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2 Dear RubinBrown Client: With the arrival of the New Year, there are changes in payroll and benefit tax requirements. Included in the Payroll & Benefits Tax Guide is information regarding 2012 Form W-2 and the handling of other compensation and fringe benefits required to be included in an employee s taxable and FICA wages. Also included in this guide is a discussion of the requirements for filing information returns (Form 1099). The Payroll Benefits Tax Guide is a publication by the Entrepreneurial Services Group of RubinBrown. For more information please contact: Steven Harris, CPA Partner-in-Charge Entrepreneurial Services Group Greg Osborn, CPA Managing Partner Denver Office Mary Ramm, CPA Partner Entrepreneurial Services Group

3 Table of Contents 3 Highlights W-2 Wage and Tax Statement 10 Other Forms of Compensation 10 Bonuses 10 Cafeteria Plans 11 Accident and Health Benefits 11 Health Insurance 11 Flexible Spending Arrangements 12 Health Savings Accounts (HSAs) 12 Dependent Care Benefits 13 Disability Insurance/Income 13 Life Insurance 14 Deferred Compensation 15 Simplified Employee Pension Plans (SEPs) 15 SIMPLE Retirement Accounts 15 Employee Business Expenses 16 Auto Allowances 16 Personal Use of a Company Car 17 Qualified Transportation Benefits 18 Educational Assistance 18 Job-Related Education 18 Working Condition Benefits 18 Employer Provided Cell Phones 19 Sick Pay 19 Uniform Allowances 20 Achievement Awards 20 Gifts (De minimis) 20 Moving Expenses 21 Membership Fees 22 Multi-State Employment Tax Issues 22 State Withholding 23 State Unemployment 25 State Highlights 25 Missouri 26 Kansas 26 Colorado 27 Illinois 28 Local Employment Tax Issues Information Return Requirements 32 Additional References 2 Page

4 Highlights Social Security and Medicare Tax The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (Act) of 2010 had reduced employees Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid during This legislation was later extended to cover all of 2012 wages. However, the 2 percent reduction expired at the end of 2012, and the withholding rate for Social Security tax increased back to 6.2 percent. The 2 percent reduction in self-employed individuals Social Security (OASDI) tax also expired at the end of The rate for 2013 will increase to 12.4 percent of income. The Social Security Administration announced another increase to the limit on earnings subject to the OASDI from $110,100 in 2012 to $113,700 in The employer portion of Social Security tax paid on employees wages remains at 6.2 percent. As a result, for 2013 employees and employers will both pay 6.2 percent Social Security tax on wages up to $113,700. In 2013, the 2010 Patient Protection and Affordable Care Act includes a provision that imposes an additional 0.9 percent Medicare tax on taxpayers receiving wages in excess of $200,000 ($250,000 for married filing jointly and $125,000 for married filing separately). The tax is in addition to the regular Medicare tax rate of 1.45 percent on wages. In 2013, individuals should have 2.35 percent Medicare tax withheld on all wages in excess of $200,000. The additional Medicare tax only applies to employees. Employers are not required to match the tax as they are with respect to the regular Medicare tax. The employer is required to withhold the additional 0.9 percent Medicare tax on wages even though the employee may not be liable for the tax. The employer s obligation to withhold the additional 0.9 percent tax applies only to wages in excess of $200,000 that the employee receives from the employer. The employer may disregard the amount of wages received from the employee s spouse. The 0.9 percent additional tax on earnings over $200,000 for individuals will also affect self-employment taxes. 3 Page

5 Social Security Tax Taxable FICA wage base: Old Age, Survivors and Disability Insurance (OASDI) portion $113,700 $110,100 Medicare Hospital Insurance (HI) portion No limit No limit Employee FICA tax rate: OASDI 6.2% 4.2% HI Wages up to $200,000 Wages in excess of $200, % 2.35% 1.45% 1.45% ($250,000 for joint returns, $125,000 for married filing separate returns) Employer FICA tax rate: OASDI 6.2% 6.2% HI 1.45% 1.45% Self-employment tax base: OASDI $113,700 $110,100 HI No limit No limit Self-employment tax rate: OASDI 12.4% 10.4% HI Self-employment income up to $200,000 Self-employment income in excess of $200,000 ($250,000 for joint returns, $125,000 for married filing separate returns) 2.9% 3.8% 2.9% 2.9% Retirement Earnings Test Exempt Amounts Under full retirement age (65 to 67 depending on year of birth) Note: $1 in benefits will be withheld for every $15,120/yr. $14,640/yr. $2 in earnings above the limit. ($1,260/mo.) ($1,220/mo.) The year an individual reaches full retirement age (65 to 67) Note: Applies only to earnings for months prior to attaining full $40,080/yr. $38,880/yr. retirement age. $1 in benefits will be withheld for every $3 in earnings ($3,340/mo.) ($3,240/mo.) above the limit. There is no limit on earnings beginning the month an individual attains full retirement age. ( Full Retirement Age varies, depending on an individual s year of birth. See tables and guidelines published by the Social Security Administration for further details.) 4 Page

