Payroll Tax Rules, Employee Benefits, and Income Tax Reporting
Winter Conference February 2016 Karen M. Field KPMG LLP
Notice
The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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Federal Income Tax Reporting and Withholding Section 61 – compensation paid to employees is included in income unless otherwise excluded ■ If income AROSE OUT OF employment relationship, it is usually taxable compensation unless specifically excluded Section 6041 – must report income on Form W-2
Section 3402 – must withhold federal income tax Section 3121 – must withhold FICA/Medicare Form 941 – quarterly report of compensation paid and withholding
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Non-employee Compensation Non-employee compensation – Report on Form 1099-MISC Box 7
■ No withholding ■ Subject to SECA Taxable injury payments and other non-employment settlements – 1099-MISC Box 3
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Taxable Compensation Section 1.61 or section 83 - taxable compensation
■ Form W-2 if arises out of employment relationship (NOT 1099-MISC unless earned as nonemployee or no longer alive!) ■ Usually DO WITHHOLDING FIRST – Withhold by holding back other compensation – Withhold by obtaining check from employee
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Withholding Timing and Method Federal
■ Regular – payroll withholding deposited within 2-5 days after payroll (for most employers) – based on weekday of payment – Follows Form W-4 – whatever the W-4 says, goes (between ee and IRS unless IRS contacts the employer ■ Supplemental – Any non-regular wages (bonuses), can generally be run through payroll but OPTIONAL supplemental withholding is typical
– 25% flat rate (39.6% rate once a person’s supplemental wage > 1 million. ■ Next Day rule – deposit FASTER
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Taxable Fringe Benefits Payroll Section 102(c) – “Gifts” to employees from employers are generally compensation
Section 1.61-21 ■ Non-cash benefits (that do not fall into section 83 property or one of the fringe benefit exclusions) ■ Taxable at FMV of the benefit in an arms-length transaction ■ Subject to FICA/Medicare and FIT withholding during the calendar year – employer can choose when during the calendar year. – Lag method – benefits earned in last 2 months of calendar year
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Deferred Compensation - Payroll
Section 457(b)
Vested (usually) deferred compensation, up to $18,000 per year per person Section 3121(v)(2) – withhold FICA/Medicare on any amounts contributed that are vested during year of contribution. Withhold on other income, usually. Withhold FIT in year of DISTRIBUTION – taxable at proper distribution
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Deferred Compensation - Payroll Section 457(f) ANY deferral of compensation, contractual, annual that is unvested must be taxed in the year of vesting Vesting = lapse of the last substantial risk of forfeiture ■ Ignore “for cause” risk of forfeiture, ignore most “non-complete risks of forfeiture. “You leave, you lose” is the usual substantial risk of forfeiture Subject to FIT and FICA/Medicare in year of vesting, no matter when paid Exception for INVOLUNTARY severance ■ Does not resemble other deferred compensation
■ Paid over less than 2 years after termination ■ Total is less than 2 x prior compensation (IRS may narrow this)
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Deferred Compensation - Payroll Qualified Plans – Generally 20% mandatory withholding unless rolled over or annuity payments (withheld by plan administrator, not employer) ■ 401(k) – elective deferrals –
– FICA/Medicare as deferred – 401(k) amounts no federal taxation until distributed- withheld by plan administrator ■ Employee after-tax contributions –
– FICA/Medicare as contributed – subject to federal income tax as contributed (withheld by employer) ■ Employer contributions – – not subject to FICA/Medicare – Subject to federal taxation as distributed (plan administrator)
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Correcting Failure to Report or Withhold Failed to withhold or report
Form 941c correction (if done correctly) is interest free ■ Do Form 941-X paying in FICA/Medicare ■ Do Form W-2c reporting income and FICA/Medicare properly to employees ■ Obtain Form 4669 (affidavit) from employees “you did not withhold but I did pay tax” Go into IRS and negotiate – rare unless amounts are large or IRS is already in the door
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Payroll Penalties Failure to report on Form W-2
■ $100 employee, $100 IRS 100% penalty for failure to withhold FICA/Medicare 100% liability for tax (section 3403) Section 6656 – progressively higher % of TAX over time for late deposit Form 941 failure to file Negligence penalties can also apply ■ 20% of tax
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State Payroll Issues Most states (not FL) require wage withholding
■ Regular ■ Supplemental ■ Multistate withholding – Two states have the right to tax, both can. ■ If one state does not tax, the other will not cede right to tax. ■ Nonqualified deferred compensation rules ■ Qualified deferred compensation rules ■ Equity compensation rules (FL is unlikely to get the money) FL State Unemployment (now “Re-employment Tax” rate for 2016) ■ Quarterly employer payment into fund
■ Beginning rate 2.7% of first $7,000 of wages ■ Recalculate after 10 quarters
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Taxable Fringe Benefits
IRS Payroll Tax/Employment Tax Examinations Reviews Compensation Reporting/Withholding issues
■ Highly Compensated Employee Compensation ■ Deferred Compensation ■ Taxable Fringe Benefits
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IRS Examination List of Fringe Benefits Gift cards
Inappropriate “tax free” education Car or use of car, driver Spousal/dependent travel Employer or vendor-paid vacations Free dining rooms (unless meet section 119 or 132(e)(2) direct cost rules) Club memberships Tax return or wealth management assistance Security
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Excludible Fringe Benefits
Excludible Fringe Benefits Section 132
■ De minimis ■ Working Condition ■ On premise gym ■ Transportation Fringe/Parking ■ Employee Discounts ■ No-additional-cost benefit ■ Line of business rules ■ Discrimination rules
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De Minimis Definition of employee
Administratively difficult to handle ■ Almost never cash or cash equivalents! ■ Grocery certificate? TAM 200437030 Infrequent Low value ■ MEALS (not every day…) ■ T-shirts, umbrellas ■ Branding does not help much! ■ $75-$100 (1.274-5(c)(2)(iii)(2))
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On-premise Dining Rooms Section 132(e)(2)
■ On business premise ■ Employer run or run for employer by management co ■ Non-discriminatory ■ Employee pays direct cost OR direct cost is included in income
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Free Meals and Lodging Section 119
■ Meals or lodging for employer’s convenience (NOT compensatory reasons) ■ On employer’s premise ■ Mandatory training on leased property? Free meals in remote areas on moving “business premise”?
