A Comprehensive Look at Payroll Practices. November 14, 2013

Transcription

1 A Comprehensive Look at Payroll Practices November 14, 2013

2 Exciting Tax News Supreme Court Rulings Ramifications Healthcare, Healthcare, Healthcare A Comprehensive Look at Payroll Practices State Specific Telecommuting Considerations Reciprocity The Payroll Process Combatting Fraud Internal Reconciliation and Preparation Unclaimed Property Other Items to Keep on the Radar Year End Preparation Questions & Answers, Comments, Complaints 2

3 Why I Am Here I have over 7 years payroll operations experience and over 15 years of transaction processing experience Managing Partner of Howard Simon & Associates we specialize in providing: Retirement Planning Services Human Capital Technology Payroll Services Not a CPA not a certified payroll professional - my degrees are in computer science and business focus is on technology and operations 3

4 U.S. Versus Windsor A same-sex couple Edith Windsor and Thea Spyer were married in Canada and resided in New York. Spyer died in 2009 leaving her state to Windsor. The IRS forced Windsor to pay $363,053 in estate taxes even though Windsor sought to claim the federal estate tax exemption for surviving spouses the IRS ruled that under DOMA same sex marriages did not apply. So she took the government to court and won: Issued on June 26, 2013 Effective July 21, 2013 Section 3 of DOMA is unconstitutional Section 2 of DOMA was not addressed 4

5 Supreme Court and DOMA The IRS will recognize the validity of a same-sex marriage if valid in the state entered into, even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages. You will hear the terms Place of Celebration versus Place of Domicile State means any domestic or foreign jurisdiction having legal authority to sanction marriages. Registered domestic partnerships and Civil Unions are not covered if the state law does not recognize them as a marriage. 5

6 Minnesota Marriage Equality States Connecticut Delaware Iowa Maine Rhode Island Maryland Vermont Massachusetts Minnesota New Hampshire New Jersey New York New Jersey Washington Washington, D.C. 6

7 Impact on Payroll W4s may need to be modified states relying on the Federal W4 but do not recognize same sex marriages will need to have a state specific W4. 401(k) plans and beneficiary forms may need to be modified and amendments are required to allow for same sex spouses. Under DOMA health insurance coverage for a same-sex spouse created taxable wage and precluded pre-tax deferrals Salary reduction contributions to cafeteria plans and FSA/HSA/HRA were also similarly impacted Sooooooooo 7

8 Impact on Payroll W4s may need to be modified states relying on the Federal W4 but do not recognize same sex marriages will need to have a state specific W4. A 941x will need to be filed and a corrected W2 to the employee. For 2013 make the adjustment to payroll and IRS refunds will cover over withheld taxes. Notice allows employers to use the fourth-quarter Form 941 to correct all of 2013 For 2010, 2011, and a 941x may be filed to correct for the overpayment of FICA taxes the IRS has stated that a single 941x for the 4 th quarter may be filed instead of having to file for all 4 quarters. IRS has said it will allow but not require same-sex married spouses to file amended returns. There may be a conflict between employers wanting to get the FICA credit and employee s not wanting to. Plus, in certain situations employers did a gross-up to compensate employee s for this additional cost, it is a mess Of course this is all to be determined the IRS has an FAQ page: Couples 8

9 Healthcare, Healthcare, Healthcare 9

10 Employer Healthcare Coverage on Form W-2 Informational reporting to employees of the cost of their employer-sponsored group health plan coverage. This informational reporting is required under 6051(a)(14) of the IRS Code, enacted as part of the Affordable Care Act to provide useful and comparable consumer information to employees on the cost of their health care coverage. This regulation took effect for 2012 and forms W-2 This reporting to employees is for their information only, to inform them of the cost of their health care coverage, and does not cause excludable employer-provided health care coverage to become taxable. Currently, smaller employers that are required to file fewer than 250 Forms W-2 will not be required to report the cost of health coverage this is pending IRS guidance. No guidance has been issued for

11 Employer Healthcare Coverage on Form W-2: Specifications The aggregate reportable cost is reported on Form W-2 in box 12, using code DD. An employer may apply any reasonable method of reporting the cost of coverage provided under a group health plan for an employee who terminated employment during the calendar year, provided that the method is used consistently for all employees receiving coverage under that plan who terminate employment during the plan year. The aggregate cost of applicable employer-sponsored coverage is the total cost of coverage under all applicable employer-sponsored coverage provided to the employee. Interim Guidance: 11