6 State/Federal Unemployment Wage Base Missouri taxable wage base $13,000 $ 13,000 Kansas taxable wage base $8,000 $ 8,000 Illinois taxable wage base $12,900 $ 13,560 Colorado taxable wage base $11,300 $11,000 Federal taxable wage base $7,000 $ 7,000 Standard Mileage Rate Cents per mile Health Insurance Premiums for 2-Percent Shareholders of S Corporations The health insurance premiums paid by an S corporation on behalf of 2-percent shareholders must be added to the shareholder-employee s Form W-2 as wages subject to income tax withholding. It is possible, however, to exclude these payments from wages subject to FICA and FUTA taxes. In order to take this exclusion, the payments must generally be made under a plan or system for employees and their dependents or for a class, or classes, of employees and their dependents. If this requirement is met, these benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. The additional payments would be included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder-employee, but would not be included in Boxes 3 or 5 of Form W-2. Under Internal Revenue Code Sec. 162(1), 2-percent shareholder-employees in an S Corporation can deduct health insurance premiums, including medicare premiums, paid by the S Corporation and included in the employee s income as long as premiums for coverage are either paid directly by the S Corporation or reimbursed to the employee upon proof of payment submitted to the S Corporation. To qualify for deduction, the S Corporation must report insurance premiums paid or reimbursed on the employee s Form W-2 and the employee must report payments or reimbursement as gross income. For 2012, 100 percent of the health insurance premium will be allowed as a deduction, subject to the net earnings from the trade or business limitation. This amount should also be included as an information item in box 14 on the W-2. Qualified long-term care and accident insurance is treated the same as health insurance. A 2-percent or more shareholder may deduct premiums paid for self, spouse, or dependents; however, there are limitations. Please refer to Publication 535, Business Expenses. 5 Page

7 Reporting and Payment of Tax for Household Employees For 2012 and 2013, all household employees receiving at least $1,800 per calendar year are subject to Social Security and Medicare tax on their cash wages. However, household employees under the age of 18 at any time during the tax year are exempt from Social Security and Medicare taxes unless household employment is their principal occupation. The employer s children, under the age of 21, and spouse are also exempt. See IRS Publication 926, Employment Taxes for Household Employers, for information on parent employees and their ability to claim exemption from this tax. Social Security and Medicare taxes, federal income taxes withheld, and federal unemployment tax are reported annually on the employer s personal income tax return (Form 1040, using Schedule H, Household Employment Taxes). However, state unemployment taxes are required to be reported based on each state s filing requirements. Form W-2 should be filed for each household employee to whom you pay Social Security and Medicare wages between January 1 and December 31, Form W-2 also should be filed for any household employee who requested income tax withholding. Form W-3 also should be filed. The box entitled Hshld. Emp. (Box b) should be marked on the W-3. When reporting employment taxes, a separate Employer Identification Number (EIN) is required. This number is not your individual Social Security Number. This number is obtained by completing Form SS-4, Application for Employer Identification Number, and then calling the IRS at or applying online at and clicking on employer ID numbers under topics. For more specific information, obtain IRS Publication 926, Employment Taxes for Household Employers. Reporting Health Insurance Coverage on Forms W-2 For 2011 the IRS issued Notice , which made the reporting of aggregate cost of employer-sponsored group health plan coverage on Forms W-2 optional for all employers. However, in 2012 the option to refrain from reporting the cost of health care insurance coverage continues for smaller employers but is no longer allowed for larger employers. Employers with 250 or more employees will be required to report the cost of health insurance coverage on Form W-2, Box 12, using code DD. Smaller employers taking advantage of the reprieve for 2012 Forms W-2 will not be treated as having failed to meet the Code Sec wage and tax statement reporting requirements or be subject to any penalties IRS Notice provides greater detail on this reporting requirement for larger employers including what coverage to include and how to determine the aggregate cost of that coverage. Also, the IRS stresses that the amounts reportable are not taxable, and the new reporting requirement is intended to be informational only and to provide employees with greater transparency into overall health care costs. 6 Page

