us internal revenue service: p15b--2006

8/14/2019 US Internal Revenue Service: p15b--2006

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ContentsDepartment of the TreasuryInternal Revenue Service Whats New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Publication 15-B 1. Fringe Benefit Overview . . . . . . . . . . . . . . . . . . . 2(Rev. December 2005) Are Fringe Benefits Taxable? . . . . . . . . . . . . . . . 2Cat. No. 29744N Cafeteria Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2. Fringe Benefit Exclusion Rules . . . . . . . . . . . . . 3

Accident and Health Benefits . . . . . . . . . . . . . . . 4

Employers Achievement Awards . . . . . . . . . . . . . . . . . . . . . 5Adoption Assistance . . . . . . . . . . . . . . . . . . . . . . 6Athletic Facilities . . . . . . . . . . . . . . . . . . . . . . . . . 6Tax Guide to De Minimis (Minimal) Benefits . . . . . . . . . . . . . . . 6Dependent Care Assistance . . . . . . . . . . . . . . . . 7Educational Assistance . . . . . . . . . . . . . . . . . . . 7Employee Discounts . . . . . . . . . . . . . . . . . . . . . . 8FringeEmployee Stock Options . . . . . . . . . . . . . . . . . . 8Group-Term Life Insurance Coverage . . . . . . . . . 9Lodging on Your Business Premises . . . . . . . . . 11BenefitsMeals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Moving Expense Reimbursements . . . . . . . . . . . 13No-Additional-Cost Services . . . . . . . . . . . . . . . . 14For Benefits ProvidedRetirement Planning Services . . . . . . . . . . . . . . . 14Transportation (Commuting) Benefits . . . . . . . . . 14in 2006 Tuition Reduction . . . . . . . . . . . . . . . . . . . . . . . . 15Working Condition Benefits . . . . . . . . . . . . . . . . . 16

3. Fringe Benefit Valuation Rules . . . . . . . . . . . . . 17General Valuation Rule . . . . . . . . . . . . . . . . . . . 17Cents-Per-Mile Rule . . . . . . . . . . . . . . . . . . . . . . 18Commuting Rule . . . . . . . . . . . . . . . . . . . . . . . . . 19Lease Value Rule . . . . . . . . . . . . . . . . . . . . . . . . 19Unsafe Conditions Commuting Rule . . . . . . . . . . 21

4. Rules for Withholding, Depositing, andReporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

How To Get Forms and Publications . . . . . . . . . . . 23

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Whats New

Cents-per-mile rule. The standard mileage rate you canuse under the cents-per-mile rule to value the personal useof a vehicle you provide to an employee in 2006 is 44.5cents a mile. See Cents-Per-Mile Rulein section 3.

Increase in qualified parking exclusion and no changeto commuter transportation benefit. For 2006, themonthly exclusion for qualified parking increases to $205

and the monthly exclusion for commuter highway vehicletransportation and transit passes remains at $105. SeeQualified Transportation Benefitsin section 2.Get forms and other information

faster and easier by: Katrina Emergency Tax Relief Act of 2005. This Actprovides tax relief for persons affected by Hurricane Ka-Internet www.irs.govtrina. Under the Act, your employees may be entitled toloans and tax-favored withdrawals from retirement plans,recontributions of withdrawals to retirement plans, andother benefits not covered in this publication. For more

TM

for Business information, see Publication 4492, Tax Information Re-www.irs.gov/efile lated to Hurricane Katrina.


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excludes it. Section 2 discusses the exclusions that applyto certain fringe benefits. Any benefit not excluded underIntroductionthe rules discussed in section 2 is taxable.

This publication supplements Publication 15, (Circular E),Employers Tax Guide, and Publication 15-A, Employers Including taxable benefits in pay. You must include in aSupplemental Tax Guide. It contains specialized and de- recipients pay the amount by which the value of a fringetailed information on the employment tax treatment of benefit is more than the sum of the following amounts.fringe benefits.

Any amount the law excludes from pay.Comments and Suggestions. We welcome your com-

Any amount the recipient paid for the benefit.ments about this publication and your suggestions for

future editions. You can email us while visiting our website The rules used to determine the value of a fringe benefitat www.irs.gov. You can write to us at the following ad- are discussed in section 3.dress:

If the recipient of a taxable fringe benefit is your em-Internal Revenue Serviceployee, the benefit is subject to employment taxes andTax Products Coordinating Committeemust be reported on Form W-2, Wage and Tax Statement.SE:W:CAR:MP:T:T:SPHowever, you can use special rules to withhold, deposit,1111 Constitution Ave. NW, IR-6406and report the employment taxes. These rules are dis-Washington, DC 20224cussed in section 4.

If the recipient of a taxable fringe benefit is not yourWe respond to many letters by telephone. It would beemployee, the benefit is not subject to employment taxes.helpful if you would include your daytime phone number,However, you may have to report the benefit on one of theincluding the area code, in your correspondence.following information returns.

Photographs of missing children. The Internal Reve-nue Service is a proud partner with the National Center for

If the recipientMissing and Exploited Children. Photographs of missing receives the benefit as: Use:children selected by the Center may appear in this publica-

An independent contractor Form 1099-MISCtion on pages that would otherwise be blank. You can helpbring these children home by looking at the photographs A partner Schedule K-1 (Formand calling 1-800-THE-LOST (1-800-843-5678) if you rec- 1065)ognize a child.

For more information, see the instructions for the formslisted above.

1. Fringe Benefit OverviewCafeteria Plans

A fringe benefit is a form of pay for the performance ofservices. For example, you provide an employee with a A cafeteria plan, including a flexible spending arrange-fringe benefit when you allow the employee to use a ment, is a written plan that allows your employees to

business vehicle to commute to and from work. choose between receiving cash or taxable benefits insteadof certain qualified benefits for which the law provides anPerformance of services. A person who performs serv-exclusion from wages. If an employee chooses to receive aices for you does not have to be your employee. A personqualified benefit under the plan, the fact that the employeemay perform services for you as an independent contrac-could have received cash or a taxable benefit instead willtor, partner, or director. Also, for fringe benefit purposes,not make the qualified benefit taxable.treat a person who agrees not to perform services (such as

Generally, a cafeteria plan does not include any planunder a covenant not to compete) as performing services.that offers a benefit that defers pay. However, a cafeteria

Provider of benefit. You are the provider of a fringe plan can include a qualified 401(k) plan as a benefit. Also,benefit if it is provided for services performed for you. You certain life insurance plans maintained by educational in-may be the provider of the benefit even if it was actually stitutions can be offered as a benefit even though theyfurnished by another person. You are the provider of a defer pay.fringe benefit your client or customer provides to youremployee for services the employee performs for you. Qualified benefits. Qualified benefits include the follow-

ing benefits discussed in section 2.Recipient of benefit. The person who performs servicesfor you is the recipient of a fringe benefit provided for those Accident and health benefits (but not medical sav-services. That person may be the recipient even if the ings accounts or long-term care insurance).benefit is provided to someone who did not perform serv-

Adoption assistance.ices for you. For example, your employee may be therecipient of a fringe benefit you provide to a member of the Dependent care assistance.employees family.

Group-term life insurance coverage (including coststhat cannot be excluded from wages).

Are Fringe Benefits Taxable?

Any fringe benefit you provide is taxable and must be Benefits not allowed. A cafeteria plan cannot includeincluded in the recipients pay unless the law specifically the following benefits discussed in section 2.

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key employees if more than 25% of the total of the nontax- Archer medical savings accounts. (See Accident and

able benefits you provide for all employees under the planHealth Benefits.)

go to key employees. However, a plan you maintain under Athletic facilities. a collective bargaining agreement does not favor key em-

ployees. De minimis (minimal) benefits.

A key employee during 2006 is generally an employee Educational assistance. who is either of the following.

Employee discounts. 1. An officer having annual pay of more than $140,000.

Lodging on your business premises. 2. An employee who for 2006 was either of the follow-

ing. Meals. Moving expense reimbursements. a. A 5% owner of your business.

No-additional-cost services. b. A 1% owner of your business whose annual paywas more than $150,000.

Transportation (commuting) benefits.

Tuition reduction.More information. For more information about cafeteria

Working condition benefits. plans, see section 125 of the Internal Revenue Code andits regulations.

It also cannot include scholarships or fellowships (dis-cussed in Publication 970, Tax Benefits for Education).

