Joseph Perera Associate San Antonio, Taxes. Employee Gifts and Fringe Benefits: Tax Consequences and Reporting Obligations

Transcription

1 Joseph Perera Associate San Antonio, Taxes Employee Gifts and Fringe Benefits: Tax Consequences and Reporting Obligations 1

2 2 Gifts to Employees Internal Revenue Code ( IRC ) Section 61 Gross income means all income from whatever source derived including IRC 102(a) Compensation for services, including fees, commissions, fringe benefits and other similar items Gross income does not include property acquired by gift

3 3 Gifts to Employees Commissioner v. Duberstein, 363 U.S. 278 (1960) A gift is made from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses A payment cannot be a gift if it is a reward for services rendered or is made because of the incentive of an anticipated benefit of an economic nature

4 4 IRC 102(c) Gifts to Employees The income exclusion for gifts does not apply to any amount that an employer transfers to an employee

5 5 Gifts to Employees An employer can make a gift to an employee that is the natural object of the employer s bounty For example, a father who employs his son can make a gift to the son, if father shows that the gift is due to the family relationship and not compensation for the son s services as an employee

6 6 IRC 83 If an employee receives property (other than cash) as compensation for services, the fair market value (minus any amount the employee pays for the property) is taxable income in the first year the employee has the right to transfer the property or the property is not subject to a substantial risk of forfeiture, whichever is earlier

7 7 Employee Eligibility For Fringe Benefits Common Law and Statutory Employees are eligible Corporate officers are statutory employees Partners of a Partnership are not employees Per IRC 1372, S Corporations are treated as partnerships for employee fringe benefit purposes 2% or more shareholders are treated as partners

8 8 Prizes and Awards IRC 74(a) states that all prizes and awards are included in gross income Exceptions Employee Achievement Awards that the employer can deduct under IRC 274(j) Certain prizes and awards transferred to governmental units or charity Qualified Scholarships (discussed later as educational benefit)

9 9 Employee Achievement Awards An item of tangible personal property that: The employer provides to the employee for length of service or safety achievement Is awarded as part of a meaningful presentation; and Is awarded under conditions and circumstances that don t create a significant likelihood that the award is really compensation

10 10 Employee Achievement Awards Length of Service Award Can include retirement awards Cannot qualify if its given within the employee s first five years of employment or if the employee received a length of service award in the current year or prior four years Safety Award Made to employees who have worked full time for at least one year Cannot be given to managers, administrators, professionals or clerical workers Cannot be provided to more than 10% of employees

11 11 Limitations on Employee Achievement Awards $400 per year for non qualified plan awards $1600 per year for qualified plan awards Qualified plan awards Awarded as part of an established written plan or program that does not discriminate in favor of highly compensated employees Average cost of all awards does not exceed $400

12 12 Prizes Transferred To Charity Gross income does not include prizes and awards made primarily in recognition of religious, scientific, educational, artistic, literary or civic achievement if Recipient is selected without taking an action to enter contest or promotion Recipient is not required to render future services Payor transfers prize or award to a governmental unit or charity of the recipient s choice

13 13 De Minimis Fringe Benefits IRC 132(a)(3) excludes de minimis fringe benefits from gross income A de minimis fringe benefit is an employer-provided benefit the value of which is so small as to make accounting for it unreasonable or administratively impracticable

14 14 Examples of De Minimis Fringe Benefits Occasional use of company property such as telephones and copy machines Occasional company cocktail parties or picnics Occasional theater and sporting event tickets Coffee and doughnuts Gold watch presented for 25 years of service or upon retirement

15 15 Items that are not De Minimis Benefits Benefits provided frequently or regularly Season tickets to theater or sporting events Membership to a country club or gym Weekend use of an employer s apartment, boat, or hunting lodge Cash payments (other than occasional meal money) or cash equivalents (e.g. gift cards)

16 16 Holiday Parties and Gifts Year End parties are generally excluded from gross income as de minimis fringe benefits Traditional holiday gifts having a low fair market value (e.g. holiday turkey) are also de minimis fringe benefits (Revenue Ruling 59-58)

17 17 Working Condition Fringe Benefits IRC 132(a)(3) excludes working condition fringe benefits from gross income A working condition fringe benefit is any property or service that an employer provides to an employee that would be deductible by employee (without respect to 2% AGI floor) as an ordinary and necessary business expense if the employee paid for the property or service