8 Avoiding Reconciliation Errors Each January, review the prior year s Form 941, 943, 944 or Schedule H against your payroll records. Compare the amounts to be reported to the Social Security Administration on Form W-3 to the sum of the amounts you reported to the IRS on Form 941, 943, 944 or Schedule H for the tax year. The following amounts on the IRS and SSA report should match: ITEM W-3 Block 941 Line 943 Line 944 Line Schedule H Social Security Wages 3 5a 2 4a 1 Social Security Tips 7 5b - 4b - Medicare Wages/Tips 5 5c 4 4c 3 Federal Income Tax Withheld Page

9 2012 W-2 Wage and Tax Statement Highlights Electronic Reporting and Extended Due Date for Electronic Filers If you are required to file 250 or more Forms W-2, you must file them electronically. File Forms W-2 and W-3 electronically by visiting the SSA s Employer Reporting Instructions and Information website at selecting Electronically File Your W-2s, and logging into Business Services Online (BSO). SSA s Create Forms W-2 Online option allows you to create fill-in versions of Forms W-2 for filing with the SSA and to print out copies of the forms for filing with state or local 8 Page

10 governments, distribution to employees, and for your records. Form W-3 will be created for you based on Forms W-2. If you file your 2012 W-2 forms electronically, the due date is automatically extended to April 1, Nonelectronic filers must file their 2012 W-2 forms by February 28, Call SSA-6270 or visit if you have additional questions about electronic filing. If undue hardship is caused by these filing requirements, a waiver can be requested on Form 8508, Request for Waiver from Filing Information Returns Electronically. This form must be submitted to the IRS at least 45 days before the due date of the return. Filing Employment Tax Returns Electronically Publication 3823, Employment Tax e-file System Implementation and User Guide, is in place for 2012 returns. This system is used to file Forms 940, 941, and 944 and contains filing instructions, procedural guidelines and validation criteria. Employers must apply to use this system. W-2 Information Should Be Reported in the Respective Boxes as Follows Box 1: In the event an employee receives other compensation in addition to wages and tips, this information should be included, along with regular wages (i.e., certain fringe benefits such as health insurance premiums paid by an S Corporation for shareholders owning 2 percent or more of stock in the company, taxable benefits from a section 125 plan, group term life insurance greater than $50,000). Box 10: Report dependent care benefits under a dependent care assistance program paid or incurred by the employer for employees. Box 11: Report taxable distributions from non-qualified deferred compensation plans and nongovernmental section 457(b) plans. Box 12: Complete this box using codes provided in Form W-2 instructions for items such as adoption assistance, elective employee deferrals, 401(k) cash or deferred compensation, 403(b) salary reduction agreements, and group term life insurance over $50,000, etc. Box 13: Check the appropriate box or boxes for statutory employees, retirement plans and third-party sick pay. Box 14: Report other information such as union dues, uniform allowances, health insurance premiums deducted, nontaxable income, and lease value of vehicle provided to employees and reported in Box 1. The lease value of a vehicle provided to an employee must be reported here or on a separate statement to the employee. Each item should be labeled. In the event that your W-2s have been processed without the other compensation items included, you may issue a supplemental Form W-2 to the employee, which includes this other compensation, or information needed by the employee as indicated in the foregoing comments. If an employee is an active participant in a qualified retirement plan maintained by the employer [including a Simplified Employee Pension Plan (SEP)], you must check retirement plan in Box 13. If your company has a qualified cash or deferred compensation plan [Section 401(k)], it is necessary to withhold Social Security and 9 Page

