Questions from training classes presented to Washington State Public School Districts (Updated June 2001)

Transcription

1 Following are questions raised prior to, during, and after the training on travel and nontravel employee benefits provided by the Internal Revenue Service during June The questions are presented followed by the response from Internal Revenue Service staff. It is our intent to update this page as new questions are asked and responses received. Districts wishing to have questions submitted anonymously should submit them to You may also fax or IRS directly. If you choose to do so we would appreciate a copy of the question and response so that the information may be shared with others. All information will be kept generic and anonymous. Each link below represents a question. Clicking on the title in the index will take you directly to that question. Index Settlement Agreements/Lump Sum Distributions...2 Staff Development...2 Staff Appreciation Items...3 Teacher Reimbursement for Tuition...3 Snacks During a Meeting...3 Meals Provided to Employees...4 Meals with Meetings...4 Employer-Provided Vehicles Recordkeeping...6 Employer-Provided Vehicles...6 Mileage Allowance (Stipend)...7 Mileage Rate...8 Mileage to Place of Work...8 Mileage Between Districts...8 Receipts Hotel...9 "De Minimis"...9 W-4 Withholding...10 Clothing and Tool Allowances...10 Clothing Allowance...11 Cell Phones...11 Moving Expenses...12 Per Diem...12 Tipping...12 TSA Contributions...13 Excess Contributions:

2 Settlement Agreements/Lump Sum Distributions Districts sometimes provide lump sum distributions pursuant to settlement agreements, most often when an employee leaves district employment. These settlements are often $35,000, $50,000 or more. 1. Are these settlement distributions taxable income to the employee? 2. If so, where should they be reported? On the W-2? On a 1099? Which box is appropriate for this purpose? 1. The taxability of the payments depends on the type of settlement agreements. If the agreements were back pay resulting from a legal action, only amounts awarded for physical injuries could qualify for tax-free treatment. Other amounts would be a taxable wage or interest income. If the settlement agreements were actually severance payments, then the amounts received, regardless of the title given them, would be taxable. The only exception could be for teachers with tenure whose contracts are bought out. 2. If payments were back pay received in a legal settlement or severance pay, they would be considered wages subject to federal employment tax withholding and matching employer payments. Payments that were not back pay are reportable on Form W-2 in Boxes 1, 3, and 5. Back pay may have special reporting requirements covered in IRS Publication 957. If any of the amounts received were interest, they would be reported on Form Staff Development What criteria should we use to determine whether employer provided staff development is taxable or not? Would a payment by the company for a college course that qualifies an employee for a higher degree in itself be considered taxable when intended for staff development? Staff development or educational assistance can be provided tax-free to employees under various sections of the Internal Revenue Code (IRC). Each of the code sections has specific requirements in order to be tax-free. For example, under Reg , an employer can provide payment for a college course that qualifies an employee for a higher degree provided the course maintains or improves the employee's job skills or is required by the employer, and is not required to meet minimum job requirements, and the course will not prepare the employee for a new trade or business. Other sections related to educational assistance are IRC 127, Qualified Educational Assistance Program, and IRC 117, Tuition Waivers. 2

3 Staff Appreciation Items Is there a dollar amount set for staff appreciation items? This would be an item of "nominal value" that EACH staff member would get for working during the year. Staff appreciation items would qualify as a tax-free de minimis fringe benefit only if the items were not cash or a cash equivalent (such as, a savings bond or gift certificate), the value was "nominal", and the items were not provided frequently to an individual employee. The law does not set a dollar amount for "nominal" value. In the computation for determining the average cost of awards, Prop. Reg (c)(5) treats awards of $50 or less as nominal. Based on this, it is reasonable to assume that non-cash items not exceeding $50 in value could be considered "nominal" and could be given tax-free to employees. Teacher Reimbursement for Tuition If the classes taken are related to their teaching position, is the tuition reimbursement taxable? Reimbursement for classes that are related to an employee's teaching position are not taxable provided the course maintains or improves the employee's job skills or is required by the employer, is not required to meet minimum job requirements, and the course will not prepare the employee for a new trade or business. Snacks During a Meeting What is an acceptable dollar amount to spend for "snacks/drinks" during a meeting? Sometimes bagels, donuts, chips or candy and or pop and coffee are purchased for the committee or group that is meeting. Is either of the above items taxable? If so, is there a dollar limit that can be spent before a tax must be paid? Refreshments provided at a meeting are tax-free to the employees provided they qualify as a de minimis fringe benefit which means they would have to be of nominal value and not provided frequently or on a regular basis. The snacks mentioned could reasonably assumed to be "nominal" in value. Even a lunch could be provided tax-free if it was provided for the convenience of the employer and was provided on the employer's premises. 3

