fringe benefits: section 132 and beyond - ascentis · fringe benefits overview reporting and taxing...
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Presented on Tuesday, February 28, 2017
Fringe Benefits: Section 132 and Beyond
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Fringe Benefits Overview
Reporting and taxing fringe benefits
De Minimis fringe benefits
No additional cost services
Working condition fringe benefits
Employee discounts
Employee achievement awards for length of service and safety
Prizes and awards—cash and noncash
Cell phones
Gift certificates and gift cards
Holiday gifts
What Is Our Focus For Today?
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Vicki M. Lambert, CPP, is President and Academic Director of The Payroll Advisor™, a firm specializing in payroll education and training. The company’s website www.thepayrolladvisor.comoffers a subscription payroll news service which keeps payroll professionals up-to-date on the latest rules and regulations.
Today’s Presenter
Vicki M. Lambert CPP
Fringe Benefit Overview
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Are a form of payment for the performance of services
Does not have to be your employee but could be an independent contractor, partner or director
But normally is an employee
Determine the taxation
Usually FIT, FICA and FUTA and state equivalents but not always
Adding to the Payroll
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Most fringe benefits are added to the payroll for taxation and reported as imputed income
Income recognized but not received through the payroll department
Add to the gross calculate and withhold taxes deduct before calculating net of check
Imputed income causes employee to have a smaller check and higher taxes—make sure they understand that
Taxing Fringe Benefits
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First thing to remember!
CASH or ITS EQUIVALENT IS ALWAYS TAXABLE!
Reporting Fringe Benefits-Form W-2
Form W-2: Boxes 1, 3, and 5 unless specifically exempted from that tax
May need to be in Box 12 under appropriate code
Other boxes as they apply
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Don’t forget the state taxes!
Reporting Fringe Benefits-Form 941
Lines 2 and 5a, 5c & 5d unless specifically exempted
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De Minimis
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Falls under Section 132 of IRC
Any property or service provided to an employee that has so little value that accounting for it would be unreasonable or administratively impractical
Have to take into account how often and to how many employees it is given
No de minimis on CASH or its equivalent!
De Minimis Examples
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Personal use of photocopier if no more than 15% of total use
Group meals, employee picnics
Occasional tickets to sports events or shows not given as an award—everybody goes
Occasional Meals for working overtime
Occasional Coffee, donuts or soft drinks
De Minimis Examples
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Flowers or fruit for special circumstances
Local telephone calls
Traditional birthday or holiday gifts (NO CASH) with a low FMV
Commuting use of employer’s car if no more than once per month
Employer provided local transportation
De Minimis Examples
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Example 1: an employer provides daily snacks valued at one dollar to an employee. Although the amount is small, the benefit is provided on a regular basis and is, therefore, taxable as wages
Example 2: An employer provides a meal daily to one employee, but not to any other employee. The benefit is “frequent” with respect to that one employee and is therefore not de minimis even though it is infrequent with respect to the rest of the workforce
Never De Minimis
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Cash except meal money
in certain cases
(we will discuss later)
Cash Equivalent: Gift cards
savings bonds, gift certificates
Use of Employers:
Apartment, condo,
vacation home or boat
Memberships in country
clubs or athletic facilities
Definitions under De Minimis
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The IRS does not furnish a concrete definition of the term “occasional”
The law does not specify a value threshold for benefits to qualify as de minimis
One time, in 2001, the IRS gave advice that a benefit valued at $100 did not qualify as de minimis but this advice was for that specific situation and cannot be relied upon for other situations
Occasional Meal Reimbursements
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Regularly provided meal money does not qualify as de minimis
Occasional meal money may qualify if the following 3 conditions are met:
1. Occasional basis: meal is reasonable in value and not provided regularly or frequently
Occasional Meal Reimbursements
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2. Provided for overtime work: overtime work necessitates an extension of the employee’s normal work schedule
3. Enables overtime work: provided to enable the employee to work overtimeMeals provided on employer’s premises that are consumed
during the meal period or
Meal money expended for meals consumed during that period satisfy this condition
Not Occasional Meal Reimbursements
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Not excludable if provided as part of a company policy or union contract
Required and not occasional
Must set up procedures therefore must account for the benefits which does not meet the “administratively impractical” standard
Meal money calculated on the basis of a number of hours worked is never excludable as de minimis
Example for Meal Money
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Nontaxable: A commuter ferry breaks down and the engineers are required to work overtime to make repairs. After working 8 hours, the engineers break for dinner because they will be working for an additional 3 hours. The supervisor gives each employee $10 for a meal
Example for Meal Money
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Taxable: An employer has a policy of reimbursing employees for breakfast or dinner when they are required to work an extra hour before or after their normal work schedule. The reimbursements are taxable because the employer has a policy which indicates the benefit is provided routinely. In addition the meal reimbursement does not enable the employee to work overtime, but is an incentive to do so.