11 Medicare taxes on wages paid and deferred and to reflect these wages and taxes in Boxes 3, 4, 5 and 6 of the W-2. Note that the amount of the wage deferral is not subject to federal or state income tax and is not included in Box 1 or 16, but is subject to FICA and federal and state unemployment taxes where wage levels are under the applicable wage base. All forms of compensation to employees are reportable on the W-2 issued by the employer, including holiday bonuses paid to employees. FICA tax (both Social Security and Medicare) should be withheld on these amounts. You should not issue Forms 1099 in lieu of W-2s. A discussion of some of the other forms of compensation and the appropriate treatment on Form W-2 follows. Other Forms of Compensation Bonuses Bonuses paid to employees in addition to their normal salaries are considered wages subject to federal and state income tax withholding and also are taxable for FICA (Social Security and Medicare), FUTA and SUTA (federal and state unemployment) tax purposes. Federal income tax must be withheld at a flat rate of 25 percent for wages paid in 2012 when bonuses are paid separately from regular wages. If bonuses and regular pay are combined together and the amounts of each are not specified, the employer should withhold federal income tax as if the total were a single payment for a regular pay period. Supplemental wage payments exceeding $1 million are subject to a flat 35 percent withholding rate (39.6% for 2013). Cafeteria Plans A cafeteria plan is a separate written benefit plan maintained by an employer, under which participating employees have the option of choosing between cash or other taxable benefits and a menu of qualified nontaxable benefits. A cafeteria plan generally may not provide for deferred compensation, and benefits are taxable if provided under a plan that discriminates in favor of highly compensated employees. Self-employed individuals cannot participate in a cafeteria plan. However, they may sponsor a plan for their employees. Examples of self-employed individuals for this purpose include sole proprietors and partners in a partnership. Additionally, more than 2 percent shareholders in an S Corporation cannot participate, as the Internal Revenue Code also treats them as self-employed for purposes of the cafeteria plan exclusion. Employer contributions underwritten cafeteria plans that permit participants to elect between taxable and qualified nontaxable benefits are excludable from the income of the participant to the extent that nontaxable benefits are selected. Treatment for FICA and FUTA purposes follows the rules for the underlying benefits. Treatment for state unemployment tax purposes varies by state. Nontaxable cafeteria benefits are excluded from Boxes 1, 3, 5, and 7 on Form W-2. The employer has the option to report the amount in Box 14. For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations. 10 Page

12 Accident and Health Benefits Payments received by an employee from an employer-financed health or accident plan for expenses incurred by the employee for medical care are not included in the employee s income and are not subject to withholding, FICA or federal unemployment tax. The exclusion applies to payments made directly to care providers or to employees to reimburse them for expenses previously paid. If the employer reimburses an employee for medical expenses from a plan that discriminates in favor of highly compensated employees, such payments may be deducted by the employer as compensation, should be included in the employee s wages, and are subject to withholding, FICA, and federal and state unemployment taxes. Contributions provided through a flexible spending or similar arrangement for long term care insurance cannot be excluded from an employee s wages subject to federal withholding. However, these contributions can be excluded from wages subject to FICA and FUTA. Health Insurance Health insurance includes hospitalization, major medical, dental and accident insurance. It is typically provided to employees on a tax-free basis. No amount needs to be included in the employee s income or wages at the time the employer remits premiums to an insurance company or makes contributions to the plan. Such amounts also are exempt from FICA and FUTA tax. Benefits that do not exceed the employee s medical expenses are not taxable. See the rules regarding the reporting requirements for health insurance coverage for 2012 in the highlights section above. Health insurance premiums paid by an S corporation for more than 2 percent shareholder employees must be treated as compensation. See, Health Insurance Premiums for 2-Percent Shareholders of S Corporations in the Highlight section above for greater detail. Flexible Spending Arrangements A flexible spending arrangement (FSA) is an employer-sponsored benefit program that is offered as part of a cafeteria plan and is designed to provide covered employees with a method of paying for certain covered expenses (e.g., medical or dependent care) with pretax dollars. Self-employed individuals cannot participate in an FSA. However, they may sponsor a plan for their employees. Examples of self-employed individuals for this purpose include sole proprietors and partners in a partnership. Additionally, more than 2 percent shareholders in an S Corporation cannot participate, as the Internal Revenue Code also treats them as self-employed for purposes of the FSA exclusion. Basically, a covered employee makes contributions through payroll deductions to a health or a dependent care FSA. Because contributions to an FSA reduce an employee s gross income, these amounts though compensatory in nature are not subject to federal income, FICA or FUTA tax, but are subject to SUTA tax in some states. The FSA, in effect, allows the employee, through income and FICA tax savings, to reduce the out-of-pocket costs of covered expenses. It should be noted, however, that the use-it-or-lose-it rule applies to FSA funds, meaning contributions not used for the designated FSA purpose within 2 ½ months after the FSA plan year-end are forfeited and cannot be recovered by the employee. 11 Page