4 Meals Provided to Employees Our district offers meals to kitchen staff at no cost, right after their shift is over. Is this appropriate? Is this considered a taxable benefit in addition to their regular compensation? Would this need to be written in the bargaining agreement or contract? Meals may be provided to kitchen staff either before, after or during the workday. The value of the meals is not taxable to the employee if it is for the convenience of the employer. No written agreement is required. Meals with Meetings Could you clarify what is needed to permit non-taxable reimbursement for a meal when there is no overnight stay if business is conducted before and after (and often during) the meal? Does it matter if the meal is at the meeting site or somewhere else? What documentation is needed? Is it needed in advance? Sometimes meetings extend longer than anticipated so advance notice is difficult. Meals with meetings may be tax-free if they meet the "directly related" test or "associated with" test. "Directly related" means that the meal and the business meeting are held simultaneously. The meal would have to be at the business site to meet the "directly related" test. "Associated with" means that the meal precedes or follows the business discussion. The meal does not have to be on the business site. There must be a valid business reason for meal. If a group of employees attended an all-day business meeting and went to dinner afterwards, this would not qualify as a tax-free meal unless the employees could prove that there was a valid business purpose for the meal. The employee must substantiate the expense by submitting to the employer a record (such as an expense sheet) that details the cost, date, location, and the business purpose of the meal. Documentary evidence, such as a receipt, cancelled check or bill is required if the meal expense is $75 or more. Advance notice of the meeting or meal expense is not required under the tax laws but districts and agencies may have a requirement. 4

5 Meals with Meetings (continued) What is required to reimburse meals purchased as part of a meeting? When is it taxable? Members of our staff often attend meetings, which include meals, for example, some professional association meetings are held at hotels and include a purchased meal. The presentations begin while the meal is finished. Sometimes professional education credit is available. These meetings provide important information and sharing by those who attend. Is the amount of the meal reimbursable? Is it taxable to the employee? Reimbursements for the meals described would not be taxable to the employee assuming the meetings had a valid business purpose and the employee substantiates the expense. If an employee attending an all-day meeting at which meals are not provided goes to lunch, any reimbursement for the lunch would be taxable assuming the employee is not away from home overnight. I serve on a committee. The meetings begin at 9-10 in the morning and continue until 1-3 in the afternoon. The committee consists of representatives from all over the state. To be most efficient with our time, we often work through lunch. To facilitate this, lunches are brought in by a caterer at a cost of $8-$12. Work continues as we eat. My understanding is that such meals would be non-taxable if provided by a host agency. When the cost is collected from the committee members is the expense of the lunch taxable if reimbursed by their districts to those members who do not spend the night? The meal reimbursement would not be taxable to the employee because it meets the directly related test since the meal and meeting occurred simultaneously. An employee is required to attend a business meeting held at his/her official workstation. The participants work through lunch and the district provides a meal. If the district follows the required administrative procedures, is the meal reportable as taxable income to the IRS? No, the meal was provided in a business setting and the main purpose of the meal was to conduct agency business (employer provides meal due to convenience for the employer.) Our district buys lunch for employees after monthly group meetings. This encourages staff to network and promotes goodwill. Would these meals be taxable to the employees? This would not be a qualified business mean. The value of the meals would be considered taxable to the employees. 5