2. Fringe Benefit ExclusionEmployee. For these plans, treat the following individualsas employees.

Rules A current common-law employee (see section 2 inPublication 15, (Circular E), for more information). This section discusses the exclusion rules that apply to

fringe benefits. These rules exclude all or part of the value A full-time life insurance agent who is a current stat-

of certain benefits from the recipients pay.utory employee.The excluded benefits are not subject to federal income

A leased employee who has provided services to tax withholding. Also, in most cases, they are not subject toyou on a substantially full-time basis for at least a social security, Medicare, or federal unemploymentyear if the services are performed under your pri- (FUTA) tax and are not reported on Form W-2.mary direction or control. This section discusses the exclusion rules for the follow-

ing fringe benefits.Exception for S corporation shareholders. Do not

Accident and health benefits.treat a 2% shareholder of an S corporation as an employeeof the corporation for this purpose. A 2% shareholder for Achievement awards.this purpose is someone who directly or indirectly owns (at

Adoption assistance.any time during the year) more than 2% of thecorporations stock or stock with more than 2% of the Archer medical savings accounts.voting power.

Athletic facilities.Plans that favor highly compensated employees. If

De minimis (minimal) benefits.your plan favors highly compensated employees as to

Dependent care assistance.eligibility to participate, contributions, or benefits, you mustinclude in their wages the value of taxable benefits they

Educational assistance.could have selected. A plan you maintain under a collec-

Employee discounts.tive bargaining agreement does not favor highly compen-sated employees.

Employee stock options.A highly compensated employee for this purpose is any

Group-term life insurance coverage.of the following employees.

Health savings accounts.1. An officer.

Lodging on your business premises.2. A shareholder who owns more than 5% of the votingpower or value of all classes of the employers stock. Meals.

3. An employee who is highly compensated based on Moving expense reimbursements.the facts and circumstances.

No-additional-cost services.4. A spouse or dependent of a person described in (1),

Retirement planning(2), or (3).

Transportation (commuting) benefits.Plans that favor key employees. If your plan favors key

Tuition reduction.employees, you must include in their wages the value oftaxable benefits they could have selected. A plan favors Working condition benefits.

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See Table 21 for an overview of the employment taxtreatment of these benefits.

Table 21. Special Rules for Various Types of Fringe Benefits(For more information, see the full discussion in this section.)

Treatment Under Employment Taxes

Type of Fringe Benefit Income Tax Withholding Social Security and Medicare Federal Unemployment (FUTA)

Exempt1,2, except for certain Exempt, except for certain Exempt

long-term care benefits payments to S corporationAccident and health benefits employees who are 2%shareholders.

Achievement awards Exempt1 up to $1,600 ($400 for nonqualified awards).

Adoption assistance Exempt1 Taxable Taxable

Exempt if substantially all use during the calendar year is by employees, their spouses, and theirAthletic facilities

dependent children.

De minimis (minimal) benefits Exempt Exempt Exempt

Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return).

Educational assistance Exempt up to $5,250 of benefits each year. (See Educational Assistanceon page 7.)

Employee discounts Exempt4 up to certain limits. (See Employee Discountson page 8.)

Employee stock options See Employee Stock Optionson page 8.

Exempt Exempt1,5 up to cost of $50,000 ExemptGroup-term life insurance

of coverage. (Special rules applycoverage

to former employees.)

Lodging on your business Exempt1 if furnished for your convenience as a condition of employment.premises

Exempt if furnished on your business premises for your convenience.Meals

Exempt if de minimis.

Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them.

No-additional cost services Exempt4 Exempt4 Exempt4

Retirement planning Exempt6 Exempt 6 Exempt 6

services

Exempt1 up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($105), orqualified parking ($205). (See Transportation (Commuting Benefits) on page 14.)Transportation (commuting)

benefitsExempt if de minimis.

Tuition reduction Exempt4 if for undergraduate education (or graduate education if the employee performs teaching orresearch activities).

Working condition benefits Exempt Exempt Exempt

1

Exemption does not apply to S corporation employees who are 2% shareholders. See page 3.2 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 highly compensated employees.5 Exemption does not apply to certain key employees under a plan that favors those employees.6 Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services.

Accident and Health Benefits Contributions to the cost of accident or health insur-ance.

This exclusion applies to contributions you make to an Contributions to a separate trust or fund that directlyaccident or health plan for an employee, including the

or through insurance provides accident or healthfollowing.benefits.

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Contributions to Archer MSAs or health savings ac- for this exclusion, you must include the value of accident orcounts (discussed in Publication 969, Health Sav- health benefits you provide to the employee in theings Accounts and Other Tax-Favored Health employees wages subject to federal income tax withhold-Plans). ing. However, you can exclude the value of these benefits

(other than payments for specific injuries or il lnesses) fromThis exclusion also applies to payments you directly or the employees wages subject to social security, Medicare,

indirectly make to an employee under an accident or health and FUTA taxes.plan for employees that are either of the following.

Exception for highly compensated employees. If Payments or reimbursements of medical expenses. your plan is a self-insured medical reimbursement plan

that favors highly compensated employees, you must in- Payments for specific injuries or illnesses (such as

clude all or part of the amounts you pay to these employ-the loss of the use of an arm or leg). The paymentsees in their wages subject to federal income tax

must be figured without regard to any period of ab-withholding. However, you can exclude these amounts

sence from work.(other than payments for specific injuries or il lnesses) fromthe employees wages subject to social security, Medicare,

Accident or health plan. This is an arrangement that and FUTA taxes.provides benefits for your employees, their spouses, and A self-insured plan is a plan that reimburses your em-their dependents in the event of personal injury or sick- ployees for medical expenses not covered by an accidentness. The plan may be insured or noninsured and does not or health insurance policy.need to be in writing. A highly compensated employee for this exception is

any of the following individuals.Employee. For this exclusion, treat the following individu-als as employees. One of the five highest paid officers.

A current common-law employee. An employee who owns (directly or indirectly) more

than 10% in value of the employers stock. A full-time life insurance agent who is a current stat-utory employee. An employee who is among the highest paid 25% of

all employees (other than those who can be ex- A retired employee.

cluded from the plan). A former employee you maintain coverage for based

on the employment relationship. For more information on this exception, see section105(h) of the Internal Revenue Code and its regulations.

A widow or widower of an individual who died whilean employee. COBRA premiums. The exclusion for accident and

health benefits applies to amounts you pay to maintain A widow or widower of a retired employee.

medical coverage for a former employee under the Com- For the exclusion of contributions to an accident or bined Omnibus Budget Reconciliation Act of 1986

health plan, a leased employee who has provided (COBRA). The exclusion applies regardless of the lengthservices to you on a substantially full-time basis for of employment, whether you directly pay the premiums or

at least a year if the services are performed under reimburse the former employee for premiums paid, andyour primary direction or control. whether the employees separation is permanent or tem-

porary.Exception for S corporation shareholders. Do not

treat a 2% shareholder of an S corporation as an employee Achievement Awardsof the corporation for this purpose. A 2% shareholder issomeone who directly or indirectly owns (at any time dur- This exclusion applies to the value of any tangible personaling the year) more than 2% of the corporations stock or property you give to an employee as an award for eitherstock with more than 2% of the voting power. length of service or safety achievement. The exclusion

does not apply to awards of cash, cash equivalents, giftExclusion from wages. You can generally exclude thecertificates, or other intangible property such as vacations,value of accident or health benefits you provide to anmeals, lodging, tickets to theater or sporting events,employee from the employees wages.stocks, bonds, and other securities. The award must meet

Exception for certain long-term care benefits. You the requirements for employee achievement awards dis-

cannot exclude contributions to the cost of long-term care cussed in chapter 2 of Publication 535, Business Ex-insurance from an employees wages subject to federal penses.income tax withholding if the coverage is provided througha flexible spending or similar arrangement. This is a benefit Employee. For this exclusion, treat the following individu-program that reimburses specified expenses up to a maxi- als as employees.mum amount that is reasonably available to the employee

A current employee.and is less than five times the total cost of the insurance.However, you can exclude these contributions from the A former common-law employee you maintain cover-employees wages subject to social security, Medicare, age for in consideration of or based on an agree-and federal unemployment (FUTA) taxes. ment relating to prior service as an employee.