13 As a funding mechanism for cafeteria plan benefits, FSAs are subject to the general rules for cafeteria plans as well as additional requirements. From the employer s standpoint, health FSAs must be able to distribute the maximum amount of coverage selected by the employee throughout the coverage period, regardless of the amount the employee has actually contributed at the time of distribution. Dependent care FSAs, however, act as an account from which employees may withdraw only previously deposited funds. Amounts allocated by employees for dependent care benefits must be included on Form W-2 in Box 10. Health Savings Accounts (HSAs) Employee contributions to a Health Savings Account (or HSA) are deductible from gross wages, assuming certain plan qualifications are met and such contributions do not exceed IRS limits of $3,100 (for single coverage) and $6,250 (for family coverage) for 2012 and IRS limits of $3,250 (for single coverage) and $6,450 (for family coverage) for In order to qualify as an HSA participant, the employee must be covered only under a high-deductible health plan. For the 2012 tax year, a high-deductible plan is defined as a plan with a minimum annual deductible of at least $1,200 (for single coverage) and $2,400 (for family coverage.) For 2013 the minimum is $1,250 (for single coverage) and $2,500 (for family coverage). Additionally, out-of-pocket expenses, including deductibles, co-pays and other non-premium amounts cannot exceed $6,050 (for single coverage) and $12,100 (for family coverage) for 2012 and $6,250 (for single coverage) and $12,500 (for family coverage) for Catch-up contributions of an additional $1,000 for 2012 and 2013 are allowed for employees who reach age 55 by the end of the tax year. Employers must report contributions to an employee s HSA on Form W-2 Box 12 using code W. Dependent Care Benefits Dependent care assistance provided under a written nondiscriminatory program (for the care of children under age 13 or any other dependent that is physically or mentally incapable of caring for himself or herself) generally is not includible in gross income and is not subject to federal withholding, FICA, or federal and state unemployment taxes. The amount excludable from income cannot exceed $5,000 ($2,500 if married, filing separately). Amounts paid in excess of those limits must be included in income and are subject to federal income tax withholding, FICA taxes, and federal and state unemployment taxes in the year in which the dependent care services were provided, rather than when the employee was reimbursed for the care. Every employer with a dependent care assistance plan must report the amount of benefits provided to employees under the plan. The total amount should be shown in Box 10 of Form W-2. Amounts in excess of $5,000 ($2,500 if married, filing separately) must also be included in Box 1, 3 and Page

14 Disability Insurance/Income Group disability premiums paid by an employer are not taxable to the employee and are not subject to withholding, FICA or unemployment taxes. However, disability benefits received as a result of premiums paid by an employer are subject to tax in the same manner as sick pay benefits. Note that premiums paid through a cafeteria plan are considered employer-paid premiums. Consider treating employer-paid premiums as compensation. Such payments are subject to withholding, FICA and unemployment taxes, but the resulting benefit payments are taxfree. Life Insurance Employers may provide insurance on the lives of employees, often affording employees coverage at a lower cost than they would have been able to secure themselves. Life insurance arrangements typically are structured as straight life or whole life insurance purchased for individual employees, split-dollar insurance or group insurance. Employers may deduct amounts spent on insurance premiums to the extent that they are not directly or indirectly beneficiaries of the policy. The premiums paid by an employer to provide straight life insurance protection for an employee are included in the gross income of the employee if the employee may designate the beneficiaries and the employer is not directly or indirectly a beneficiary. The amount included in income on Form W-2 is equal to the premium payment made by the employer. This amount is subject to both FICA and unemployment taxes. The cost of coverage provided under qualified plans also is included in income, but is usually less than the actual premiums paid. The taxable benefit of life insurance coverage provided for an employee through a qualified retirement plan or trust is calculated using the IRS tables referred to as PS 58 rates, is reported on Form 1099-R, and is not included for FICA or unemployment tax purposes. If you have a split-dollar arrangement, please contact your tax advisor for guidance on any amounts includible in the employee s income. Group term life insurance premiums paid by an employer on an employee s behalf under a nondiscriminatory plan are not included in taxable wages. However, the cost of employer-paid group life insurance in excess of $50,000 must be included in an employee s taxable income and is subject to Social Security and Medicare tax, but is not subject to FUTA tax. Employers do not have to withhold income taxes on the excess coverage, even though the cost must be included as other compensation. The taxable cost of group term coverage is computed using the governmental table reproduced below. The table sets forth the monthly cost of $1,000 of group term life insurance for individuals in various age brackets. The employee s age for the purpose of computing life insurance cost is based on his or her age on the last day of the taxable year. Employee contributions reduce the taxable amount. The cost of employer-provided group-term life insurance on the life of an employee s spouse or dependent is not taxable to the employee if the face amount of the coverage does not exceed $2,000. If the face amount exceeds $2,000, the entire cost of such insurance is includable in the employees income, except to the extent the cost is paid by the employee on an after tax basis. The taxable amount is determined by using the IRS Table reproduced below using the dependents or spouse s age. 13 Page