6 Meals with Meetings (continued) A district official attends a Rotary Club meeting as the representative of the district. The meeting is followed by a dinner for which the district reimburses the official. Is the meal reimbursement taxable? The meal reimbursement meets the associated with business test, and, therefore, qualifies as a non-taxable business meal. Employer-Provided Vehicles Recordkeeping What are the acceptable methods for recording personal use of a company supplied automobile? Can we do a time study for one week and apply to the whole year or are we required to do a time study for one month? What other methodology can we use to establish taxable cost? Unless the employee is using a vehicle that qualifies for one of the safe-harbor substantiation rules, the employee is required to keep record of business and personal use "at or near the time of the expenditure" (Reg A(c)). Examples of records made "at or near the time of the expenditure" include a diary, log, or a monthly expense voucher. A time study for any period would not qualify as a timely kept record. Recordkeeping by employees is not required if the safe-harbor substantiation rules (Reg T(a)) are met for employer vehicles not used for personal use, such as, motor pool vehicles and vehicles not used for personal use other than commuting. Employer-Provided Vehicles We have a contractual staff member that we would like to use a District owned vehicle. At the present time we are paying mileage, by way of increased contract cost, to this person for use of her personal car. We would like her to report to a central location and drive the District vehicle in order to save on costs. Can a contracted person drive a district owned vehicle and, if so, do we have to report in any way the value of the car use to the IRS? Whether or not a contractor is assigned a district owned vehicle is the district's decision. For tax purposes, if the vehicle is used by the contractor exclusively for business, there will be no tax to the contractor. If the contractor uses the vehicle for personal use, such as commuting, the value of the personal use is reported on the contractor's Form No withholding is required. 6

7 Employer-Provided Vehicles (continued) The school district has several vehicles, which are assigned to individuals. They must be available for district use during working hours but the individuals to whom they are assigned may drive them to and from work. Is this taxable to those individuals? How should it be shown? Would the Internal Revenue Service Response be different if personal use were allowed? How much personal use qualifies as "de minimis"? Driving to and from work is personal commuting and the value of the commute is taxable as a wage subject to employment tax withholding and employer matching. The employees are required to keep a record of business and personal use. The value of the commute is determined by using the "general" or "special" valuation rules found in Internal Revenue regulation and in IRS Publication 463, Travel, Entertainment, Gift, and Car Expense. The commuting valuation rule (the "$1.50") rule cannot be used in the situation described because the employees are not required to commute for a valid business reason. Infrequent commuting (not more than one day per month) in an employer vehicle is considered a non-taxable de minimis fringe benefit (Reg (d)(3)). This doesn't mean that an employee can commute tax-free 12 times a year. This rule is available to cover infrequent usage. Mileage Allowance (Stipend) Our superintendent is provided a mileage allowance (stipend) each month. This payment has been made through the voucher system. The district provides a 1099 to the superintendent at year-end so the amount can be reported on his individual 1040 tax return. Is this the correct way to handle this or should the amount be run through the payroll system and all payroll taxes be withheld? Internal Revenue Service Response Stipends should never be put on a 1099, if paid to an employee. To the extent the superintendent provides adequate substantiation for business use of the car, that portion of the stipend would not be taxable. To the extent there is not adequate substantiation, the stipend would be included in the W-2 as if it were part of the superintendent s compensation. If the superintendent provides no substantiation or is not required to provide any, then the entire amount would be included in the W-2. 7