12 Full Time Employees Full Time Equivalents Part Time Under the Affordable Care Act employers with over 50 full-time equivalent (FTE) employees must provide affordable, adequate health insurance for full-time employees and dependents. These provisions are scheduled to take effect on January 1, Two key calculations 1. Full Time Employee is an individual working on average over 30+ hours a week 2. Full Time Equivalent can be comprised of multiple employees (i.e. 2 employees working 15 hours a week equals 1 FTE) If you are making judgments in regards to your status of 50 FTE or an employees status as a full time employee we highly recommend you have a reliable and secure method of recording and reporting time Small employers who have less than 25 FTEs may be eligible for a tax credit if they offer insurance to their employees 12

13 Health Flexible Spending Accounts Starting in 2013 there is a $2500 limit for the plan year All plans need to be updated by the end of calendar year 2014 See IRS Guidance at: 13

14 Employee Social Security New Medicare Tax Employee Social Security is currently at 4.2% for 2012 waiting on Congress to see if this is extended, if not it will get back up to 6.2% 2013 wage limit recently announced is: $113,700 Employee Additional Medicare Individuals making more than $200,000 in wage income next year ($250,000 for couples) would see their Medicare payroll tax on amounts above these levels rise to 2.35 percent from 1.45 percent. Medicare-Tax 14

15 Who is liable for the tax? New Medicare Tax An individual is liable for the Additional Medicare tax if the individual s wages, other compensation, or self-employment income exceeds the threshold amount for the individual s filing status Married 250K and Single 200K All excess wages are subject to this tax above the threshold amount The statute requires an employer to withhold Additional Medicare tax on wages or compensation it pays to an employee in excess of $200,000 There is no employer match on this component 15

16 Unclaimed Property - Escheat Abandonment of an uncashed or unclaimed paycheck No uniformity among the states on the handling of this Review before remit 1. Is it a current employee 2. Are there voided checks 3. Are there any other possible errors Obviously make every attempt to contact the employee record and document your every move If you can t each state has their own definition of what the abandonment period is and how to handle it. 16

17 Illinois Escheat Rules Abandonment period has changed from 5 years to 1 year Claims can now be made online at and filed by November 1. Must send a Due Diligence letter prior to escheating requirement for all states send it to last known address Get everyone on direct deposit so you don t need to worry about this!!! 17

18 State Specific Tax Issues 18

19 FUTA Credit Reduction Credit reduction states are states that did not repay the money they borrowed from the Federal government to pay unemployment benefits. Employers must include liabilities owed for credit reduction in calculating their fourth quarter FUTA deposit. List of credit reduction states is published after the Nov. 10 th deadline 18 states were on the list last year + Virgin Islands Check the Department of Labor website for the current list, projections, and more information Amount depends on how long your state is on the list,.3% for the first years,.6% 2 nd, etc. (.3% is $21 per employee) 19

20 Considerations 1. Residency Out of State Workers 2. Location of services performed watch out for telecommuters 3. Nexus Business connection for the employer considerations include: business location, sales transactions, or employees performing services. Differs from state-to-state 4. Reciprocity agreements 5. Unemployment Insurance 20

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22 Lives In Wisconsin Works in Illinois Wisconsin Residents are not subject to IL income tax Neither are Iowa, Kentucky, or Michigan Must complete Form IL-W-5NR Company can do Courtesy withholding for Wisconsin employees HS&A suggests consultation with tax and legal advisors first by registering and filing in another state you may create Nexus 22

23 Lives In Indiana Works in Illinois Indiana Residents are subject to IL income tax and IN income tax (no reciprocity in place) IL tax must be withheld IL tax is currently higher than IN tax, so only IL withholding is done If IL taxes ever go lower than IN taxes both IL and IN taxes would be withheld Employees would file returns with both states 23

24 Lives In Illinois Works in Indiana Now an issue for employees because IL taxes are higher than IN Now the employee has the following options: Make estimated payments to IL Increase IN withholding Company can do courtesy withholding but they would need to register in IL Employees would file returns with both states 24

25 Telecommuters If they perform services in their home state nexus is established and you need to withhold in that location and may have to pay corporate taxes in that location SUI obligations would be paid to that state If they split time between their home and the office then the state tax withholding would be proportionately split as well 25

