THE COMPLEXITIES OF BENEFITS TAXATION

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1 THE COMPLEXITIES OF BENEFITS TAXATION Presented by Brenda JM Sabin, CBP Key Concepts, LLC

2 WHAT ARE FRINGE BENEFITS Items of value given/offered to employees that have a fair market value to them FMV = the price the employee would pay on his/her own for that benefit arms length transactions terminology from IRS

3 BENEFITS - TAXES Health insurance Pre-tax for Fed, State and OASDI Section 125 of the IRC - _sup_01_26_10_a.html Legal dependents Federal definition and State definitions may vary. VT and NH - civil unions

4 RETIREMENT Non taxable if payroll deducted Taxable for OASDI and Medicare Employer must have written plan Watch for plan document rules What is the definition of compensation How often can employee change deferrals

5 OTHER BENEFITS Relocation Initial Test Time, Distance Deductibility Test Two distinct non-taxable, qualified reimbursements Moving of oneself and family Moving of household goods and personal items Meals? >>>>> Lodging? Always taxable Mileage -19 cents per mile Scenario.

6 OTHER BENEFITS Tuition Reimbursement Written plan document Not favor highly compensated Must be tested each year IRS allowed maximum for a calendar year $5,250 Books, tuition, fees NOT parking, transportation, housing or tangible items required

7 PARKING TRANSIT - BIKES Exclusion from wages - (note these numbers are being discussed in Congress now) $120 per month for combined commuter highway vehicle transportation and transit passes. $230 per month for qualified parking For a calendar year, $20 multiplied by the number of qualified bicycle commuting months during that year for qualified bicycle commuting reimbursement of expenses incurred during the year. Must have plan document Not favor highly compensated

8 GROUP TERM LIFE INSURANCE Age Cost Under $.05 through $ through $ through $ through $ through $ through $ through $ through $ through $ and older $ 2.06

9 GROUP TERM LIFE INSURANCE Imputed income for amounts over $50,000 Take value of insurance $120,000 Less allowed amount $ 50,000 Amt to calculate imputed inc $70,000 Divide by units Find employees age and amount (using age 45) Amount is.15 per unit X 70 units $10.50 That is taxable amount for each MONTH

10 MILEAGE REIMBURSEMENTS Use of personal car being reimbursed by company Companies can choose to reimburse any amount they want The amount set by the IRS is the amount allowed to be reimbursed on a non-taxable basis Current Jan June 30 th 51 cents per mile July 1 Dec 31 st 55.5 cents per mile Car Allowances Non accountable plan - taxable

11 Personal Use of Company Vehicles Annual lease value method Cents per mile method Commuting use method 100 percent personal use method

12 Business Expense Reimbursements Travel Expenses Non taxable if under an accountable plan Accountable Plan Must be in writing Show a business connection Must have receipts or return of excess amounts Non-Accountable Elements Mileage reimbursement up to 58.5cents per mile Per Diem (IRS has a chart every year)** De Minimus amounts ** Note the per diem chart may go away discussions happening now

13 PRIZES - AWARDS - BONUSES Merchandise prizes Depends --- was it performance driven? Example gift certificate to a restaurant for a job well done Discounts on Employer goods Non taxable UNLESS the product is sold at less than cost the difference is taxable Cash prizes ALWAYS taxable

14 ACHIEVEMENT AWARDS Special Tax Rules not taxed if: Tangible property (not cash) that is awarded in recognition of a worker s length of service or safety accomplishments. (5 year increments) Award must be given in a meaningful presentation. The annual dollar limit on qualified plan awards to an individual employee is $1,600 per year. A lower limit of $400 per year applies to awards made under a program that is not qualified.

15 SAFETY AWARDS Only 10% of employees each year No management clerical workers FT employees with a minimum of 1 year employment Presented in a meaningful presentation

16 SUPPLEMENTAL WAGES AND TAXATION Supplemental flat tax rates Federal 25% State VT 7.2% Aggregate Method Flat Rate Supplemental Wages: bonuses prizes and awards commissions Back pay awards retroactive pay overtime pay severance or dismissal pay payments for unused annual leave tips payments for working during vacation reimbursements for nonqualified moving expenses reimbursements for business expenses under a nonaccountable plan.

17 SUPPLEMENTAL WAGES TAX CALCULATIONS If wages are combined in one check and NOT clearly indicated then withhold at W4 exemption. 17 If wages are combined in one check and ARE clearly indicated OR paid in a separate check you have two choices: the flat rate of 25% for the portion of pay that is supplemental wages Aggregate method combine payments calculate withholding as one payment, subtract the tax on the regular wages and deduct remainder from supplemental wages

18 EXAMPLE Joe s paycheck shows: Regular pay $1,000 Bonus $ 500 Total $1,500 You tax the $1,000 at his W4 withholding and tax the $500 at the flat rate of 25% OR. You tax the entire $1,500 at his W4 withholding Then you calculate what the tax would have been on just the $1,000 and take the difference out of the $500.

19 SUPPLEMENTAL WAGES TAX CALCULATIONS If there is no withholding on regular pay (due to W4 exemptions) then you must use the aggregate method: Combine the total of pay (supp wages and reg wages) calculate the total taxes due with the W4 withholding and subtract that amount from the supplemental wages

20 SUPPLEMENTAL WAGES TAX CALCULATIONS If an employee claims EXEMPT then all supplemental wages are exempt as well. Things to think about: This is the EmployER s choice! Not the employee s Be consistent do not make exceptions to your policies Setting up the earning code to always tax at the flat rate on supplemental wages has it s own problems (ie: exempt or too many withholdings)

21 OTHER ITEMS Stock purchase plans Stock options Housing/lodging on employers premises Athletic facilities on and off premises The list could go on and on Get IRS Publications 15 (Circ E) Employers Guide 15A Additional Wages 15B Fringe Benefits

22 THANK YOU Brenda JM Sabin, CBP Key Concepts, LLC (tab for businesses) Follow me on Facebook! Key Concepts, LLC - Training for Human Resource and Payroll Professionals