8 Mileage Rate The district reimbursement policies sometimes differ from the federal policies (or amounts). Which should be followed? For example, can the district give a higher mileage rate than the federally allowed amount? Is the "extra" amount taxable? The district can reimburse an employee at a higher mileage rate than the federally allowed amount. The amount exceeding the federal rate is taxable to the employee as a wage. The employer has the option of reimbursing the employee based on actual expense rather than using a mileage rate. If the actual expense method is used, the employee must substantiate the actual expenses. Mileage to Place of Work Some employees return to their school more than one time in a day. For example, a principal may go home at the end of the workday and return in the evening to provide supervision during a school play. Should the district reimburse mileage for the second trip? Would the amount be taxable? Could the return trip be reimbursed as volunteer work? It does not matter how many times someone goes between his/her personal residence and primary place of business, it is still considered a commute. The district can reimburse for the trip, but the reimbursement should be included in the employee s taxable wages. Mileage for charitable work is substantially below the business mileage rate. Doing additional work for your employer is never considered charitable work. Mileage Between Districts Our Speech Therapist is employed by another district. We pay the other district on a service contract. She is reimbursed for mileage from her home to our district. She does not go to the other district first or at any time during the days she works in our district. Currently, the mileage is reimbursed through accounts payable, should this be done through payroll? In this situation, District A pays the therapist as an employee while working for District B. District B pays District A on a contract basis. District B is paying mileage directly through accounts payable. Since this mileage is taxable commuting, District B is responsible for the employment taxes even though not the traditional employer. District B is considered the third party payer for the mileage. District B might want to consider paying the mileage to District A and them include the amount in wages. 8

9 Receipts Hotel If an employee does not provide a receipt for a hotel room per company policy but does provide a visa slip showing expense, should this be taxable to employee? Are there any instances where a reimbursement for travel could be taxable to an employee? If an accountable plan requires a receipt, then failure to provide the receipt should cause the reimbursement to be taxable. Currently, the Internal Revenue Service does not require lodging receipts as long as there is some form of substantiation that shows the person has traveled away from home overnight for a valid business purpose. A VISA slip would verify the location and the amount spent. Examples of taxable travel reimbursements include: reimbursements where the travel is indefinite as compared to temporary; the employee is paid a per diem and is not traveling away from home overnight; the employee is paid a per diem that exceeds the federal rate; the employee does not substantiate travel expenses; the employee does not return excess advances; if reimbursed based on actual costs, the reimbursement exceeds actual substantiated costs "De Minimis" Can you define de minimis? A de minimis fringe benefit is benefit that has a small value and accounting for the item is unreasonable or administratively impractical. Also, the item, even if small in value, can't be provided on a regular basis and qualify as a de minimis fringe benefit. The law does not set a dollar amount for "nominal" value. In the computation for determining the average cost of awards, Prop. Reg (c)(5) treats awards of $50 or less as nominal. Based on this, it is reasonable to assume that non-cash items not exceeding $50 in value could be considered "nominal" or de minimis and could be given tax-free to employees. 9

10 W-4 Withholding Our current payroll software allows employees the ability to have a percentage of their gross wages deducted for the federal withholding amount each month. The W-4 form does not have a box that identifies this percentage method. If it is acceptable for employers to continue using this percentage method, how would an employee identify properly on their W-4 form that they wish to have a percentage taken out? There is no special place on the Form W-4 to request a specific percentage for withholding. The employer has the option to withhold using the wage bracket tables or the percentage withholding tables. The tables are based on the marital status and the number of allowances. You cannot just claim a percentage for a method of withholding. You must use marital status and the number of allowances on the Form W-4. Clothing and Tool Allowances Through the collective bargaining agreements, the district provides clothing and tool allowances to some classes of employees (e.g. cooks and maintenance workers). Are these allowances taxable? Are receipts required to show the amount provided was actually spent on the intended items? If receipts are provided, does that change the taxable status of the allowance? Where should this be reported? The clothing must first meet the basic requirements in order to be tax-free: the clothing must be required by the employer, cannot be adapted to general wear and cannot be used for general wear; or the clothing must be protective (such as safety shoes). If the clothing meets these requirements and the employee provides adequate substantiation for the amount spent, then the allowance would not be taxable. Any excess allowance over the amount substantiated would be taxable. If any amount is taxable, it would be included in the employee s W-2. A tool allowance must meet the accountable plan rules, i.e. must be job related, substantiation must be required and any excess allowance must be returned in order to be a tax-free allowance. 10

