Use Personal Vehicle Example 27 John Levy is one of the sales staff at Acme. In July he submits his auto log for the month of June. For all his sales calls, John logged 1,457.3 miles. Using the 2013 IRS standard mileage rate of 56.5 cents, his calculation would be done as follows: 1,457.3 x $.565 = $ Since $ exceeds the $500 payment, nothing needs to be reported to payroll. Business Use Personal Vehicle 2 nd Example 28 Joe Bumble is also a salesperson for Acme. In July he also submits his log. But Joe spent the majority of his time in June at Acme s two biggest clients and didn t do as much traveling as he usually does. The total mileage for his log is only 435 miles. We would do the calculation for his mileage as follows: 14

18 29 Business Use Personal Vehicle 2 nd Example 435 x $.565 = $ Since $ is less than the monthly payment of $500, the difference will be taxable to the employee Therefore, accounts payable must submit $ ($ $245.78) to the payroll department as taxable income for July Or the employee must return the excess to accounts payable No you cannot average over the year if paid monthly math done monthly Example 3: Totally Taxable 30 Acme does not require its sales staff to submit logs or any backup for the auto allowance that is paid each month That is a nonaccountable plan under IRS rules no paperwork Therefore the entire $500 per each sales staff member is taxable income for that month and must be reported to payroll 2012 The Payroll Advisor 15

19 Personal Use of a Company Vehicle 31 Fully taxable Vehicle may qualify as nontaxable 4 methods of determining taxation General Valuation Annual Lease Value Cents per mile Commuting 31 Nontaxable Vehicles 32 Working condition fringe De minimis benefit Qualified non-personal use vehicle Special rules for auto dealerships 32 16

20 Valuing the Vehicle 33 Fair Market Value (FMV) determined as the price a person pays to purchase the vehicle at an arm s length transaction Used car may use Blue Book Fleet averaging is available if 20 cars or more Leased cars are valued by either the manufacturer s suggested retail price minus 8% or manufacturer s invoice price plus 4% FMV is as of the date the vehicle is first made available to the employee 33 General Valuation Method 34 Most liberal Any employee All use taxable Employee deducts business use on personal taxes 2% AGI is a problem More taxes as well 34 17

21 Annual Lease Value Method 35 Must be consistent in using method Need value of vehicle Need vehicle use log Use annual lease value table Must use for 4 years or until car is transferred Prorate if less than full year 35 Annual Lease Value Method 36 Annual lease value table includes the value of maintenance and insurance for the automobile Do not reduce the amount of the table for the value of the services if you do not provide them Does not include fuel 36 18

22 Annual Lease Value Method 37 The value of fuel must be included separately in the employee s wages May use fair market value or 5.5 cents per mile Do not have to include the value of a telephone or specialized equipment if the equipment is necessary for the business 37 Annual Lease Value Example 38 $18,000 vehicle driven 14,741 miles. 1,540 were for personal use: 38 19

23 Annual Lease Value Example Calculations 39 1,540 miles/14,741 miles = 10.44% Table value of vehicle = $5,100 $5,100 x 10.44% = $ taxable income Need to know about fuel as well 39 Cents Per Mile Method 40 Vehicle must be under $15,900 for pending Must have log Driven over 10,000 miles in calendar year and used primarily by employee $.565 per mile for 2013 Example: 1,540 miles x $.565 = $

24 Cents Per Mile Method 41 Includes the value of maintenance and insurance. Do not reduce the rate if you do not provide If you do not provide fuel you can reduce the rate by 5.5 cents per month 41 Commuting Method 42 Don t need value of vehicle Need only know how many days employee drove vehicle Restricted by employee $1.50 each way--$3.00 per day 42 21

25 Commuting Method 43 Vehicle is provided to the employee for use in trade or business or for other bona fide non-compensatory business reasons and employee is required to commute in the vehicle Written policy in effect, which prohibits the employee from using the vehicle for personal purposes other than commuting Cannot be a control employee 43 Commuting Method 44 Control employee for 2013: Board or elected officer whose pay is $100,000 or more A director Employee whose pay is $205,000 or more Employee who owns 1% or more equity, capital or profits of the business 44 22