S corporation shareholders. Because you cannot A leased employee who has provided services totreat a 2% shareholder of an S corporation as an employee you on a substantially full-time basis for at least a

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year if the services are performed under your pri- employees wages subject to federal income tax withhold-mary direction or control. ing. However, you cannot exclude these payments from

wages subject to social security, Medicare, and federalException for S corporation shareholders. Do not unemployment (FUTA) taxes. For more information, see

treat a 2% shareholder of an S corporation as an employee the Instructions for Form 8839, Qualified Adoption Ex-of the corporation for this purpose. A 2% shareholder is penses.someone who directly or indirectly owns (at any time dur- You must report all qualifying adoption expenses youing the year) more than 2% of the corporations stock or paid or reimbursed under your adoption assistance pro-stock with more than 2% of the voting power. gram for each employee for the year in box 12 of the

employees Form W-2. Use Code T to identify thisExclusion from wages. You can generally exclude the amount.value of achievement awards you give to an employee

Employee. For this exclusion, do not treat a 2% share-from the employees wages if their cost is not more thanholder of an S corporation as an employee of the corpora-the amount you can deduct as a business expense for thetion. A 2% shareholder is someone who directly oryear. The excludable annual amount is $1,600 ($400 forindirectly owns (at any time during the year) more than 2%awards that are not qualified plan awards). See chapter 2of the corporations stock or stock with more than 2% of theof Publication 535 for more information on the limit onvoting power.deductions for employee achievement awards.

To determine for 2006 whether an achievementAthletic Facilitiesaward is a qualified plan award under the de-

duction rules described in Publication 535, treatCAUTION!

You can exclude the value of an employees use of anany employee who received more than $100,000 in pay foron-premises gym or other athletic facility you operate from2005 as a highly compensated employee.an employees wages if substantially all use of the facilityIf the cost of awards given to an employee is more thanduring the calendar year is by your employees, their

your allowable deduction, include in the employees wages spouses, and their dependent children. For this purpose,the larger of the following amounts.an employees dependent child is a child or stepchild who

The part of the cost that is more than your allowable is the employees dependent or who, if both parents arededuction (up to the value of the awards). deceased, is age 24 or younger.

The amount by which the value of the awards ex- On-premises facility. The athletic facility must be locatedceeds your allowable deduction. on premises you own or lease. It does not have to be

located on your business premises. However, the exclu-Exclude the remaining value of the awards from thesion does not apply to an athletic facility for residential use,employees wages.such as athletic facilities that are part of a resort.

Employee. For this exclusion, treat the following individu-Adoption Assistance als as employees.An adoption assistance program is a separate written plan A current employee.

of an employer that meets all of the following requirements. A former employee who retired or left on disability.

A widow or widower of an individual who died while1. It benefits employees who qualify under rules set up an employee.

by you, which do not favor highly compensated em- A widow or widower of a former employee who re-ployees or their dependents. To determine whether

tired or left on disability.your plan meets this test, do not consider employeesexcluded from your plan who are covered by a col-

A leased employee who has provided services tolective bargaining agreement, if there is evidence you on a substantially full-time basis for at least athat adoption assistance was a subject of good-faith year if the services are performed under your pri-bargaining. mary direction or control.

2. It does not pay more than 5% of its payments during A partner who performs services for a partnership.

the year for shareholders or owners (or their spousesor dependents). A shareholder or owner is someone

who owns (on any day of the year) more than 5% of De Minimis (Minimal) Benefitsthe stock or of the capital or profits interest of yourbusiness.

You can exclude the value of a de minimis benefit youprovide to an employee from the employees wages. A de3. You give reasonable notice of the plan to eligibleminimis benefit is any property or service you provide to anemployees.employee that has so little value (taking into account how

4. Employees provide reasonable substantiation thatfrequently you provide similar benefits to your employees)

payments or reimbursements are for qualifying ex-that accounting for it would be unreasonable or administra-

penses.tively impracticable. Cash, no matter how little, is never

You must exclude all payments or reimbursements you excludable as a de minimis benefit, except for occasionalmake under an adoption assistance program for an meal money or transportation fare.employees qualified adoption expenses from the Examples of de minimis benefits include the following.

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The employees spouse. Occasional personal use of a company copying ma-

chine if you sufficiently control its use so that at least Special rules apply to determine the earned income of a85% of its use is for business purposes. spouse who is either a student or not able to care for

himself or herself. For more information on the earned Holiday gifts, other than cash, with a low fair market

income limit, see Publication 503.value.

Exception for highly compensated employees. You Group-term life insurance payable on the death of an

cannot exclude dependent care assistance from theemployees spouse or dependent if the face amount

wages of a highly compensated employee unless the ben-is not more than $2,000.

efits provided under the program do not favor highly com- Meals. See Mealson page 11. pensated employees and the program meets the

requirements described in section 129(d) of the Internal Occasional parties or picnics for employees and

Revenue Code.their guests.

For this exclusion, a highly compensated employee for Occasional tickets for entertainment or sporting 2006 is an employee who meets either of the following

events. tests.

Transportation fare. See Transportation (Commut- 1. The employee was a 5% owner at any time duringing) Benefitson page 14. the year or the preceding year.

Occasional typing of personal letters by a company 2. The employee received more than $100,000 in paysecretary. for the preceding year.

You can choose to ignore test (2) if the employee was notEmployee. For this exclusion, treat any recipient of a de also in the top 20% of employees when ranked by pay forminimis benefit as an employee. the preceding year.

Form W-2. Report the value of all dependent care assis-Dependent Care Assistancetance you provide to an employee under a dependent careassistance program in box 10 of the employees Form W-2.This exclusion applies to household and dependent careInclude any amounts you cannot exclude from theservices you directly or indirectly pay for or provide to anemployees wages in boxes 1, 3, and 5.employee under a dependent care assistance program

that covers only your employees. The services must be fora qualifying persons care and must allow the employee to Educational Assistancework. These requirements are basically the same as thetests the employee would have to meet to claim the depen- This exclusion applies to educational assistance you pro-dent care credit if the employee paid for the services. For vide to employees under an educational assistance pro-more information, see Qualifying Person Test and gram. The exclusion also applies to graduate levelWork-Related Expense Testin Publication 503, Child and courses.Dependent Care Expenses. Educational assistance means amounts you pay or in-

cur for your employees education expenses. These ex-Employee. For this exclusion, treat the following individu- penses generally include the cost of books, equipment,als as employees. fees, supplies, and tuition. However, these expenses do

not include the cost of a course or other education involv- A current employee.

ing sports, games, or hobbies, unless the education: A leased employee who has provided services to

Has a reasonable relationship to your business, oryou on a substantially full-time basis for at least ayear if the services are performed under your pri- Is required as part of a degree program.mary direction or control.

Education expenses do not include the cost of tools or Yourself (if you are a sole proprietor).

supplies (other than textbooks) your employee is allowed A partner who performs services for a partnership. to keep at the end of the course. Nor do they include the

cost of lodging, meals, or transportation.

Exclusion from wages.You can exclude the value of

Educational assistance program. An educational assis-benefits you provide to an employee under a dependent tance program is a separate written plan that providescare assistance program from the employees wages if you educational assistance only to your employees. The pro-reasonably believe that the employee can exclude the gram qualifies only if all of the following tests are met.benefits from gross income.

The program benefits employees who qualify underAn employee can generally exclude from gross incomerules set up by you that do not favor highly compen-up to $5,000 of benefits received under a dependent caresated employees. To determine whether your pro-assistance program each year. This limit is reduced togram meets this test, do not consider employees$2,500 for married employees filing separate returns.excluded from your program who are covered by aHowever, the exclusion cannot be more than the earnedcollective bargaining agreement if there is evidenceincome of either:that educational assistance was a subject of

The employee, or good-faith bargaining.

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The program does not provide more than 5% of its Employee. For this exclusion, treat the following individu-benefits during the year for shareholders or owners. als as employees.A shareholder or owner is someone who owns (on

A current employee.any day of the year) more than 5% of the stock or ofthe capital or profits interest of your business. A former employee who retired or left on disability.

The program does not allow employees to choose to A widow or widower of an individual who died whilereceive cash or other benefits that must be included an employee.in gross income instead of educational assistance.