18 18 Examples of Working Condition Fringe Benefits Employee s use of employer provided vehicle to carry out job duties On the job training Reimbursements for professional dues Cash payments if Employer requires the employee to use the cash to pay for a deductible business expense; and Employee verifies the use of the cash and returns any excess not spent

19 19 Cell Phones Notice provides that business use of an employerprovided cell phone is a working condition fringe benefit; personal use of an employer provided cell phone is a de minimis fringe benefit IRS extends this treatment to employer reimbursement of employee owned cell phones and cell phone service

20 20 Identity Theft Protection The value of identity theft protection services provided to an employee is not taxable as income or wages Does not apply to cash received in lieu of identity theft protection services or to proceeds under an identity theft insurance policy

21 21 Qualified Retirement Planning Any retirement planning advice and information furnished to the employee and the employee s spouse by an employer maintaining a qualified retirement plan Advice can cover all of the employee s retirement plans, not just the employer s qualified plan Can extend to general retirement income planning Does not include tax preparation, accounting, legal or brokerage services

22 22 Qualified Employee Discounts IRC 132(a)(2) excludes qualified employee discounts from income Discount on purchases of goods or services that the employer offers for sale to customers in the ordinary course of its business The employee is employed in the line of business in which the items is ordinarily sold

23 23 Qualified Employee Discounts Discounts cannot discriminate in favor of highly compensated employees Qualified employee discounts do not apply to purchases of real estate or investment assets (stocks, commodities, foreign currencies) If employer is in the business of selling real estate or investment assets, employer can provide discount for services in connection with purchase of these assets

24 24 Limits on Qualified Employee Discounts For services, discount cannot exceed 20% For property, discount cannot exceed the gross profit percentage of the price at which the employer offers the property to its customers Gross profit percentage is ratio of (1) excess of sales revenues over cost of goods sold to (2) sales revenue

25 25 Limits on Qualified Employee Discounts Example: $1 million in gross sales $600,000 as cost of goods sold Gross profit percentage is 40% (($1,000,000 minus $600,000) / ($1,000,000)) The excludable discount is 40%; any excess discount would be taxable

26 26 No Additional Cost Service Service the employer provided to the employee if Service is offered for sale to customers in the ordinary course of the line of business in which the employee is performing services Employer incurs no substantial additional cost (including foregone revenue) in providing the service to the employee

27 27 Educational Benefits as Working Condition Fringe Benefits Employers can provide educational benefits which an employee could deduct as a business expense under IRC 162 Education that maintains or improves skills required by the individual in his or her employment (e.g. refresher courses or current development courses) Education that the employer expressly requires or education required by law or regulations to maintain the individual s employment, status or rate of compensation (e.g. required continuing education)

28 28 Working Condition Fringe Benefit (cont d) Education expenses are not deductible under IRC 162 if: Education is required to meet the minimum educational requirements for entering employment (e.g., accounting classes required to become a certified public accountant) Education that will lead to the taxpayer s qualifying for a new trade or business (e.g., an accountant pursuing a law degree)

29 29 Travel Expenditures for Education Travel expenditures such as meals, hotels and transportation incurred while traveling primarily to obtain education (e.g. going to seminars, conferences, etc) are deductible However, if the travel is primarily personal and the education activities are minimal or incidental, then the travel expenses are not deductible Relative time spent on educational activities compared to personal activities is an important factor to determine purpose of travel

30 30 Travel to Seminars Outside of North America These travel expenses are deductible only if the employee demonstrates that the meeting is directly related to the employee s trade or business and the employee documents: Purpose of the meeting and the activities taking place at meeting Purpose and activities of the sponsoring organization or group The residences of the active members of the sponsoring organization and the places at which other meetings of the organization have been held, or will be held Any other factors the taxpayer thinks helps demonstrate business purpose

31 31 Seminars on Cruise Ships This travel is deductible only if it is directly related to the employee s trade or business and The cruise ship is a vessel registered in the U.S. and All cruise ports of call are in the U.S. or U.S. possessions Deduction limited to $2,000

32 32 Educational Assistance Programs Per IRC 127, employees can exclude up to $5,250 per year for assistance furnished under an educational assistance plan ( EAP ) This educational benefit is not limited by the working condition fringe benefit rules (e.g., education that can lead to a degree) The EAP does not have to be a separately funded plan; benefits can be cash reimbursements paid by employer directly to employee, cash payments to institutions providing the education to the employees, or other expenses incurred by the employer

33 33 Educational Assistance Programs (cont d) The EAP must be a separate written plan for the employee s excusive benefit and must meet certain requirements