26 Employee Achievement Awards 45 Length of Service and Safety only Tangible personal property Not disguised compensation Meaningful presentation No more than specific dollar amounts $1600 qualified plan $400 nonqualified plan Length of Service Award 46 Will qualify only if either of the following apply: The employee receives the award after his or her first 5 years of employment The employee did not receive another length-of-service award (other than de minimis) during the same year or in any of the prior 4 years 23

27 Safety Awards 47 Qualifies unless one of the following applies: Given to a manager, administrator, clerical employee or other professional employee During the tax year, more than 10% of your employees have already received a safety achievement award (not counting de minimis) Bonuses, Prizes and Awards 48 Cash is taxable! So are all other types of payments Trips, tangible personal property or whatever! Doesn t matter what it is-if given as a prize, bonus or award it is taxable income Applies to referral awards as well as employee suggestion 24

28 Bonuses, Prizes and Awards 49 Doesn t mater what you call the award Doesn t matter who pays for it or if it is donated by a vendor Doesn t matter if the company got it for free using bonus points or frequent flyer miles Holiday Gifts/Gift Certificates, Cards 50 Can be De Minimis Cash or cash equivalent is taxable This includes gift certificates to supermarkets! Turkey rule applies Turkey, ham or similar item of nominal value at holiday time. Must be for the actual turkey not to store 2012 The Payroll Advisor Fri., Dec. 14,

29 Company Supplied Cell Phones 51 The value of an employer-provided cell phone, provided primarily for non-compensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis fringe benefit. Non-compensatory Business Purposes 52 You provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. Examples of substantial business reasons include the employer's: 26

30 Non-compensatory Business Purposes 53 Need to contact the employee at all times for work-related emergencies, Requirement that the employee be available to speak with clients at times when the employee is away from the office, and Need to speak with clients located in other time zones at times outside the employee's normal workday. Non-compensatory Business Purposes 54 You cannot exclude from an employee's wages the value of a cell phone provided to promote good will of an employee, to attract a prospective employee, or as a means of providing additional compensation to an employee. 27

31 55 Reimbursement for Personal Cell Phones Used for Business If the employer requires the employee to maintain and use their personal cell phones for business purposes and reimburses the employee for the business use of their personal cell phones the following rules apply: 56 Reimbursement for Personal Cell Phones Must have substantial business reasons for requiring employee s use of personal cell phones in connection with employer s trade or business 28

32 Substantial Business Reasons 57 Need to contact the employee at all times for work-related emergencies, Requirement that the employee be available to speak with clients at times when the employee is away from the office, and Need to speak with clients located in other time zones at times outside the employee's normal workday. 58 Reimbursement for Personal Cell Phones Employee must maintain cell phone coverage that is reasonably related to the needs of the employer s business Reimbursement must be reasonably calculated so as to not exceed actual expenses the employee incurs Must not be a substitute for a portion of the employee s wages 29

33 Acceptable Reimbursement Arrangement 59 Employee must communicate with employer s clients outside of normal business hours Employee s basic coverage plan charges a flatrate per month for a certain number of minutes for domestic calls Employer reimburses employee for the monthly basic plan expense to enable employee to maintain contact with business clients after hours 60 Unacceptable Reimbursement Arrangements Reimbursement for international or satellite cell phone coverage for technician whose clients are in local geographical area Pattern of reimbursement that deviates significantly from a normal cell phone use in the employer s business Example: employee is reimbursed $100 per quarter in quarters 1-3 of the year but receives a reimbursement of $500 in quarter 4 30

34 Section 129 Plans 61 Dependent care plans Up to $5,000 Exempt from FICA and FUTA Not subject to federal income tax Can be provided in kind or as cash payment Must be reported on Form W-2 therefore payroll must have info Educational Assistance 62 Must have an educational assistance program Graduate as well as undergraduate Includes cost of books, equipment, fees, supplies and tuition Does not include cost of tools or supplies employee is allowed to keep Does not include lodging, meals or transportation even on internet courses Limit of $5,250 per year 31

35 De Minimis Meals 63 Very little value Occasional is the word to remember Applies to employer operated eating facilities Does not apply to highly compensated employees The Payroll Advisor 2013 Monday, April 23, 2012 Meals on Premises 64 May exclude the value of meals if: Employee s place of work For employer s convenience Depends on facts and circumstances Substantial business reason other than provide additional pay Need more than written statement If more than half of employees are furnished meals for employer convenience may treat all meals as for convenience of employer The Payroll Advisor 2013 Monday, April 23,