A widow or widower of an employee who retired or You give reasonable notice of the program to eligible left on disability.

employees. A leased employee who has provided services to

Your program can cover former employees if their employ- you on a substantially full-time basis for at least ament is the reason for the coverage. year if the services are performed under your pri-

mary direction or control.For this exclusion, a highly compensated employee for2006 is an employee who meets either of the following

A partner who performs services for a partnership.tests.

1. The employee was a 5% owner at any time during Exclusion from wages. You can generally exclude thethe year or the preceding year. value of an employee discount you provide an employee

from the employees wages, up to the following limits.2. The employee received more than $100,000 in payfor the preceding year. For a discount on services, 20% of the price you

charge nonemployee customers for the service.You can choose to ignore test (2) if the employee was notalso in the top 20% of employees when ranked by pay for For a discount on merchandise or other property,the preceding year. your gross profit percentage times the price you

charge nonemployee customers for the property.Employee. For this exclusion, treat the following individu-als as employees.

Determine your gross profit percentage based on all A current employee. property you offer to customers (including employee cus-

tomers) and your experience during the tax year immedi- A former employee who retired, left on disability, or

ately before the tax year in which the discount is available.was laid off.To figure your gross profit percentage, subtract the total

A leased employee who has provided services to cost of the property from the total sales price of the prop-you on a substantially full-time basis for at least a erty and divide the result by the total sales price of theyear if the services are performed under your pri- property.mary direction or control.

Exception for highly compensated employees. You Yourself (if you are a sole proprietor). cannot exclude from the wages of a highly compensated

employee any part of the value of a discount that is not A partner who performs services for a partnership.available on the same terms to one of the following groups.

All of your employees.Exclusion from wages. You can exclude up to $5,250 ofeducational assistance you provide to an employee under

A group of employees defined under a reasonablean educational assistance program from the employees

classification you set up that does not favor highlywages each year.

compensated employees.Assistance over $5,250. If you do not have an educa-

For this exclusion, a highly compensated employee fortional assistance plan, or you provide an employee with2006 is an employee who meets either of the followingassistance exceeding $5,250, you can exclude the value

of these benefits from wages if they are working condition tests.benefits. Property or a service provided is a working condi-

1. The employee was a 5% owner at any time duringtion benefit to the extent that if the employee paid for it, thethe year or the preceding year.amount paid would have been deductible as a business or

depreciation expense. See Working Condition Benefits, on 2. The employee received more than $100,000 in paypage 16. for the preceding year.

You can choose to ignore test (2) if the employee was notEmployee Discountsalso in the top 20% of employees when ranked by pay forthe preceding year.This exclusion applies to a price reduction you give an

employee on property or services you offer to customers inthe ordinary course of the line of business in which the Employee Stock Optionsemployee performs substantial services. However, it does

There are three kinds of stock optionsincentive stocknot apply to discounts on real property or discounts onoptions, employee stock purchase plan options, and non-personal property of a kind commonly held for investmentstatutory (nonqualified) stock options.(such as stocks or bonds).

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Wages for social security, Medicare, and federal unem- You provide it under a policy you directly or indirectlyployment taxes (FUTA) do not include remuneration result- carry. Even if you do not pay any of the policys cost,ing from the exercise after October 22, 2004, of an you are considered to carry it if you arrange forincentive stock option or an employee stock purchase plan payment of its cost by your employees and charge atoption, or from any disposition of stock acquired by exer- least one employee less than, and at least one othercising such an option. The IRS will not apply these taxes to employee more than, the cost of his or her insur-an exercise before October 23, 2004, of an incentive stock ance. Determine the cost of the insurance, for thisoption or an employee stock purchase plan option, or to a purpose, as explained under Coverage over the limitdisposition of stock acquired by such exercise. on page 10.

Additionally, federal income tax withholding is not re-Group-term life insurance does not include the following

quired on the income resulting from a disqualifying disposi- insurance.tion of stock acquired by the exercise after October 22,2004, of an incentive stock option or an employee stock

Insurance that does not provide general death bene-purchase plan option, or on income equal to the discountfits, such as travel insurance or a policy providingportion of stock acquired by the exercise after October 22,only accidental death benefits.2004, of an employee stock purchase plan option resulting

from any disposition of the stock. The IRS will not apply Life insurance on the life of your employees spousefederal income tax withholding upon the disposition of or dependent. However, you may be able to excludestock acquired by the exercise before October 23, 2004, of the cost of this insurance from the employeesan incentive stock option or an employee stock purchase wages as a de minimis benefit. See De Minimisplan option. However, the employer must report as income (Minimal) Benefitson page 6.in box 1 of Form W-2, (1) the discount portion of stock

Insurance provided under a policy that provides aacquired by the exercise of an employee stock purchasepermanent benefit (an economic value that extendsplan option upon disposition of the stock, and (2) thebeyond 1 policy year, such as paid-up or cash sur-

spread (between the exercise price and the fair market render value), unless certain requirements are met.value of the stock at the time of exercise) upon a disqualify-See Regulations section 1.79-1 for details.ing disposition of stock acquired by the exercise of an

incentive stock option or an employee stock purchase planoption. Employee. For this exclusion, treat the following individu-

als as employees.The spread on nonstatutory options normally is includedin wages for income tax purposes when the options are

1. A current common-law employee.exercised. (See Regulations section 1.83-7.) The spreadon nonstatutory options is subject to social security, Medi- 2. A full-time life insurance agent who is a current statu-care, FUTA, and federal income tax withholding at the time tory employee.of exercise.

3. An individual who was formerly your employee underAn employee who transfers his or her interest in non-(1) or (2), above.statutory stock options to the employees former spouse

incident to a divorce is not required to include an amount in 4. A leased employee who has provided services to you

gross income upon the transfer. The former spouse, rather on a substantially full-time basis for at least a year ifthan the employee, is required to include an amount in the services are performed under your primary direc-gross income when the former spouse exercises the stock tion and control.options. See Revenue Ruling 2002-22 and Revenue Rul-ing 2004-60 for details. You can find Rev. Rul. 2002-22 on Exception for S corporation shareholders. Do notpage 849 of Internal Revenue Bulletin 2002-19 at treat a 2% shareholder of an S corporation as an employeewww.irs.gov/pub/irs-irbs/irb02-19.pdf. You can find Rev. of the corporation for this purpose. A 2% shareholder isRul. 2004-60 on page 1051 of Internal Revenue Bulletin someone who directly or indirectly owns (at any time dur-2004-24 at www.irs.gov/pub/irs-irbs/irb04-24.pdf. ing the year) more than 2% of the corporations stock or

For more information about employee stock options, stock with more than 2% of the voting power.see sections 421, 422, and 423 of the Internal RevenueCode and the related regulations. The 10-employee rule. Generally, life insurance is not

group-term life insurance unless you provide it to at least10 full-time employees at some time during the year.Group-Term Life Insurance Coverage

For this rule, count employees who choose not to re-This exclusion applies to life insurance coverage that ceive the insurance unless, to receive it, they must contrib-meets all the following conditions. ute to the cost of benefits other than the group-term life

insurance. For example, count an employee who could It provides a general death benefit that is not in-

receive insurance by paying part of the cost, even if thatcluded in income.

employee chooses not to receive it. However, do not count You provide it to a group of employees. See The an employee who must pay part or all of the cost of

10-employee rulebelow. permanent benefits to get insurance, unless that employeechooses to receive it.

It provides an amount of insurance to each em-ployee based on a formula that prevents individual Exceptions. Even if you do not meet the 10-employeeselection. This formula must use factors such as the rule, two exceptions allow you to treat insurance asemployees age, years of service, pay, or position. group-term life insurance.

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Cost Per $1,000 of ProtectionUnder the first exception, you do not have to meet theFor 1 Month10-employee rule if all the following conditions are met.

Age Cost1. If evidence that the employee is insurable is re-Under 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .05quired, it is limited to a medical questionnaire (com-25 through 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .06pleted by the employee) that does not require a30 through 34 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .08physical.35 through 39 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .09

2. You provide the insurance to all your full-time em- 40 through 44 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10ployees or, if the insurer requires the evidence men- 45 through 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15tioned in (1), to all full-time employees who provide 50 through 54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

evidence the insurer accepts. 55 through 59 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4360 through 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .663. You figure the coverage based on either a uniform 65 through 69 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27

percentage of pay or the insurers coverage brackets 70 and older . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.06that meet certain requirements. See Regulations

You figure the total cost to include in the employeessection 1.79-1 for details.wages by multiplying the monthly cost by the number of full

Under the second exception, you do not have to meet months coverage at that cost.the 10-employee rule if all the following conditions are met.