34 34 Educational Assistance Programs (cont d) Educational Assistance Can be an employer s payment of employee s education expenses and courses of instruction provided by the employer directly Benefits can be payment of tuition, fees, books, supplies, and equipment Cannot pay for tools or supplies that the employee can retain after completing the course; meals lodging or transportation; or courses or education involving hobbies, sports or games

35 35 Educational Assistance Programs (cont d) Benefits can only be provided to employees and the employer must give reasonable notification to employees of the availability and terms of the program Program must benefit all employees equally or benefit one or more groups of employees qualifying under a classification that does not discriminate in favor of highly compensated employees

36 36 Educational Assistance Programs (cont d) Employer can limit reimbursement to successful completion of the course or attaining a particular course grade; can also impose a reasonable condition subsequent (such as remaining employed for one year after completing the course) No more than 5% of the plan s cost can be provided to shareholder-employees, or proprietors holding greater than 5% equity interest in employer and their spouses and dependents

37 37 Qualified Scholarships IRC 117(a) excludes from income qualified scholarships to an individual who is a degree candidate at an institution of higher learning Employers can establish scholarship programs to make scholarships to employees, spouses and their dependents Qualified scholarships are amounts the student uses for tuition, fees and required books and supplies; the student can t use funds for room and board

38 38 Qualified Scholarships (cont d) Employers can establish private foundations to grant scholarships to employees and their children Must have an independent selection committee Scholarship decisions must be based on objective criteria such as candidate s academic performance and financial need Cannot condition scholarship on continued employment Cannot give scholarships to more than 25% of applicants or 10% of eligible individuals

39 39 Qualified Scholarships (cont d) Cannot require the scholarship recipient to perform services as a condition of receiving the scholarship Grants by an employer to enable employee to go back to school to get a degree on the condition that the employee returns back to work for the employer are not scholarships. Bingler v. Johnson, 394 U.S. 741 (1969) Scholarship to a student in consideration for student s promise to work for the employer are not qualified scholarships

40 40 Qualified Tuition Reductions IRC 117(d) provides income exclusion for tuition reduction for education below the graduate level to an employee of an educational institution for themselves, spouse, or children Retired employees as well as surviving spouse and dependents of deceased employees are also eligible Can provide to highly compensated employees only if the tuition reduction is available to all employees and is nondiscriminatory

41 41 Employer Provided Vehicles Business use of an Employer Provided Vehicle is a Working Condition Fringe Benefit (Treas. Regs (b)) Personal use of the vehicle or use to commute from home to work and back is not an excludable benefit

42 42 Valuation of Employer Provided Vehicles Lease Value Cents per mile Commuting rule

43 43 Lease Value Pro rate the vehicle s use value for the period according to the number of business and non-business miles driven Business miles can be treated as working condition fringe benefit Personal miles are taxable fringe benefit Lease Value does not include value of employer provided fuel; if employer pays for fuel, then add an additional 5.5 cents per mile

44 44 Example: Lease Value Use value of the vehicle for the year is $2,000 Employee drives 6,000 business miles and 2,000 personal miles Working condition fringe benefit is $1,500 (3/4 * $2,000) and the amount included in income is $500 (1/4 * $2,000)

45 45 Cents Per Mile Valuation Multiply standard mileage rate (54 cents in 2016) by the total miles the employee drives the vehicle for personal purposes Can use the method only if Employer reasonably expects vehicle to be regularly used in the trade and business throughout the entire year; or The vehicle is used primarily by employees and the vehicle is actually driven at least 10,000 miles

46 46 Commuting Rule Multiply each one-way commute by $1.50 Must meet the following requirements Provide vehicle to employee and for noncompensatory business reasons require the employee to commute in the vehicle Establish a written policy that employee won t use the vehicle for personal use other than commuting or de minimis personal use and the employee does not use the vehicle other than these reasons

47 47 Commuting Rule Cannot use this method for control employees Board or shareholder appointed, confirmed or elected officer whose compensation exceeds $105,000 Director Employee whose pay is $215,000 or more Employee who owns a 1% or more equity, capital or profits interest

48 48 Occasional Cab or Transportation Fare Can exclude occasional payments for local transportation fare as a de minimis fringe benefit if an employer provides the fare because overtime work necessitates an extension of the employee s normal work schedule

49 49 Qualified Transportation Fringe Benefits IRC 132(a)(5) excludes qualified transportation fringe benefits from income Transportation in a commuter highway vehicle (Van Pooling) Transportation passes Qualified parking Qualified bicycle commuting reimbursement Employer can choose which transportation benefits to provide (does not have to provide all)