15 Cost Per Thousand Dollars of Coverage of Group-Term Life Insurance Exceeding $50,000 Paid by the Employer 5-Year Age Bracket Cost Per $1,000 of Coverage per Month Under to to to to to to to to to and above 2.06 To the extent the cost of group term life insurance is taxable to an employee, the amounts must be included as other compensation in Box 1 and as Social Security and Medicare wages in Boxes 3 and 5. The cost of coverage also must be reported in Box 12, using code C. Deferred Compensation The law imposes limits on the amount of compensation an employee can defer to a qualified cash-or-deferred retirement plan. Box 12 (codes D or E) on Form W-2 enables the IRS to identify cases in which an employee exceeds the annual limit on employee elective deferrals. The 2012 per-employee limit for 401(k) deferrals and 403(b) annuities is $17,000 and the 2013 limit is $17,500. Report an employee s salary reduction or elective deferrals in Box 12, using code D for 401(k) or code E for 403(b). Age 50 Catch-Up contributions also are reported in Box 12. The 2012 and 2013 per-employee catch-up limit for 401(k) deferrals and 403(b) plans is $5,500. Employee deferrals are not includible in gross income and are not subject to federal or state withholding, but are subject to FICA, FUTA and SUTA tax if the employee remains within the applicable wage bases. Employer matching contributions do not have to be reported on Form W-2 and are not subject to withholding, FICA or FUTA tax, but ARE subject to SUTA tax in some states. 14 Page

16 Simplified Employee Pension Plans (SEPs) The employee excludes employer contributions to an IRA, which are part of a SEP, from income. For 2012 and 2013, the exclusion is generally limited to the lesser of $50,000 in 2012 and $51,000 in 2013 or 25 percent of compensation for the year (limited to compensation of $250,000 in 2012 and $255,000 in 2013). Employer contributions are not subject to FICA or FUTA tax. The manner in which the W-2 is completed depends on whether a company has a traditional SEP or a cash-ordeferred SEP (allowed in the case of small employers with no more than 25 employees). If the company maintains a traditional SEP (i.e., only the employer makes a contribution), the retirement plan box in Box 13 is checked. The contributions are not subject to income, FICA or FUTA tax. The employer should not report these amounts in Box 1 of Form W-2. If the company maintains a cash-or-deferred SEP (salary reduction SEP or SARSEP), the W-2 treatment depends on whether an employee elects cash or deferral. If cash was elected, the amount is included in Box 1, (wages, tips and other compensation) and Boxes 3 and 5 (Social Security and Medicare). If the employee elects to defer part of his or her wages, then the amount deferred is excluded from Box 1 but must be included as Social Security and Medicare wages in Boxes 3 and 5 and also included as wages for unemployment purposes. The amount the employee defers should be included in Box 12 (code F). Employer contributions are not reported on Form W-2. SIMPLE Retirement Accounts Employers with 100 or fewer employees, each of whom received at least $5,000 in compensation for the preceding year, and with no other employer-sponsored retirement plans may adopt savings incentive match plans for employees (SIMPLE). A SIMPLE retirement account may take the form of an IRA or may be part of a 401(k) plan. SIMPLE retirement plans allow employees to make elective contributions of up to $11,500 in 2012 and $12,000 in Employers must match the contributions dollar-for-dollar up to 3 percent of the employee s compensation. Alternatively, an employer may make a 2 percent nonelective contribution for each eligible employee, taking into account no more than $250,000 of compensation in 2012 and $255,000 in 2013 for each employee. The age 50 Catch Up contribution limit is $2,500 for 2012 and Employer contributions are not subject to FICA or FUTA tax. If the employee elects to defer part of his or her wages, then the amount deferred is excluded from Box 1, but must be included as Social Security and Medicare wages in Boxes 3 and 5 and also included as wages for unemployment purposes. The amount the employee defers should be included in Box 12 (code D or S). Employee Business Expenses Amounts that have been paid specifically, either as advances or as reimbursements, for job-related travel or other bona fide ordinary and necessary expenses incurred in the business of the employer, are considered taxable wages and are subject to withholding, FICA and FUTA taxes unless the amounts are paid under an accountable plan. 15 Page