Example. Toms employer provides him with You provide the insurance under a common plangroup-term life insurance coverage of $200,000. Tom is 45covering your employees and the employees of atyears old, is not a key employee, and pays $100 per yearleast one other employer who is not related to you.toward the cost of the insurance. Toms employer must

The insurance is restricted to, but mandatory for, all include $170 in his wages. The $200,000 of insuranceyour employees who belong to, or are represented coverage is reduced by $50,000. The total cost ofby, an organization (such as a union) that carries on $150,000 of coverage is $270 ($.15 x 150 x 12), and issubstantial activities besides obtaining insurance. reduced by the $100 Tom pays for the insurance. The

employer includes $170 in boxes 1, 3, and 5 of Toms Form Evidence of whether an employee is insurable doesW-2. The employer also enters $170 in box 12 with code C.not affect an employees eligibility for insurance or

the amount of insurance that employee gets. Coverage for dependents. Group-term life insurancecoverage paid by the employer for the spouse or depen-

To apply either exception, do not consider employees dents of an employee may be excludable from income as awho were denied insurance for any of the following rea- de minimis fringe benefit (see page 6). The part of thissons. coverage that the employee paid on an after-tax basis is

also excludable from income. For this purpose, the cost is They were 65 or older.

figured using the monthly cost table above. They customarily work 20 hours or less a week or 5

Former employees. For group-term life insurance overmonths or less in a calendar year.$50,000 provided to former employees (including retirees),

They have not been employed for the waiting period the former employees must pay the employees share ofgiven in the policy. (This waiting period cannot be social security and Medicare taxes with their income taxmore than 6 months.) returns. You are not required to collect those taxes. Use

the table above to determine the amount of social securityand Medicare taxes owed by the former employee forExclusion from wages. You can generally exclude thecoverage provided after separation from service. Reportcost of up to $50,000 of group-term life insurance from thethose uncollected amounts separately in box 12 on Formwages of an insured employee. You can exclude the sameW-2 using codes M and N. See the Instructions for Forms

amount from the employees wages when figuring socialW-2 and W-3.

security and Medicare taxes. In addition, you do not haveto withhold federal income tax or pay FUTA tax on any Exception for key employees. Generally, if yourgroup-term life insurance you provide to an employee. group-term life insurance plan favors key employees as to

participation or benefits, you must include the entire cost ofCoverage over the limit. You must include in your

the insurance in your key employees wages. (This excep-employees wages subject to social security and Medicare

tion generally does not apply to church plans.) Whentaxes the cost of group-term life insurance that is more figuring social security and Medicare taxes, you must alsothan the cost of $50,000 of coverage, reduced by the

include the entire cost in the employees wages. Includeamount the employee paid toward the insurance. Report it

the cost in boxes 1, 3, and 5 of Form W-2. However, you doas wages in boxes 1, 3, and 5 of the employees Form W-2.

not have to withhold federal income tax or pay FUTA tax onAlso, show it in box 12 with code C.

the cost of any group-term life insurance you provide to anFigure the monthly cost of the insurance to include in the employee.

employees wages by multiplying the number of thousands For this purpose, the cost of the insurance is the greaterof dollars of insurance coverage over $50,000 (figured to of the following amounts.the nearest $100) by the cost shown in the following table.Use the employees age on the last day of the tax year. The premiums you pay for the employees insur-You must prorate the cost from the table if less than a full ance. See Regulations section 1.79-4T (Q-6) formonth of coverage is involved. more information.

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The cost you figure using the table on page 10 under Lodging on Your Business PremisesCoverage over the limit.

You can exclude the value of lodging you furnish to anFor this exclusion, a key employee during 2006 is an employee from the employees wages if it meets the follow-

employee or former employee who is one of the following ing tests.individuals. See section 416(i) for more information.

It is furnished on your business premises.

It is furnished for your convenience.1. An officer having annual pay of more than $140,000.

The employee must accept it as a condition of em-2. An individual who for 2006 was either of the follow-ployment.ing.

Different tests may apply to lodging furnished by educa-a. A 5% owner of your business.tional institutions. See section 119(d) of the Internal Reve-

b. A 1% owner of your business whose annual pay nue Code for details.was more than $150,000.

The exclusion does not apply if you allow your employeeto choose to receive additional pay instead of lodging.A former employee who was a key employee upon

retirement or separation from service is also a key em-On your business premises. For this exclusion, yourployee.business premises is generally your employees place of

Your plan does not favor key employees as to partici- work. (For special rules that apply to lodging furnished in apation if at least one of the following is true. camp located in a foreign country, see section 119(c) of the

Internal Revenue Code and its regulations.) It benefits at least 70% of your employees.

At least 85% of the participating employees are notFor your convenience. Whether or not you furnish lodg-key employees. ing for your convenience as an employer depends on allthe facts and circumstances. You furnish the lodging to It benefits employees who qualify under a set ofyour employee for your convenience if you do this for arules you set up that do not favor key employees.substantial business reason other than to provide the em-ployee with additional pay. This is true even if a law or anYour plan meets this participation test if it is part of aemployment contract provides that the lodging is furnishedcafeteria plan (discussed in section 1) and it meets theas pay. However, a written statement that the lodging isparticipation test for those plans.furnished for your convenience is not sufficient.

When applying this test, do not consider employeeswho:

Condition of employment. Lodging meets this test if yourequire your employees to accept the lodging because

Have not completed 3 years of service,they need to live on your business premises to be able to

Are part-time or seasonal, properly perform their duties. Examples include employ-

ees who must be available at all times and employees who Are nonresident aliens who receive no U.S. sourcecould not perform their required duties without being fur-

earned income from you, ornished the lodging.

Are not included in the plan but are in a unit of It does not matter whether you must furnish the lodgingemployees covered by a collective bargaining agree- as pay under the terms of an employment contract or a lawment, if the benefits provided under the plan were fixing the terms of employment.the subject of good-faith bargaining between youand employee representatives. Example. A hospital gives Joan, an employee of the

hospital, the choice of living at the hospital free of charge orYour plan does not favor key employees as to benefits if living elsewhere and receiving a cash allowance in addition

all benefits available to participating key employees are to her regular salary. If Joan chooses to live at the hospital,also available to all other participating employees. Your the hospital cannot exclude the value of the lodging fromplan does not favor key employees just because the her wages because she is not required to live at theamount of insurance you provide to your employees is hospital to properly perform the duties of her employment.

uniformly related to their pay.S corporation shareholders. For this exclusion, do notS corporation shareholders. Because you cannottreat a 2% shareholder of an S corporation as an employeetreat a 2% shareholder of an S corporation as an employeeof the corporation. A 2% shareholder is someone whofor this exclusion, you must include the cost of alldirectly or indirectly owns (at any time during the year)group-term life insurance coverage you provide the 2%more than 2% of the corporations stock or stock with moreshareholder in his or her wages. When figuring socialthan 2% of the voting power.security and Medicare taxes, you must also include the

cost of this coverage in the 2% shareholders wages.Include the cost in boxes 1, 3, and 5 of Form W-2. How- Mealsever, you do not have to withhold federal income tax or payfederal unemployment tax on the cost of any group-term This section discusses the exclusion rules that apply to delife insurance coverage you provide to the 2% shareholder. minimis meals and meals on your business premises.

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For this exclusion, a highly compensated employee forDe Minimis Meals2006 is an employee who meets either of the following

This exclusion applies to any meal or meal money you tests.provide to an employee if it has so little value (taking intoaccount how frequently you provide meals to your employ- 1. The employee was a 5% owner at any time duringees) that accounting for it would be unreasonable or ad- the year or the preceding year.ministratively impracticable. The exclusion applies, for

2. The employee received more than $100,000 in payexample, to the following items.for the preceding year.

Coffee, doughnuts, or soft drinks. You can choose to ignore test (2) if the employee was not

also in the top 20% of employees when ranked by pay for Occasional meals or meal money provided to enable the preceding year.an employee to work overtime. (However, the exclu-sion does not apply to meal money figured on thebasis of hours worked.)