50 50 Qualified Transportation Fringe Benefits (cont d) Can provide the transportation fringe benefits directly by the employer or through a bona fide reimbursement arrangement Can make cash reimbursement for transit passes only if a voucher for transit pass is not readily available for direct distribution by employer to the employee Can also provide the benefit (other than bicycle) through a compensation reduction arrangement (i.e. employee can choose between the benefit or additional cash compensation)

51 51 Qualified Parking Parking the employer provides: On or near the employer s business premises On or near the location from which the employee commutes to work using mass transit, van pools or car pools Does not include parking at or near the employee s home

52 52 Qualified Transportation Fringe Benefit Limits An employee can receive any combination of van pooling, transit pass and parking benefits in the same month Employee can exclude $255 per month combined for van pooling and transit passes $255 per month for qualified parking Any benefit provided in excess of these limits is treated as taxable wages

53 53 Qualified Bicycle Commuting Reimbursement Can reimburse for reasonable expenses incurred for purchasing a bicycle, repairs, improvements and storage Reimbursement is $20 per qualifying bicycle commuting month Any month in which the employee regularly uses the bicycle for a substantial portion of travel between home and place of employment and the employee does not receive other transportation benefits

54 54 Frequent Flyer Miles In 1995, IRS took position that frequent flyer miles would be considered taxable compensation In subsequent guidance, IRS announced it would not treat receipt or use of frequent flyer miles as gross income unless received as compensation, converted to cash or used for tax avoidance purposes

55 55 Qualified Moving Expense Reimbursement Amounts directly or indirectly to an employee (including services furnished in kind) as payment for or reimbursement of moving expenses Only applies to moving expense deductions that the employee could deduct if he or she paid for them

56 56 Deductible expenses Qualified Moving Expenses Moving household goods and personal effects Traveling (including lodging but not meals) from former home to new home Must meet distance test and time test New job location is at least 50 miles father from employee s old home than the old job location was Employee works at least 39 weeks during the first 12 months after arriving in general area of new job

57 57 Occasional Meals and Meal Money Can provide, as a de minimis fringe benefit, meals or meal money to employees if the benefits are provided to enable the employee to work overtime

58 58 Eating Facilities An employer can subsidize an eating facility for employees if: The employer charges enough for meals to cover the facility s direct costs (facility can be operated by a food service business) The employer owns or leases the facility The facility is located on or near the employer s premises The employee s meals are furnished during or immediately before or after the work hours

59 59 Meals and Lodging Provided for the Employer s Convenience IRC 119 provides an exclusion from gross income for meals and lodging to an employee, spouse and dependents if the meals and lodging are provided for the employer s convenience and are provided on the employer s premises The exclusion applies to benefits provided in kind; it does not apply to cash allowances for meals and lodging

60 60 Lodging In order for lodging to qualify, the employee must accept the employer provided lodging as a condition of employment Typical qualified lodging includes lodging at remote or isolated locations (e.g. construction site) or the employee must be available for duty at all times (e.g. apartment maintenance worker)

61 61 Qualified Campus Lodging Exclusion for value of campus lodging (located on or in the proximity of educational institutions including academic health centers) if the employee pays rent at least equal to the lesser of: 5% of appraised value of lodging; or Average rental paid to the institution for comparable lodging by persons who are are not employees or students

62 62 Meals The meals have to be furnished for a noncompensatory reason Having the employee available for emergency call during meal period Need to restrict employee to a quick meal period An absence of sufficient eating facilities in the employer s facility Employee misses meal time during working hours because of their job duties

63 63 Meals Meals will not qualify if They are used to promote goodwill or boost morale Furnished before or after the work period or furnished on non-working days

64 64 On-Premise Athletic Facilities Employee s use of gym or other athletic facility is excludible if Facility is located on the employer s premises Employer operates the facility Substantially all the use of the facility is by employees, spouses or dependents

65 65 Dependent Care Assistance IRC 129 excludes from gross income the costs of dependent care assistance provided by the employer Includes only costs of caring for dependents under age 13 or are disabled that are incurred to enable the employee to be employed

66 66 Dependent Care Assistance (cont d) Maximum amount of exclusion is lesser of $5,000 (or $2,500 if married filing separately); or Lesser of employee s or spouses earned income Assistance can be provided in kind or by cash reimbursement Must have a written plan for the exclusive benefit of employees, eligible employees must be notified of availability and benefits of the plan and the plan cannot be discriminatory

67 67 Dependent Care Assistance (cont d) Report value of dependent care assistance in box 10 of Form W-2 Any taxable amount (e.g., amounts over $5,000) are reported as wages in box 1, 3 and 5

68 68 Adoption Assistance Exclusion from gross income (but not FICA and FUTA) for qualified adoption expenses furnished pursuant to an adoption assistance program

69 69 Adoption Assistance (cont d) Qualified adoption expenses include reasonable and necessary adoption fees, court costs and attorney fees Which are directly related to adoption of a child under age 18 or individual that is physically or mentally incapable of caring for themselves Do not violate Federal or state law Not in connection with surrogate parenting Not for adopting spouse s child

70 70 Adoption Assistance (cont d) Adoption assistance program is separate written plan document Benefits employees but does not discriminate in favor of highly compensated employees Does not pay more than 5% of its payments during the year for shareholders or owners Gives reasonable notice of plan to employees Employees provide substantiation for expenses

71 71 Dollar Limitations Adoption Assistance (cont d) Lesser of actual expenses or $10,000 for all years (indexed for inflation) If the child is a special needs child, limitation is $10,000 (indexed for inflation) without regard to expenses Phase out for taxpayers with AGI between $150,001 and $190,000; not available if AGI exceeds $190,000

72 72 Adoption Assistance (cont d) Payments are not subject to income tax withholding but are subject to FICA withholding and FUTA Report adoption assistance payments for the year in box 12 of Form W-2 Use code T to identify these amounts

73 Withholding and Reporting of Non-Cash Fringe Benefits Employer can choose to withhold and report non-cash fringe benefits on a pay period, quarter, semiannual, annual or other basis Employer can add the value of the fringe benefits to regular wages for a payroll period and figure income tax withholding on the total Alternatively, can withhold according to supplemental wage withholding rules 73

74 Withholding and Reporting on Non-Cash Fringe Benefits (cont d) To estimate amount of income tax withholding and employment taxes, make a reasonable estimate of the value of the fringe benefits on the date employer chooses to treat benefits as paid Determine estimated deposit by figuring the amount of withholding if those benefits were provided in cash; value must be determined no later than January 31 of the following year If the employer pays the employee s share of employment taxes (grossing up the benefit), the employer includes the amount of the gross up as wages 74

75 75 Valuation of Taxable Fringe Benefits General rule is Fair Market Value, not the employer s cost of providing the benefit Special valuation rules for employer provided vehicles, meals and personal use of aircraft

76 76 Withholding on Value of Employer Provided Highway Motor Vehicle Employers do not have to withhold income taxes on employee use of motor vehicle; employer still pays and withholds employment taxes Employer must report this amount in box 14 of the W-2 and notify the employee that the employer is not withholding income tax

77 77 W-2 Reporting Generally employers must report wages (including fringe benefits) to employees on Form W-2 However, taxable wages do not include: Educational Assistance Programs Meals and Lodging provided for the employer s convenience Qualified Scholarships Employee Achievement Awards Qualified Fringe Benefits under IRC 132

78 78 W-2 Reporting If the employer pays taxable fringe benefits, employer reports the amounts in box 1, and in box 3 and 5 as applicable; the employer can also include the value in box 14

79 Form W-2 79

80 80 Supplemental Wages Supplemental wages are payments that are not regular wages and include Bonuses Awards and prizes Taxable Fringe Benefits

81 81 Supplemental Wage Withholding If employer pays supplemental wages with regular wages and does not specify the amount of each, employer withholds federal income tax as if the total were a single payment for a regular payroll period

82 82 Supplemental Wage Withholding If employer pays supplemental wages separately or combines with regular wages and specifies the amount of each and has withheld income tax from the employee in the current year or prior year then: Employer withholds at a flat 25% or Add the supplemental wages to current wages, figure the income tax withholding as if the total were a single payment, subtract the tax withheld from regular wages and withhold the remaining tax from the supplemental wages

83 83 Supplemental Wage Withholding If the employer did not withhold income tax in the current year or prior year then: Add the supplemental wages to current wages, figure the income tax withholding as if the total were a single payment, subtract the tax withheld from regular wages and withhold the remaining tax from the supplemental wages

84 84 Supplemental Wage Withholding If a supplemental wage payment, together with all other supplemental wage payments made to the employee exceed $1 million in the calendar year, the excess is withheld at 39.6% rate

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