17 To qualify as an accountable plan, not only must expenses have a business connection, but the employer must require the employee (1) to adequately account for the expenditures (expenditures must be properly substantiated), and (2) return all unsubstantiated amounts to the employer within a reasonable period of time. If a per diem or mileage allowance is paid in excess of government specified rates, the excess amounts are taxable and subject to federal income tax withholding, FICA tax, and federal and state unemployment taxes. Reimbursements and advances must be identified either by making separate payment or by specifically indicating separate amounts if wages and expense allowances are combined in a single payment. If the payments are not adequately accounted for, then those amounts are included in wages for income and other employment tax purposes. Auto Allowances Auto allowances paid directly to employees are included in gross wages and are subject to withholding, FICA, and federal and state unemployment taxes. Personal Use of a Company Car Employer-provided cars that are used exclusively for business purposes are excludable from an employee s income if the business use can be substantiated. The value of employer-provided cars used for personal purposes, such as commuting to and from work, is includible in an employee s gross income. The amount included in an employee s wages for income and other employment tax purposes is generally determined by the fair market value of the car s availability. Alternatively, an annual lease or cents-per-mile valuation method or a special rule for valuing the commuter use of an employer-provided car may be utilized. An employer may elect not to withhold income taxes on this benefit, but must provide written notification of such an election by January 31 of the year for which the election applies or within 30 days after the date the vehicle is first provided to the employee, whichever is later. The government allows employers to choose any one of three methods for placing a value on the personal use by an employee of a company-provided car. Generally a different method may be chosen for each company car. However, there cannot be a switch between the special methods when valuing the use of one particular car. The brief summary of the three methods follows: Annual lease value: The fair market value of the vehicle must first be determined. Once the fair market value has been determined, then the annual lease value is determined from government-approved tables. This value is then multiplied by the ratio of personal mileage to total mileage to arrive at the personal use value. An additional allocation must be added if the employer is providing fuel for the car. The IRS provides a safe harbor for valuing the fuel at 5.5 cents per mile. The personal use miles are multiplied by 5.5 cents to yield the fuel value. Commuting valuation: This method may be used for what the tax law calls ordinary (i.e., non-key) employees when the employer limits the personal use of the car to commuting or de minimis personal use. The employee may value the commuting use at $1.50 per one-way commute ($3 round trip). If more than one employee commutes in the same vehicle, the $1.50 figure is applied to each employee. However, the 16 Page

18 employer must have established a written policy that the employee has personal use of the vehicle only for commuting or de minimis use. Cents-per-mile valuation: The number of personal miles driven by an employee (whether an owner or a rank and file worker) is multiplied by the standard mileage deduction rate. The standard mileage rate for 2012 is 55.5 cents per mile and 56.5 cents per mile for This rate includes the cost of maintenance and gas. For cars first made available to employees in 2012, the cents-per-mile method can only be used if the car (1) has a fair market value of no more than $15,900 for a passenger automobile and $16,700 for a truck or van, and (2) is used regularly for company business or is driven by an employee (or employees) more than 10,000 business and/or personal miles during the year. For cars first made in 2013, the fair market value limits are $16,000 for a passenger automobile and $17,000 for a truck or van. On Form W-2, the value of the personal use of a company car must be reported in Box 1, Box 3 and Box 5 to the extent the employee has not exceeded the Social Security wage base. The total value of the personal use of a company car is reported in Box 14. The personal use also is subject to unemployment taxes. An employer can choose to include the entire annual lease value of a company car as taxable income on an employee s W-2, without regard to amounts the employee may be entitled to exclude from tax. This means the employer treats the entire use of the car as personal use and reports 100 percent of the benefit s value as compensation in Box 1. The employee then deducts, as a miscellaneous itemized deduction (to the extent permitted), the W-2 amount allocable to business use and, in effect, pays tax on the personal use only. This 100 percent inclusion technique has one advantage the employer does not have to worry about obtaining records from employees detailing their business and personal mileage. Qualified Transportation Benefits Employers may offer employer provided parking, van-pooling, bicycle commuting reimbursement or mass transit passes as a tax-free benefit pursuant to an elective pretax salary reduction arrangement. The amount by which an employee s pay is reduced to pay for such benefits is excluded from compensation for both income and FICA taxes. The non-taxable benefits are subject to statutory dollar limits. For 2012, an employee can exclude up to $240 a month of qualified parking expenses ($245 for 2013) and up to $240 a month for 2012 of the combined value of transit and van pooling passes ($245 for 2013) and $20 a month for qualified bicycle commuting. The 2012 Taxpayer Relief Act, enacted on January 2, 2013, retroactively increased the monthly exclusion for employer-provided transit passes and vanpool benefits, so that the exclusion for employer-provided transit and vanpool benefits is equal to that of the exclusion for employer-provided parking benefits in 2012 and Previously the 2012 tax-free exclusion for mass transit/vanpool expenses was $125 per month. If the value of a benefit for any month is more than its limit, include in the employee s wages the amount over the limit minus any amount the employee paid for the benefit. You cannot exclude the excess from the employee s wages as a de minimis transportation benefit. 17 Page