Meals on Your Business Premises Occasional parties or picnics for employees and

You can exclude the value of meals you furnish to antheir guests.employee from the employees wages if they meet thefollowing tests.This exclusion also applies to meals you provide at an

employer-operated eating facility for employees if the an- They are furnished on your business premises.nual revenue from the facility equals or exceeds the direct

costs of the facility. For this purpose, your revenue from They are furnished for your convenience.

providing a meal is considered equal to the facilitys directoperating costs to provide that meal if its value can be This exclusion does not apply if you allow your employeeexcluded from an employees wages as explained under

to choose to receive additional pay instead of meals.Meals on Your Business Premiseslater.

If food or beverages you furnish to employees On your business premises. Generally, for this exclu-qualify as a de minimis benefit, you can deduct sion, the employees place of work is your business prem-their full cost. The 50% limit on deductions for

TIP

ises.the cost of meals does not apply. The deduction limit onmeals is discussed in chapter 2 of Publication 535.

For your convenience. Whether you furnish meals foryour convenience as an employer depends on all the facts

Employee. For this exclusion, treat any recipient of a de and circumstances. You furnish the meals to your em-minimis meal as an employee. ployee for your convenience if you do this for a substantial

business reason other than to provide the employee withadditional pay. This is true even if a law or an employmentEmployer-operated eating facility for employees. Ancontract provides that the meals are furnished as pay.employer-operated eating facility for employees is an eat-However, a written statement that the meals are furnished

ing facility that meets all the following conditions. for your convenience is not sufficient. You own or lease the facility. Meals excluded for all employees if excluded for

more than half. If more than half of your employees who You operate the facility. (You are considered to op-are furnished meals on your business premises are fur-erate the eating facility if you have a contract withnished the meals for your convenience, you can treat allanother to operate it.)meals you furnish to employees on your business prem-

The facility is on or near your business premises. ises as furnished for your convenience. You provide meals (food, drinks, and related serv-

Food service employees. Meals you furnish to a res-ices) at the facility during, or immediately before or

taurant or other food service employee during, or immedi-after, the employees workday. ately before or after, the employees working hours are

furnished for your convenience. For example, if a waitressworks through the breakfast and lunch periods, you canExclusion from wages. You can generally exclude theexclude from her wages the value of the breakfast andvalue of de minimis meals you provide to an employeelunch you furnish in your restaurant for each day shefrom the employees wages.works.

Exception for highly compensated employees. Youcannot exclude from the wages of a highly compensated

Example. You operate a restaurant business. You fur-employee the value of a meal provided at an employer- nish your employee, Carol, who is a waitress working 7operated eating facility that is not available on the same a.m. to 4 p.m., two meals during each workday. Youterms to one of the following groups. encourage but do not require Carol to have her breakfast

on the business premises before starting work. She must All of your employees.

have her lunch on the premises. Since Carol is a food A group of employees defined under a reasonable service employee and works during the normal breakfast

classification you set up that does not favor highly and lunch periods, you can exclude from her wages thecompensated employees. value of her breakfast and lunch.

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If you also allow Carol to have meals on your business Meals furnished on nonworkdays or with lodging.You generally cannot exclude from an employees wagespremises without charge on her days off, you cannot ex-the value of meals you furnish on a day when the employeeclude the value of those meals from her wages.is not working. However, you can exclude these meals if

Employees available for emergency calls. Meals you they are furnished with lodging that is excluded from thefurnish during working hours so an employee will be avail- employees wages as discussed under Lodging on Yourable for emergency calls during the meal period are fur- Business Premiseson page 11.nished for your convenience. You must be able to show

Meals with a charge. The fact that you charge for thethese emergency calls have occurred or can reasonablymeals and that your employees may accept or decline thebe expected to occur.meals is not taken into account in determining whether or

not meals are furnished for your convenience.Example. A hospital maintains a cafeteria on its prem-ises where all of its 230 employees may get meals at no

S corporation shareholder-employee. For this exclu-charge during their working hours. The hospital furnishession, do not treat a 2% shareholder of an S corporation as

meals to have 120 employees available for emergencies.an employee of the corporation. A 2% shareholder is

Each of these employees is, at times, called upon tosomeone who directly or indirectly owns (at any time dur-

perform services during the meal period. Although the ing the year) more than 2% of the corporations stock orhospital does not require these employees to remain on stock with more than 2% of the voting power.the premises, they rarely leave the hospital during theirmeal period. Since the hospital furnishes meals on its

Moving Expense Reimbursementspremises to its employees so that more than half of themare available for emergency calls during meal periods, the This exclusion applies to any amount you directly or indi-hospital can exclude the value of these meals from the rectly give an employee, (including services furnished inwages of all of its employees. kind) as payment for, or reimbursement of, moving ex-

penses. You must make the reimbursements under rulesShort meal periods. Meals you furnish during workingsimilar to those described in chapter 13 of Publication 535hours are furnished for your convenience if the nature offor reimbursements of expenses for travel, meals, andyour business restricts an employee to a short meal periodentertainment under accountable plans.(such as 30 or 45 minutes) and the employee cannot be

The exclusion applies only to reimbursements of mov-expected to eat elsewhere in such a short time. For exam-ing expenses that the employee could deduct if he or sheple, meals can qualify for this treatment if your peakhad paid or incurred them without reimbursement. How-work-load occurs during the normal lunch hour. However,ever, it does not apply if the employee actually deductedthey do not qualify if the reason for the short meal period isthe expenses in a previous year.to allow the employee to leave earlier in the day.

Deductible moving expenses include only the reasona-ble expenses of:Example. Frank is a bank teller who works from 9 a.m.

to 5 p.m. The bank furnishes his lunch without charge in a Moving household goods and personal effects fromcafeteria the bank maintains on its premises. The bank the former home to the new home, andfurnishes these meals to Frank to limit his lunch period to

Traveling (including lodging) from the former home30 minutes, since the banks peak workload occurs duringto the new home.the normal lunch period. If Frank got his lunch elsewhere, it

would take him much longer than 30 minutes and the bankstrictly enforces the time limit. The bank can exclude the Deductible moving expenses do not include anyvalue of these meals from Franks wages. expenses for meals and must meet both the

distance test and the time test. The distance testCAUTION!

Proper meals not otherwise available. Meals you fur-is met if the new job location is at least 50 miles farther from

nish during working hours are furnished for your conve-the employees old home than the old job location was.

nience if the employee could not otherwise eat properThe time test is met if the employee works at least 39

meals within a reasonable period of time. For example, weeks during the first 12 months after arriving in the gen-meals can qualify for this treatment if there are insufficient eral area of the new job location.eating facilities near the place of employment. For more information on deductible moving expenses,

see Publication 521, Moving Expenses.Meals after work hours. Meals you furnish to an em-

ployee immediately after working hours are furnished for Employee. For this exclusion, treat the following individu-your convenience if you would have furnished them duringals as employees.working hours for a substantial nonpay business reason

but, because of the work duties, they were not eaten during A current employee.working hours.

A leased employee who has provided services toMeals you furnish to promote goodwill, boost mo- you on a substantially full-time basis for at least a

rale, or attract prospective employees. Meals you fur- year if the services are performed under your pri-nish to promote goodwill, boost morale, or attract mary direction or control.prospective employees are not considered furnished foryour convenience. However, you may be able to exclude Exception for S corporation shareholders. Do nottheir value as discussed under De Minimis Meals on treat a 2% shareholder of an S corporation as an employeepage 12. of the corporation for this purpose. A 2% shareholder is

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someone who directly or indirectly owns (at any time dur- 5. A leased employee who has provided services to youing the year) more than 2% of the corporations stock or on a substantially full-time basis for at least a year ifstock with more than 2% of the voting power. the services are performed under your primary direc-

tion or control.Exclusion from wages. You can generally exclude quali-

6. A partner who performs services for a partnership.fying moving expense reimbursements you provide to anemployee from the employees wages. If you paid the Treat services you provide to the spouse or dependentreimbursements directly to the employee, report the child of an employee as provided to the employee. For thisamount in box 12 of Form W-2 with the code P. Do not fringe benefit, dependent child means any son, stepson,report payments to a third party for the employees moving daughter, or stepdaughter who is a dependent of the em-expenses or the value of moving services you provided in ployee, or both of whose parents have died and who haskind. not reached age 25. Treat a child of divorced parents as a

dependent of both parents.Treat any use of air transportation by the parent of anNo-Additional-Cost Services

employee as use by the employee. This rule does notapply to use by the parent of a person considered anThis exclusion applies to a service you provide to anemployee because of item (3) above.employee if it does not cause you to incur any substantial

additional costs. The service must be offered to customersExclusion from wages. You can generally exclude the

in the ordinary course of the line of business in which thevalue of a no-additional-cost service you provide to an

employee performs substantial services.employee from the employees wages.