Transportation Fringe Benefits
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Local commuting transportation fare provided to an employee by an employer on an occasional basis and to enable to the employee to work overtime may be excluded as a de minimis fringe benefit
Unusual Circumstances and Unsafe Conditions
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Local transportation for commuting provided to an employee by an employer because of unusual circumstances and unsafe conditions is taxable to the employee as wages at the rate of $1.50 each way
Any additional value is excludable
Unusual circumstances include such times as when an employee is temporarily working outside his normal hours or has a shift change
Unusual Circumstances and Unsafe Conditions
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Unsafe conditions determined by a history of crime in the geographic area surround the employee’s workplace or residence and the time of day during which the employee must commute
Must be a qualified employee to use this special rule
Must have certain conditions met to use this rule
Qualified Employee for Unsafe Conditions
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Performs services during the year
Paid on an hourly basis
Not an exempt employee under the FLSA
Is paid overtime or subject to overtime
Not paid more than $120,000 for 2016
Cannot be a “control employee”
Required Conditions
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Employee normally walks or uses public transportation for commuting
Written policy that states employer does not provide transportation for personal purposes other than for commuting because of unsafe conditions
Employees does not use the transportation for personal purposes other than commuting because of unsafe conditions
Example
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Mary is a qualified employee who works as a data-entry clerk from 11pm to 7am. Public transportation is the only means of transport available to her but is considered unsafe by a reasonable person at the beginning of her shift. Employer hires car service to pick her up each evening and return her home each morning. The commute to work is $1.50 because of the unsafe conditions. However the commute home is the FMV of the car as unsafe conditions do not exist for that trip
Qualified Transportation Fringe Benefit
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Applies to:
1. A ride in a commuter highway vehicle between the employee’s home and work place
2. A transit pass
3. Qualified parking
4. Qualified bicycle commuting reimbursement
Exclusion applies whether you provide only one or a combination of these benefits—except bicycles
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Providing Benefits
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Can be provided directly by employer or through reimbursement arrangementVoucher or similar item not
available? Can do cash in that type of instance
If value is over limit then include amount over limit in wages
Transit Passes
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Any pass, token, farecard, voucher or similar item entitling a person to ride on mass transit and includes bus, rail or ferry
May be publically or privately provided
2017 - $255 per month may be excluded from wages
States may be different
Transit Passes
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If sold at discount the discounted price rather than the face amount can be used to determine the exclusion so long as discounted price is available to the public
Example: 10 tickets cost $17.50 if purchased separately but are sold in a packet of 10 for $15. This is offered to the general public so $15 counts against the annual or monthly minimum exclusion
Transit Passes
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No substantiation requirements if the employer distributes the transit passes themselves
Cash reimbursements are only nontaxable if no voucher or similar item is readily available for direct distribution to employees
Example 1: Fred buys a transit pass for $100 each month. At the end of the month he presents it to his employer and is reimbursed the $100—bona fide reimbursement arrangement and is excluded from income
Transit Passes
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Example 2: Larry purchases a monthly transit pass for $100 but presents it to the employer at the beginning of the month. He certifies he purchased it and will use it during the month. The employer reimburses Larry at the time he presents the transit pass. Bona fide reimbursement arrangement is established and the reimbursement is excluded from income
Qualified Parking
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Parking provided to employees on or near employer’s business premises
Includes parking on or near location where employees commute using mass transit or car pools
2017 - $255 per month
Commuter Highway Vehicle
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Seats at least 6 adults not including driver
80% of mileage for commuting
Employees in at least half the seats
Bicycle Commuting
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Exclusion includes any employer reimbursement during the 15-month beginning the first day of the calendar year for reasonable expenses incurred by the employee during the calendar year
Bicycle must be used as regular transportation between employee home and work
Reasonable Costs Include:
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Purchase of bicycle and
Bicycle improvements, repair and storage
Commuting month includes:Regularly uses bicycle for a substantial
portion of the travel between home and work
Does not receive transportation in commuter highway vehicle, transit passes or parking benefits
Bicycle Commuting
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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.
No Additional Cost Services
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Employers generally can exclude the value of a no-additional-cost service under Section 132
Employer must not incur an substantial additional costs
Ordinary line of business for which employee performs services
Usually excess capacity services such as airline seats or hotel rooms
Can apply to cable and phone services as well
No Additional Cost Services
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Reciprocal agreements between employers are permitted
The service is the same type of service generally provided to customers in both the line of business in which the employee works and the line of business in which the service is provided.
The employer of the employee and the employer providing the service have a written reciprocal agreement under which a group of employees of each employer, all of whom perform substantial services in the same line of business, may receive no-additional-cost services from the other employer.