26 The Payroll Process 26

27 Payroll 53 Wednesdays Calendar Notes Holidays: Be careful and plan for delivery to be delayed especially if you have a Tuesday checkdate and there is a Monday holiday. Federal Reserve Holidays: Your Direct Deposits will not settle on a Federal Reserve holiday! is NOT a Standard Calendar Year: Number of Each Day: Monday 52 Tuesdays 52 Wednesdays 53 Thursdays 52 Fridays 52 27

28 How Does This Happen? There are days per year 53 Wednesdays (Every 4 years we have the leap year to account for the.25) There are 52 weeks/year There are 364 Days in 52 weeks, leaving 1.25 odd days each year ( ) 14/1.25 = 11.2 So roughly every 11 years a Bi-Weekly Payroll will have 27 payrolls. (Every 5-6 years for a weekly) 53 Thursdays in Fridays in

29 Considerations 53 Wednesdays Annual salary employees Your options Let it go but watch out from a budget standpoint you will have an extra pay period Modify the per payroll amount to divide it by 27 pay periods instead of 26 Deductions Be sure to look at all of the bi-weekly deductions such as insurance and if you are breaking up on a per payroll basis be sure to consider the 27 pay periods in these calculations 29

30 Internal Reconciliation and Preparation 30

31 Combatting Fraud Unfortunately it happens you have to pay attention to what is going on with your payroll. Simple checks and balances go a long way Control Reports to review payroll Variance +/- $xxxxx New Employees on the payroll Terminated employees on the payroll Direct deposit changes on the payroll Run an executive payroll where the payroll administration is separate than the primary payroll. 31

32 Error Prevention Is Key to Success Even if you have third party administrators or outsourced services, the IRS says you cannot delegate your tax responsibility! It is easier (and cheaper) to get it right the first time, than to correct it after payroll has been processed Payroll errors hurt employee morale 32

33 Common Mistakes Ways To Fix Them Manual Input if you have a 99.9% success 1 out of 1000 inputs will be wrong Employee s fill out forms or timesheets that do not make any sense You receive information too late and the payroll has already been processed 33

34 Common Mistakes Ways To Fix Them Have a process to check everything If you can t automate have a manual process have a co-worker or someone else verify the input. Use a Manual Change Form for tracking of these changes or some other paper trail Sanity Checks Human Capital Management Systems 34 Change Logs

35 Common Mistakes Ways To Fix Them Import time if possible Use spreadsheets or time systems Verify totals sounds obvious but do it! Anticipate problems holidays, vacation issues, etc. Use Variance Reporting tools 35

36 Common Mistakes Ways To Fix Them What about when employee s submit information after payroll is submitted.. There is no solution to this 36

37 Anticipate Problems Know There is Going to Be an Issue Change in a policy such as overtime or PTO Starting to do business in a new state Change in systems or procedures Running a bonus or second payroll 37

38 Year End Considerations PLAN EVEYRTHING IN ADVANCE!!! Plan Additional Payroll Check Dates In Advance Schedule additional checks well in advance so you do not run into tax and compliance issues. Additionally, your service providers will be busy, so advanced scheduling will facilitate a smooth process. Enter Year End Adjustments in Advance There is a lot going on at year end, the more you take care of in advance, the better off you are. Supplemental Payments Supplemental Payments should be taxed at the supplemental rate (more on this coming up) Federal Tax Liability In Excess of $100,000 Exceeding $100,000 of Federal tax liability in any deposit period automatically triggers a next day due date. Beware about multiple check date liability issues! 38

39 100K Tax Liability Monday Tuesday Wednesday Thursday Friday 1 st payroll processed liability of 70K 2% liability for late deposit or 2,400!! 2 nd Bonus Payroll Processed with Federal liability of 50K All taxes due today because liability is over 100K Typical Due Date is following Wednesday 39

40 Supplemental Payments Definition Supplemental wages are wage payments to an employee that are not regular wages. These include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for non-deductible moving expenses. Withholding Options 25% Added to regular wages in the period paid Supplemental Wages in Excess of $1,000,000 When supplemental wages for the calendar year exceed $1,000,000, the excess is subject to withholding at 39.6%. State Regulations Be sure to verify the applicable state regulations, as they may differ from Federal. 401k Most supplemental payments ARE subject to 401k, unless excluded by the document. Check with your provider. 40