Boyd Gaming and statute ■ 50% of employees rule No discrimination rule on lodging Free meals, section 119 passes through 132(e)(2) – discrimination rule applies
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Working Condition Fringe Benefit Most executive and director costs
■ D&O insurance ■ Offices provided to directors, independent contractors? Definition of employee includes partners If employee could have deducted in business of being an employee of THIS employer, employer can provide tax free
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Parking Pre-tax payments for valuable parking or imputing value in income
Subject to indexed limit ■ Parking ■ Other transportation (subway cards, etc.)
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Health Benefits (sections 104, 105, and 106) Insured benefits
Medical check-ups for top people Self-funded benefits ■ Definition of HCE ■ Definition of covered benefits ■ Discrimination rules
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Education Benefits Section 127
■ Discrimination rules apply ■ Broad array of classes available Section 132(d) ■ No discrimination rules ■ Limited to improving “current job skills” – watch education that automatically prepares for other career Can ER pay for the CFOs MBA?
Can ER “groom” the up-and-coming manager for a new level by paying for education?
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Other Excludible Fringe Benefits Section 74 Prizes and Awards
■ 5 year awards ■ Tangible personal property Employee Loans ■ Small loans, relocation loans ■ Watch TAM/Gales case ■ Section 127 PLR
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Taxable Fringe Benefits
Regular Taxable Fringe Benefit Rules Financial management
Tax assistance Car and driver Employer-paid vacations ■ Watch “facility” rule! ■ Watch employer-provided travel ■ Watch spousal travel
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Fair Market Value General Valuation Rules
■ what the employee would have to pay for the benefit in an arms length transaction (with a few exceptions) – Example: auto lease – what the employee could lease a car for, ignoring company discounts. Same for planes – charter rate for use of plane.
Special Valuation Rules ■ 1.61-21 has special exceptions for use of a car, use of a company plane, commuting, etc. ■ If employer does not use special valuation timely, cannot go back an use the special methods.
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Spousal Travel Danville Plywood vs Disney case
■ Is spouse REALLY along to perform a business function – facts and circumstances but hard to argue Section 274(m)(3) – no deduction for spouse to travel unless also an employee traveling on business
■ However, section 274(e) – generally deductible if included in employee income (but watch company plane rules) Section 1.61-21(a) – if fringe is provided because of the service of another person, that person must include the FMV of the benefit in income. Definition of “employee” very broad for this purpose
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Security Security study
SIFL rate Home vs. work security Family member security Emergencies (country of assignment blow-ups)
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Retired Employee Taxable Fringe Benefits Retiree health policy
Cars Watch 409A “In-kind Benefit rules!
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Use of Automobile Fringe Benefits Auto Lease rules
Commuting rule FAVR
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Auto Lease Rules Employer-provided car
Employee uses for business and personal Substantiate and report personal use (per quarter or monthly) Auto lease value rules ■ Use current IRS table of car values ■ Can use fleet average but only for cars worth less than $19,000 (currently) ■ Annual lease value x personal use percentage = income Watch car allowances! Can toss whole value in income and allow them to deduct, but not very beneficial
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Cars Vehicle Cents per Mile Method
■ Car worth less than Annual Listed FMV (around $15,000) ■ Employer reasonably expects car will be used mostly by employee and regularly for business ■ 48.5 (indexed) cents for each mile of personal use
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Cars Commuter Value
■ $1.50 per one way commute ■ required to use vehicle ■ de minimis personal use ■ not a control employee
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In-town Apartment Section 119
■ SELDOM WORKS! Section 62(c) ■ Not if the employee has chosen to live somewhere other than near the office (tax home) – Flowers case Temporary travel ■ Not if there is an expectation that this job will last beyond one year Section 1.61-21 – taxable fringe benefit at FMV (probably long term rental value)
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Other facilities Owned or leased
Use ■ Fishing boats? ■ Resorts? Effect of section 274(e) on other facilities
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Reimbursement Exclusion Rules
Temporary Travel Temporary vs. permanent
■ Is the job expected to be “temporary” (reasonably expected to last less than 1 year?) ■ Assignment letters? ■ Later extensions? Tax home is where your office is, usually ■ Is a person’s post of duty somewhere other than the regular office? CCAs ■ commuting, flexible work place, travel from home to other work sites, multiple long-term assignments
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Reimbursements Section 62(c) - Employees
Accountable Plan Rules ■ Business reason for expense (is primary reason for travel a business reason?) ■ Substantiation within a reasonable period of time ■ Advances required to be paid back! Watch Business Pre-tax “accountable” plans
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QUESTIONS?
Thank you Presentation by Karen Field
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