Neither the employer of the employee nor the other employer incurs any substantial additional cost either in providing the service or because of the written agreement.
No Additional Cost Services
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Example: Employee J works for Fly By Night Airlines. Whenever there is an open seat on a flight, the airline allows employees to fill the seat. For Employee J to take advantage of this benefit, she must be willing to fly standby to make sure that a paying customer does not want the seat. If the flight is ready to take off and the seat is empty she is allowed to fly on that flight. Following these procedures the cost of the flight is not considered taxable income to Employee J. (Note: Sales tax and landing taxes are considered in a separate category and are decided by individual airline and company).
Working Condition Fringe Benefit
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Property or services provided to employee so employee can perform his or her job
Cost excluded from wages under Section 132
Exclusion applies to extent employee could deduct expense if he or she pays for it themselves
Example: Job related education course
Must be substantiated
Employee Discounts
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Applies to price reductions employer gives to employee
On property or services offered to customers in the ordinary course of the line of business in which employee performs substantial services
Section 132
Cannot use for real property or investment property such as stocks
Employee Discounts
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The following limits apply:
Discount on services 20% of price charged to non-employee customers
For merchandise:• Employer’s gross profit percentage times the price charged
to non-employee customers
Example: Employee G works at Main Street Store and is allowed a 10% discount when buying merchandise from the store
Employee Achievement Awards
Length of Service and Safety only
Tangible personal property
Not disguised compensation
Meaningful presentation
No more than specific dollar amounts$1600 qualified plan
$400 nonqualified plan
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Length of Service Award
Will qualify only if either of the following apply:
The employee receives the award after his or her first 5 years of employment
The employee did not receive another length-of-service award (other than de minimis) during the same year or in any of the prior 4 years
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Safety Awards
Qualifies unless one of the following applies:
Given to a manager, administrator, clerical employee or other professional employee
During the tax year, more than 10% of your employees have already received a safety achievement award (not counting de minimis)
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Bonuses, Prizes and Awards
Cash is taxable!
So are all other types of payments
Trips, tangible personal property or whatever!
Doesn’t matter what it is-if given as a prize, bonus or award it is taxable income
Doesn’t matter what you call the “award”
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Company Supplied Cell Phones
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The value of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis fringe benefit.
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Noncompensatory Business Purposes
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You provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. Examples of substantial business reasons include the employer's:
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Noncompensatory Business Purposes
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Need to contact the employee at all times for work-related emergencies,
Requirement that the employee be available to speak with clients at times when the employee is away from the office, and
Need to speak with clients located in other time zones at times outside the employee's normal workday.
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Noncompensatory Business Purposes
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You cannot exclude from an employee's wages the value of a cell phone provided to promote good will of an employee, to attract a prospective employee, or as a means of providing additional compensation to an employee.
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Reimbursement for Personal Cell Phones Used for Business
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If the employer requires the employee to maintain and use their personal cell phones for business purposes and reimburses the employee for the business use of their personal cell phones the following rules apply:
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Reimbursement for Personal Cell Phones
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Must have substantial business reasons for requiring employee’s use of personal cell phones in connection with employer’s trade or business
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Substantial Business Reasons
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Need to contact the employee at all times for work-related emergencies,
Requirement that the employee be available to speak with clients at times when the employee is away from the office, and
Need to speak with clients located in other time zones at times outside the employee's normal workday.
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Reimbursement for Personal Cell Phones
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Employee must maintain cell phone coverage that is reasonably related to the needs of the employer’s business
Reimbursement must be reasonably calculated so as to not exceed actual expenses the employee incurs
Must not be a substitute for a portion of the employee’s wages
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Acceptable Reimbursement Arrangement
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Employee must communicate with employer’s clients outside of normal business hours
Employee’s basic coverage plan charges a flat-rate per month for a certain number of minutes for domestic calls
Employer reimburses employee for the monthly basic plan expense to enable employee to maintain contact with business clients after hours
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Unacceptable Reimbursement Arrangements
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Reimbursement for international or satellite cell phone coverage for technician whose clients are in local geographical area
Pattern of reimbursement that deviates significantly from a normal cell phone use in the employer’s businessExample: employee is reimbursed $100 per quarter in
quarters 1-3 of the year but receives a reimbursement of $500 in quarter 4
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Holiday Gifts/Gift Certificates, Cards
Can be De Minimis
Cash or cash equivalent is taxableThis includes gift certificates to
supermarkets!
Turkey rule appliesTurkey, ham or similar item of nominal
value at holiday time.
Must be for the actual turkey not to store
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• Set your pay codes up as cash payments, imputed income, or non-tax reimbursements
• Customized settings for federal and state tax configurations and Box 12 code mapping
• Include or exclude fringe benefits on regular checks, one-off checks, or in adjustment runs
Stay in compliance and have full control at the same time!
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