41 Quick Word on 401(k) Plans We have been seeing an uptick in IRS 401(k) audits and during these audits an increased focus on the following areas Timely Deposits Per the Department of Labor regulations, all plan contributions and loan repayments which have been deducted from the participants must be deposited the earlier of: 1. Earliest date which the contributions and loan repayments can be reasonably segregated from the employer s assets 2. The seventh business day following the end of the payroll period Plan Loans watch out for: 1. Loan Limits 2. Timely deposits 3. Level amortization 4. Loan delinquencies if there is an error correct immediately Definition of Plan Compensation this is the #1 error with 401(k) plans according to the IRS IRS looks carefully at the plan definition of compensation and compares it to the client s official payroll reports (from the payroll vendor or the client s own software, as applicable) and W-2s. I The IRS is looking at things like taxable fringe benefits, bonuses, inclusion or exclusion of elective deferrals, inclusion of self-employed health insurance premiums, etc. 41

42 Quick Word on 401(k) Plans We have been seeing an uptick in IRS 401(k) audits and during these audits an increased focus on the following areas Safe Harbor Notices Make sure that the plan is in compliance. Safe Harbor notices need to go out. If you miss the notice date send them out immediately then contact your TPA for guidance. Notices are due days from the beginning of each plan year so if your plan is on the calendar year they are due out by Dec 1. The notice must contain the following items: SH formula (match or nonelective) Other contributions or potential contributions Plan SH contribution made (if employer sponsors another plan) Compensation that may be deferred (type and amount) How to make deferral elections Periods available to make deferrals Vesting and withdrawal provisions of all sources of funds How to obtain other plan information 42

43 Record Retention We recommend 7 years due to various state requirements. However, the IRS Recommendation is to: Keep all records of employment taxes for at least 4 years. These should be available for IRS review. Your records should include: Your employer identification number (EIN), Amounts and dates of all wage, annuity, and pension payments, Amounts of tips reported to you by your employees, Records of allocated tips, The fair market value of in-kind wages paid, Names, addresses, social security numbers, and occupations of employees and recipients, Any employee copies of Forms W-2 and W-2c returned to you as undeliverable, Dates of employment for each employee, Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third-party payers made to them, Copies of employees' and recipients' income tax withholding allowance certificates (Forms W-4, W-4P, W- 4(SP), W-4S, and W-4V), Copies of employees' Earned Income Credit Advance Payment Certificates (Forms W-5 and W-5(SP)), Dates and amounts of tax deposits you made and acknowledgment numbers for deposits made by EFTPS, Copies of returns filed and confirmation numbers, and Records of fringe benefits and expense reimbursements provided to your employees, including substantiation. 43

44 Reconcile: Individual Payroll W-2s You must reconcile your individual payrolls to your forms W-2. Skipping steps leaves room for error. Adjustments and accumulators can cause discrepancies. Don t skip steps. Payroll Year-To-Date Reports Year-To-Date Reports Tax Returns (Q1, Q2, Q3, Q4) Tax Returns (Q1, Q2, Q3, Q4 ) Control Totals for W-2s Control Totals for W-2s (Box 1) Gross Payroll 44

45 Duplicate W2 Request Employers must stamp reissued on W2 requests IRS requires the new copy to have reissued statement noted on it. This applies to copies of paper forms or retyped statements, and paper copies of electronic forms. If the original form was issued electronically and the duplicate will also be issued electronically, the payroll department does not have to insert reissued statement on the form Employers can charge a fee for additional W2 requests 45

46 Group Term Life Calculation (P15B) Many software packages have problems with the GTL calculation. Create a spreadsheet to verify the GTL amount. Group Term Life: Name Hire Date Birthday Total Coverage LOS Age Excess Coverage Multiple Monthly GTL WAGES Person 1 5/1/2011 1/1/ , , ,263 Other Person 1/1/2000 5/1/ , , The Thrid Person 1/1/1998 8/1/1978 2,650, ,600, ,496 The 10-Employee Rule Generally, life insurance is not groupterm life insurance unless you provide it to at least 10 full-time employees at some time during the year *For all coverage provided within the calendar year, use the employee s age on the last day of the employee s tax year. You must prorate the cost from the table if less than a full month of coverage is involved. 46.