Generally, no-additional-cost services are excess ca-Exception for highly compensated employees. Youpacity services, such as airline, bus, or train tickets; hotel

cannot exclude from the wages of a highly compensatedrooms; or telephone services provided free or at a reducedemployee the value of a no-additional-cost service that isprice to employees working in those lines of business.not available on the same terms to one of the following

Substantial additional costs. To determine whether you groups.incur substantial additional costs to provide a service to an

All of your employees.employee, count any lost revenue as a cost. Do not reducethe costs you incur by any amount the employee pays for A group of employees defined under a reasonablethe service. You are considered to incur substantial addi- classification you set up that does not favor highlytional costs if you or your employees spend a substantial compensated employees.amount of time in providing the service, even if the timespent would otherwise be idle or if the services are For this exclusion, a highly compensated employee forprovided outside normal business hours. 2006 is an employee who meets either of the following

tests.Reciprocal agreements. A no-additional-cost service

1. The employee was a 5% owner at any time duringprovided to your employee by an unrelated employer maythe year or the preceding year.qualify as a no-additional-cost service if all the following

tests are met:

2. The employee received more than $100,000 in payfor the preceding year. The service is the same type of service generallyprovided to customers in both the line of business in You can choose to ignore test (2) if the employee was notwhich the employee works and the line of business also in the top 20% of employees when ranked by pay forin which the service is provided. the preceding year.

You and the employer providing the service have awritten reciprocal agreement under which a group of Retirement Planning Servicesemployees of each employer, all of whom performsubstantial services in the same line of business, You may exclude from an employees wages the value ofmay receive no-additional-cost services from the any retirement planning advice or information you provideother employer. to your employee or his or her spouse if you maintain a

qualified retirement plan. In addition to employer plan ad- Neither you nor the other employer incurs any sub-

vice and information, the services provided may includestantial additional cost either in providing the servicegeneral advice and information on retirement. However,

or because of the written agreement. the exclusion does not apply to services for tax prepara-tion, accounting, legal, or brokerage services.

Employee. For this exclusion, treat the following individu-als as employees. Transportation (Commuting) Benefits1. A current employee.

This section discusses exclusion rules that apply to bene-2. A former employee who retired or left on disability. fits you provide to your employees for their personal trans-

portation, such as commuting to and from work. These3. A widow or widower of an individual who died while

rules apply to the following transportation benefits.an employee.

De minimis transportation benefits.4. A widow or widower of a former employee who re-

tired or left on disability. Qualified transportation benefits.

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Special rules that apply to demonstrator cars and qualified In a vehicle that seats at least 6 adults (not includingthe driver) if a person in the business of transportingnonpersonal-use vehicles are discussed under Workingpersons for pay or hire operates it.Condition Benefitson page 16.

Mass transit may be publicly or privately operated andDe Minimis Transportation Benefits includes bus, rail, or ferry.

You can exclude the value of any de minimis transportationQualified parking. Qualified parking is parking you pro-

benefit you provide to an employee from the employeesvide to your employees on or near your business premises.

wages. A de minimis transportation benefit is any transpor- It includes parking on or near the location from which yourtation benefit you provide to an employee if it has so little employees commute to work using mass transit, com-

value (taking into account how frequently you provide muter highway vehicles, or carpools. It does not includetransportation to your employees) that accounting for it parking at or near your employees home.would be unreasonable or administratively impracticable.For example, it applies to occasional transportation fare Employee. For this exclusion, treat the following individu-you give an employee because the employee is working als as employees.overtime if the benefit is reasonable and is not based on

A current employee.hours worked.

A leased employee who has provided services toEmployee. For this exclusion, treat any recipient of a de you on a substantially full-time basis for at least aminimis transportation benefit as an employee. year if the services are performed under your pri-

mary direction or control.

Qualified Transportation BenefitsException for S corporation shareholders. Do not

treat a 2% shareholder of an S corporation as an employeeThis exclusion applies to the following benefits.

of the corporation for this purpose. A 2% shareholder is A ride in a commuter highway vehicle between the someone who directly or indirectly owns (at any time dur-

employees home and work place. ing the year) more than 2% of the corporations stock orstock with more than 2% of the voting power.

A transit pass.

Qualified parking. Relation to other fringe benefits. You cannot exclude aqualified transportation benefit you provide to an employeeThe exclusion applies whether you provide only one or aunder the de minimis or working condition benefit rules.combination of these benefits to your employees.However, if you provide a local transportation benefit other

Qualified transportation benefits can be provided directly than by transit pass or commuter highway vehicle, or to aby you or through a bona fide reimbursement arrange- person other than an employee, you may be able to ex-ment. However, cash reimbursements for transit passes clude all or part of the benefit under other fringe benefitqualify only if a voucher or a similar item that the employee rules (de minimis, working condition, etc.).can exchange only for a transit pass is not readily available

for direct distribution by you to your employee. A voucher is Exclusion from wages. You can generally exclude thereadily available for direct distribution only if an employee value of transportation benefits that you provide to ancan obtain it from a voucher provider that does not impose employee during 2006 from the employees wages up tofare media charges or other restrictions that effectively the following limits.prevent the employer from obtaining vouchers. See Regu-

$105 per month for combined commuter highwaylations section 1.132-9 for more information.

vehicle transportation and transit passes.You can exclude qualified transportation fringe benefits

$205 per month for qualified parking.from an employees wages even if you provide them inplace of pay. For information about providing qualified

Benefits more than the limit. If the value of a benefittransportation fringe benefits under a compensation reduc-for any month is more than its limit, include in thet i on ag r eemen t , see Regu la t i ons sec t i onemployees wages the amount over the limit minus any1.132-9(b)(Q-11).amount the employee paid for the benefit. You cannotexclude the excess from the employees wages as a de

Commuter highway vehicle.A commuter highway vehi-

minimis transportation benefit.cle is any highway vehicle that seats at least 6 adults (notincluding the driver). In addition, you must reasonably

More information. For more information on qualifiedexpect that at least 80% of the vehicle mileage will be fortransportation benefits, including van pools, and how totransporting employees between their homes and workdetermine the value of parking, see Regulations sectionplace with employees occupying at least one-half the1.132-9.vehicles seats (not including the drivers).

Tuition ReductionTransit pass. A transit pass is any pass, token, farecard,voucher, or similar item entitling a person to ride, free of

An educational organization can exclude the value of acharge or at a reduced rate, one of the following.qualified tuition reduction it provides to an employee from

On mass transit. the employees wages.

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A tuition reduction for undergraduate education gener- An independent contractor who performs servicesally qualifies for this exclusion if it is for the education of for you.one of the following individuals.

Vehicle allocation rules. If you provide a car for an1. A current employee. employees use, the amount you can exclude as a working

condition benefit is the amount that would be allowable as2. A former employee who retired or left on disability.a deductible business expense if the employee paid for its

3. A widow or widower of an individual who died whileuse. That is, if the employee uses the car for both business

an employee. and personal use, the value of the working condition bene-fit is the part determined to be for business use of the4. A widow or widower of a former employee who re-

vehicle. See Business use of your car under Personaltired or left on disability.Expenses in chapter 1 of Publication 535. Also, see the

5. A dependent child or spouse of any individual listedspecial rules for certain demonstrator cars and qualified

in (1) through (4) above.nonpersonal-use vehicles discussed below.

A tuition reduction for graduate education qualifies for However, instead of excluding the value of the workingthis exclusion only if it is for the education of a graduate condition benefit, you can include the entire annual leasestudent who performs teaching or research activities for value of the car in the employees wages. The employeethe educational organization. can then claim any deductible business expense for the

car as an itemized deduction on his or her personal incomeFor more information on this exclusion, see Publicationtax return. This option is available only if you use the lease970, Tax Benefits for Education.value rule (discussed in section 3) to value the benefit.

Working Condition BenefitsDemonstrator cars. All of the use of a demonstrator carby your full-time auto salesperson generally qualifies as aThis exclusion applies to property and services you pro-working condition benefit if the use is primarily to facilitatevide to an employee so that the employee can perform histhe services the salesperson provided for you and thereor her job. It applies to the extent the employee couldare substantial restrictions on personal use. For morededuct the cost of the property or services as a businessinformation and the definition of full-time auto salesper-expense or depreciation expense if he or she had paid forson, see Regulations section 1.132-5(o).it. The employee must meet any substantiation require-

ments that apply to the deduction. Examples of workingQualified nonpersonal-use vehicles. All of ancondition benefits include an employees use of a companyemployees use of a qualified nonpersonal-use vehicle is acar for business and job-related education provided to anworking condition benefit. A qualified nonpersonal-use ve-employee.hicle is any vehicle the employee is not likely to use moreThis exclusion also applies to a cash payment youthan minimally for personal purposes because of its de-provide for an employees expenses for a specific or prear-sign. Qualified nonpersonal-use vehicles generally includeranged business activity for which a deduction is allowableall of the following vehicles.to the employee. You must require the employee to verify

that the payment is actually used for those expenses and Clearly marked police and fire vehicles.to return any unused part of the payment. Unmarked vehicles used by law enforcement officers

For information on deductible employee business ex- if the use is officially authorized.penses, see Unreimbursed Employee Expensesin Publi-

An ambulance or hearse used for its specific pur-cation 529, Miscellaneous Deductions.pose.The exclusion does not apply to the following items.

Any vehicle designed to carry cargo with a loaded A service or property provided under a flexible gross vehicle weight over 14,000 pounds.

spending account in which you agree to provide the Delivery trucks with seating for the driver only, or theemployee, over a time period, a certain level of un-

driver plus a folding jump seat.specified noncash benefits with a predeterminedcash value.

A passenger bus with a capacity of at least 20 pas-sengers used for its specific purpose. A physical examination program you provide, even if

mandatory. School buses. Any item to the extent the employee could deduct its

Tractors and other special-purpose farm vehicles.cost as an expense for a trade or business otherthan your trade or business. Pickup trucks. A pickup truck with a loaded gross vehi-

cle weight of 14,000 pounds or less is a qualifiednonpersonal-use vehicle if it has been specially modifiedEmployee. For this exclusion, treat the following individu-so it is not likely to be used more than minimally forals as employees.personal purposes. For example, a pickup truck qualifies ifit is clearly marked with permanently affixed decals, spe- A current employee.cial painting, or other advertising associated with your

A partner who performs services for a partnership.trade, business, or function and meets either of the follow-

A director of your company. ing requirements.

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fits include promoting a positive business image, maintain-1. It is equipped with at least one of the following items. ing employee morale, and avoiding wrongful termination

suits.a. A hydraulic lift gate.

Outplacement services do not qualify as a working con-b. Permanent tanks or drums. dition benefit if the employee can choose to receive cash

or taxable benefits in place of the services. If you maintainc. Permanent side boards or panels that materially

a severance plan and permit employees to get outplace-raise the level of the sides of the truck bed.

ment services with reduced severance pay, include in thed. Other heavy equipment (such as an electric gen- employees wages the difference between the unreduced

erator, welder, boom, or crane used to tow auto- severance and the reduced severance payments.mobiles and other vehicles).

Exclusion from wages. You can generally exclude thevalue of a working condition benefit you provide to an2. It is used primarily to transport a particular type ofemployee from the employees wages.load (other than over the public highways) in a con-

struction, manufacturing, processing, farming, min- Exception for independent contractors. You cannoting, drilling, timbering, or other similar operation for exclude the value of parking or the use of consumer goodswhich it was specially designed or significantly modi- you provide in a product testing program from the compen-fied. sation you pay to an independent contractor who performs

services for you.Vans. A van with a loaded gross vehicle weight of

Exception for company directors. You cannot ex-14,000 pounds or less is a qualified nonpersonal-use vehi-clude the value of the use of consumer goods you providecle if it has been specially modified so it is not likely to bein a product testing program from the compensation youused more than minimally for personal purposes. For ex-pay to a director.ample, a van qualifies if it is clearly marked with perma-

nently affixed decals, special painting, or other advertisingassociated with your trade, business, or function and has aseat for the driver only (or the driver and one other person) 3. Fringe Benefit Valuationand either of the following items.

Rules Permanent shelving that fills most of the cargo area.

This section discusses the rules you must use to determine An open cargo area and the van always carriesthe value of a fringe benefit you provide to an employee.merchandise, material, or equipment used in yourYou must determine the value of any benefit you cannottrade, business, or function.exclude under the rules in section 2 or for which theamount you can exclude is limited. See Including taxable

Education. Certain job-related education you provide to benefits in payon page 2.an employee may qualify for exclusion as a working condi- In most cases, you must use the general valuation ruletion benefit. To qualify, the education must meet the same to value a fringe benefit. However, you may be able to userequirements that would apply for determining whether the a special valuation rule to determine the value of certain

employee could deduct the expenses had the employee benefits.paid the expenses. The education must meet at least one This section does not discuss the special valuation ruleof the following tests. used to value meals provided at an employer-operated

eating facility for employees. For that rule, see Regulations The education is required by the employer or by law

section 1.61-21(j). This section also does not discuss thefor the employee to keep his or her present salary,special valuation rules used to value the use of aircraft. Forstatus, or job. The required education must serve athose rules, see Regulations sections 1.61-21(g) and (h).bona fide business purpose of the employer.

The education maintains or improves skills needed General Valuation Rulein the job.

You must use the general valuation rule to determine theHowever, even if the education meets one or both of the value of most fringe benefits. Under this rule, the value of a

above tests, it is not qualifying education if it: fringe benefit is its fair market value.

Is needed to meet the minimum educational require-Fair market value. The fair market value (FMV) of a fringements of the employees present trade or business, benefit is the amount an employee would have to pay a

or third party in an arms-length transaction to buy or leasethe benefit. Determine this amount on the basis of all the Is part of a program of study that will qualify thefacts and circumstances.employee for a new trade or business.

Neither the amount the employee considers to be thevalue of the fringe benefit nor the cost you incur to provide

Outplacement services. An employees use of outplace- the benefit determines its FMV.ment services qualifies as a working condition benefit ifyou provide the services to the employee on the basis of Employer-provided vehicles. In general, the FMV of anneed and you get a substantial business benefit from the employer-provided vehicle is the amount the employeeservices distinct from the benefit you would get from the would have to pay a third party to lease the same or similarpayment of additional wages. Substantial business bene- vehicle on the same or comparable terms in the geo-

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graphic area where the employee uses the vehicle. A Mileage test. A vehicle meets the mileage test for a calen-comparable lease term would be the amount of time the dar year if both of the following requirements are met.vehicle is available for the employees use, such as a

The vehicle is actually driven at least 10,000 miles1-year period.during the year. If you own or lease the vehicle onlyDo not determine the FMV by multiplying apart of the year, reduce the 10,000 mile requirementcents-per-mile rate times the number of miles driven un-proportionately.less the employee can prove the vehicle could have been

leased on a cents-per-mile basis. The vehicle is used during the year primarily by

employees. Consider the vehicle used primarily byCents-Per-Mile Rule employees if they use it consistently for commuting.

Do not treat the use of the vehicle by another individ-Under this rule, you determine the value of a vehicle you ual whose use would be taxed to the employee asprovide to an employee for personal use by multiplying the use by the employee.standard mileage rate by the total miles the employeedrives the vehicle for personal purposes. Personal use is For example, if only one employee uses a vehicle duringany use of the vehicle other than use in your trade or the calendar year and that employee drives the vehicle atbusiness. This amount must be included in the employees least 10,000 miles in that year, the vehicle meets thewages or reimbursed by the employee. For 2006, the mileage test even if all miles driven by the employee arestandard mileage rate is 44.5 cents a mile. personal.

You can use the cents-per-mile rule if either of thefollowing requirements is met.

Consistency requirements. I f you use the You reasonably expect the vehicle to be regularly cents-per-mile rule, the following requirements apply.

used in your trade or business throughout the calen-dar year (or for a shorter period during which you You must begin using the cents-per-mile rule on theown or lease it). first day you make the vehicle available to any em-

ployee for personal use. However, if you use the The vehicle meets the mil

us internal revenue service: p15b--2006

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