11 Clothing Allowance Our teamsters are given $150-$200 a year for uniforms per their contract. These are non taxable, as the district logo is on them BUT the uniform in most cases is very nice t-shirt, polo shirts or jackets can than be worn anywhere, anytime (personal). Is this still non-taxable? Where is the line between personal (taxable) and non-taxable fringe benefit drawn? Are the uniforms required by the employer? If not, then the allowance would be taxable to the employees, regardless of what the contract requires. In addition, the employee must still provide adequate substantiation of the clothing cost. Any excess that was not substantiated or returned would be taxable to the employee. There must be a business reason for having the district logo on the clothing, such as identification for security reasons or for advertising, in order for the clothing to be considered tax-free. If there is a valid business reason for the logo, the clothing could be provided tax-free. Cell Phones The district owns cell phones used by administrators. The district pays monthly bills. There is no breakdown of business vs personal calls. Should all calls be considered personal? Should these be considered taxable benefits? If so, how much is taxable, a portion or all? If the calls require documentation, how do you suggest this be done to meet audit requirements and not unduly burden the administrators? Cell phones are considered listed property and, as such, employees should be required to track personal use. If the District is being billed by the usage, then the monthly statement would identify the number called and the duration of the call. The employee should be able to review the billing and identify what was business and what was personal. If the phone is used for less than 50% business, then the entire cost for the use of the phone would taxable to the employee. If there is a monthly flat rate, where there are no additional charges based on usage then there would be no income to the employee (assuming the business use test is met). 11

12 Moving Expenses Direct from contract: The District agrees to reimburse the Superintendent for reasonable moving expenses for a single move, not to exceed $4, incurred in moving himself to a location within the district. The Superintendent agrees to obtain three bids and to contract with the moving company submitting the lowest bid. The Superintendent agrees to provide the district with receipts and necessary documentation to support the expenses incurred. The first step is to determine whether the move meets the distance test. The move must be at least 50 miles farther from the employee's home than his old job was from his former home. If the employee meets the distance test, the reimbursement must be made under an accountable plan to be tax-free; that is, the employee must substantiate the expenses and be required to return any excess allowance. If the employee meets the distance test and reimbursements are made under an accountable plan, there are various expenses which may be reimbursed tax-free. I recommend that you refer to IRS Publication 521 for details. Per Diem May per diem be used for meals when the employee is not in travel status? No, per diems can only be used for travel away from home, which means away from tax home. Tipping Could you provide guidance on what is considered reasonable when tipping for cab fares, shoe shines, laundry, meals (including room service) and hotels while on a business trip? For people in travel status, the tip would be considered as part of the meal and the employee would only be reimbursed to the extent of the per diem rate for the locality. If an employee is reimbursed actual expense, tipping may be reimbursed to the employee tax-free. If an employee is reimbursed using a per diem method, tips are included as part of the meals and incidental expenses (M&IE). This would include meals and tips for cabbies and luggage handlers.. Therefore, if an employee is reimbursed for tips in addition to the per diem, the tip reimbursement would be taxable to the employee. See Rev. Proc for reference. Tips for haircuts, shoeshines, etc. would be considered strictly personal and would not be reimbursable. 12

13 TSA Contributions We have been notified by an employee s TSA agent that the employee has over contributed to her TSA in The check is being sent directly to us. We will not receive it until January In the past, when an employee s contributions have been refunded to the district, it has been because the account was closed or the employee has made a hardship withdrawal and should not have been making contributions. The ten adjusted for taxes, paying the net to the employee and the taxes to the IRS. These have all occurred during the same tax year. Is this correct in when years are crossed, also? The distribution is taxable in the year received (i.e 2001). The TSA vendor will probably issue a 1099R for If the check was made payable to the participant and given to him/her there would be no effect on the employer s payroll. Excess Contributions: In November of each year, letters go out to all employees asking them whether they would like a draw or advance on their salaries prior to winter break. What this means is that the advance paid out in December is taxed in the following year. What issues/problems would the IRS see in this procedure? A draw or advance is considered a wage (and taxable) when paid or advanced to the employee unless the amount is a legitimate loan. In order to be a loan, there should be a loan agreement or some other written instrument to show the amount is a loan and not an advance or draw. 13