47 Independent Contractor vs. Employee From the IRS: It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. Avoid issuing a 1099 and a W-2 to the same employee in the same year. If transitioning a current employee from a W-2 to a 1099, begin on 1/1/20xx. When in doubt, issue a W-2. 47

48 Independent Contractor vs. Employee Determination Factors Behavioral Does the company control or have the right to control what the worker does and how the worker does his or her job? Financial Are the business aspects of the worker s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Type of Relationship Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? Need Help? Complete an SS-8 and the IRS will make a determination for you. 48

49 Independent Contractor vs. Employee Erroneous Classifications The IRS has a Voluntary Correction Program: IR , Sept. 21, 2011 WASHINGTON The Internal Revenue Service today launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers. 49

50 Common Error: FLSA Regular Rate of Pay When computing overtime, you must use the Regular Rate of Pay when calculating the overtime premium portion of pay. Exempt/Nonexempt: There is typically no issue when computing overtime for employees that are paid at a single rate and do not receive any additional income or payments other than their hourly pay. Non-Exempt employees that receive pay at multiple rates or additional amounts require special calculations. The Regular Rate Of Pay is the total pay received for the period divided by the total hours worked. 50

51 Common Error: FLSA Regular Rate of Pay Example Regular Rate of Pay Example Data Wages Overtime Premium Total Hours 48 $9.21 *.5 $4.61 Hourly Rate $9.00 Overtime Due: $4.61 * 8 $36.88 Bonus Paid $10.00 Regular Pay Calculation Total Pay 48 Hours * $9.00 $ Regular Earnings $ Bonus $10.00 Overtime Earnings $36.88 Total Regular Earnings $ Total $ Regular Rate Of Pay $442 / 48 Hours $

52 From the IRS: 3 rd Party Sick Pay Employer. If you pay sick pay to your employee, you must generally withhold employee social security and Medicare taxes from the sick pay. You must timely deposit employee and employer social security and Medicare taxes and FUTA tax. There are no special deposit rules for sick pay. See section 11 of Publication 15 (Circular E) for more information on the deposit rules. Does not need to be reported by the sick pay provider until January 15 th which results in: Late payments require an IRS response Delay in annual filings and W2 delivery Contact your provider now! Get your reporting and know when to expect your year end package. Clearly identify who is issuing the forms W-2 and remitting the employer taxes. 52 Long Term Pay: Payments after 6 months absence from work. Social security, Medicare, and FUTA taxes do not apply to sick pay paid more than 6 calendar months after the last calendar month in which the employee worked.

53 Sub-S Medical Medical Insurance Premiums treated as wages. The health and accident insurance premiums paid on behalf of the greater than 2% S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employee s Form W-2. They are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. Therefore, this additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2. A 2% shareholder-employee is eligible for an AGI deduction for amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation. Previously, established by the S corporation meant that the medical care coverage had to be in the name of the S corporation. 53

54 Fringe Benefits All fringe benefits have a high degree of complexity associated with them. The listing included in this presentation is intended to be a reference guide. When computing actual fringe benefits, please consult your tax professional. This section is not intended to be all inclusive. The majority of the information in this section is taken directly from the forms and publications referenced. 54

55 Summary Items from Publication 15-B: De Minimis (Minimal) Benefits You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. A de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable. Cash and cash equivalent fringe benefits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit, except for occasional meal money or transportation fare. An example of a de minimis benefit would be the occasional personal use of a company copying machine if you sufficiently control its use so that at least 85% of its use is for business purposes Educational Assistance This exclusion applies to educational assistance you provide to employees under an educational assistance program. The exclusion also applies to graduate level courses. Employee Discounts Fringe Benefits: Less Common (P15B) This exclusion applies to a price reduction you give an employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. However, it does not apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds). 55

56 Achievement Awards (P15B) Exclusion from Wages You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost is not more than the amount you can deduct as a business expense for the year. Deduction Limit Your deduction for the cost of employee achievement awards given to any one employee during the tax year is limited to the following: $400 for awards that are not qualified plan awards $1,600 for all awards, whether or not qualified plan awards A qualified plan award is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. A highly compensated employee is an employee who meets either of the following tests. The employee was a 5% owner at any time during the year or the preceding year. The employee received more than $110,000 in pay for the preceding year. See chapter 2 of Publication 535 for more information about the limit on deductions for employee achievement awards. 56

57 Transportation (Commuting) Benefits: Qualified (P15B) Qualified transportation benefits can be provided directly by you or through a bona fide reimbursement arrangement. This exclusion applies to the following benefits. A ride in a commuter highway vehicle between the employee's home and work place. A transit pass Cash reimbursements for transit passes qualify only if a voucher or a similar item that the employee can exchange only for a transit pass is not readily available for direct distribution by you to your employee. Qualified parking Qualified bicycle commuting reimbursement. 57