19 Educational Assistance This exclusion applies to educational assistance payments made by an employer under an educational assistance program that has a reasonable relationship to your business or is required as part of a degree. The exclusion also applies to graduate level courses. For 2012, the employer can exclude up to $5,250 of educational assistance provided to an employee under an educational assistance program. If you do not have an educational assistance plan or you provide an employee with assistance exceeding $5,250, you can exclude the value of these benefits from wages if they are a working condition benefit. Job-Related Education The education must meet one of the following tests to be excluded from the employee s compensation: (1) the education is required by the employer or by law for the employee to keep his or her present salary, status, or job, or (2) the education maintains or improves skills needed in the job. The required education must serve a bona fide business purpose of the employer. For further exceptions to the rules see Publication 15-B. Working Condition Benefits This exclusion applies to property and services an employer provides to an employee so the employee can perform his or her job. It applies to the extent the employee could deduct the cost as a business expense or depreciation expense if the employee had paid for it. Examples of working condition benefits include an employee s use of a company car for business and job-related education. Employer-Provided Cell Phones Prior to January 1, 2010, Code Sec. 280F(d) (4) categorized cell phones as listed property. In order for employer provided cell phone expenses to be excluded from income, strict substantiation requirements had to be met, and any personal use of the phone was determined to be taxable. However, effective January 1, 2010, the IRS has excluded employer provided cell phones from listed property and made the exclusion from income opportunity much more lenient. This continues to remain in effect for New guidance issued by the IRS in Notice says that, if an employer provides an employee with a cell phone primarily for non-compensatory business reasons, the IRS will treat the employee s use of the cell phone for business reasons as a working condition fringe benefit, described above. Employees will no longer have to provide records to support their business use of the cell phone. This rule also applies to reimbursements of an employee s expenses for reasonable cell phone coverage of a phone used for noncompensatory business reasons. An employer is considered to have provided an employee with a cell phone primarily for non-compensatory business purposes if there are substantial reasons related to the employer s business, other than providing compensation to the employee, for providing the employee with a cell phone. A cell phone is deemed not to be provided primarily for non-compensatory business purposes if it is provided to promote the morale or goodwill of an employee, or to attract a prospective employee. 18 Page

20 Additionally, any value of primarily business related cell phones related to personal use will be excludable from the employee s income as a de minimis fringe benefit. Sick Pay Sick pay is the continuation of wages an employee receives while temporarily absent from work. Sick pay is generally includible in income and is subject to withholding unless it is received (1) under a workers compensation law, (2) as settlement on account of personal injuries or sickness, or (3) from health or accident insurance that was paid in whole or in part by the employer. The manner in which sick pay is reported depends on whether it was paid by the company or through a third party. It is treated like other taxable compensation if the company pays it directly to the employee. Sick pay is reported in Box 1 on Form W-2 and in Boxes 3 and 5 if the employee earned less than the Social Security and Medicare taxable wage bases. The taxes withheld are included in Box 2 and, if applicable, in Boxes 4 and 6. You must also show in Box 12 with code J the amount of sick pay NOT includible in income because the employee contributed to the sick pay plan. Sick pay paid by the company or its agent is subject to mandatory federal income tax withholding. In the case of payments made by third parties who are not an agent of the company, income tax is usually not withheld by the third party (e.g., an insurance company) unless specifically requested by the employee on Form W-4S. The third party withholds and deposits the employee s share of FICA tax and usually transfers liability for the employer s portion to the company by informing it of the amount of payments made at the time the tax is deposited. Check Third-party sick pay in Box 13 if employer is a third-party sick pay payer filing a Form W-2 for an insured s employee. The third party must provide (on or before January 15 of the year following the calendar year) a statement of the total payments made in the prior calendar year, the amount of tax withheld (if any), and the employee s share of FICA tax paid. The company reports this information on the employee s W-2. Sick pay is included as taxable wages and FICA wages in Boxes 1, 3 and 5. Income, Social Security and Medicare taxes withheld are reported in Boxes 2, 4 and 6. Payments made during the first six months an employee is off work are subject to FICA tax, as are payments made under a state temporary disability law. Payments received under a workers compensation law and payments more than six months after the employee last worked are not FICA taxable. The same rules apply for FUTA tax. Uniform Allowances Amounts paid to employees as advances or reimbursements for ordinary and necessary business expenses are not wages for income or other employment tax purposes if the employee accounts for these expenses and the payments are identified when made. The cost of buying and maintaining uniforms may be considered an ordinary and necessary business expense if the uniforms are required as a condition of employment and are not adaptable for general use. Uniform allowances not falling into this category should be considered taxable for income and other employment tax purposes. 19 Page

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