36 Meals 65 Food service workers-nontaxable Restaurant or other food service employee During, Immediately before or after employee working hours for your convenience Emergency call workers-nontaxable Employee available for emergency calls during meal period Must show these emergency calls have occurred or can be expected to occur The Payroll Advisor 2013 Monday, April 23, 2012 Meals 66 Short meal periods-nontaxable Business must restrict to 30 to 45 minutes for lunch Employee cannot be expected to eat anywhere else in that short of time Can t be to leave early Proper meals not available-nontaxable Employee cannot otherwise eat proper meal Example: no eating facilities in area The Payroll Advisor 2013 Monday, April 23,

37 Meals 67 Meals after work hours-nontaxable Immediately after working hours For employer convenience Good will meals These are not considered furnished for employer s convenience--taxable Meals with a charge Does not apply when determining taxation The Payroll Advisor 2013 Monday, April 23, 2012 Meals 68 Employer operated eating facility: Employer owns the facility Employer operates the facility On business premises Meals provided immediately before or after employee s workday Cover the costs The Payroll Advisor 2013 Monday, April 23,

38 Lodging 69 Value can be excluded if: Furnished on business premises Furnished for the employer s convenience Employee must accept as condition of employment The Payroll Advisor 2013 Monday, April 23, 2012 Stipends 70 A stipend is defined as a fixed sum of money paid periodically for services or to defray expenses. The fact that remuneration is termed a "fee" or "stipend" rather than salary or wages is immaterial. The income from stipends is reportable All payments received for past, present, or future services must be included in income. The Payroll Advisor 2013 Monday, April 23,

39 Memberships 71 Effective 1994, 274(a)(3) provides that no deduction is permitted for club dues. This includes all types of clubs, including social, athletic, sporting, luncheon clubs, airline and hotel clubs and business clubs for all amounts paid or incurred after Regulations (a)(2)(iii) and (e)(3) (ii)(b) clarifies that the purposes and activities of a club, and not its name, determine whether it is covered under the disallowance provision. The Payroll Advisor 2013 Monday, April 23, 2012 Memberships 72 The employer has the choice of either including the value of the club membership in the employee s income or foregoing any deduction for the club dues. IRC 274(e)(2). Put another way, the company can deduct the cost if it treats the club dues as compensation includable in gross income and wages. The Payroll Advisor 2013 Monday, April 23,

40 Memberships 73 However, if the employer s deduction for club dues is disallowed by 274(a)(3), Regulations (s) provides that the amount, if any, of an employee s working condition fringe benefit relating to the employer provided membership in the club is determined without regard to the application of 274(a) to the employee. To be excludible as a working condition fringe, however, the amount must otherwise qualify for deduction by the employee under 162(a). Note that the requirements of 274(d) must still be met (i.e., time, place and business purpose must be established. See Regulations (s)(3) for examples applying these rules. The Payroll Advisor 2013 Monday, April 23, 2012 Medical Expenses 74 Depends on the type of plan that is set up by the employer Health Savings accounts; Health Reimbursement Arrangements; Archer Medical Savings Accounts In general nontaxable to the employee if within the limits for HSAs or MSA HRA have no limits on reimbursements Optional or no reporting on Form W-2 Code DD The Payroll Advisor 2013 Monday, April 23,

41 Life Insurance Other Than Group Term 75 Whole life: Individual whole-life insurance policies may be purchased by employers for employees May pay premiums on policy already owned by employee Taxation depends on who is designated as the beneficiary Employee s designed beneficiary then usually value of policy paid for by the employer is included in income and subject to FIT but not FICA is part of plan intended to benefit employees or their dependents Calculation of taxable income is usually done annually The increase in the policy s cash surrender value for the year and the reasonable net premium cost of the current life insurance protection as added together Life Insurance Other than Group Term 76 Split-Dollar Life Insurance: Final regs issued in 2003 Owners and non-owners pay portions of the premiums Owner is the person named as the policy owner Taxation depends on the relationship between the owner and non-owner 38

42 Are There Any Questions? 77 Speaker Contact Information

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