58 Business Use of Employee-Owned Vehicle If using your personal car for business purposes, you ordinarily can deduct car expenses. Important: To be treated as an expense reimbursement, the reimbursement must be provided under an accountable plan To be an accountable plan; Your expenses must have a business connection You must adequately account for the expenses You must return any excess reimbursement or allowance with a reasonable period of time 2012 Mileage Rates: Purpose Rates 1/1 through 12/31/11 Rates 1/1 through 12/31/131 Business 55.5 TBD Medical/Moving 23 TBD Charitable 14 TBD 58

59 Personal Use of Business-Owned Vehicle If you provide a car for an employee's use, the amount you can exclude as a working condition benefit is the amount that would be allowable as a deductible business expense if the employee paid for its use. If the employee uses the car for both business and personal use, the value of the working condition benefit is the part determined to be for business use of the vehicle. See Publication 535 for more details: Generally, you may include; Actual Expense Miles * Applicable Mileage Rate However, instead of excluding the value of the working condition benefit, you can include the entire annual lease value of the car in the employee's wages. The employee can then claim any deductible business expense for the car as an itemized deduction on his or her personal income tax return. This option is available only if you use the lease value rule to value the benefit. 59

60 Publication 521 explains the deduction of certain expenses of moving to a new home because you changed job locations or started a new job. You can deduct your moving expenses if you meet all three of the following requirements. Your move is closely related to the start of work. You can generally consider moving expenses incurred within 1 year of the date you first reported to work at the new location You meet the distance test. Your new main job location is at least 50 miles further from your former home than your old main job location was from your former home You meet the time test. Moving Expenses You must work full time for at least 39 weeks during the first 12 months after you arrive More information can be found at: 60

61 Summary of Fringe Benefits(P15B) Table 2-1. Special Rules for Various Types of Fringe Benefits Treatment Under Employment Taxes Type of Fringe Benefit Income Exempt1,2, Tax Withholding except for long-term care benefits Social Exempt, Security except and for Medicare certain payments to S Federal Unemployment (FUTA) provided through a flexible spending or similar corporation employees who are 2% Accident and health benefits arrangement. shareholders. Exempt Achievement awards Exempt1 up to $1,600 for qualified plan awards ($400 for nonqualified awards). Adoption assistance Exempt1,3 Taxable Taxable Athletic facilities De minimis (minimal) benefits Exempt Exempt Exempt Dependent care assistance Educational assistance Employee discounts Employee stock options Group-term life insurance coverage Health savings accounts (HSAs) Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent children and the facility is operated by the employer on premises owned or leased by the employer. Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return). Exempt up to $5,250 of benefits each year. (See Educational Assistance, later.) Exempt3 up to certain limits. (See Employee Discounts, later.) See Employee Stock Options, later. Exempt Exempt1,4 up to cost of $50,000 of coverage. (Special rules apply to former employees.) Exempt Exempt for qualified individuals up to the HSA contribution limits. (See Health Savings Accounts, later.) 61

62 Summary Continued (P15B) Table 2-1. Special Rules for Various Types of Fringe Benefits Type of Fringe Benefit Income Tax Withholding Social Security and Medicare Federal Unemployment (FUTA) Lodging on your business premises Meals Moving expense reimbursements No-additional-cost services Exempt3 Exempt3 Exempt3 Retirement planning Services Exempt5 Exempt5 Exempt5 Transportation (commuting) benefits Tuition reduction Exempt3 if for undergraduate education (or graduate education if the employee performs teaching or research activities). Volunteer firefighter and emergency medical responder benefits Exempt Exempt Exempt Working condition benefits Exempt Exempt Exempt 1 Exemption does not apply to S corporation employees who are 2% shareholders. Exempt1 if furnished for your convenience as a condition of employment. 2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees. 3 Exemption does not apply to certain highly compensated employees under a program that favors those employees. 4 Exemption does not apply to certain key employees under a plan that favors those employees. Exempt if furnished on your business premises for your convenience. Exempt if de minimis. Exempt1 if expenses would be deductible if the employee had paid them. Exempt1 up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($120, but see the Caution on page 1), qualified parking ($230), or qualified bicycle commuting reimbursement6 ($20). (See Transportation (Commuting) Benefits, later.) Exempt if de minimis. 5 Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services. 6 If the employee receives a qualified bicycle commuting reimbursement in a qualified bicycle commuting month, the employee cannot receive commuter highway vehicle, transit pass, or qualified parking benefits in that same month. 62

63 Contact Information: It s Over! HOWARD SIMON & ASSOCIATES retirement plan administration payroll solutions Brad Simon 304 Saunders Road Riverwoods, IL bsimon@hsapayroll.com Phone: X222 Fax: