CPP Study Group2010 Exam

Table of Contents

CPP Study Group............................................................................................................ 1

Section 1 – The Employer-Employee Relationship ......................................................... 2

Section 2 – Federal and State Wage-Hour Laws .......................................................... 18

Section 3 Part 1 – Taxable and Nontaxable Compensation .......................................... 43

Section 3 Part 2 – Taxable and Nontaxable Compensation .......................................... 67

Section 4 – Health, Accident, and Retirement Benefits ................................................. 88

Section 5 – Paying the Employee ............................................................................... 114

Section 6 – Withholding Taxes.................................................................................... 122

Section 7 – Unemployment Insurance......................................................................... 139

Section 8 – Depositing and Reporting Withheld Taxes ............................................... 152

Section 9 – Other Deductions From Pay ..................................................................... 173

Section 10 – Recordkeeping and Record Retention ................................................... 184

Section 11 – Payroll Accounting.................................................................................. 192

Section 12 – Payroll Systems and Technology ........................................................... 204

Section 13 - Managing a Payroll Department............................................................. 215

Section 14 – Payroll for U.S. Employees Abroad and Aliens in the U.S...................... 229

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CPP Study Group 1

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CPP Study Group 2

Section 1 – The Employer-Employee Relationship Objectives

Determine the characteristics of a worker’s status

Define the differences between various types of employees and non-employees

Explain the Common Law and Reasonable Basis Tests

Understand the functions of Forms SS-8, 1099MISC, and I-9

Describe the Penalty Tier for improper worker classification

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Importance of the Determination

The term “worker” is a very broad term and it is the employer’s responsibility to make the correct designation. An employer’s tax withholding and reporting obligations are contingent on proper classification of the worker. There are many types of workers that provide services to employers.

Under the Internal Revenue Code (IRC), am employer has the following obligations for employees:

Withholding _____________ _______ Withholding ___________ _____________ Withholding ______________ Paying employer’s share of ___________ ___________ Paying employer’s share of __________________ Paying ___________ __________________ ______

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Employee vs. Independent Contractor

It is often much less expensive for a business to use independent contractors to provide services because the taxing and reporting requirements are much less costly than they are for employees. So long as the independent contractor provides the employer with a valid ____________ ___________________ ____________, the employer’s only obligations are to give the contractor a Form _______- ______ at the end of the year stating how much the contractor was paid for the services rendered if the total was at least $______.

__________ __________ and ______________ need not be withheld from an independent contractor’s payments or matched by the employer. Also, no ___________ or _____________ ____________________ _________________ ________ are required.

Common Law Test

Under the common law test, an employer-employee relationship exists and the worker is a common law employee if the employer has the right ________________________

_____________________________________________________________________.

Control factors include:

Behavioral control

Financial control

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Type of Relationship

There several factors that generally indicate how the worker and the business perceive their relationship to each other. These include:

Reasonable Basis Test (safe-harbor rules)

An alternative standard may be used for determining the status of workers. The status of independent contractor applies if the employer relied on one or more of the following safe-harbor rules:

Form SS-8 - Determination of employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding

This form can be submitted by the employer or a worker when a definitive ruling from the IRS is required.* While waiting for the IRS to respond to the Form SS-8, the employer should treat the worker(s) in question as an ____________________.

Taxes paid by the employer to the IRS while waiting for a ruling will not be refunded to the employer even if it is determined that the worker is not an employee.

*The Payroll Source does not reference the fact that an employee can file a form SS8; however PayTrain does indicate this.

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Employment Status Determined by Law

Workers who would not meet the definition of the “Common Law Test” still are considered employees for certain purposes.

Statutory Employees

While statutory employees are not employees under the Common Law Test, they are treated as employees for certain employment tax purposes. These employees have no substantial investment in the business.

Payments made to statutory employees are not subject to __________ but they are subject to ____________ and ___________. Although employers are not responsible to withhold FIT, employees are still responsible for filing these taxes.

The four categories of statutory employees are: (remember DISH)

An agreement must exist that the worker will personally perform all services for the employer. The worker cannot make a substantial investment in the business equipment or facilities. The work performed must be on a continuing relationship, not just one lone transaction.

Statutory Nonemployee

While they may qualify to be classified as employees under the Common Law Test, statutory nonemployees are treated as __________________ for all employment tax purposes. The payments an employer makes to a statutory nonemployee are not subject to FIT, FICA, or FUTA withholding.

The two categories of statutory non-employees are: (remember REDS)

Wages for statutory nonemployees are based on service, not on hours worked. A statutory nonemployee is responsible for depositing all taxes, much like an independent contractor.

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Temporary Help Agencies employees

These workers are hired by a Temporary Help Agency to provide short-term services for client companies. These employees may or may not have a specific specialty that can be offered to potential clients.

Some of the characteristics of a Temporary Help Agency Employee include:

Leased employees

Employees that work for an Employee Leasing company are usually employed for longer periods of time than Temporary Help Agency employees. These workers usually offer a specialized service to potential clients of the Leasing Company. The Client Company should be watchful of the level of control they maintain over the employee. The more control they retain, the greater likelihood that they may be considered the employer rather than the leasing company.

Some of the characteristics of a Leasing company employee include:

Note: The employer should always make sure they are dealing with a financially secure and reputable Temporary Help Agency or Employee Leasing Company since the companies failure could lead to the client company being liable for any withholding or employment taxes that remain unpaid.

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Employees Under Other Federal and State Laws

Wage and Hour Division

The FLSA broadly defines an employee as any individual who works for an employer. The Department of Labor and the federal courts find an employer-employee relationship where the worker is ____________ ______________ on the employer. Factors considered by the courts and the Department of Labor when making a determination include:

Control the employer has over how the work is performed Chance to make a profit or risk a loss based on how skillfully the work is performed Investment in tools or materials required to perform the work or hiring of helpers Work requires a special skill Permanency of the working relationship Work performed is an integral part of the employer’s business operation

State Wage-Hour Laws

Employees that are covered under the Common Law employee test usually satisfy the test for employment status under the state law. Common Law test can be used to determine and employer-employee relationship for State Income Tax (SIT). A _____________ agreement between two states allows the employees residence state to withhold SIT when the employee is working in one state and living in another.

ABC Test

For State Unemployment Insurance (SUI) the ABC test is used in more than half the states to determine the employer-employee relationship. ABC stands for:

A_________________________________ – the worker is free from control or direction in performing the work both by agreement and in reality

B_________________________________ – the work is performed outside the usual course of the company’s business or away from any of the employer’s facilities

C___________________________________ – the worker is customarily engaged in an independent trade, occupation, or business

For those states that require state disability insurance, the employment status is determined under the same test the state uses for its unemployment insurance.

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Worker Misclassification

IRS Penalties

Determination ER Action Penalty

Not Intentional Filed Form 1099-MISC

Employer pays ____% of employee’s portion of social security/Medicare

Employer pays % of wages paid for not withholding federal income tax

Not Intentional Failed to filed Form 1099-MISC

Employer pays ____ % of employee’s portion of social security/Medicare

Employer pays _____% of wages paid for failure to withhold federal income tax

Intentional Employer pays ______ % of all employer and employee taxes

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IRS Enforcement Efforts

When in doubt, treat the worker as an employee until a determination is made. It is the employer’s responsibility to make the correct designation.

IRS looks at employees who receive a 1099 from only one company Review each employer-worker relationship separately Former employees, or retirees, called back to perform services for the employer as

consultants doing the same work as before are considered employees If IRS examiner finds that business is wrongfully treating employees as

independent contractors, one of two Classification Settlement Program (CSP) settlement offers can be made Has met reporting consistency requirement, but has no reasonable basis Has met reporting consistency requirement and has met reasonable basis test

FLSA Complaints Employees who feel they are being improperly treated as independent contractors

and are not being paid minimum wage or overtime can file a complaint with the U.S. Department of Labor’s Wage and Hour Division

More than 75% of the audits are the result of individual complaints Huge back pay and damage rewards can result

State Unemployment Agencies Many problems begin with an EE whose claim for unemployment benefits is denied

because there were no eligible earnings A finding of misclassification can lead to the assessment of penalties

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Proof of Right to Work in the U.S.

Immigration Reform and Control Act of 1986 (IRCA)

The Immigration Reform and Control Act of 1986 (IRCA) made it illegal for an employer to hire an unauthorized worker. Employers can protect themselves by:

Having employees fill out Form I-9. Making sure EEs provide original documentary evidence of their identity and

eligibility to work within 3 business days of the date of hire Making sure documents establishing EE’s identity appear genuine within 3 days of

date of hire Properly completing the employer’s portion of Form I-9 Keeping Form I-9 for 3 years from date of hire or 1 year from date of termination,

whichever is longer Presenting Form I-9 upon request to Immigration and Naturalization Services (INS)

or Department of Labor (DOL)

Form I-9

Form I-9 is the Employment Eligibility Verification form. Guidelines for Form I-9 include:

Keep Form I-9 for ____ years from date of hire or ____ year form date of termination, whichever is longer

Present Form I-9 upon request to U.S. Bureau of Citizenship and Immigration Services (US-CIS)* or Department of Labor (DOL)

*Formerly known as the Immigration and Naturalization Services (INS)

Example: Fred Jones is hired by ABC Company on March 6 of the current year. Fred works for one day and then terminates his employment on March 7. ABC Company must retain Fred’s Form I-9 until ___________________________.

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List of Acceptable Documents

List A – Documents Proving Both Identity and Work Authorization U.S. Passport (unexpired or expired) Permanent Resident Card or alien Registration Receipt Card with photograph,

fingerprint, and signature of bearer (USCIS Form I-551) Unexpired foreign passport with temporary I-551 stamp reading “Processed for I-

551 Temporary Evidence of Lawful Admission for permanent residence. Valid till _____Employment Authorized”

Unexpired Employment Authorization Document that contains a photograph (USCIS FormI-776, I-688, I-688A, I-688B)

An unexpired foreign passport with an unexpired Arrival-Departure Record, Form I-94, bearing the same name as the passport and containing an endorsement of the alien’s non-immigration status.

List B – Documents that Establish Identity Driver’s license or ID card issued by a state or outlying possession of the United

States provided it contains a photograph or information such as name, date of birth, gender, height, eye color, and address

ID card issued by federal, state, or local government agencies or entities, provided it contains a photograph or information such as name, date of birth, gender, height, eye color, and address

School ID card with a photograph Voter’s registration card U.S. Military card or draft record Military dependent’s ID card U.S. Coast Guard Merchant Mariner Card Native American tribal document Drive’s license issued by a Canadian government authority For persons under 18 who are unable to present a document listed above:

School record or report card Clinic, doctor, or hospital record Day-care or nursery school record

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List C – Documents Proving Work Authorization Only U.S. Social Security Card issued by the Social Security Administration (other than

a card stating it is not valid for employment) Certification of Birth Abroad issued by the Department of State (Form FS-545 or

Form DS-1350) Original or certified copy of a birth certificate issued by a state, county, municipal

authority, or outlying possession of the United States bearing an official seal Native American tribal document U.S. Citizen ID Card (INS Form I-197) ID Card for use of Resident Citizen of the United States (INS Form I-179) Unexpired employment authorization document issued by DHS (other than those

listed under List A)

Remember – the employer cannot demand specific documents to prove the right to work in the U.S. The employee can provide any document on the list to prove identity and work authorization.

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Employee or Non-employee?

In the list below, classify the worker as an employee or non-employee. Also list the form the worker would receive at the end of the year and what taxes the employer would be required to withhold:

Worker Classification Form Taxes Withheld

Leased Worker

Real Estate Agent

Temporary Help Worker

Common Law Worker

House Painter (to home owner)

Driver

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CPP Study Group 15

Key Terms – Section One

ABC Test A set of criteria used by many states to determine the relationship of a worker for the state’s unemployment insurance law.

Behavioral Control

The right of a business to direct and control the details and means by which a worker performs the work to be done.

Common Law Employee

A worker who is an employee under the common law test.

Common Law Test

A test that measures the control and direction that an employer has the authority to exercise over a worker.

Employee An individual who performs services for another individual or an organization in return for compensation.

Employer An individual or organization that hires individuals to perform services in return for compensation, and that has the right to control and direct the work of those individuals as part of the employer-employee relationship.

Financial Control The right of a business to direct and control the economic aspect of` a worker’s job.

FLSA Fair Labor Standards Act

Independent Contractor

A nonemployee contracted by a business to perform services. Although the business specifies the result of the work, it has no right to control the details of the work.

IRC Internal Revenue Code

IRS Internal Revenue Service

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Leased Employees

Employees of a leasing agency who are hired and trained for the client firm through the agency.

New Hire Reporting

The reporting of newly hired and rehired employees to state agencies to facilitate the collection of child support payments or to uncover abuse in the state’s unemployment compensation, worker’s compensation, or public assistance programs.

Reasonable Basis Test

A standard used to determine whether a worker can be treated as a independent contractor whether or not the common law test is met, based on prior court and administrative rulings, IRS audits, or longstanding practice in the industry.

Reciprocity In payroll, a relationship between status under which privileges granted are returned by the other.

Statutory Employees

Special groups of employees identified by law (full-time life insurance sales, homeworkers, agent drivers, traveling salespersons) whose wages are not subject to FIT withholding but are subject to social security, medicare, and FUTA.

Statutory Nonemployees

Special group of workers who may qualify as common law employees but are treated under the law as independent contractors (real estate salespersons and direct sellers).

Temporary Help Agency Employees

Workers hired through temporary help agencies that are screened and trained by the agency to provide services for client firms.

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Forms

I-9 Form used to verify that an individual has the legal right to work in the United States.

SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – Form which an employer can use to get a definitive ruling from the IRS as to a newly hired worker’s status as an employee or an independent contractor.

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Section 2 – Federal and State Wage-Hour Laws

Objectives

State the purpose and function of the Fair Labor Standards Act (FLSA)

Explain the difference between exempt and non-exempt employees

State the federal minimum wage and tip credit amounts

Define the factors used in determining overtime pay

Explain compensable time and the issues with compensable time

List the child labor restrictions of the FLSA

Identify the four public contract laws

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CPP Study Group 19

Federal Wage and Hour Law (Fair Labor Standards Act)

The purpose of the FLSA is to protect workers by regulating employment activities of both employers and employees. The FLSA ensures that fair and equitable wages are paid to employees, discourages long workweeks by requiring a higher rate of pay for each hour worked over 40 per week and prohibits oppressive child labor

What it covers:

What it does not cover:

Even though these items are not covered under FLSA they are governed under state laws or by other federal laws or regulations.

Although the FLSA does not require that wages be paid within a certain amount of time, it does require that the employer have a regularly scheduled pay date and that the employees be paid by the pay date. Delaying the pay date due to a permanent change in pay cycle does not violate the FLSA.

The U.S. Department of Labor (DOL), Wage and Hour Division administers the federal wage-hour law. The Equal Employment Opportunity Commission (EEOC) enforces the equal pay provisions.

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Federal/State Relationship

Employers must also be aware of state wage-hour laws in the state(s) in which they operate.

Areas left unregulated by the FLSA are likely to be regulated by the state. Even in areas that are governed by the FLSA, the state may also have regulations

and THE EMPLOYER MUST COMPLY WITH THE LAW THAT IS MOST FAVORABLE TO THE EMPLOYEE!

Examples:

The FLSA requires overtime pay of 1-½ times the regular rate of pay for hours worked over 40 in a workweek. The State of California requires overtime pay for hours worked over 8 in a workday. If an employee in California works four 10-hour days, how many overtime hours is the employer required to pay? ______________________________

The Federal Minimum wage at the beginning of 2010 is $7.25 per hour. The minimum wage in Connecticut is $8.25 per hour. What minimum wage rate must be paid to employees in Connecticut? ______________________________

FLSA does not restrict the number of hours that are worked by children ages 16-17. Michigan limits the number of hours that a 16-17 year old can work to 48 hours per week. How many hours can a 16-year-old employee work in the state of Michigan? ______________________________

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Employer and Employee Coverage

The goal of the FLSA is to eliminate conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well being of workers. There are two tests for coverage that can be met in order to provide coverage to workers. They are:

Enterprise Coverage

Under the Enterprise Coverage test, all the employees of a business are covered and protected by the FLSA if:

At least two employees of the business are employed in jobs closely related and directly essential to interstate commerce or the production of goods for interstate commerce AND

The business has annual gross sales of at least $500,000

Certain businesses are also covered regardless of annual sales volume. They are:

Hospitals Nursing Homes Elementary and secondary schools and colleges (public or private) Government agencies

Individual Coverage

An individual employee is covered by the FLSA if he or she is engaged in interstate commerce or in the production of goods for interstate commerce. It then does not matter if the business is covered under the Enterprise coverage as long as the employee is eligible under the individual coverage.

Note: Interstate commerce is any trade, transportation, or communication between one state and another state (or states) or between a state and a foreign country.

Most businesses, unless they are “Mom and Pop” shops, are covered by the FLSA or may be covered by similar state wage-hour laws.

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Exempt and Nonexempt Employees

Exempt verses nonexempt employees refer to the employee’s status under the FLSA minimum wage and overtime requirements. Exempt employees are those that do not have to be paid the required minimum wage and do not have to be paid overtime for over 40 hours of work in a workweek. The employer also does not have to keep certain records detailing their work.

The following job duties are considered exempt from the FLSA:

A non-exempt employee must be paid at least the minimum wage for all hours worked and an overtime premium for hours worked over 40 in a workweek. A workweek can be any 7 consecutive 24-hour periods or 168 hours. Each workweek stands alone for overtime purposes.

White Collar Exemption

All Bona fide administrative, executive, and professional employees as well as computer-related professionals and outside salespersons are considered exempt “white collar” employees under the FLSA.

Remember, it is not the job title that determines the status of the employee but the actual duties performed. The determination also depends on:

The employee’s level of discretionary authority The percentage of time spent on exempt activities If the minimum salary requirement is met

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Administrative Employees

Primary duties must consist of:

Must also:

Customarily and regularly exercise discretion and independent judgment Regularly assist a proprietor or executive Perform work along specialized or technical lines that require special training,

experience, or knowledge Carry out special assignments and tasks under only general supervision Can spend only 20% (40% in retail or service) of time worked in a workweek on

nonexempt work Must be paid at least $455 per week on a salary or fee basis

Executive Employees

Primary duty must be:

Must also:

Regularly direct the work of at least two or more other employees Have the actual authority to hire and fire or can suggest/recommend hiring,

firing, promotion, or other employment status changes Regularly exercise discretionary powers Spend no more than 20% (40% in retail or service) on nonexempt duties unless

a 20% owner or in charge of an independent or physically separate part of the business

Receive a salary of at lease $455 per week, not including board, lodging, or other employer-paid facilities

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Executive duties include:

Interviewing, selecting, and training employees Setting and adjusting pay rates and work hours Directing work Keeping production and sales records of employees Evaluating productivity and efficiency Resolving employee complaints Disciplining employees Planning and scheduling work Determining techniques to be used in performing work Deciding the tools, supplies, and material to be used Providing for employee safety

Professional Employees

Primary duties must require:

Other requirements include:

Consistently exercise discretion and judgment Have duties which are intellectual and varied Can spend no more than 20% of the time worked in a workweek on nonexempt

work Must be paid at least $455 per week on a salary or fee basis. This requirement

does not apply to lawyers, doctors, interns or residents, or teachers working in an educational institution

NOTE: Just having a degree is not enough; the employee must also meet the first two items listed above.

Computer-related Professional Employees

This category includes salaried, highly skilled computer professionals working as systems analysts, programmers, software engineers, or similar positions that meet the other requirements for professional employee status. Salary must be at least $455 a week or _______ per hour for hourly paid employees.

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Outside Salespersons

Must customarily and regularly work away from the employer’s place of business and be employed for the purpose of:

Selling tangible or intangible items

OR

Obtaining contracts or orders for services or use of facilities

AND

Must spend no more than 20% of time worked in the workweek on nonexempt work.

NOTE: There is no salary test for outside salespersons.

Remember: CAPES for Exempt Employees

Computer Professionals

Administrative

Professional

Executive

Salesperson

Retail and Service Industry Exemption

Employees in retail or service industries are exempt from the overtime pay requirements of the FLSA if:

and

Minimum Wage

The federal minimum wage rate is ________ per hour at the beginning of 2010. This wage must be paid to all covered employees who are not exempt for all hours worked. This can be done on an hourly, piecework, salary, or commission basis as long as the wages at least equal the minimum wage.

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Lower “opportunity” wage for teenagers

New hires under the age of 20 may be paid ________ per hour for the first 90 consecutive calendar days from the date they are hired or until the employee reaches 20.

Wages cannot be averaged over any longer than a workweek.

Tips and the Tip Credit

Employers can pay their tipped employees _______ per hour and take a tip credit as long as the employee’s tips are at least enough to make up the remainder of the minimum wage then in affect. (Tip credit is ______) A “tipped employee” is any employee who works in an occupation in which they regularly receive more than _______ per month in tips.

Employers can take the tip credit as long as:

Employee’s tips bring them up to the current minimum wage; otherwise the employer must make up the difference

Employee is informed of tip credit provisions before the credit is taken All tips received are kept by the employee (tip pooling is only allowed if it is

among tipped employees only) Credit card tips must be given to the employee by _________________ even

though the employer can deduct the card companies percentage charge for the use of the card from the tip

The tip credit cannot be increased for overtime hours that are paid at a premium rate

Employers must pay the minimum wage based on what is more beneficial to the employee. If the state minimum wage is higher than the federal minimum wage, then the state minimum must be paid to all covered employees. If the federal minimum wage is higher than the state, then the federal wage must be paid.

Equal Pay for Equal Work

The 1963 Equal Pay Act amendment of the FLSA requires equal pay for men and women performing equal work under similar conditions. Equal work is defined as work requiring equal skill, effort, and responsibility. The Equal Pay Act is enforced by the Equal Employment Opportunity Commission.

Overtime Pay Requirements

Employees must be paid at least 1½ times their _______________________ for all hours physically worked over 40 in a workweek. Another way to state this is that they

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CPP Study Group 27

receive an overtime premium of one-half their regular rate of pay for all overtime hours worked. (Employers cannot take an increased tip credit for overtime hours.)

Several factors go into determining overtime payments including the company workweek, hours physically worked, what payments to an employee are considered wages, and the employee’s regular rate of pay.

The Workweek

The workweek is defined as a regular recurring period of _____ hours or ___ consecutive ____ hour periods. The workweek does not have to coincide with the calendar week, the start of a day, or with the pay period. The important factor is that the workweek is established and although the employer may change the workweek, any change must be intended to be permanent.

Examples:

Fred is paid bi-weekly. In the first week of the pay period Fred worked six days for 7 hours each day. In the second week of the pay period, Fred worked five days at 7 hours each day. What were Fred’s total regular and overtime hours for the pay period?______________________________________________

Stacy is paid semi-monthly. She works 78 hours over 15 days. What other information would you need to know in order to determine the regular and overtime hours for Stacy? ______________________________________

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Exemptions for hospitals and nursing homes

For flexibility of scheduling, employers for hospitals and nursing homes are allowed to use a 14-day period for determining overtime compensation. This is referred to as the 8/80 rule. The rule requires payment of overtime for hours worked over 8 in a day or 80 in the 14-day period, whichever would result in higher pay to the employee.

Example: Sally the nurse worked the following hours during her 14-day work period:

Week Sun Mon Tues Wed Thurs Fri Sat Total

1 10 10 6 8 9 0 0 43

2 12 12 12 0 0 12 2 50

How many hours of overtime would Sally’s employer have to pay? _______________________________________________

When workweeks do have to be changed special rules apply. Where workweeks overlap the following steps must be taken:

1. Add the overlapping days to the old workweek and calculate the regular and overtime hours.

2. Add the overlapping days to the new workweek and calculate the regular and overtime hours.

3. Pay the employee the greater amount or, in other words, the amount that provides the greatest benefit to the employee.

Hours Worked

Hours that employees are paid for but during which no actual work is done do not have to be counted when calculating the number of hours worked for overtime purposes. Hours paid but not actually worked include: vacation, sick time, holiday, etc. Payments for hours not worked cannot be offset against any overtime pay due for hours actually worked over 40 in a workweek.

FLSA places no limit on the number of hours an employee over 16 years of age can work so long as the employer pays the required overtime premium for all hours physically worked over 40. States may have maximum hour restrictions.

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Regular Rate of Pay

The “regular rate of pay” is an hourly amount determined by dividing the total regular pay actually earned for the workweek by the total number of hours worked.

The following items are included in the determination of the regular pay rate:

What items does the FLSA exempt from the regular rate of pay calculation?

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Special Problems in Regular Rate Determination

Employees working at more than one rate

An employee who is paid at two or more rates for performing different jobs or shifts during the workweek must be paid at a regular rate of pay determined by using a “weighted average.” In some cases the employer may choose to pay overtime based on the higher of the rates. This is lawful since it would be more beneficial to the employee. An employer cannot however, pay the employee at the lower rate.

Example:

Fred works for 25 hours at $10.00 per hour on the day shift and then works for an additional 20 hours at $12.00 per hour on the night shift in the same week. What would the calculation be to determine Fred’s regular rate of pay?

___________________________________ ___________________________________ ___________________________________ ___________________________________

Salaried Non-Exempt Employees

Not all salaried employees are exempt from overtime. The regular rate of pay for salaried employees is determined by dividing the salary amount by the number of hours that the salary is intended to compensate. If the employee normally works 40 hours per week, the annual salary would be divided by ______ hours. If the employee normally works just 35 hours per week then the annual salary must be divided by _______.

Workweeks of less than 40 hours

If an employee who has a regular workweek of less than 40 hours works 40 or more hours they can be paid at their regular rate for up to the 40 hours and at their overtime rate for any hours above 40 as long as they are making at least the federal minimum wage. There are some exceptions.

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Computing the regular rate and overtime for pieceworkers

To compute the regular rate for piecework, add the weekly piece rate earnings to any other earnings (production bonuses, etc) for the workweek and then divide the total by the number of hours worked in the workweek. This amount must be at least minimum wage.

Example:

George earns $1.00 for every paper airplane he produces. In one week he produced 420 paper airplanes and worked for 41 hours. He also received a production bonus of $.50 for every airplane over 400. His total earnings for the week would be as follows:

420 airplanes @$1.00 per plane _______

20 airplane bonus @ $.50 _______

Total Piecework Earnings _______

Regular Rate of Pay 430.00 41 _______

Overtime Premium 10.49 x .5 _______

Total Overtime 1 hour x 5.25 _______

Total Earnings $430.00 + 5.25 _______

Tipped Employees

When computing the overtime premium for tipped employees whose employer is taking a tipped credit the full hourly wage must be used including any tips or additional income.

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Fluctuating Workweeks

The Fluctuating Workweek allows an employer to enter into an agreement with the employee to provide a guaranteed fixed “salary” for all hours worked, whether the actual hours worked are more or less than 40 for the week.

If the employee works more than 40 hours, the employer must pay the overtime premium for the hours over 40 however they can divide the “salary” by the total number of hours worked in the week to determine the regular rate of pay. Because the employee’s hours may differ from week to week, the employer has the potential to save money in weeks when the employee works more hours because the regular rate of pay decreases as hours increase.

Belo-type Constant Wage Plans

Belo Plans allow the employer to guarantee a salary for a maximum amount of hours. If the employee exceeds the agreed upon hours, the employer must compensate for the additional hours at 1.5 the regular rate of pay.

Example: Fritz is guaranteed $440 for work up to 50 hours per week. This rate is based on $8 per hour for the first 40 hours and $12 for the additional 10 hours. Fritz is guaranteed this salary regardless of the number of hours he works up to 50 hours per week. If he exceeds the 50 hours he must be paid an additional $12 per hour for the additional hours worked. If he only works 40 hours he is still paid the $440.

Compensatory Time Off

In general, employers cannot “pay” overtime earned in one workweek by giving the employee time off from work in another workweek, even if 1.5 hours are given for each overtime hour worked. However, there are exceptions!

Time Off in Same Pay Period

One narrow exception allows employees to take time off in the same pay period if they are paid biweekly, semimonthly, or monthly. The employee must be paid the overtime premium for actual overtime hours and the time off must be given within the same pay period that the overtime is worked.

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Public Sector Employees

State and local government employers can give their nonexempt employees at least 1½ hours of paid compensatory time off for each hour of overtime worked instead of paying the overtime premium if the following conditions are met:

Agreement must be made between the employer and the employee or union The employees must be allowed to take the time within a reasonable period Employees can be required to use their compensatory time Outstanding time must be paid upon termination Maximum amount of accrued time is 240 hours (160 overtime hours) –

employee must be paid overtime once the maximum is met Some occasional part-time work for the same public agency in a different job

can be excluded from overtime Public safety, emergency response, and seasonal employees can accrue up to

480 hours (320 overtime hours) – Includes fire, police, paramedics, etc. There are also additional exceptions for firefighters.

Compensable Time Issues

An employee must be compensated for all hours during which the employee is under the control of the employer, even if it is unproductive, as long as the time spent is for the employer’s benefit.

Unauthorized Overtime

Unless the employer has a rule that is strictly and consistently enforced with disciplinary action regarding unauthorized overtime, the employee must be compensated.

Meal and Rest Period

Meal and rest periods are compensable time unless the period is at least 30 minutes and the employee is relieve of all duties and responsibilities during the period. (Breaks are not required under FLS.

Travel Time

The rules of travel time as compensable time are covered in the Portal-to-Portal act of 1947.

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Travel to and from work

Travel from home to work and back is generally not considered compensable time unless the employee is called out on an emergency from home and has to travel a substantial distance or has a special assignment for one day in another city and travels outside the regular workday.

Travel as part of the job

Travel as part of the employee’s regular job such as travel from one site to another is considered compensable.

Travel to and from home in a company vehicle

Travel to and from home in a company vehicle is not compensable if the vehicle used is for normal commuting and is subject to an agreement between the employer and employee.

Travel away from home

Travel away from home during an employee’s regular work hours is considered compensable, even if it occurs on a non-work day. Travel outside of the employee’s regular work hours as a passenger on a plane, train, boat, bus, or car is not hours worked.

Example: Fred travels to Atlanta from LAX on Sunday from 10:00 a.m. to 4:00 p.m. His regular work hours are Monday through Friday from 8:00 a.m. to 5:00 p.m. with one hour for lunch. He should be compensated for 5 hours of travel time on Sunday. If Fred traveled on Sunday from 6:00 p.m. to 12:00 a.m. then the time would not be compensable.

On Call Time

An employee who is on call on the employer’s premises or close enough to seriously curtail their use of the time for their own purposes must be paid. An employee who is on call but is able to carry on his or her own activities does not have to be paid.

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Sleeping Time

Employees working for less than 24 hours must be paid for all time on duty even though they may sleep or engage in other personal activities when not busy. For shifts of more than 24 hours, actual meal or sleep periods of at least 8 hours may be excluded.

Employees living on the employer’s premises

An employee living on the employer’s premises are not considered working for the entire time spent on the premises. Any reasonable arrangement made between the employer and employee is general acceptable under the FLSA.

Waiting Time

Time spent “engaged to be waiting” is generally when an employee is at work but is waiting for a customer or repairs to a machine, etc. This time is compensable. Time “waiting to be engaged” generally refers to time when the employee can pursue other activities and is not compensable.

Time at Meetings and Training Sessions

Meetings and training time are compensable unless ALL of the following conditions are met:

Meeting or session held outside of the regular working hours Attendance is voluntary Meeting or session is not directly related to the job The employee does not perform any productive work while attending the

session

The FLSA provides an exemption for employees attending remedial education. Up to 10 hours over the employee’s 40 hours can be paid at straight time for remedial education hours. Education must be for employees with less than a high school education and cannot include any job specific training.

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Preliminary and Postliminary Activities

In general, preliminary and postliminary activities are not compensable time unless a contract or custom of the employer makes them compensable. The following exceptions apply:

Time spent changing clothes or cleaning up because of the demands of the job or company policy is compensable

Going through security checkpoints for workers in nuclear power plants and airports is considered not compensable

De minimis time after regular work hours is not compensable so long as it is indefinite and last no more than a few seconds or minutes

Employees who clock in early or clock out late on an electronic devise are not paid for the additional time

Rounding differences to the nearest 10th or quarter of an hour can be used as long as they are consistent

Receiving Medical Attention

If an employee receives medical attention on the employer’s premises or at the employer’s direction during regular work hours then the employee must be paid for this time. Compulsory medical exams are compensable no matter when they occur.

Child Labor Restrictions

Minors under the age of 18 cannot work at any job that the Wage and Hour Division has declared _____________.

Minors age 14 and 15 can work in a limited number of non-hazardous jobs in:

Minors age 14 and 15 cannot work during school hours and are limited to ___ hours a day and _____ hours a week when school is in session. When school is not in session they are limited to __hours in a day and ____ hours in a week. They can only work between the hours of ______ and ______ (______ to ______ between June 1 and Labor Day.)

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Minors under the age of 14 are generally prohibited from working unless for a parent. Restrictions are greatly relaxed for workers in agriculture, entertainment, news carriers, and home workers making Christmas wreaths.

Minors ages 14 and 15 who are working as Professional Sports Attendants (batboys and batgirls) are not limited from the maximum hours restriction as long as work is performed outside of school hours (America’s game!).

State laws may be more restrictive than FLSA.

Enforcement and Penalties

FLSA is administered and enforced by the Wage and Hour Division of the US Department of Labor’s Employment Standards Administration. It is unlawful to violate any provisions of the law. It is also unlawful to discriminate against or discharge any employee who files suit or testifies in enforcement proceedings.

The Portal-to-Portal Act protects employers as long as they have relied in good faith on a written interpretation of the FLSA by the Division or an administrative practice or enforcement policy of the Division.

Employers who move goods through interstate commerce that have been produced in an establishment where there were minimum wage, overtime, or child labor violations are in violation of the FLSA unless they relied on an written statement from the producer of the goods that they were in compliance with the law.

Employees can sue for back pay for minimum wage and overtime violations, plus an equal amount in liquidated damages for willful violations. The employer’s violations are considered willful if they knew or should have known that they were acting unlawfully.

Statute of limitations on minimum wage and overtime complaints are 2 years (up to 3 years if the violation was willful).

Civil and criminal penalties include fines and prison time if the violation is serious and/or repeated.

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Public Contract Laws

Walsh-Healey Public Contracts Act

The Walsh-Healey Public Contracts Act governs wages and hours of employees of manufactures and dealers furnishing materials, supplies, and equipment to the federal government under contacts exceeding $10,000.The Act covers the payment of overtime for any hours over 40 in a workweek and payment of prevailing minimum wage.

Davis-Bacon Act

This act sets prevailing wage standards for laborers and mechanics working on federally financed construction contracts of $2,000 or more. Under this act wage determinations for specific job classifications, not just industry-wide wage determinations.

Contract Work Hours and Safety Standards Act

This act requires contractors with the federal government, who are not already covered under the Walsh-Healey or Davis-Bacon Acts to pay employees overtime for at least 1½ times their “basic rate” for hours worked over 40 in a workweek.

Service Contract Act

Also called the McNamara-O’Hara act, applies to employers with contracts to provide services to federal government agencies over $2,500 and requires prevailing minimum wages and fringe benefits based on similar employment in the locality or collective bargaining agreement.

Copeland Anti-Kickback Act

Protects the wages due employees of contractors and subcontractors on federally funded construction projects. Employers are prohibited from forcing employees to surrender or “kick back” compensation to which employees are lawfully entitled. Covers all workers under all contracts federally funded in whole or in part.

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State Wage and Hour Charts and Laws

The only information needed for states is the understanding that if a state law or regulation is more beneficial to the employee than the federal law then the state requirement should be followed.

Example: The federal minimum wage at the beginning of 2010 is $7.25 per hour while the minimum wage in Connecticut is $8.25. Covered employees in Connecticut must be paid at the higher minimum wage of $8.25 per hour.

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CPP Study Group 40

Key Terms – Section Two

Covered Employee

For each law affecting payroll and human resources, this term defines those workers who are subject to the law.

Enterprise Coverage

A test for determining whether an employer’s entire operation is covered by the Fair Labor Standards Act. It is based on the employee’s involvement in interstate commerce and the employer’s annual volume of revenue.

Equal Pay Act (EPA)

A federal law requiring equal pay for men and women performing work requiring equal skill, effort, and responsibility under similar working conditions. It was made part of the FLSA in 1963.

Exempt Employees

While this term can refer to anyone not covered as an employee under a certain law, it generally means those employees who are exempt from the minimum wage, overtime pay, and certain recordkeeping requirements of the Federal Wage-Hour Law.

Federal Wage Hour Law

The Fair Labor Standards Act of 1938, as amended. It regulates such areas as minimum wage, overtime pay, and child labor for employers and employees covered by the law.

FLSA Fair Labor Standards Act

Fluctuating Workweek

An arrangement between an employer and a nonexempt employee to pay the employee a fixed weekly salary even though the employee’s hours may vary from week to week.

Interstate Commerce

The exchange of goods and/or services across state lines. It provides a basis for congressional and federal government agency regulation or wages and hours of work and other employment-related matters.

Minimum Wage The lowest amount that an employer can pay its employees per hour under federal or state law.

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Nonexempt Employees

Employees who are covered by the minimum wage and overtime provisions of the Fair Labor Standards Act. They may be paid on a salary or hourly basis.

On-call Time Nonworking time during which employees are required to be available to handle job-related emergencies.

Opportunity Wage

A reduced minimum wage that can be paid to teenagers during their first 90 days at work.

Overtime Hours worked in excess of maximums set by federal or state law that must be compensated at a premium rate of pay (e.g. under the FLSA, all hours worked over 40 in a workweek must be paid at no less than 1½ times the employee’s regular rate of pay.

Payroll Period The period of service for which an employer pays wages to its employees.

Preliminary and Postliminary Activities

Time spent by employees to get ready for work or to get ready to leave work, which is generally not compensable time unless the activities are essential to the employee’s principal work activity.

Premium Pay In a payroll context, it can have two meanings. It can be the extra pay above an employee’s regular rate of pay that is paid for working overtime hours. Or it can be a special pay rate for work done on weekends, on holidays, during undesirable shifts, or for doing dangerous work.

Regular Rate of Pay

An hourly pay rate determined by dividing the total regular pay actually earned for the workweek by the total number of hours worked.

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Shift Differential Extra pay received by employees for working a less-than-desirable shift (e.g. evenings or late nights).

Split Shift A workday that is divided into two parts separated by a spread of hours longer than the conventional rest or meal period.

Straight Time The standard number of work hours during a workweek for which an employee’s regular rate of pay will be paid.

Time-and-a-half Payment of 1½ times an employee’s regular rate of pay for hours worked over 40 in a workweek, as required by the Federal Wage-Hour Law (for nonexempt employees only).

Tip Credit A reduction in the minimum wage allowed for tipped employees (e.g. 50% of the federal minimum wage).

White Collar Employees

In the context of the Federal Wage-Hour Law, these are executive, administrative, professional (including computer-related professions), or outside sales employees who are exempt from the law’s minimum wage, overtime pay, and certain recordkeeping requirements.

Workweek The basis for determining an employee’s regular rate of pay and overtime pay due under the Fair Labor Standards Act. It can be any consecutive 7-day (168-hour) period chosen by the employer (e.g., Saturday through Friday, Wednesday through Tuesday).

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Section 3 Part 1 – Taxable and Nontaxable Compensation Objectives

Understand the concepts of Gross Income and Fair Market Value Define fringe benefits and their taxability Explain additional employer provided benefits and taxability Describe other payments to employees and their effect on taxable earnings Review reporting and withholding of taxes on taxable cash and non-cash fringe

benefits

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Gross Income and Wages Under the IRC

The Internal Revenue Code uses “gross income” as the starting point for determining a taxpayer’s federal tax bill. Gross income includes any compensation for services, including fees, commissions, fringe benefits, and similar items. It also describes wages as “all remuneration for employment including the cash value of all remuneration paid in any medium other than cash.” Because of these broad terms, wages and fringe benefits take many forms.

Income and Employment Taxes Defined

When employee compensation is described as “taxable” it means:

_______________________________________________________

AND

_______________________________________________________ _______________________________________________________

Unfortunately, not all taxable items are subject to all taxes.

Fair Market Value

When the employer provides taxable non-cash fringe benefits to an employee, the fair market value must be calculated. Fair market value is the amount it would cost an individual to purchase the benefit on the open market in an ________________ _________________.The fair market value is NOT the amount paid by the employer or the employee’s perception of the value of the item. This amount, when added to income, taxed, and then deducted is call “imputed income.”

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To calculate the taxable amount, the following is used:

IFBA = FMV – (EPA + AEL)

IFBA =

FMV =

EPA =

AEL =

Example: Sara’s employer pays for ½ of her parking space each month. Her space rental is $500 a month, which is the same amount paid by all renters. Her employer gives her $250 and Sara pays $250. The calculation is as follows

IFBA = $500 - ($250 + $220)

IFBA = $500 - $470

IFBA = $30

Fringe Benefits Under the Internal Revenue Code

Certain fringe benefits are listed in the Internal Revenue Code as either taxable or nontaxable.

Nontaxable Fringe Benefits

These benefits are excluded from income and are exempt from Federal Income Tax (FIT), Social Security (SS), Medicare (MED), and Federal Unemployment (FUTA).

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No-additional-cost Services

Employer provided services that meet the following conditions:

What is a highly compensated employee?

Qualified employee discounts

Employer may offer discounted goods or services to the employee without adding the fair market value to wages if:

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For both of the above, the employer must generally offer only benefits to employees within the same line of the employer’s business in which they normally work. Some exceptions may apply.

Working Condition Fringes

Employers may offer certain work-related property or services to employees under the following conditions:

Working Condition Fringes include:

Business use of company car or airplane Chauffeur or bodyguard provided for security Dues and memberships in professional organizations Employee subscriptions to business periodicals Job-related education Goods used for product testing by employees Use of demo vehicle by full-time car salesman Outplacement services

Tax preparation services are not a working condition fringe and are taxable for FIT, SS, Med, and FUTA.

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De Minimis Fringes

De minimis fringes are small items or services that are not taxable. To be considered de minimis the following conditions must be met:

De minimis fringes include:

Occasional preparation of personal documents (typing and copies) Occasional parties and picnics for all employees Occasional tickets to sporting events or theater Traditional holiday gifts (turkey, ham) with a small value (No cash or cash

equivalent) Coffee, donuts, bagels provided to employees Occasional use of company phones for local personal calls Occasional meals, supper money, or cab fare provided to employees who work

late but not based on hours worked Cab fare for employees not on their regular shift and under unsafe conditions Operation by the employer of an eating facility on or near the employer’s

premises if the facility does not operate at a loss

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Qualified Transportation Fringes

The three types of qualified transportation fringes that are non-taxable include:

Exclusion limits: __________ – Employer provided transit passes or vanpool

__________ – Parking

Other factors:

Items can only be provided to employees. These fringes apply to both private and public employees Plan need not be in writing Cash reimbursement are only allowed for transit passes if the employer cannot

provide the passes directly without incurring more than a 1% fee plus $15 delivery

If the employer reduces the employee wages for employer provided parking and then adds the amount back the amount is taxable

Salary reduction plans can be provided as long as the plan is in writing and is a fixed dollar amount or fixed percentage (up to $350 in 2010)

Stored value cards that can be used only for fare or at transit terminals are generally within the limit for exclusion as long as it cannot be used to purchase items other than fares or transit passes.

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Valuation

Qualified parking is any parking provided by the employer, which is on or near the employer’s premises. The value of the qualified parking is the amount that an individual would pay in an arm’s length transaction for parking at the same site or a spot in the same general location.

Vanpools provided by the employer or run by a third party for the employer can be valued using all the facts and circumstances or one of the special valuation rules used for employee use of a company provided vehicle. If an employee vanpool also receives parking, one member must be designated as the “prime member” any amount over the exclusion must be charged to just the one employee.

The value of a transit pass, fare card, or voucher is its purchase price, not the face amount of the pass.

The amount of any qualified transportation fringe that is included in income is the amount by which the fair market value of the benefit exceeds the exclusion amount plus any amount paid by the employee. The exclusion must be calculated monthly and excess amounts cannot be carried over.

Example: Karen is given a transit pass each month by her employer to take the bus to work. The price of the transit pass is $290.00. Karen does not pay her employer for any portion of the pass. The amount included in Karen’s income each month is determined as follows:

IFBA = FMV – (EPA + AEL)

IFBA = ___________________

IFBA = ___________________

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On-premises athletic facilities

These can be provided to employees by an employer free of charge without including the fair market value in the employees’ income if:

The facility is located on the employer’s premises The facility is operated by the employer through its employees or another entity Substantially all use is by employees, their spouses, their children, and retired

employees, and widowers The facility is not a resort or other residential facility

Personal Use of Employer-Provided Vehicles

When a vehicle provided by an employer is used for business-related purposes, the value of the use is excluded from income as a working condition fringe. All other use of the vehicle is generally considered taxable income to the employee – unless an exception applies.

Exceptions include:

If the vehicle is used mainly for business, infrequent side trips are considered de minimis

A vehicle is considered a qualified nonpersonal use vehicle if it is unlikely to be used for personal travel because of its special design (i.e. hearses, police cars, delivery trucks with one seat).

Use of a demonstration vehicle by full-time car salespersons or sales managers within the sales area of the dealership is excluded as a working condition fringe. A full exclusion or partial exclusion method can be used.

Accounting for vehicle use:

Employees must account to their employer for the business use of a company provided vehicle. Any use which is not substantiated as business use is defined by the IRC to be personal use and is included in income.

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Valuation methods

General valuation method

The fair market value of a company provided vehicle is the price an individual would pay to lease the same or a comparable vehicle in an arm’s length transaction in the same area for the same length of time. Because use is generally divided between business and personal, one of the special valuation methods is normally used.

Special valuation methods

There are three special valuation methods for determining the fair market value of the personal use of a company provided vehicle:

The following general rules apply to all methods:

If either the cents-per-mile or annual lease method are used, they must be used for any subsequent year that the vehicle is provided to any employee, although the employer can switch to the commuting method

Neither the employee or employer can use a special valuation method unless at least one of the following is met: o The employer reports the value of the benefit as wages by January 31 of the

following year o The employee includes the value of the benefit as income within the

prescribed time period o The employee is not a control employee o The employer demonstrates a good faith effort to treat the benefit correctly

for reporting purposes The same special valuation method does not have to be used for all company

provided vehicles or all employees If the employer uses a special valuation method, the employee must use the

same rule or the general valuation method on their personal tax return If a single vehicle is used by more than one employee, the employer must use

the same method for all employees using that vehicle and allocate the amounts based on facts

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Commuting valuation method

This method allows an employer to value an employee’s personal commuting use of an employer-provided vehicle at ______ per one-way commute (______ round trip).

Annual lease valuation method

The fair market value of an employee’s personal use of a company-provided vehicle is determined by multiplying the annual lease value of the car by the percentage of personal miles driven.

IFBA = ALV*PM%

The value of employer provided fuel is not accounted for in the value and must be included by using the actual cost of the fuel or an IRS approved rate of ________ per mile. The amount under this method is reported as taxable income in boxes 1, 3, and 5 of form W2.

Note: Per the IRS Publication 15b, the employer has the option of not withholding the FIT from the value of personal car use. However, if they choose to do that, they must notify the employee in writing by January 31 of the election year or 30 days after the vehicle is provided, whichever comes later.

Example: Dave drives an employer-provided car that he uses for both business and personal use. Dave drove 11,300 business miles and 3,700 personal miles. The car’s fair market value is $26,300. The amount of the car’s fair market value that must be included in Dave’s income for the year is calculated as follows:

Annual Lease Value (ALV) of $26,300 car (per IRS table) $____________

% of personal miles (personal miles ÷ total miles) ____________%

Fair Market Value of personal use to add to Dave’s taxable wages

$_____________

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Vehicle cents-per-mile method

The fair market value of a company provided car is determined by multiplying the IRS standard business mileage rate of _____ by the number of personal miles driven.

To use this method, the following conditions must be met:

The employer must expect the employee to use the vehicle while conducting

the employer’s business or the vehicle must actually be driven at least 10,000 annually (including personal use) and be primarily used by employees.

The fair market value of the vehicle cannot exceed _________ for cars placed in service in the current year.

If the employee pays for fuel, the mileage rate is reduced by no more than _____ cents per mile in 2010.

Example: Jenny drives a qualifying car 18,000 miles in 2010 and 5,200 miles were for personal use. If Jenny’s employer pays for the gasoline for the car, the fair market value of her personal use of the car is calculated as follows:

FMV of personal use = 5,200 miles x $________ = $__________

If Jenny pays for the car’s gasoline, then the fair market value is calculated as follows:

FMV of personal use = 5,200 miles x ($______ - $_______) = 5,200 x $_________

= $_____________

Personal Use of Employer Provided Aircraft

Business travel in a company-owned aircraft is excluded as a working condition fringe. However, personal air travel is included in the employee’s income. Travel that combines business and personal must be allocated to each.

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The value of the employee’s air travel can be determined by:

The general valuation rule charges the employee an amount equal to what an individual would pay in an arm’s length transaction for a comparable flight. If more than one employee is on the flight then the costs can be allocated among them.

The non-commercial flight valuation rule is calculated by using an aircraft multiple based on the weight of the aircraft and a cents-per-mile rate known as the Standard Industry Fare Level (SILF).

Seating capacity exception – if at least 50% of the regular seating capacity in an employer provided aircraft is by individuals flying on the employer’s business, the valuation is zero.

Free or Discounted Commercial Flights

Under the commercial flight valuation rule, the value is 25% of the airline’s unrestricted coach fare in effect for that particular flight. This means that 25% of the fare must be included in the employee’s income and is subject to tax.

Discounts on Property or Services

Employee discounts on goods or services normally sold to customers that do not qualify as non-taxable fringe benefits must be included as income.

Club Memberships

Club dues may be a working condition fringe if

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CPP Study Group 56

Additional Employer-Provided Benefits

Life Insurance

Group Term Life

The cost of coverage for Group Term Life insurance for the first $50,000.00 is excluded from the employee’s income. The cost of coverage over $50,000.00 minus any employee contributions is included as employee income. This income is subject to SS and MED but not FIT withholding or FUTA. Although the amount is not subject to FIT withholding, it is included as income for personal income tax and the employer has the option to withhold FIT.

The value of Group Term Life is included on the following forms:

Employee Form W-2 box 1, 3, 5, and 12 – Other Wages code ____________ Employer Form 940 – part 2 lines 3 & 4 Employer Form 941 – lines 2, 5a, and 5c

The amount included in income is calculated as follows:

1. Determine the total amount of the employee’s Group Term Life insurance. In many cases it is equal to a multiple of the employee’s regular salary (i.e.: salary x 2).

2. Deduct $50,000.00 from the total amount. If the answer is less than zero then there is no taxable amount.

3. Divide the excess insurance amount by $1,000.00.

4. Determine the employee’s age as of December 31 of the calendar year in which the benefit is taxable.

5. Use the IRS Table I – Uniform Premiums to determine the monthly per unit amount and multiply this amount by the answer in step 3.

6. Deduct any after-tax contributions made by the employee from the fair market value calculated in step 5.

7. Add the excess amount to the employee’s income, withhold and pay the SS and MED taxes and report the amount as required.

8. The result of the calculation is the monthly amount. For pay periods other than monthly, perform the following calculation:

Monthly amount x 12 = annual amount number of pay periods

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Example: Fred’s employer has a non-discriminatory Group Term Life (GTL) plan that covers Fred for 2x his annual salary of $70,000.00. Fred turned 40 on May 31 of the current year. Fred contributes $2.00 per pay period for his coverage and is paid on a bi-weekly basis. Calculate the following:

1. Total amount of coverage $_________ - $__________ (Amount excludable by law)

= the taxable amount $____________

2. $_________ ÷ 1,000 = ___ units

3. ___ units times the monthly premium amount _____ (from the IRS table) = $_____

4. $_____ x 12 months = $_____ ÷ 26 pay periods = $_____ per pay period

5. Per pay period amount less employee contribution = imputed income $_______

The imputed income will be added to the employee’s taxable earnings for _____ and _________

Dependent coverage up to $_______ for a spouse or child is not included as income. If the coverage is over this amount, the entire cost of the coverage is included as income and is subject to FIT as well as SS and MED.

Example: Fred’s employer offers their employees dependent coverage for spouses and children. Fred earns $65,000.00 per year and accepts coverage for his spouse of $2,500.00 and for each of his two children at $1,500.00. The amount of the coverage for the children is not subject to withholding but because the spouse coverage is over $2000.00 it must be included in the GTL calculation and is subject to FIT withholding along with SS and MED.

Fixed Term Life

A Fixed Term Life policy is similar to Group Term Life except the benefit period is fixed for 12 months. Coverage does not change with raises that occur during the year.

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Whole Life Insurance

Employers may purchase a Whole Life or Straight Life policy for their employees or pay the premiums on policies already owned by the employees. This type of policy provides both a death benefit and a savings amount or Cash Surrender Value. If the proceeds of the policy are payable to the employee’s beneficiary, the amount of the increase in the cash value of the policy for the year and the “reasonable net premium cost” of the current life insurance are included in the employee’s income.

Moving Expenses

An Employer may pay for the cost of a move by a new or existing employee either by reimbursing the employee for the move or by paying a third party for the move. Some moving expenses are considered deductible while others are taxable to the employee for ALL federal taxes.

Time and Distance Tests

Before any expenses of a job-related move can be considered the following two tests must be met:

Distance – the new workplace must be at least ____ additional commuting miles farther from the employee’s old residence.

Time- The employer must reasonably believe that the employee will work full time at least ____ weeks out of the 12-month period immediately following the move in the general location of the new workplace.

Deductible Moving Expenses

Only the following expenses are deductible:

Transportation of household goods – Reasonable expenses incurred in packing and moving household goods and personal effects (for the employee and members of the household) to the new residence and temporary (in-transit) storage

Travel – All reasonable expenses incurred while traveling from the employee’s old residence to the new residence (transportation and lodging only).

Mileage at a rate of ______ per mile.

Amounts should be displayed on the employee W2 in box 12 with code ___________

Amounts are also displayed on the employer 940 – part 2, lines 3 & 4.

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Non-deductible expenses

The following items are not deductible and must be included in the employee’s income for FIT, SS, MED, and FUTA:

Cost of meals while traveling from the old residence to the new residence Pre-move house hunting expenses Temporary living expenses after starting work in the new location Qualified real estate expenses

Example: Sue’s employer paid for or reimbursed her for the following expenses related to her permanent move from New York to San Francisco:

Moving of her household goods and personal effects $ 7,500

Mileage for travel from NY to SF (3000 miles @ $0.165 per mile) 495

Hotel in route 450

Meals in route 125

Hotel while house hunting 1,100

Meals while house hunting 375

Car rental on house hunting trip 300

Real estate commissions 12,000

Appraisal Fees 500

Relocation Bonus 5,000

Total 27,845

What amount will be excluded from Sue’s income? $__________

How much of this amount will be included in income? $_____________

Which boxes on the W-2 would be affected by these amounts? ________________________

Which code would be use in box 12 of the W-2 for excluded moving expenses? ______________________

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CPP Study Group 60

Educational Assistance

Educational Assistance that is related to the employee’s current job is excluded from income as a working condition fringe if:

The course is not necessary to meet minimum requirements of the current job The course is not taken to qualify for a promotion or transfer to a different type of

work The education must be for maintenance or improving the skills for the current job

There is no dollar limit on employer provided education if related to the current job.

Non-job related education assistance is an employer paid fringe benefit with a limit of $_________ excludable from income per year. To qualify the course must be part of an Education Assistance Program (EAP).

Non-qualified or excess amounts are subject to all federal taxes.

Employee Business Travel Expense Reimbursements

In general, reimbursements made to employees under an “accountable plan” are excluded from income and are not subject to FIT withholding, SS, MED, or FUTA. If the reimbursement is made under a nonaccountable plan or exceeds the amount substantiated by the employee, the reimbursement or excess amount is subject to all federal taxes.

Away from home and Temporary

Employer reimbursements can only be excluded from income if the expenses are incurred while the employee is temporarily away from home on the employer’s business. The work is considered temporary if the assignment is realistically expected to last less than one year.

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CPP Study Group 61

Reimbursements for Daily Transportation Expenses

Employers can reimburse for an employee’s daily transportation expenses without including the amount in income if:

Or

Or

Reimbursements Under an Accountable Plan

To be considered an Accountable Plan, the following qualifications must be met:

The amounts reimbursed must have a business connection and cannot be for personal expenses (transportation, meals, lodging, tips).

The employee must substantiate the expenses by providing the employer with evidence of the amount, time, place, and business purpose of the expense within a reasonable period of time. This is normally done through Expense Reports with receipts attached for any amount over $75.00.

The employer has to approve the expenses and inform the employees about the recordkeeping requirements. The employer must also collect any excess reimbursements or treat the excess as being paid under a non-accountable plan.

In general, amounts paid by the employer that exceed amounts spent by the employee must be returned to the employer in a reasonable period of time. o Fixed Date - If an advance is given no more than 30 days before the

expense was incurred, the expense must be substantiated within 60 days of payment. Any excess amounts must be returned within 120 days of payment.

o Periodic Statement - The employer can issue a periodic statement to the employee detailing the amounts that have been paid and not substantiated. It also requires substantiation or the return of the excess amount within 120 days of the statement receipt.

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CPP Study Group 62

Employers may provide reimbursement in the form of a per diem allowance for each day of travel under an accountable plan as long as the reimbursement does not exceed the IRS established rates. IRS rates are established for CONUS (500 locations in the Continental US) and OCONUS (out of the Continental US). Per Diem amounts are also established for meals and incidentals only (M&IE).

Non-accountable Plan

If an employer’s reimbursement plan fails any single item of the qualifications, then the plan is considered a non-accountable plan. Under a non-accountable plan, all payments are included as income and are subject to FIT, SS, MED, and FUTA taxes. If one associate has a non-accountable expense it does not affect the balance of the accountable plan. The IRS allows elements of both as long as they are treated separately.

Example: Fred’s company reimburses his business travel expenses while away from home under a plan that requires him to substantiate his expenses within 14 days of returning home. He also receives $50.00 per month to cover office supplies that he purchases but his employer does not require Fred submit any listing or receipts for this amount. How are the payments treated?

__________________________________________________

Mileage Allowances

An employer can reimburse their employees for the cost of using their personal vehicle for business purposes. The federal business standard reimbursement is _____ per mile. This mileage rate covers fuel and vehicle wear and tear.

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CPP Study Group 63

Employer Provided Meals and Lodging

Employer Provided Meals

Generally, meals furnished by an employer are excluded from the employee’s income and are not subject to FIT, SS, MED, or FUTA taxes as long as the following conditions are met:

The meals are furnished on the employers business premises The meals are furnished for the convenience of the employer

Employer Provided Lodging

Employer provided lodging is excluded from the employee’s income if:

The lodging is on the employer’s premises (including a camp provided by the employer near the worksite) or a remote location in a foreign country

The lodging is furnished for the convenience of the employer The employee is required to accept the lodging as a condition of employment

Cash allowances are excluded from for both meals or lodging but may qualify as a business expense.

Adoption Assistance

Internal Revenue Code 137 excludes from an employee’s income employer provided adoption assistance that is furnished under an adoption assistance program in connection with the employee’s adoption of an eligible child.

Dollar limitation

The maximum exclusion amount for qualified adoption expenses for the current year is $_________ per eligible child over all taxable years related to the particular adoption. The exclusion applies even if the adoption process fails. The exclusion applies to the adoption and not to the number of incomes involved. Income limitations also apply.

Eligible Child

An eligible child is an individual who is under the age of 18 or is physically or mentally incapable of caring for him or herself. A child with special needs is an eligible child who a state has determined cannot or should not be returned to the parents and cannot be placed for adoption without adoption assistance because of a special factor or condition. A child of special needs must be a citizen or resident of the U.S.

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CPP Study Group 64

Qualified Expenses

Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorneys’ fees, travel expenses (including meals and lodging) while away from home, and other expenses directly related to the legal adoption of an eligible child. Qualified expenses do not include any expenses incurred in violation of federal or state law, in carrying out any surrogate parenting arrangement, or in connection with the adoption of a child of the employee’s spouse.

Withholding and Reporting

Although adoption assistance is not included as income for FIT, it is still subject to SS, Med, and FUTA taxes. The amount should be included on Form W-2 in boxes 3 and 5 (SS and MED wages) and the amount withheld in boxes 4 and 6 (SS and MED tax withheld).The total assistance is displayed in box 12 with code ______________.

Now, complete the table on the following page to determine if each of these items is taxable for the employer (EE), the employer (ER), or both. Then determine if each item would affect the wages (Effect on Gross Pay), and finally if it’s reported on the W-2, which boxes and if affects box 12, which code would be used?

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CPP Study Group 65

Taxable and Non-Taxable Compensation Recap

Compensation EE Taxability

ER Taxability Effect on Gross Pay

Reported on Form W-2?

No-additional –cost services

Qualified employee discounts ____% - services and ______ _________ sales)

Working condition fringes

De minimus fringes

Qualified transportation benefits

Trans. ______ Parking ________

On-premises athletic facilities

Qualified moving expense reimbursement (Covers _________ ____________ _______ and _____ per mile)

Personal use of employer vehicle

Group Term Life

(over $__________ )

Qualified education assistance (up to $_________ per year)

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CPP Study Group 66

Substantiated business expense reimbursement

Unsubstantiated business expense reimbursement

Mileage reimbursement ( ________ per mile )

Employer provided meals and lodging

Adoption Assistance (up to $________ per adoption)

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CPP Study Group 67

Section 3 Part 2 – Taxable and Nontaxable Compensation

Objectives

Explain additional employer provided benefits and taxability

Calculate gross wages and taxes on “gross up” amounts

Describe other payments to employees and their effect on taxable earnings

Review reporting and withholding of taxes on taxable cash and non-cash fringe benefits

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CPP Study Group 68

Other Payments

Advances and Overpayments

Advances and Overpayments must be included in the employee’s taxable income for the pay period when it is received and is subject to _____________________. When an employee repays the amount, the treatment varies depending on the timing of the repayment.

If the advance or overpayment is paid in the same year, wages and taxes can be reduced and the repayment can be made for the net amount. If the amount is repaid in a subsequent year, the employee should pay the gross amount. In some instances the SS and Med amounts can be refunded.

Awards and Prizes

In general, any prizes or awards provided to employees are considered taxable and are subject to FIT, SS, Med, and FUTA. Some exceptions do apply to non-cash awards that comply with several restrictions.

Length of Services or Safety Achievement Awards need not be included in employee’s income as long as the award is deductible as a business expense and:

Must be “tangible personal property” (no cash, stocks, bonds) Must be presented in a “meaningful presentation” Must not be “disguised compensation”

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CPP Study Group 69

Type of Award

Included Income? (Y/N)

FIT SS/

Med

FUTA Requirements

Length of Service

Cannot be for less than 5 years or be awarded to the same employee within the past 4 years.

Safety

Cannot be presented to more than 10% of employees in the tax year or awarded to management, professional, or clerical

Civic/

Charitable

The recipient cannot actively seek the award, cannot be a conditioned on performing future services, and must be turned over to a government or charitable organization

Retail Salespersons

Receives special treatment as it relates to taxes and taxables

Back Pay Awards

When an employee wins a lawsuit or settlement against an employer for alleged violations of federal and state employment laws, the amounts are generally subject to FIT, SS, Med, and FUTA.

Bonuses

Amounts paid to employees as bonuses in addition to their usual compensation must be included in the employee’s income and are subject to_________________________. An exception is made for “push money” which is given to a salesperson by a manufacturer to “push” its products. This type of bonus is issued by a third party and as such is not subject to withholding but must be reported as income by the salesperson on their personal income tax.

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CPP Study Group 70

Commissions

Commissions on the sale of goods or insurance premiums are subject to ____________ ___________ when paid to an employee or former employee whether or not the employee was directly involved in the sale. The exception to this is that full-time life insurance salespeople are not subject to federal withholding, but are subject to SS and Med when paid. They are also not subject to FUTA if they are paid strictly commissions.

“Commissions” (as opposed to push money) paid by the manufacturer directly to an employee are considered wages and are subject to all federal taxes which become the responsibility of the manufacturer.

Conventions

If an employee attends a convention or conference related to their job and substantiates any expenses reimbursed by the employer then the amount is considered excluded from the employee’s income as a working condition fringe.

Death Benefits

Death benefits paid upon an employee’s death to their estate or beneficiary should be reported on form 1099-R. These amounts are not subject to SS or Med.

Dependent Care Assistance Programs

Dependent care assistance paid by an employer is excludable from the employee’s wages and is not subject to federal taxes up to $___________ per family per year. Children must be under 13 and care must be “necessary”. Amounts are considered paid when incurred. Must be administered under a written non-discriminatory plan and employees must be notified of the availability and terms of the program.

Directors’ Fees

Fees paid to nonemployee directors of a corporation are not considered wages or subject to federal tax withholding. These amounts must be reported on form _________ and the individual is responsible for reporting payments on their personal income tax return.

Disaster Relief Payments

The Victims of Terrorism Tax Relief Act provides that any amount received by an individual as a qualified disaster payment is excluded from gross income and is not subject to federal taxes.

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CPP Study Group 71

Employer-Paid Taxes (Grossing Up)

An employer may decide to give employees a specified net amount for a bonus or other additional pay. In these situations, the employer is paying the employees taxes. In order to easily calculate this situation (as the payment of the employees taxes by the employer is considered taxable) the IRS has approved a method commonly known as “grossing-up”.

The calculation is as follows:

Gross amount of earnings = Desired net payment (100% - Total tax %)

One other thing to consider in the calculation is the social security wage base. The calculation becomes more complicated if the employee will reach their taxable limit with the gross-up amount.

Grossing-up – SS Limit will not be met

The following formula is used when performing the gross-up calculation for an employee who will not reach the SS limit for the current year:

1. Identify the desired net amount.

2. Verify the employee’s YTD SS taxable wages will not be exceeded with this payment.

3. Compute the net tax percentage (100% - [Federal % + SS % + Med % + State % + Local %]). In most cases the supplemental federal rate is used.

4. Divide the desired net amount by the net tax %

5. The result is the gross amount. Check the calculation by taking the computed gross pay and calculating the net amount.

6. Check your calculation.

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CPP Study Group 72

Example: Fred Frolic is receiving a net bonus from his company for $3,000.00. He is in Florida and the amount should be calculated using the federal supplemental rate. Fred’s YTD SS Taxable is $55,000.00.

1. Desired Net Amount

2. Reaching SS Limit?

3. Net Tax % (100 - Total Tax %)

4. Desired Net divided by net tax %

5. Gross Amount

6. Check!

Grossing-up – SS Limit will be met

If the employee will meet their Social Security taxable limit with the gross-up calculation then an additional step is needed. Calculate the amount needed to withhold the balance of Social Security and then add it to the desired net amount before calculating the total tax percentage. The formula will then be:

1. Identify the desired net amount.

2. Calculate the balance due for Social Security

3. Add the balance due for Social Security to the desired net amount

4. Compute the net tax percentage (100% - [Federal % + Med % + State % + Local %]).

5. Divide the desired net amount by the net tax %

6. The result is the gross amount. Check the calculation by taking the computed gross pay and calculating the net amount.

7. When checking the calculation, don’t forget to also deduct the Social Security amount calculated in step 2.

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CPP Study Group 73

Example: Susie Summer is receiving her annual bonus of $3,000.00. Her current SS taxable wages is $106,300.00. She is in Nevada.

1. Desired Net Amount

2. Calculate SS Tax Due

3. New Net Amount

4. Net Tax % (100 - Total Tax %)

5. New Net divided by net tax %

6. Gross Amount

7. Check!

Equipment Allowances

Allowances paid to employees for use of their own tools or heavy equipment on the job is not included in the employee’s wages and is not subject to federal tax. The amount must be kept separate from wages and cannot be paid to all employees regardless if they use their own tools.

Gifts

Gifts given to employees must be included in the employee’s income and are subject to FIT, SS, Med, and FUTA unless they can be excluded as a de minimis fringe or are given between relatives and not related to employment.

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CPP Study Group 74

Golden Parachute Payments

A “parachute” payment is compensation paid to an officer, shareholder, or highly compensated employee only after a change in corporate ownership or control that is at least three times the employee’s average compensation during the five most recent tax years. The entire payment is subject to FIT, SS, and Med. Any excess amount (over the three times average compensation) is also subject to a 20% excise tax. The amount is reported on form W-2 in Box 12 with code _________________.

Guaranteed Wage Payments

Wages paid under a guaranteed annual wage plan are wages subject to FIT, SS, Med, and FUTA.

Jury Duty Pay

If the employer pays the employee’s regular wages while on jury duty, they are subject to all taxes. If the regular wages are paid less the jury duty pay then only the balance is taxable. If the employer makes the employee give up the jury duty pay then only the balance is taxable and the employee may deduct the amount from their personal income tax. The jury duty payment received from the courts should be included on the employee’s personal income tax return.

Leave Sharing Plans

Days taken from a leave-sharing plan are taxable for all taxes. Employees who donate paid leave days and then do not use any of the banked days cannot deduct the compensation donated from their income.

Loans to Employees

The interest on loans made to employees is taxable for SS, Med, and FUTA if the interest rate is below the applicable federal interest rate on any day that the loan amount exceeds $10,000. The difference between the actual interest rate and the federal rate is the taxable amount.

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CPP Study Group 75

Military Pay

Supplemental military pay to an employee on temporary assignment in the National Guard or Armed Forces Reserve is subject to ___________________________.

If the employee is on active service or an indefinite assignment, then the employment relationship is considered broken and the wages are reported as 1099-Misc income and not subject to FIT, SS, Med, or FUTA.

Outplacement Services

Outplacement services are generally not taxable if due to a layoff or reduction in workforce and the amount cannot be traded for a higher “cash” severance package.

Retroactive Wage Payments

Retroactive wage payments are subject to taxes when paid at the current rate.

Security Provided to Employees

Security provided to employees for “bona fide business-oriented security concerns” is not taxable for FIT, SS, Med, or FUTA. Security provided to family members for the same business reason is also not taxable.

Severance or Dismissal Pay

Severance or dismissal pay is included in income and subject to FIT, SS, Med, and FUTA.

Stocks and Stock Options

Stocks and stock options are taxable if given in lieu of wages. Incentive stock options (ISO) are not taxable as long as the time restrictions are followed. Any income is treated as a capital gain at the time the stock is sold. Employee stock purchase plans (ESPP) provide similar benefits.

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CPP Study Group 76

Strike Benefits

Strike benefits are not treated as wages and are not subject to withholding. Money paid at an hourly rate for picketing is considered wages.

Supplemental Unemployment Benefits

These benefits are provided to employees in addition to State Unemployment and are considered wages subject to FIT but not SS, Med, and FUTA. If given as a lump sum payment, the amount is subject to SS, Med, and FUTA as well as FIT.

Tips

Tips and gratuities provided voluntarily by customers are taxable wages and must be reported by the employee to the employer on form _______. The employer is then responsible for adding the tipped amounts to the employee’s wages and withholding and paying all taxes.

Food and beverage establishments with more than 10 employees must “allocate” tips if the tips reported by employees are less than 8% of the establishments gross sales subject to tips for the period. An employee must make at least $20.00 per month in tips to be classified as a tipped employee.

Allocated tips are not subject to FIT, Med, SS, or FUTA, but must be reported in Box ___ of form W-2.

Uniform Allowances

Uniform allowances to purchase and clean uniforms that cannot be used as regular street clothes are not taxable.

Vacation Pay

All vacation pay is taxable. When an employee is paid and does not take the leave, the amount can be treated as supplemental wages.

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CPP Study Group 77

Wages Paid After Death

If an employee dies after receiving their check but before cashing it, the check should be issued for the same net amount to the employee’s representative. The amount is reported on the employee W-2.

If the employee is paid wages following his death but in the same calendar year, the wages are not subject to FIT but are taxable for SS, Med, and FUTA. The amounts will display on the employee W-2 and the taxable amount should also be in Box 3 of the Form 1099-Misc in the name of the beneficiary.

If the employee is paid wages the year following his death, the amount is not subject to taxes and should only be reported in Box 3 of the Form 1099-Misc in the name of the beneficiary.

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CPP Study Group 78

Reporting and Withholding on Noncash Fringe Benefits

Any form of compensation in the form of cash or cash equivalent (gift card) is fully taxable income and the taxes are due when the amount is paid.

For noncash fringe benefits the employer can treat the benefit as being paid on a pay period, quarterly, semi-annual, or annual, or any other basis but no less frequently than annual.

Employers do not have to make the same election for all employees. Employers must also consider the possibility of the employee not having enough regular wages to cover the taxes on the fringe benefits if they impute the income at the end of the year so it is recommended that they calculate on a more frequent basis. If the employee does not have adequate wages to cover the taxes then the employer becomes liable for any uncollected Social Security and Medicare taxes as well as its own share.

Withholding Methods

The employer can use one of the following two methods to withhold FIT, SS, and Med:

1. Add the included fringe benefit amount to the employee’s regular wages for a payroll

period (imputing) and calculate withholding on the total. The fringe benefit amount may be spread over several payroll periods.

2. Treat the included fringe benefit amount as supplemental wages and withhold federal income tax on the amount from the regular wages at the supplemental wage rate of 25% (35% for payments over 1 million).

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CPP Study Group 79

Special Accounting Rule

Noncash fringe benefits provided during November and December can be treated as being paid during the next year. This gives the employer time to value noncash fringe benefits. The following restrictions apply:

1. The rule applies only to noncash fringes provided during November and December,

not all benefits the employer treats as paid during those two months. 2. The employer does not have to formally elect to use the rule but must notify

employees of the decision during the period beginning with the employees last pay period of the year that will be included on the W2.

3. The employer can use the rule for some benefits and not others but if they use it for one employee receiving a particular benefit it must be used for all employees receiving that benefit.

4. The employer can use different ending dates during the two months for each benefit. 5. The employee’s personal income tax return must follow the employer usage of the

rule. 6. The rule cannot be used for group-term life, taxable reimbursed moving expenses,

taxable education assistance, or transfer of real estate or other personal property held for investment.

In fact, IRS Officials contend that the use of the rule is restricted to the taxable income attributed to the personal use of a company-provided vehicle or jet and non-cash transportation fringe benefits.

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CPP Study Group 80

Review of Other Compensation Types

Compensation EE Taxability

ER Taxability

Effect on Gross Pay

Reported on Form W-2

Advances and Overpayments

Awards and Prizes

LOS ______________

Safety ________________

Back Pay Awards

Bonuses

Commissions

Conventions

Death Benefits

Dependent Care Assistance (up to$____________)

Directors’ Fees

Disaster Relief Payments

Equipment Allowances

Gifts

Golden Parachute Payments

Guaranteed Wage Payments

Jury Duty Pay

Leave Sharing Plans

Loans to Employees

(amount exceeds 10,000)

Military Pay

Outplacement Services

Retroactive Wages

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CPP Study Group 81

Security Provided to Employees

Severance or Dismissal Pay

Stocks and Stock Options

In Lieu of wages

Incentive Stock Option

Employee Purchase Plan

Strike Benefits

Picketing Pay

Supplemental Unemployment Benefits

Tips

(Allocated at ____ percent)

Uniform Allowances

Vacation Pay

Wages Paid After Death

Pending check

In year of death

In year after death

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CPP Study Group 82

Key Terms – Section Three

Accountable Plan An employer’s business expense reimbursement plan that satisfies all IRS requirements regarding substantiation, business connection, and return of excess amounts in a reasonable period of time.

Adoption Assistance

Financial benefit provided by an employer to an employee to help with the child adoption process. Within certain limitations, it is excluded from FIT although not SS and Med taxes.

Back Pay Award A cash award made to an employee that generally results from legal action to remedy a violation of federal or state wage-hour or employment discrimination laws.

Business Standard Mileage Rate

A cents-per-mile figure issued annually by the IRS. Reimbursement for employee transportation expenses incurred while using their vehicles for business are not included in income up to the business standard mileage rate (.50 in 2010).

Compensation All cash and non-cash remuneration given to an employee for services performed for the employer.

De Minimis Anything that is too insignificant to merit legal scrutiny, such as a fringe benefit that is provided occasionally and is too small to justify accounting for or recording it. This does not apply to cash or cash equivalents except in very specific instances such as supper money.

Deemed Substantiation

Safe-harbor rules under which IRS requirements regarding the substantiation of amount spent on employee business expenses are considered to have been met (e.g. per diem allowances).

Dependent Care Assistance Program

An employer provided plan providing dependent care services or reimbursement for such services.

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CPP Study Group 83

Dependent Group-Term Life Insurance

Term life insurance that gives an employee death benefits should the employee’s spouse or other dependents die.

Discrimination In the context of employee benefits, favorable treatment of highly compensated employees under an employer’s plan.

Dismissal Pay Amounts paid to employees who are terminated from employment, also known as payments in lieu of notice, termination pay, or severance pay.

Educational Assistance Program

An employer plan providing for payment or reimbursement of an employee’s educational expense.

Employee Business Expense

Amounts spent by an employee for travel, lodging, meals, etc., while on the employer’s business. Reimbursements for such expenses may be excluded from income if they are properly accounted for.

Employee Stock Purchase Plan (ESPP)

An employer plan under which all employees are given the opportunity to buy employer’s stock at a discount, subject to strict limitations.

Fringe Benefits Compensation other than wages provide to an employee, such as health and life insurance, vacations, employer-provided vehicles, public transportation subsidies, etc., that may be taxable or nontaxable.

Golden Parachute Payments made to business executives in excess of their usual compensation in the event the business is sold and the executives are terminated from employment.

Gross-up An IRS-approved formula that employers can use to determine the taxable gross payment when the employer wishes to pay the employee’s share of tax.

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CPP Study Group 84

Group-term Life Insurance (GTL)

Term life insurance that is provided to employees, with the cost being borne by the employer, employee, or both. The premium is taxable for the amount of coverage paid by the employer that exceeds $50,000.

Guaranteed Annual Wage (GAW)

A plan guaranteeing employees their annual income (regardless of the work available) or that they will be kept on the payroll (although possibly at a lower wage).

High-Low Substantiation Method

A safe-harbor method (deemed substantiation) for reimbursing lodging, meals, and incidental expenses incurred by an employee who is traveling overnight on the employer’s business.

Highly Compensated Employee (HCE)

In the context of certain fringe benefit plans, an employee who is an owner or officer of a business or whose salary exceeds a certain amount (indexed each year for inflation). Many benefits offered by employers do not qualify for favorable tax treatment if they discriminate in favor of highly compensated employees.

Impute The addition of the value of cash/noncash compensation to an employee’s taxable wages in order to properly withhold income and employment taxes from the wages.

Incentive Stock Option (ISO)

A stock option plan that gives an employee the opportunity to buy the employer corporation’s stock at a fixed price for a certain period of time, and that offers favorable tax treatment if certain conditions are met.

Key Employee In the context of certain fringe benefit plans, an officer or owner (of all or a significant part) of a business whose annual pay exceeds a certain amount. Many benefits offered by employers do not qualify for favorable tax treatment if they discriminate in favor of key employees.

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CPP Study Group 85

No-Additional-Cost Services

A tax-free fringe benefit for employees consisting of free services offered by an employer at no substantial additional cost to the employer.

Non-accountable Plan

An employer’s business expense reimbursement plan that does not meet the requirements regarding business connection, substantiation, and returning excess amounts. Payments made under the plan are included in employees’ income.

Noncash Fringe Benefits

Benefits provided to employees in some form other than cash (e.g., company car, health and live insurance, parking facility, etc.), which may be taxable or nontaxable.

Nondiscrimination Testing

Tests that determine whether benefit plans provided by an employer discriminate in favor of highly compensated or key employees. If such discrimination is found, the employer will lose its favorable tax treatment of the benefit. Benefits provided under the plan may be taxable to employees receiving them.

Nonqualified Plan In the context of employee benefits, an employer provided plan that does not meet IRS qualification requirements.

Other Compensation

Compensation not subject to federal income tax withholding that an employer must report on an employee’s W-2 in Box 1.

Outplacement Services

Services provided by employers to help employees find a new job after a layoff or reduction in force.

Per Diem A flat daily rate of reimbursement for business expenses (e.g., meals, lodging, and incidentals) incurred by employees while traveling overnight on business.

Qualified Plan A benefit plan that meets IRS qualification requirements for tax-favored treatment (e.g., nondiscrimination).

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CPP Study Group 86

Supplemental Military Pay

Payments made by an employer to an employee who is serving in the U.S. armed forces to make up the difference between the employee’s military pay and his or her regular wages.

Qualified Transportation Fringe

Certain employer-provided transportation benefits that can be excluded from an employee’s income up to certain annually adjusted limits (i.e., Transit passes, vanpools, parking).

Safe-harbor An IRS-approved alternative method (usually a short-cut) for complying with IRS rules, regulations, and procedures (e.g., per diem allowances and high-low substantiation).

Special Accounting Rule

A safe-harbor rule that allows employers to treat certain noncash fringe benefits provided to employees in November or December as received in the following year. If an employer uses the special accounting rule, the employee must also report the benefit for the same period.

Split-dollar Life Insurance

An arrangement where an employer pays that part of an annual life insurance premium representing the increase in the cash surrender value of the policy during the year, while the employee pays the remainder of the premium.

Statutory Stock Option

An Incentive Stock Option or an option exercised under an Employee Stock Purchase Plan.

Substantiation In the context of reimbursed employee business expenses, the requirement that employees keep records of the time, place, and business purpose of reimbursable expenses they incur, including receipts (also used to track the business use of employer provided vehicles).

Supper Money The irregular and occasional payment of amounts to employees who work late to cover the cost of meals eaten during that extra working time.

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CPP Study Group 87

Supplemental Wages

Compensation received by employees other than their regular pay, such as bonuses, commissions, and severance pay. Income tax may be withheld from such payments at a flat rate under certain circumstances.

Table I (Uniform Premium Table

Refers to IRS Uniform Premium Table I, which is used to calculate the value of group-term life insurance over $50,000.

Tip Rate Determination Agreement (TRDA)

An agreement by an employer with the IRS on a certain tip percentage and a requirement that 75% of the tipped employees agree to report at least the tip percentage found in the agreement.

Tip Reporting Alternative Commitment (TRAC)

An agreement between a hospitality employer and the IRS that bases FICA assessments on employee audits and requires the employer to educate its employees on tip reporting.

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CPP Study Group 88

Section 4 – Health, Accident, and Retirement Benefits

Objectives

Describe different types of health insurance plans and their taxability requirements

Define COBRA Explain the FMLA and what it means to employers Define Sick Pay and its taxability Explain Workers’ Compensation benefits Describe Cafeteria Plans and their tax requirements Define Deferred Compensation Plans and their components

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CPP Study Group 89

Health Insurance

Most mid-size to large employers provide some type of heath or medical insurance to their employees. There are several different types of health plans that an employer can provide.

Types of Health Insurance Plans

Traditional Health Insurance Plans

The employer either purchases an insurance policy from a third-party provider (i.e., Aetna) or self-insures and pays claims to employees or health care providers from its own insurance fund.

When insurance is purchased from a third-party, the employer (and usually also the employee) pay premiums to the insurer which then reimburses the employee for medical expenses incurred or makes payments to health care providers.

Employers who are self-insured pay benefits out of their own insurance funds and either administer the plan or contract with a third-party administrator. o “Stop-loss” insurance may be purchased from an insurance carrier to pay

claims once the employer has paid out a certain amount (for catastrophic illnesses).

o “Minimum premium plans” combine third-party insurance and self-insurance by the employer paying a portion of a calculated premium to the insurer to cover administrative costs and the insurer’s profit, while placing other funds into an account to cover benefit claims. If benefit claims exceed the calculated premium, the employer’s liability is limited to the amount of the premium. If not, the employer gets to keep the difference.

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CPP Study Group 90

Health Maintenance Organizations (HMO)

A HMO provides health care services on a prepaid basis with employers contributing to the plan on behalf of the employees choosing the HMO.

HMOs typically have no forms to complete for treatment and have low or no deductibles

The employee typically must use health care providers within the HMO network to receive maximum benefits

Point-of-Service (POS)

A Point of Service plan is also a HMO plan; however, these plans allow covered employees and their dependents to use non-HMO health care providers, with the inclusion of deductibles and insurance co-payments.

The employee can use health care providers outside the HMO network The employee must select a Primary Care Physician (PCP) that serves as the

“gatekeeper” and oversees the delivery of all health care services

Preferred Provider Organization (PPO)

This type of health care system gives participants a choice of a higher level of benefits and lower out-of-pocket costs if they use doctors who are part of the PPO’s “network”.

Provides for a higher _______________ and lower _____________________ Employee is subject to deductibles and co-payments but costs to the employee

are lower if a Preferred Provider is used

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CPP Study Group 91

Tax Treatment of Contributions and Benefits

The following table recaps the taxability of contributions to health care plans from both the employee and employer, as well as taxability of benefits:

Contribution or Benefit

Included in Income?

Taxable for FIT, SS, Med, FUTA?

Requirements/Exceptions

Employer

Contributions

Must be part of a written plan and satisfy at least one of the following:

Written or known to employees

Referred to in the employment contract

Employees contribute to the plan

Employer contributions are to a fund separate from employers salary account

Employer is required to contribute

Employer Cash in Lieu of Contributions

Contributions in lieu of cash are fully taxable according to the IRS

Employee Contributions (not 125 Plan)

Contributions made by the employee which are not part of a § 125 Cafeteria Plan are fully taxable

Employee Contributes (125 Plan)

Must be made through a valid IRC § 125 Cafeteria Plan.

Any portion accepted as cash is taxable

Medical Care Benefits

Non-taxable up to the amount actually spent or incurred by the employee

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CPP Study Group 92

Non-Medical Care

Procedures that do not qualify as medical care are taxable. This includes Plastic Surgery unless medically necessary.

Coverage of a Life Partner

For IRS, the covered individual must be a spouse and/or dependent by definition

Nondiscrimination requirements

No nondiscrimination requirement exists for Fee-for-Service plans that are provided through a 3rd party insurer.

Companies that are self-insured (whether self administered or administered by a third party) cannot discriminate in favor of highly compensated employees in terms of either benefits or eligibility. If the plan is discriminatory, only amounts paid to the highly compensated employees must be included in income.

For purposes of nondiscrimination, highly compensated employees include:

The 5 highest paid officers An owner of more than 10% of the employers stock The top paid 25% of employees

In order to be nondiscriminatory in terms of eligibility, the self-insured plan must benefit one of the following:

At least 70% of all employees At least 80% of all employees who are eligible to participate in the plan if the above

is true A classification of employees deemed nondiscriminatory by the Secretary of the

Treasurer

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CPP Study Group 93

Medical Savings Accounts – Archer

The Health Insurance Portability and Accountability Act (HIPAA) of 1996 started a pilot for employees of small businesses who are covered by high deductible health insurance plans to make tax deductible contributions to a Medical Savings Account (MSA). General rules of the plan include:

The employee can make tax deductible contributions or the employer can contribute for the employee

Contributions cannot be made by both the employee and employer Employers must have 50 or fewer employees For 2010, the employees must be covered by a high deductible health

insurance plan with deductibles of at lease $______ to $________ for individual or $______ to $________ for family

MSAs cannot be part of a cafeteria plan although the employer can offer both Employer contributions are reported on Form W-2 in Box 12, Code _______

To be excludable from taxable income, the following additional rules apply:

The taxable reduction cannot exceed the employees annual compensation The deduction cannot exceed 65% of the plan deductible for single coverage or

75% for family coverage Employer contributions are not exempt if supplied under COBRA Contribution limit must be determined monthly based on employee status and

coverage If the employer does not contribute the same amount for each employee based

on either the dollar amount or the percentage of the applicable deductible, the amount contributed for the period is subject to a 35% excise tax

Earnings and distributions of MSA investments are tax-exempt for medical care

Long Term Care Insurance

Under HIPAA, long term care insurance contracts are generally treated as accident and health insurance contracts. Amounts received are excluded from income as amounts received for personal injuries and sickness and reimbursements for medical expenses. The excludable amount for 2010 is capped at $______ per day (unless actual expenses are higher). Also:

Is not subject to COBRA Cannot be included in a cafeteria plan If paid for by a Flexible Spending Account (FSA), payments are taxable income Payments can only be for qualified long term care services

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CPP Study Group 94

COBRA Health Insurance Continuation

The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 requires that all sponsors of health plans provide employees and their beneficiaries an opportunity to elect a continuation of group health coverage for a given period of time in the event their employment coverage is lost after a “qualifying event”.

Employers with ____ or more employees on at least 50% of the working days in the previous calendar year are subject to COBRA requirements.

Employees include full-time and part-time workers, agents, independent contractors, and directors, and certain self-employed individuals who are eligible to participate in a group health plan.

Qualifying Events – Periods of Coverage

The following qualifying events and periods of coverage apply to COBRA:

Qualifying Events Period of Coverage

Death of a covered employee ___ months

Termination of employment (other than gross misconduct) or reduction in hours of a covered employee

___ months unless another qualifying event occurs during the 18 months (other than bankruptcy) then extended to 36 months

If a qualified beneficiary (employee or dependent) is disabled under the Social Security Act at any time during the first 60 days of continued coverage – 29 months for all qualified beneficiaries entitled to coverage due to same event (extended to 36 months for another event other than bankruptcy as above)

Divorce or separation of the covered employee

___ months

Entitlement of the covered employee to Medicare benefits

___ months

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CPP Study Group 95

Dependent child of a covered employee losing the dependent status

___ months

ER Bankruptcy proceedings that cause the retired covered employee or the employee’s dependents to lose coverage

The life of the retiree or the retiree’s spouse; but once the retiree dies, 36 months from the retiree’s death for spouse and dependent children

Coverage will end before the maximum periods if:

The employer ceases to provide group coverage to employees The required premium is not paid within 30 days of due date The qualified beneficiary becomes covered under any other group health plan

with no pre-existing restrictions The qualified beneficiary becomes entitled to Medicare benefits unless

bankruptcy is the event

Premium Requirements

The premium may be up to 102% of the group premium paid for similar coverage under the plan by the employer and employee. The maximum increases to 150% for disabled qualified beneficiaries after the 18th month. The first premium may not be required earlier than 45 days after the qualified beneficiary elects continuation coverage.

Election and Notice Procedures

Employees or other qualified beneficiaries must make an election of the coverage. The election period must be at least 60 days and cannot start before the date on which coverage was terminated or when the beneficiary receives notice. Notice procedures are as follows:

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CPP Study Group 96

Type When Requirements

General Notices – must be furnished to covered employees

Within 90 days after participation in a medical plan

Summary Plan Description (SPD) should contain information regarding COBRA

Within 30 days of a qualifying event or employer becoming aware of a qualifying event

The employer must notify the Plan Administrator

Within 14 days of receiving information

The plan administrator must provide a notice of election rights to qualified or beneficiaries

Specific Notices

The employee has a 60 day period to elect coverage

This period is measured from the later of the following:

1. Coverage loss date

2. Date notice to elect COBRA coverage is sent

Penalties for failure to notify a qualified beneficiary are $100 per day/per individual or $200.00 per day/per family. For unintentional failure, the employer pays the lesser of 10% of contributions paid to group health plans in the previous year or $500,000.00 per year.

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CPP Study Group 97

Health Reimbursement Arrangements (HRA)

A Health Reimbursement Arrangement is an employer-provided health benefit that provides coverage and reimbursement of medical care expenses. Generally, an HRA is an arrangement that:

Is paid solely by the employer and not provided pursuant to salary reduction election or under a 125 cafeteria plan

Reimburses the employee for medical care expenses incurred by the employee and the employee’s spouse and dependents

Provides reimbursements up to a maximum dollar amount for a coverage period, with any unused portion of the maximum dollar amount at the end of the coverage period carried forward to increase the maximum reimbursement amount in subsequent coverage periods.

HRA’s are generally excluded from an employees income as long as it only reimburses for expenses for medical care as defined in IRC, requires that all medical expenses submitted for reimbursement are substantiated, and does not reimburse a medical care expense attributed to a medical expense deduction for a prior taxable year or before the HRA was in existence.

Health Savings Accounts (HSA)

A Health Savings Account (HSA) is designed to help employees save for medical expenses while they are employed and into retirement. They are tax-exempt trusts or custodial accounts created exclusively to pay for the qualified medical expenses of the account holder, spouse, and dependents. Rules of a HSA include:

The employees must be covered by a high deductible health insurance plan Out-of-pocket expenses can not exceed the limits Individuals over 55 can include an additional catch-up provision until the

individual is eligible for Medicare coverage Maximum contribution is $_______ for individuals and $________ for families Rollovers from Archer MSA plans is allowed Employees and employers can both contribute to the plan Employer contributions are coded on W2 in Box 12 with a __________.

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CPP Study Group 98

Family and Medical Leave Act (FMLA)

The Family and Medical Leave Act (FMLA) guarantees up to ____ weeks of unpaid leave within a 12-month period with continuation of health care benefits and the right of return to work with equal or equivalent status for any one of the following reasons:

To be with a newborn or newly adopted child To take care of a seriously ill child, spouse, or parent (in-laws do not qualify) To care for themselves if they are seriously ill

In order for employees to be covered by FMLA, the following conditions must be met:

The employer must have at least ____ employees at the location or at least ____ employees working within 75 miles of the location

The employee must be employed by the employer for at least 12 months and have worked 1250 hours in that period in the USA or its territories

Other conditions of an FMLA leave include:

Intermittent leave is permitted and reduced pay for reduced hours does not force an exempt worker into a non-exempt status

The employee can be forced to use paid vacation, sick time, etc., as part of the 12 week guaranteed leave

For foreseeable circumstances (care for a newborn or newly adopted child, serious medical conditions known beforehand, etc…), employee must give at least 30 days notice

Benefits continue during the leave If the employee contributes to benefit plans while working, contributions must

continue during the leave to guarantee coverage but must do so within 30 days or coverage can be dropped until the employee returns to work

Changes to health care coverage during the leave that affect active workers also affect the employee on leave

Non-health benefits may not continue unless provided for in the employers established Leave of Absence policy

Employee’s job or an “equivalent” position is guaranteed upon return Key employees must be notified of job denial in writing Recordkeeping is required and includes basic payroll records for hours worked,

pay rate, deductions, dates, and amounts of leave taken FMLA is enforced by the Department of Labor’s Wage and Hour Division

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CPP Study Group 99

Sick Pay

The tax treatment of amounts paid to employees while out sick depends on several things including who makes the payments for sick leave programs, who bears the risk, and if the employee is temporarily or permanently unable to work.

Sick Leave Pay

Payments made to an employee to replace wages while out on a non-job related illness where the employee is out for a brief amount of time is considered regular wages and so is fully taxable. This is also the case if flex days are used for sick days.

Sick Pay Under a Separate Plan

When an employee is out for a more extended period of time but is still expected to return to work at some point then wages are usually received through some type of short or long-term disability plans.

Benefits that are attributable to employer contributions or to employee pre-tax contributions through a cafeteria plan are taxable income to the employee.

Plans that are funded by both the employer and the employee are subject to special rules to determine the taxability of the sick payment received. If the employer knows the amount of the premium they paid to the insurance company during the last three years, then the following formula applies:

Employee sick pay x (Employer paid 3-year premium ÷ [Employer and Employee premiums paid for the past 3 years])

Example: Mike was injured in a non job-related accident on March 2, 2010 and was out of work until January 1, 2011. Mike received payments of $2,500 per month while out of work from his employer’s insurance company. During the 3 policy years before 2010, Mike’s employer contributed $30,000 in net premiums to insure its employees, while the employees paid $12,000 in after-tax dollars. The amount of Mike’s monthly sick pay that is included in income is:

Taxable sick pay = $3,000 x [$30,000 ÷ ($30,000 + $12,000)]

Taxable sick pay = $3,000 x ($________ ÷ $__________)

Taxable sick pay = $3,000 x ____

Taxable sick pay = $____________

Remember: Where the employee paid the premium with pre-tax dollars, the amount is fully taxable.

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CPP Study Group 100

Withholding Requirements

Type of Sick Pay/Contributor

FIT Withholding

SS/MED FUTA Explanation

Sick leave or “sick days”

Fully taxable on payroll

STD/LTD – Contributions by employer who is self insured

The employer uses the most recent W-4 form for FIT. FICA and FUTA are paid and matched for the first 6 full months of leave. Employer is responsible for reporting on W-2.

STD/LTD – Employers pays an agent on a cost-plus-fee basis

Treated as above. The 25% supplemental rate can be used. Employer is responsible for reporting on W-2.

STD/LTD – Employer pays a premium to a 3rd party who assumes withholding and reporting risks

FIT can be withheld with a W-4S. The minimum withheld is $20.00 or 10%. The employee must receive at least $10.00 net. Third party can report on separate W-2.

Any sick pay that was nontaxable because it was attributed to employee contributions to premiums is included in Box 12 of the Form W-2 with code _____.

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CPP Study Group 101

Permanent Disability Benefits

Payments made to an employee who is not expected to return to work are income to the employees and are subject to federal income tax withholding by the party making the payments to the extent the employer paid the premiums or the employee paid the premiums with pre-tax dollars.

Amounts paid under a definite plan or system on or after the employment relationship is has been terminated due to death or disability retirement are not subject to social security, Medicare, or FUTA tax.

Workers Compensation Insurance

Workers compensation is a form of insurance employers are generally required to purchase to insulate them against lawsuits brought by employee who are hurt or become ill while working.

Benefit Payments

Are not subject to tax Amounts received in excess of disability amount (supplemental payments) are

subject to tax when regular salary is paid over the amount of workers comp

Premium Payments

The premium an employer pays to either the state agency or an insurance carrier is generally based on the type of business the employer engages in and the size of its payroll. Employers are assigned classification codes based on the type of business they carry on. A dollar value is assigned to the code and is multiplied b the employer’s total payroll allocated to the code to determine the employer’s worker’s comp premium.

All employers are entitled to use a “low risk” code for office staff, outside sales, and drivers regardless of the business.

Cafeteria Plans

Cafeteria plans are a benefit that gives employees a choice from a “menu” of cash compensation and non-taxable (qualified) benefits. The plan is authorized by section 125 of the Internal Revenue Code.

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What Benefits Can Be Offered

The plans, which are usually offered by midsize and large employers, must include at least one cash compensation and one non-taxable (qualified) benefit. Some examples are:

Coverage under accident and health insurance plans Coverage under dependent care assistance plans ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________ ___________________________________________________

Premium Only Plans (POP)

One type of cafeteria plan, known as a Premium-only Plan (POP) is used by employers who require their employees to contribute towards benefits, usually health insurance.

Deferred Compensation

Certain rules governing cafeteria plans prohibit the inclusion of any plan providing for or allowing the deferral of compensation. A cafeteria plan violates this rule if it allows employees to:

Carry over unused contributions or benefits from one plan year to another (such as purchased vacation days)

Use contributions from one plan year to purchase benefits the employer will provide in a later plan year

How Cafeteria Plans Are Funded

Cafeteria plans and other flexible benefit plans are generally funded by either or both of the following:

Flex dollars or flex credits - each employee is provided with a certain amount of “flex dollars” or “flex credits” with the employee can then use to buy selections from the plan menu or elect to receive them in cash.

Salary reduction – employees use part of their own salary to purchase their benefits selections through pre-tax or after-tax deductions.

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CPP Study Group 103

What Cafeteria Plans Must Contain

The plan must be a written document laying out the particulars of the plan and it must be intended to be a permanent plan. The plan document must contain:

Description of the benefits available under the plan The plan rules for becoming an eligible participant Procedures governing participants elections under the plan The manner in which contributions are made The maximum amount of employer contributions (including salary reduction)

available to any participant A definition of the plan year If the plan offers time off, the ordering rule for using nonelective and elective

paid time off The plan’s provisions complying with any additional requirements for flexible

spending arrangements The plan’s provisions for HSA distributions from a health FSA

Revocation of Benefit Elections

Employees must make irrevocable benefit elections before the plan year begins. Changes can only be made during the plan year, under the following limited circumstances:

Who Can Participate in the Plan

Cafeteria plan participation must be restricted to employees (including former employees but not self-employed individuals) and the plan must be maintained for their benefit. The plan may not be maintained solely for the benefit of former employees. Spouses and children cannot participate in the plan, but they may benefit from the employee’s selection of benefits

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CPP Study Group 104

Nondiscrimination Testing

Nondiscrimination tests must be processed every plan year to ensure the integrity of the plan. To qualify for favorable tax treatment for all cafeteria plan participants there are three main nondiscrimination tests that cafeteria plans must satisfy.

Eligibility Test – Plan must meet the following conditions:

Must not favor highly compensated employees Employees may not be required to have more than three years of employment All employees must have the same length of service requirement Eligibility must start no later than the first day of the first plan year after they

meet the length of employment requirement

Contributions and Benefits Test – Either the total qualified (nontaxable) benefits and the total benefits or employer contributions for such benefits do not discriminate in favor of highly compensated employees

Concentration Test – The qualified (nontaxable) benefits provided to key employees do not exceed 25% of such benefits provided to all employees under the plan

Flexible Spending Arrangements

Flexible Spending Arrangements (FSA) give the employees a chance to pay for certain covered health care and dependent care expenses with pre-tax dollars.

To qualify as an FSA, the benefit program must provide coverage under which:

Specified expenses incurred by employees may be reimbursed up to certain maximums and subject to reasonable conditions; and

Maximum reimbursement amounts cannot be substantially more than the total premium for the employee’s coverage (ER and EE); less than 500% of the premium is allowed as a maximum reimbursement amount.

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CPP Study Group 105

Health Care FSA rules

Flexible Spending Accounts that provide medical, dental benefits are governed by several rules, including:

Elections cover a full plan year No deferred compensation – employees must “use it or lose it” Plan can allow a grace period Uniform coverage throughout the coverage period 12-month period of coverage

Tax Treatment of Cafeteria Plans

Contributions Included in Income?

FIT Taxable

SS/Med Taxable

FUTA Taxable

Comments

Employer

Must relate to non-taxable benefits selected by the employee

Employee

Pre-tax

*If the selection is 401K, it is subject to SS/Med

Employee After-tax

Cash

Discriminatory Plans

Highly Compensated Employees

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CPP Study Group 106

Reporting Requirements

Pre-tax contributions to a Cafeteria Plan are not reported on form 941 or the employee W-2; however they are reported on the employer 940 in Part one on lines one and two (exempt payments).

Cash or deferred arrangements (401K)

These contributions are not subject to federal income tax, but they are subject to social security, Medicare, and FUTA taxes. Therefore, they must be reported on the W-2 in Boxes __________________________________.

Dependent Care FSA rules

Dependent care assistance FSAs must report the total amount of dependent care on Form W-2, Box _____ Non-taxable limit on dependent care is $_________.

Amounts in excess of the limit are taxable and reported on Form W-2 in boxes 1, 3, and 5.

Unlike health care FSAs, employees can only be reimbursed up to the year-to-date contributed amount.

Example: Fred contributes $100 per month to a health care FSA and $50 per month to a dependent care FSA. As of May 31 he has contributed $500 to his health FSA and $250 to his dependent care FSA. He submits reimbursement requests for $600 in health care expenses and $350 in child care expenses. How much will he be reimbursed?

_________________________________

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CPP Study Group 107

Retirement and Deferred Compensation

Retirement and Deferred Compensation plans are provided to ensure that employees will have a source or retirement income and they are one of the most important benefits employers generally provide. Funds are contributed by the employer and/or the employee under a plan that invests the money and returns the contributions and investment gains to the employee upon retirement. Also sometimes know as CODA (Cash or Deferred Accounts).

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CPP Study Group 108

Qualified Pension and Profit-Sharing Plans (IRC § 401(a))

Type of Plan Included in Income?

FIT Taxable

SS/Med Taxable

FUTA Taxable

Contribution Limit

Catch-up Provision

W-2 Box 12 Codes

401(k)

For profit companies with over 99 employees

403(b) Schools & Churches

§408(k)

Simplified EE Pension – IRC

§457

State & Local government and other tax-exempt organizations

§501(c) (18) (D)

Pension plans prior to 6/25/59

IRAs

Employer Contributions

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CPP Study Group 109

SIMPLE Plans

EE Stock Ownership Plans (ESOP)

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CPP Study Group 110

Key Terms – Section Four

Actual Contribution Percentage (ACP)

The percentage of employer matching contributions and after-tax employee contributions made to an employee’s account in a 401K plan. The IRS uses the ACP to determine whether the plan discriminates in favor of highly compensated employees

Actual Deferral Percentage (ADP)

The percentage of wages deferred by employees participating in a salary reduction plan (e.g. 401K plan). The IRS uses the ADP to determine whether the plan meets the agency’s nondiscrimination requirements.

AD&D Accidental Death and Dismemberment Insurance

After-tax Deduction

A deduction from an employee’s pay that does not reduce the employee’s taxable wages. It is taken out only after all applicable taxes and other deductions have been withheld.

Cafeteria Plan A plan that offers flexible benefits under IRC125. Employees choose their benefits from a “menu” of cash and benefits, some of which can be paid for with pretax deductions from wages.

Cash or Deferred Arrangement

An arrangement under a retirement plan that allows employees to either receive cash or have the employer contribute an equivalent amount to the plan.

Catch-up Contributions

Elective deferrals by an employee to a defined contribution retirement plan or IRA above any statutory or plan-mandated limit.

CODA Cash or Deferred Arrangement

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

Federal law that requires employers with group health care coverage to offer continued coverage to separated employees and other qualifying beneficiaries.

Control Group A group of key or highly compensated employees in a company whose proportion of benefits is limited under the qualification requirements of certain benefit plans (e.g. 401K or 125 plans).

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CPP Study Group 111

Deferred Compensation

In general, the postponement of a wage payment to a future date. Usually describes a portion of wages set aside by an employer for an employee and put into a retirement plan on a pretax basis.

Defined Benefit Plan

A retirement plan that uses a formula (generally based on an employee’s salary and length of service) to calculate an employee’s retirement benefits and is not funded by employee contributions to the plan.

Defined Contribution Plan

A retirement plan with benefits determined by the amount in an employee’s account at the time of retirement. The account may be funded by contributions from both the employer and the employee.

Early Retirement Age

The earliest age at which social security retirement benefits can be received – currently age 62. Individual company retirement plans may provide for benefits at an earlier retirement age.

Elective Deferral The amount of pretax dollars that an employee chooses to have the employer contribute to a qualified deferred compensation plan (e.g., 401K) on the employee’s behalf, also known as pretax contributions or employer contributions.

Employee Retirement Income Security Act of 1974 (ERISA)

Federal law regulating the operation of private sector pension and benefit plans.

Excess Deferral The amount of an employee’s deferred compensation that exceeds the IRS’s annual contribution limit.

Flexible Benefits The option to choose from a menu of benefits offered by an employer.

Flexible Spending Arrangement (FSA)

An arrangement that allows an employee to have pretax dollars deducted from wages and put into an account to pay for health insurance deductibles and co-payments and dependent care assistance (separate accounts).

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CPP Study Group 112

401K Plan A cash or deferred arrangement that allows employees to authorize their employer to place pretax dollars in a retirement plan that invests the money. The contributions (including those matched by the employer) and any earnings on them are not subject to federal or state income tax until they are withdrawn.

403B Annuity An annuity or mutual fund hat provides retirement income for employees of public schools and certain tax-exempt organizations.

457 Plan A deferred compensation plan that provides retirement income for employees of public sector employers (e.g. state and local governments) and certain tax-exempt organizations.

Health Insurance Portability and Accountability Act (HIPPA)

Law passed in 1996 restricting the right of group health plans to limit participation by newly hired employees and their dependents because of preexisting medical conditions.

Health Reimbursement Arrangement (HRA)

An employer-funded arrangement under which the employer reimburses an employee and the employee’s spouse and dependents for medical care expenses up to a maximum dollar amount for the coverage period.

Health Savings Account (HSA)

Tax-exempt trusts or custodial accounts created exclusively to pay for the qualified medical expenses of the account holder (employee) of his or her spouse and dependents.

Individual Retirement Arrangement (IRA)

A trust created or organized for the exclusive benefit of an individual or his or her beneficiaries.

Long-term Care Insurance

An insurance contract providing for coverage of qualified long-term care services, including diagnostic, preventative, treating, mitigating, and rehabilitative services, which is treated as an accident and health insurance contract for payroll tax purposes.

Medical Savings Account (MSA)

An arrangement through which an employer or an employee (but not both) can put tax-preferred contributions into an account for the payment of health care deductibles under a high deductible health insurance plan.

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CPP Study Group 113

Monopolistic State

A state that administers workers’ compensation premiums and benefits solely through a state fund, prohibiting employers from purchasing insurance from a private insurance carrier.

Normal Retirement Age

Currently 65 and 2 months, the age at which retirees may receive unreduced social security benefits. Individual company retirement plans may use a different age.

Pretax Deduction A deduction taken from gross pay that reduces taxable wages.

Qualified Plan A benefit plan that meets IRS qualification requirements for tax-favored treatment (e.g. nondiscrimination).

Qualifying Event One of several events that results in the loss of group health insurance coverage for employees or their dependents and entitles them to continued coverage under COBRA.

Roth IRA An individual retirement arrangement to which nondeductible contributions may be made (subject to certain AGI phase-outs) and the distributions of which are generally nontaxable.

Savings Incentive Match Plans for Employees of Small Employers (SIMPLE Plan)

Retirement plans for employees of small employers (no more than 100 employees) that have simpler administrative and nondiscrimination requirements than other retirement plans.

Simplified Employee Pension (SEP)

An Individual Retirement Arrangement (IRA) with special participation requirements that is available to certain small employers.

Third-Party Sick Pay

Payments made by a third-party, such as a state or private insurer, to employees because of non-job related illness or injury.

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CPP Study Group 114

Section 5 – Paying the Employee

Objectives

Define pay frequencies and rules for payments upon termination

Discuss the different payment methods

Describe the rules governing pay statements, unclaimed paychecks, and wages owed to deceased employees

Review the procedures for extra pay periods caused by the calendar

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CPP Study Group 115

Paying the Employee

There are various aspects of paying employees that are not covered by either the Fair Labor Standards Act or the Internal Revenue Code. Rules that govern these additional areas are regulated by the individual states.

Pay Frequency

The Federal Wage-Hour Law (FLSA) does not regulate how often employees must be paid by their employer or how soon they must be paid after performing services (only that paydays must be consistent). Each state has rules that govern these frequencies.

State regulations for frequency of pay vary from at least every 30 days to weekly. Regulations for lag time from the date services are performed also vary with some states having no provision at all.

Payment on Termination

FLSA does not regulate when an employee must be paid upon termination. Most states have a separate set of rules governing when employees must be paid when they separate from employment, either through discharge, layoff, or resignation. Most states also have rules governing what must be included in an employees final wage payment (such as commissions, fringe benefit final payments) and a few even require severance pay where the employer shuts down, is acquired, or moves out of state.

Payment Methods

FLSA does not regulate the payment methods used to pay employees. Individual states have assumed the task of making sure employees actually receive cash or its equivalent when they are paid for services performed.

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Cash or Check

All 50 states and DC either expressly allow by law or regulation the payment of employees by cash or check or do not have a law or regulation regulating the method of payment. States generally require that employees be able to cash their paychecks or other negotiable instruments provided by the employer for face value without a charge or discount by a financial institution.

Direct Deposit

Direct Deposit which is a type of electronic funds transfer (EFT) allows the employer to deposit the employee’s pay (full or partial) directly into their designated bank accounts without having to handle a paycheck.

Direct Deposit eliminates many of the problems associated with employee paychecks, including:

How the process works

Employee Role:

Provides authorization to the employer for direct deposit Provides the name and routing number for the financial institution designated to

receive the payments Provides the type of account into which payments will be deposited Provides the account number

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Employers Role:

Process Prenotification (voluntary but recommended) o Checks the accuracy of the bank routing (ABA) and account number (DDA) o Sends a “zero” dollar amount through the network to test for account

accuracy o Must be sent at least 6 banking days before any actual pay is sent o Inaccuracies will be sent back to the employer o Employer must make corrections and send a new prenote

Creates the electronic pay transactions for direct deposit Sends the file to the Originating Depository Financial Institution (ODFI) Must send the file early enough so that the deposit can be credited to the

employees account no later than the beginning of the banking day on pay date Generate a _________ _________ _____________ through the ACH network

within five business days from the date of entry for deposits sent in error

Originating Depository Financial Institution (ODFI) – Employer’s Bank

Validates that the file has been prepared correctly Checks for any exceptions and processes any entries for accounts maintained

at their institution Processes the remaining entries through the Automated Clearing House (ACH)

network

Automated Clearing House (ACH) Network

Processes the remaining entries to the Receiving Depository Financial Institutions (RDFI)

Coordinates the financial settlement between the participating financial institutions

Operates under the rules developed by the National Automated Clearing House Association (NACHA)

Receiving Depository Financial Institution (RDFI) – Employee’s Bank

Accepts the employee’s electronic payment and credits the employee’s account Sends periodic statements showing the credits Sends exceptions back to the ACH Network to be routed back to the employer

through the ODFI

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Electronic Paycards

The newest form of payment for employees is Electronic Paycards. These cards are especially helpful for situations where an employee cannot have direct deposit due to lack of a banking relationship (unbanked). These paycards are actually a prepaid debit card that the employer funds with the amount of the employee’s net pay. The employee then accesses their pay by using the card to make purchases or withdraw cash.

How paycards work

Generally, a paycard is a pre-funded, host-based, stored value card that the employee can use to access his or her net pay at an ATM or a bank, or to make point-of-sale (POS) purchases.

Branded vs. nonbranded paycards

Branded cards have either the Visa or MasterCard logos imprinted on them and are accepted wherever these cards are accepted. They can be used in a signature transaction or a pin transaction.

Non-branded cards have the logo of one or more major ATM or POS networks imprinted on them and can be used to make POS purchases, access account information, or withdraw funds from any ATM. These cards require a PIN for all transactions and can only be used if there is enough in the account to fund the transaction.

Branded cards that are lost or stolen are more susceptible to unauthorized use since only a signature is necessary to make purchases whereas Non-branded cards cannot be used unless the PIN is also known. Also, if an employee is under the age of 18 they are only liable for their Branded paycard if he employer gets the written approval of the employee’s parents before the card is issued.

Pay Statements Provided to Employees

Each state determines what information must be included on an employee’s pay stub or statement. Generally they can include the following:

Earnings Hours worked Tax withholdings Deductions Pay dates, period ending dates

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Unclaimed Paychecks

Most often, the problem of unclaimed paychecks occurs when an employee is discharged or resigns and fails to pick up or claim any wages owed at the time. These wages become a form of “abandoned property”. The employer must then follow the escheat laws for the state in which the wages were earned and pay over to the appropriate agency any amount that remains unclaimed for a certain number of years. Most states also require that the employer attempt to contact the employee to keep the unclaimed wages from becoming abandoned property.

Wages Owed to Deceased Employees

Most states regulate wages owed to deceased employees in terms of who the wages may be paid to, how much may be paid before administration of the deceased employee’s estate, and what conditions must be met before payment can be made.

Extra Pay Periods Caused by the Calendar

Each calendar year, one day of the week will occur 53 times in a year (52 weeks x 7 days/week = 364 days). In leap years, two days of the week will occur 53 times. The main problem with this for employers is the issue of whether or not to re-compute weekly or biweekly paychecks for employees on an “annual” salary.

Employers are free to reduce salaried employees pay as long as there is no contract guaranteeing a certain amount of pay each week or biweekly. However, this is not a common practice due to the strain on the employer-employee relationship. Hourly employees are not affected.

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Key Terms – Section Five

Automated Clearing House (ACH)

A Federal Reserve Bank or private financial institution acting on behalf of an association operating a facility that serves as a clearinghouse for direct deposit transactions. Entries are received and transmitted by the ACH under the rules of the association.

Central Information File (CIF)

A file maintained by an Automated Clearing House (ACH) that contains depository financial institution names, routing numbers, addresses of contact persons, settlement and delivery information, and output medium requested.

Check 21 and the Check Clearing for the 21st Century Act

The Check Clearing for the 21st Century Act allows banks to use “substitute” checks and electronic check imaging in clearing paper checks, thus reducing greatly the amount of paper used in the check clearing process.

Direct Deposit The electronic transfer of an employee’s net pay directly into financial institution accounts designated by the employee, thus avoiding the need for a paycheck.

Electronic Funds Transfer (EFT)

The transfer of money electronically from an account in one financial institution to an account in another financial institution.

Originating Depository Financial Institution (ODFI)

A financial institution that is qualified to initiate deposit entries submitted by an employer as part of the direct deposit process.

Participating Depository Financial Institution (PDFI)

Financial institutions that can accept direct deposits and transmit or receive entries.

Paycards Stored value debit cards that are funded by employers with employees’ net pay. Employees can access their net pay by sing the cards to make purchases or withdraw cash.

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Payroll Period Period of service for which an employer pays wages to its employees.

Receiving Depository Financial Institution (RDFI)

A financial institution that qualifies to receive direct deposit entries from an Automated Clearing House.

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Section 6 – Withholding Taxes

Objectives

Define the Principal of Constructive Receipt

Discuss the Social Security Numbers and the Verification Process

Review Employee Withholding Forms

Define the Methods of Withholding Federal Income Tax and Social Security/Medicare Taxes

Identify Requirements for Backup Withholding and Earned Income Credit

Discuss Penalties for Failure to Withhold Taxes

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The Principle of Constructive Payment

Under federal regulations, employers are required to withhold FIT, SS, and Medicare taxes when the employee is __________ or ________________ paid, not when wages are earned and become payable. Under the principle of constructive payment (receipt) the employee is considered to have been paid when the wages __________________ _________________________________

The employee is not required to have actual possession of the wages, it is enough that the wages are available to be drawn on or controlled by the employee. For example:

Employee is paid by direct deposit Employee is not in the office on payday but the check is in the office and

available to be picked-up Employees that are sent their check through the mail are generally not paid

when the check is sent but when the check arrives to the employee’s address regardless of the date printed on the check

Regardless of the date on the check the date it is actually or constructively provided to the employee is the date that triggers the employer’s withholding and deposit obligations as well as the employer matching contributions.

Short delays that sometimes occur will not necessarily affect the employer’s or employee’s withholding, however if these delays occur at the end of the year there could be a substantial difference in the amount of tax that should be withheld.

Example: Fred earns 120,000 per year and is paid monthly. He works remote and his paycheck is mailed. At the end of the year due to the holidays he does not receive his final check dated December 30 until January 3. What should his employer do?

___________________________________________________________________

___________________________________________________________________

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Social Security Numbers

The original purpose of Social Security Numbers (SSN) was to establish an account for an individual so that wages and self-employment income could be posted to the account for purposes of receiving Social Security retirement benefits.

In addition to the original purpose, the SSN is used as the following:

An identification number used by IRS in dealing with individuals An identification number for employers when wages are paid and taxes

withheld are reported to the Social Security Administration (SSA) and IRS

Employers are required to have each new employee provide their original social security card when the employee is hired to help make sure the employee’s SSN is transcribed properly onto all forms. This should be done on the first day of work if available or “promptly” thereafter. Invalid SSN’s include:

111-11-1111, 333-33-3333, 123-45-6789 All 000 or 666 in the first three numbers Numbers greater than 773 in the first three numbers 00 as the fourth and fifth digits 0000 in the sixth through ninth digits

Asking to see the original card cannot be done to establish the right to work in the US but only to verify the name and number of the employee.

An individual can apply for a SSN with Form SS-5 – Application for a Social Security Card. Because all children who are claimed as dependents on a personal income tax return are now required to have an SSN, few new employees will be hired without already having a number.

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Verifying Social Security Numbers

Employers can verify the validity of a Social Security card through phone (up to 5), paper list (up to 50), and Employee Verification Service (EVS) for 50-300 employees.

When an employee requests a name change due to marriage or divorce, the employer should refuse to make the change until they receive a new social security card. Making the change before the SSA has it in their system could result in the mis-posting of the employee’s wages.

The SSA now sends Social Security Statements to all individuals 25 years old and older who are not already collecting benefits. This information can also be requested using form SSA-7004 Request for Earnings and Benefits Estimate Statement.

Employee Withholding Allowance Certificates

Form W-4

A new form W-4 should be submitted under the following circumstances:

Event Date

Starting a new job (or the employer must withhold as Single-0)

Decrease in number of dependents

No longer eligible for exempt status

Increase in dependents or eligible for exempt status

A new W-4 form becomes effective for a new employee on the first payday. For changes on existing employees, an amended W-4 form must take affect by the first pay period ending _________ of being submitted. Employers are required to ask their employees to file an amended W-4 form by _________________ of each year if their allowances will change for the following year.

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This form is used to identify an employee’s:

_______________________ _______________________ _______________________

An employer should never advise the employee as to how many allowances they are eligible to claim. This information can be obtained from IRS Publication 919.

Exempt Employees

The employer must keep Form W-4 on file for every employee. An employee may claim exempt from withholding if:

They had a right to a refund of all federal income tax withheld in the prior year because there was no tax liability

AND

They expect to have no tax liability in the current year

ALSO

They cannot be claimed as a dependent on someone else’s income tax return and their income cannot exceed $950 and include more than $300 of unearned income in 2010

New W-4 forms must be filed by ____________ for the exempt status to continue. High school and college students are not automatically exempt but are only exempt if they meet the same requirements as stated above.

The employer should reject the employee W-4 if:

_____________________________________ _____________________________________ _____________________________________

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Employees who claim more allowances than they are entitled may face a civil penalty of $500.00 in addition to criminal penalties.

The Employer must submit Form W-4 to the IRS if:

_______________________________________________ _______________________________________________

The Form W-4 must be submitted to the IRS by the due date of the 941. The employer must continue to withhold based on the employee W-4 until the IRS informs the employer that the form is defective. When the IRS informs the employer of a defective W-4, the employer must withhold using the information from the IRS. The employee can complete a new form as long as the number of exemptions does not exceed the amount on the IRS notice. Forms may be filed magnetically or electronically.

The employer must retain the employee W-4 form for at least ____ years after the date the last return was filed using the information contained on the Form W-4.

Example: Greg terminated his employment with XYZ Company on May 19. His Form W-4 is used to withhold and pay taxes, which will be on the 2Q tax returns due July 31. The employer must retain Greg’s Form W-4 until four years from ___________.

Form W-4P

Unless directed otherwise, payers and plan administrators must withhold FIT from pension and annuity payments made to retired employees. Retirees can have input into the amount withheld by submitting a Form W-4P, Withholding Certificate for Pension or Annuity Payments. By completing this form they can:

Elect not to have any income tax withheld Designate a certain number of withholding allowances to be used in calculating

the amount withheld or Indicate an additional dollar amount to be withheld

If no Form W-4P is filed, the payer must withhold on periodic pension payments as if the payee is _____ claiming _______ withholding allowances.

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Form W-4S

When an employee who is disabled by a non job-related illness or injury is being paid sick pay by a third party insurer, no federal tax will be withheld unless the employee requests it by submitting Form W-4S, Request for Federal Income Tax Withholding from Sick Pay. Guidelines include:

The employee used the form to request a _______________ be withheld from sick pay

The minimum amount that can be requested for withholding is _______ per week

After withholding, the employee must receive at least ___________ If the payment is smaller or larger that the regular payment, the amount

withheld must be changed in the same proportion as the payment

Methods of Withholding Federal Income Tax

There are various methods for calculating FIT. These methods include: Wage-bracket method Percentage method (used by service bureaus and thought to be the most

accurate) Percentage method (used by service bureaus and thought to be the most

accurate) Annualized method Average estimated method Cumulative method Part-year employment Supplemental wages method

No matter which method us used, there are five key pieces of information needed in order to determine the taxability of a payment. They include:

___________________________ ___________________________ ___________________________ ___________________________ ___________________________

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Wage Bracket Method

The Wage Bracket Method is the quickest and easiest method to use. The amount to withhold is taken directly from wage-bracket tables issued by the IRS in Publication 15, Circular E, Employer’s Tax Guide. This publication is adjusted annually and is broken down by marital status and pay frequency.

Use the following procedure to calculate FIT using the Wage Bracket Method:

1. Find the table that applies to the Marital status and _freq. for the employee.

2. Determine the employee’s wages subject to FIT withholding by adjusting for any taxable or non-taxable benefits (Adjusted Gross Income).

3. Locate the wage range that includes the taxable amount in the first two columns of the table.

4. Move across the table in the wage range row to the column that coincides to the number of allowances claimed by the employee on Form W-4. The amount in this field is the FIT withholding amount for the employee.

5. Add any additional FIT withholding amount from line 6 of Form W-4 to the amount.

Also remember:

When using the daily method, calculate the daily wage amount to determine the

daily taxes. Then multiply the daily tax by the number of days to determine the withholding.

If the Adjusted Gross Income (AGI) is more than the maximum amount on the table the Percentage Method must be used.

If the AGI equals the amount in the “But less than” column of the table, the next line which includes the same amount in the “At least” column must be used.

If the employee is claiming more than 10 allowances, the employer may deduct at a maximum of 10 or multiply the allowance in excess of 10 by the corresponding amount on page 36 of Circular E and then deduct this amount from the wages that are subject to FIT to come up with a new “AGI.” Calculate the FIT using the new AGI and 10 allowances.

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Common Mistakes made when using the Wage Bracket Method include:

Selecting the incorrect marital status Selecting the incorrect pay frequency Using the Percentage Method instead when the Wage Bracket Method is called

for Looking down the wrong column Deducting the allowances from page 36 of Circular E Not going to the next row when the “But Less Than” amount is reached

Percentage Method

Because of the flexibility and accuracy of the Percentage Method it is the preferred method for employers with automated payroll systems and service bureaus. To use the percentage method, the following steps must be followed:

1. Find the number of withholding allowances claimed on Form W-4 in the left hand column of the Allowance Table.

2. Move across the row to the corresponding payroll frequency for the employee to find the value of the withholding allowances claimed by the employee.*

3. Determine the employee’s wages subject to FIT withholding by adjusting for any taxable or non-taxable benefits (Adjusted Gross Income).

4. Subtract the amount from step 2 from the employees AGI.

5. Locate the Percentage Method Withholding Table for the employee’s payroll period and marital status [(a) for Single, (b) for Married]

6. Use the formula detailed in the table to calculate the withholding tax.

7. Add any extra dollar amount of withholding from line 6 of the employee’s Form W-4.

*NOTE: CPP exam supplemental booklet may not have the full allowance table. They will most likely give the amount for one allowance and expect the tester to know to multiply that amount by the number of W4 allowances referenced in a question.

Example: Harold is paid federal income taxable wages of $2,613.00 bi-weekly and is claiming married with 1 allowance on his Form W-4. Calculate his FIT withholding using the Percentage Method. _____________________________________________________________________ _____________________________________________________________________

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Alternative Withholding Methods

Annualized Wages

The Annualized Wage method is used in many automated payroll system. In this method, the withholding calculation is based on the annual wage amount and then divided among the number of payroll periods in the year.

Average Estimated Wages

An employer may withhold based on the employee’s estimated wages during a quarter. The employer must make an adjustment each quarter to bring the withholding on the estimated wages in line with the amount required to be withheld on the wages actually paid.

Cumulative Wages

The Cumulative Wages method is used for adjusting withholding amounts for employees whose wage payments are inconsistently high and low. Employees must request this method in writing and the request is valid until revoked by the employee. This method:

Is usually used for commissioned salespeople Allows for lower withholding when payments are low and higher withholding

when payments are high Also beneficial for employees who receive bonus payments much larger than

regular wages The employee must have been paid at the same frequency since the beginning

of the calendar year

Part-Year Employment Similar to the cumulative wages method, this method reduces withholding for employees who work only during part of the calendar year, usually on a seasonal basis or because they have been unemployed.

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Supplemental Wage Payments

A supplemental wage payment is an amount for compensation that is not part of an employee’s regular wages. Supplemental wage payments include bonuses, commissions, prizes, awards, severance, and other payments. There are three methods for calculating FIT on supplemental wages.

Combining Wages

If supplemental wages are combined with regular wages and are not clearly identified, then the employer must withhold taxes based on the combined wage payment for that payroll period.

Aggregate method

The employer must use this method if no FIT withholding occurred on the last payment. The amount of the supplemental wages are combined with the wages from the last payment and treated as one payment. The difference in taxes is used for the supplemental wages.

Flat Withholding Rate

When supplemental wages are paid separately from regular wages or when they are clearly identifiable from regular wages the employer can withhold FIT at a rate of ___%. If the total amount of supplemental wages totals $1 million or more for the year, the rate is increased to___% for all supplemental wages in excess of $1 million.

Withholding on Pensions and Annuities

Generally, distributions from an employer’s retirement or deferred compensation plan are subject to federal income tax withholding. The method of withholding depends on the type of payment – periodic or non-periodic.

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Periodic Payments

Periodic payments are those made over a period of more than one year. Employees can elect federal withholding using Form _________ If no form is submitted, the withholding must be calculated at ____________ The employee must be notified of their right to revoke or change their

withholding elections six months prior to the first payment and annually thereafter.

Nonperiodic Payments Not Eligible for Rollover

Nonperiodic payments are all payments which are not considered periodic. All nonperiodic payments made after December 31, 1992 that are not eligible for rollover to another qualified plan and are at least $200 are subject to withholding at the rate of ___%.

The recipient may use W-4P to elect no withholding or increase withholding by a specific dollar amount.

Eligible Rollover Distributions

Eligible rollover distributions are nonperiodic payments of all or any portion of the balance of a recipient’s account in a qualified deferred compensation plan under IRC 401(a)(9) (including a 401K), 403(b), 457 plan, or IRA. If distributions are not directly rolled over into another qualified plan they are subject to a mandatory federal income tax withholding of 20%.

Backup Withholding

The IRS requires that payments of $_____ or more be reported as income. Businesses are required to withhold a ___% backup withholding tax from non-employees under the following conditions:

The payee fails to provide the payer with a Taxpayer Identification Number (TIN) and/or a Employer Identification Number (EIN)

The IRS notifies the payer that the TIN or EIN is not valid The IRS notifies the payer that the payee has underreported interest or

dividend payments The payer has not received a certification from the payee that they are not

subject to withholding

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Form W-9

The Form W-9, Request for Taxpayer Identification Number and Certification is used by persons required to file information returns with the IRS to get the payee’s correct TIN. Part I requests the TIN, which is either the Social Security Number (for individuals) or the Employer Identification Number for businesses. Part II is the certification that the payee is not subject to backup withholding.

Advance Earned Income Credit (EIC)

Employees earning under a certain amount per year may qualify for Advance Earned Income Credit (EIC). EIC is a credit on federal income tax paid. Advance EIC payments can be made to employees who qualify under the following:

Annual income cannot exceed $_________ if filling separately or$________ if married filing jointly for a maximum EIC payment of $_________.

The employee(s) must have a dependent child living 6 months or more per year in the home

The principal residence must be in the United States The employee(s) must file form ____ annually and the form expires on

__________ of each year Once received by the employer, the form must be put into affect by the next

scheduled payroll

A Form W-5, Earned Income Credit Advance Payment Certificate, is used by any employee who is eligible to receive part of their EIC in advance with his or her regular payroll and wished to do so. The following rules also apply:

Employers must reject any invalid certificates. The employer must know if the employee’s spouse has also filed a Form W-5

with their employer as the EIC percentage tables are based on this information. If an employee’s circumstances change, the employee must either revoke the

W-5 in writing if they are no longer eligible for credits or submit a new Form W-5 if an eligibility change is required due to the spouse’s filing

If an employer does not honor an eligible Form W-5 and does not make the advance EIC payments, the employer is subject to penalties equal to the advance payments.

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How to pay advance EIC

Advance EIC payments are not wages and do not change the amount of federal income tax, social security, and Medicare taxes that must be withheld from the employee’s wages. Because the amount is a credit to the employee, the amount does not increase the taxability of the wages. The taxes are considered to have been withheld and paid to the IRS and then the employer adds the credit to the net pay. The advance EIC payment is calculated based on the employee’s wages subject to income tax withholding.

Example: Fred is eligible for advance EIC and files a W-5 form with his employer as Single Head of Household. He earns $325.00 per week and claims Single with one withholding allowance on Form W-4. He also has a pre-tax medical deduction of $5.00 per week. Calculate Fred’s net pay using the Percentage Method for Federal and advance EIC.

Gross ________

Medical ________

FIT ________

SS ________

Med ________

SIT ________

Adv. EIC ________

Net Pay ________

Remember, as soon as the employee’s wages reach the maximum gross taxable amount of $__________ for single or head of household or $___________ for married filing jointly the employer is required to stop making EIC payments. The maximum credit that can be given to the employee is $_______. Amounts that are paid in excess will be reconciled when the employee completes their Form 1040.

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Depositing and Reporting Advance Payments of EIC

The employer must maintain a separate record of federal tax liabilities and advance EIC parents. At the end of the deposit period the employer adds together the FIT taxes withheld and the employee and employer SS/Med taxes. From this total, the employer subtracts the total advance EIC payments made to employees and deposits the net amount.

Advance EIC payments are reported on line 9 of Form 941 and Box 9 of Form W-2 and W-3. Line 9 of Forms 941 filed for the tax year must agree with the total advance EIC payments reported in Box 9 of the Form W-3.

Required Notices to Employees

Employers are required to notify employees of their potential eligibility for advance EIC by providing them with copies of IRS Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC), no later than January 31 of each year. This reporting requirement is also met by providing employee’s with the notification on the reverse side of Form W-2, Copy B.

Social Security and Medicare Taxes

Employers and employees are both required to pay taxes required by the Federal Insurance Contributions Act (FICA) to fund two federal government benefit programs: Social Security and Medicare. The employee’s share of social security and Medicare taxes is withheld from wages and matched by the employer, which then pays both shares to the federal government.

Social Security and Medicare Rates and Limits

Withholding rates:

Social security ______

Medicare ______

Total ______

Combined ER and EE ______

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Taxable Wage Base:

Social security ______________

Medicare No Limit

Total Calculated Withholding:

Social security

$____________ X _______ = $__________

Medicare

Because Medicare taxable base is unlimited the tax is also unlimited at the rate of 1.45%.

Remember: If an employee reaches the social security taxable wage base with one employer and changes jobs to a new employer:

The new employer must deduct social security and pay their matching share The employee can claim a credit when filing their Form 1040 and receive a refund

of overwithheld social security Neither the former or new employer will receive a refund for the employer share

Common Paymaster

When two or more related corporations concurrently employ one or more employees and pay them through one of the corporations as a “common paymaster,” the total social security and Medicare taxes that must be paid are determined as if the employees had one employer (the common paymaster) paying all of their wages.

Concurrent employment is the primary qualification that must be met by the employees of the common paymaster. This means that the employees must have an employment relationship with each of the related employers at the same time.

The common paymaster is responsible for all payroll records and the depositing and filing of all related taxes and returns. If the common paymaster fails to pay taxes, the common paymaster remains liable for the unpaid taxes but each of the separate corporations is jointly and severally liable for its appropriate share of the taxes.

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Remember, using a common paymaster is not the same as using a “common pay agent.” A Common Pay Agent is a corporation that processes the payroll for multiple corporations with each company’s payroll processing separately from the other using their own respective employer IDs.

Self Employment Tax

Self-employed individuals must pay both the employer and employee portion of social security and Medicare taxes, paying a combined rate of _____% for social security (up to the wage base) and ______% for Medicare.

Wages Exempt from Social Security and Medicare

All wages are subject to social security and Medicare unless specific provisions are made under the IRC (for example, qualified moving expenses, qualified transportation fringe benefits, Non-cash section 125 plans, excludable meals and lodging, etc.)

Employment Exempt from Social Security and Medicare

In addition to wages that are exempt from social security and Medicare, there are also specific types of employment including work performed by a child under the age of 18 for a parent and work done by student nurses.

Penalties for Failure to Withhold

Most IRS penalties are focused on employers for the failure to either deposit the proper amount of taxes on time or for filing correct returns on time. Employers can usually avoid liability if they can show that the employee later paid FIT tax on their own. Employers are then relieved of other penalties in regards to failure to withhold such as late deposits or returns.

Special rules apply for third parties who supply funds to an employer for the purpose of paying wages to that employer’s employees, knowing that the employer cannot or will not deposit the required taxes. The third party is then liable for up to a maximum of 25% of the funds supplied to pay wages.

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Section 7 – Unemployment Insurance

Objectives

Define FUTA tax and taxable requirements

Review Form 940 including the instructions for completion

Identify the relationship between State Unemployment and FUTA

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Unemployment Insurance

Federal Unemployment Insurance

The Federal Unemployment Tax Act (FUTA) requires employer contributions in the form of unemployment tax. The FUTA tax is paid by the employer only and is calculated as a percentage of covered wages for each employee.

Who Pays FUTA

All non-farm employers paying $______ or more in covered wages in any calendar quarter during the current or preceding year or who employ at least one employee at least part of one day in 20 different weeks during the current or preceding year are subject to FUTA. For farm employers the amount of covered wages increases to $________ and the number of employees to 10. Employers paying domestic employees $1,000 or more in any calendar quarter of the current or preceding year also pay FUTA.

Federal, state, and local government employers as well as nonprofit religious, charitable or educational organizations that are tax exempt are not subject to FUTA tax.

Although most employers must pay FUTA contributions, there are several items such as qualified moving expenses, group term life, and meals and lodging that are exempt from FUTA. Some types of employment (similar to the types exempt from SS/Med) are also exempt from FUTA.

FUTA Tax Rate and Wage Base

Actual FUTA Tax Rate ______

Tentative Credit ______

Effective FUTA Rate ______

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Taxable Wage ______

Total Tax per Employee ______

General Rules

Constructive receipt rules apply Where employees work for more than one employer, each employer is subject

to the wage limit Successor/predecessor rules apply similar the rules for Social Security Common paymaster rules also apply

Depositing and Paying FUTA Tax

Employers calculate their FUTA tax liability on a quarterly basis and assume that they will be eligible for the full 5.4% credit in 1, 2, and 3 quarter. If the employer owes more than ________ in each of the first three quarters, the full amount is deposited by the following dates:

First quarter ends ______ Deposit Due ______

Second quarter ends ______ Deposit Due ______

Third quarter ends ______ Deposit Due ______

If the FUTA tax deposit due date falls on the weekend or a federal or state legal holiday then the deposit is due ________________________.

In the first three quarters, if the total amount due at the end of the quarter is below the limit of _______ then the liability is carried over and added to the liability for the next quarter.

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Final Quarter Liability

Employers determine their fourth quarter FUTA liability when they complete Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. Completing the 940 determines if the employer is entitled to the full 5.4% credit and determines the balance of FUTA due for the year.

If the total balance due is more than $_____ it must be deposited by January 31.

If the total balance due is less than $______ then it can be attached to the employer’s Form 940 when the form is filed (by _____________).

Calculating Tentative Credit

There are two types of credits against FUTA liability. The “normal” (or 90%) credit provides a reduction in FUTA liability for payments required and actually made under state unemployment compensation laws. The “additional” credit allows employers whose state unemployment rate is less than 5.4% to receive credit for the difference between 5.4% and the actual state percentage paid. Credits cannot exceed 5.4%.

Full credit for paying to the state can only be taken under the following requirements:

Payment must be made by Form 940 due date State must have “certified” unemployment insurance program Payments must be “required” by state law Amounts owed must “actually” be paid by the employer

If an employer is exempt from coverage under state unemployment insurance laws but is subject to FUTA, then it must pay the full 6.2% FUTA tax rate. In some states they may be able to submit voluntarily to state coverage and receive credit for payments made to the state.

Credit Reduction

States with a high rate of unemployment that have difficulty meeting their benefit obligations can borrow money from the federal unemployment insurance fund to pay benefits. If the loans taken out during one year are not repaid by the end of the following

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year, the FUTA credits for employers in those states are reduced and the extra amounts paid by the employers are applied against the state’s loan balance.

Sometime after November 10 of each year (the deadline for loan payments) the credit reductions for that year are announced by the IRS and are included on Schedule A (Form 940). Credit reduction amounts start at .3% the first year, which changes the Tentative Credit from 5.4% to 5.1% and in effect changes the FUTA rate from .8% to 1.1%. For 2008, there were no credit reduction states, so the areas relating to credit reductions on the 2008 940 have been shaded out.

Reporting FUTA Tax on Form 940

Employers covered by FUTA must report their liability annually on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.

Form 940 EZ is being eliminated for 2006 and beyond

If the client is doing business in more than one state, or if they are in a credit reduction state, they must also complete Schedule A (Form 940).

Form 940 must be filed by ________________ of the year after the FUTA tax liability was incurred. If this date falls on a weekend or holiday, then the form is due on the next business day. Employers receive an automatic extension to ______________ if they have deposited their FUTA tax liability in full and on time for all four quarters. An extension of up to 90 days may also be granted as long as the extension was filed by the due date of the form and all FUTA tax payments were made timely.

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Penalties for FUTA Noncompliance

Item Initial Penalty Limits or Additional Penalty

Notes

Late Filing 940

Failure to pay FUTA Tax

IRS notice and demand

Above items are raised to 1% per month following levy notices or demands for immediate payment from the IRS.

Accuracy related penalties

Failure to make timely deposits

- Up to 5 days - 6-15 days - >15 days - >10 days after

IRS notice

EFTPS mandated employers

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State Unemployment Insurance

The Federal Unemployment Tax Act provides a framework for state funding and coverage requirements. However, each state has their own methods for determining tax rates, wage bases, and benefit eligibility and amounts.

If an employee is working in more than one state, the following factors can be used in determining to which state an employee should be allocated for state unemployment purposes:

Are services localized with any services performed outside the state merely incidental?

Does the employee have a base of operations? Is there a place of direction or control? What is the employee’s state of residence?

SUI taxable wages vary from state to state but are always at least equal to the FUTA taxable wage base of $7,000.

Rate Determination

Contribution rates and experience rates also vary from state to state and are determined by one of four methods depending on the state:

Reserve Ratio – Under the Reserve Ratio method, each employer is assigned an account into which it pays unemployment taxes. The account is then reduced by the amount of unemployment benefits paid to the employer’s former employees during the year. The reserve ratio is the balance (reserve) in the employer’s account divided by the employer’s average taxable payroll for a specific number of years. The higher the ratio, the lower the tax rate. (Used by the majority of states.)

Reserve ratio = Unemployment taxes paid – Benefits charged

Average taxable payroll

Example in Payroll Source:

Company had a balance of $34,600 in their unemployment account and had $2,200 charged to them for the previous year and an average payroll of $800,000

34,600 – 2,200 = 32,400 = .041 = 4.1%

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800,000 800,000

Benefit Ratio – The Benefit Ration method considers the relationship between the unemployment benefits charged to the employer during a stated period and the employer’s total taxable payroll for the same period.

Benefit ratio = Benefits charged

Total taxable payroll

Example in Payroll Source:

Company had $4,800 in benefits charged to their unemployment account over the past three years and a total taxable payroll during that time of $400,000.

4,800 = 0.012 = 1.2%

400,000

Benefit Wage Ratio – Two states (Delaware and Oklahoma) use this method,

which focuses on the taxable wages used to determine the benefits payable to employees who were terminated during the applicable time period, rather than the benefits themselves. These wages are then compared to the employer’s total taxable payroll during the same period.

Benefit wage ratio = Benefit wages paid

Total taxable payroll

Example in Payroll Source:

Company terminated 6 employees whose wages totaled $140,000. Company had a total taxable payroll of $900,000 during that time.

140,000 = .1556 = 15.56%

900,000

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Payroll Stabilization – This method, which is only used in Alaska, uses fluctuations in an employer’s payroll from quarter to quarter to determine the tax rate. As more employees are terminated and the payroll decreases, the employer’s tax rate will increase. As long as the employer’s payroll remains stable or increases, the tax rate will not be increased and may be decreased.

Employers in nearly all of the reserve ratio states can also elect to make voluntary contributions to their unemployment tax accounts which in turn increases the balance of their account and decreases their unemployment tax rate.

Voluntary Contributions

Employers in 27 states can make voluntary contributions to their unemployment tax accounts. This increased their reserve ratio, resulting in a lower unemployment tax rate. Not all employers are eligible.

Reporting Requirements

Each state requires employers to submit quarterly contribution and wage reports which contain some or all of the following:

_____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________

Generally, the quarterly reports and deposits are due on the last day of the month following the end of the quarter.

State Disability Insurance

Five states (California, Hawaii, New Jersey, New York, and Rhode Island) as well as Puerto Rico provide benefits to employees who are temporarily off work due to non-work related illness or injury. Employees usually contribute to these plans and in some cases the employer must also contribute.

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Section 8 – Depositing and Reporting Withheld Taxes

Objectives

Discuss Employer Identification Numbers Define the payroll tax deposit rules Review the 941 and W-2 forms and requirements Discuss other forms and filings Review penalties for incorrect or late returns

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Employer Identification Numbers

The Employer Identification Number (EIN) is a 9-digit number (00-0000000) that must be used when filing returns or depositing taxes to the IRS. To apply for an EIN, the employer can complete _____, Application for Employer Identification Number and mail or fax the form to the IRS. Optionally, employers can now apply for their EIN directly from the IRS Website or by calling in to the Tele-TIN program. In both cases the number is assigned immediately which avoids the need to deposit or file under an “applied for” status.

Where there is no EIN

If an employer has not yet received its EIN before the due date of a deposit or filing, the employer should write ________________ and the ___________________________ in the space provided for the EIN.

Mergers, consolidations and reincorporations

The correct EIN to use after a corporate merger or acquisition depends on its characterization under the IRC. If the merger is a reorganization, then the surviving corporation should use _______________________________. However, if a new corporation emerges, then the corporation should use ______________.

Depositing Withheld Income and Employment Taxes

Payroll Tax Deposit Rules

Employers that file Form 941, Employers Quarterly Federal Tax Return, are assigned one of two depositor status classifications under the deposit rules: ________ and___________________.

This determination is based upon the employer’s total tax liability during the ____________________________.

The lookback period is __________________________________________________ _____________________________________________________________________

Example: For calendar year 2010, the Form 941 lookback period is July 1, 2008 through June 30, 2009.

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The following thresholds apply to both payroll and non-payroll withholdings:

If the total federal tax liabilities deposited during the lookback period are greater than $____________ the ER is a ______________ depositor.

-If the total federal tax liabilities deposited during the lookback period are $__________ or less, the ER is a ___________ depositor.

Very small employers

Beginning in 2006, employers with a total annual employment taxes of $1,000 or less will file Form _____, Employer’s Annual Federal Tax Return rather than Form 941 and will be able to deposit their tax liability annually.

Non-payroll withholding

Withholding on nonpayroll wages (backup withholding, gambling winnings, pensions, IRA’s, etc.) is not reported on Form 941, but annually on Form ______, Annual Return of Federal Income Tax. Depositing frequency for these liabilities follows the rules as 941 filers.

New Employers

Because new employers do not have a lookback period, they must begin filing as __________ depositors unless they either incur a liability of over $___________ or develop a lookback period of over $50,000.

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Requirements for Monthly and Semiweekly Depositors

Deposit Frequency

Check Date Cutoff Date Due Date

Monthly

Semiweekly

Next Day

*Note: All semi-weekly depositors are guaranteed at least three banking days after the end of the semiweekly period. Also, if any deposit day falls on a non-banking day, then the deposit is due on the next banking day.

One-Day Deposit Rule

If an employer’s accumulated employment tax liability reaches $____________ on any day during a monthly or semiweekly deposit period, the taxes must be deposited by the close of the next banking day.

Example: One day deposit rule – SWDI, Inc. ran two out-of-cycle payrolls. One had a pay date of Wednesday, June 9th for $80,098.00, one on Thursday, June 10th for $20,870.00 and the regular run on Friday, June 11th for $13,524.00. The deposits would be as follows:

$_____________ due on ______________ and

$_____________ due on __________________

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Semiweekly periods bridging two quarters

A semiweekly deposit period (Saturday – Tuesday or Wednesday – Friday) may overlap the end of one quarter or annual period and the beginning of the next. If the employer pays wages on two days in different quarters that fall within the same semiweekly period, then the employer will need to make each deposit separately in the respective quarters (or years).

Quarterly “de minimis” deposit rule

Employers with an accumulated tax liability of less than $________ for any quarter can deposit the liability according to their depositor status or _____________.

Annual Form 944 Deposit or Payment Exception

Beginning in 2006, employers with an annual employment tax liability less than $_________ can pay their liability with a timely filed Form 944.

Shortfall rule

The IRS allows “safe harbor” shortfall where an employer can deposit less than the entire amount of its liability and still be in compliance. The underdeposited amount can be the greater of $_____ or __% of the liability if deposited timely.

Monthly depositors must make up the shortfall by ______________. Semiweekly depositors must make up the shortfall by ___________________________________.

How to Deposit Payroll Taxes

Over 90% of employers pay taxes electronically through __________. If an employer has deposited $__________ or more in payroll and/or non-payroll taxes two calendar years ago, then they must file ________. Employers with less than $_________ during that time frame may still use checks and deposit coupons.

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EFTPS Enrollment

All businesses receiving a new EIN will be automatically pre-enrolled in EFTPS. New business taxpayers will activate their enrollment by calling an 800 number, entering their banking information, and completing an authorization for EFTPS to transfer funds.

Employers that will be required to use EFTPS because their tax deposits have increased must enroll by completing and submitting Form ________. A separate enrollment must be submitted for each EIN.

When paying by check, employers can use Form _________, FTD Coupon. These coupons are sent to each employer several weeks after the employer receives its EIN.

Penalties for Failure to Deposit on Time

Employers who fail to deposit the entire amount of tax without reasonable cause, are subject to the following penalties:

___% of the undeposited amount if deposited within ___ days of the due date. ___% of the undeposited amount if deposited within _________ days of the due

date. ____% of the undeposited amount if deposited more than _____ days after the

due date.

____% of the undeposited amount if not paid within ____days after receiving the first IRS delinquency notice or on the first day a notice of demand for payment is received.

Special rule for electronic depositors

If an employer is required to use EFTPS but uses a check and paper deposit coupon instead, the ER is subject to a ___% failure-to-deposit penalty. If the deposit is late, then the above mentioned penalties are also assessed.

If an employer uses EFTPS voluntarily and is not mandated, then the employer is not subject to any failure-to-deposit penalty.

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100% Penalty for not Withholding and Paying Taxes

Individuals who are responsible for withholding and depositing taxes and willfully fail to do so are subject to the _________________________ or __________.

Responsible party includes corporate officers and partners as well as accountants and others who had even less control over the employer’s funds. However, it excludes non-owner employees who work under the direction of a manager and other clerical type positions.

Criminal Penalty

In addition to the 100% penalty, responsible persons are guilty of a felony and can be fined up to $__________ and/or imprisonment for up to ______________.

The Employer’s Employment Tax Return – Form 941

The basic employment tax return file by employers is Form 941, Employers Quarterly Federal Tax Return.

Who must file Form 941

All employers that withhold FIT and are subject to withholding and payment of social security and/or Medicare taxes generally must file Form 941.

Exempt Employers

The following employers are exempt from filing the 941:

____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________

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Successor Employers

For the most part, if an employer sells or transfers its business, a separate Form 941 must be filed by the previous and the current owners. In certain situations, successor employers may be able to consider wages paid by a predecessor when determining whether an employee has reached the social security wage limit.

Mergers or Consolidations

The surviving corporation that is the result of the merger or consolidation must file the 941 for the quarter during which the change took place and report the wages earned by both companies. A ___________ should be filed which will explain the discrepancies in the totals of wages and tips and FIT withheld.

When an acquisition occurs and the successor hires the predecessor’s employees one of two procedures must be followed:

Acquisition where successor hires predecessor’s employees

Standard Procedure

Successor and predecessor each file a form ________ If standard procedure is followed, form______________ should not be filed

Alternate Procedure

Successor and predecessor agree that predecessor will not have to report wages and taxes for the employees on form _________

Predecessor is still required to file form _________

Predecessor should also complete a ______________ to explain discrepancies

in totals of social security wages, Medicare wages and tips, social security tips, federal income tax withheld, and advance earned income credit payments.

The predecessor’s _______________ should be filed after Forms______ are

prepared for the year of acquisition and should be filed with the predecessor’s first quarter form ______ for the year after the year of the acquisition or with the predecessor’s final Form ______ if that is due earlier.

The successor will have similar discrepancies. It should also complete a

________ to explain discrepancies in totals of social security wages, Medicare wages and tips, social security tips, federal income tax withheld, and advance earned income credit payments.

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The successor’s __________ should also be filed after Forms ________ are prepared for the year of acquisition and should be filed with the successor’s first quarter form _____ for the year after the year of the acquisition or with the successor’s final Form _____ if the successor goes out of business.

Who must sign Form 941 ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________ ________________________________________________________

Employers going out of business

An employer that will no longer be in business or will not be paying wages subject to federal income withholding, SS, and Medicare taxes should do the following:

Check the box on Line ___ when completing its last _______. Attach a statement showing the ____________ where the ER’s records will be

kept.

Payments made with 941

If an employer’s total tax liability for a quarter is less than $___________, the employer can either deposit the amount or pay it with Form 941. Monthly depositors may pay any lawful deposit shortfalls for the quarter with Form 941, even if the amount exceeds $___________.

Payments can be made by including Form _________ which is the 941 payment voucher, with the 941 return.

When and where to file Form 941

The 941 must be postmarked on or before the last day of the month following the close of quarter. There is an automatic ____ day extension granted if the employer has made timely deposits in the full amounts throughout the quarter. The extension does not apply to employers who pay their tax with the 941.

Schedule B

Semiweekly depositors at any time during a quarter must file an attachment to form 941 – Schedule B. The Schedule B records an employer’s liability, not their deposits.

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Annual reporting of non-payroll withholding

Form _____ is used by employers who withhold FIT and backup withholding tax from certain non-wage income payments, such as the following:

Gambling winnings Backup withholding Annuities Retirement pay for service in the Armed Forces Pensions IRAs Certain other deferred compensation

When and where to file Form 945

Due by Jan. 31. And extension to February 10th for the employers that have timely deposited all

their non-payroll withheld taxes for the year. Employers that are required to file Forms 945 for one year must file Form 945

for subsequent years only if the employer has non-payroll withheld income taxes for that year.

Depository status is determined by the tax liability of the calendar* year.

*Note – The 2010 lookback period for non-payroll tax is the 2008 calendar year.

Other federal employment tax returns

Form 941-M - monthly reporting for delinquent employers

Employer’s Monthly Federal Tax Return is filed by employers who are required to report wage and tax information monthly. Required when the employer has repeatedly failed to file employment tax returns or pay employment taxes.

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Form 941-PR/941-SS

Form 941-PR, Employer’s Quarterly Federal Tax Return – Puerto Rico is filed by employers whose principal place of business in Puerto Rico.

Form 941-SS: American Samoa, Guam, and Virgin Islands is filed by employers whose principal place of business is one of the following locations:

Guam American Samoa Virgin Islands Northern Mariana Islands

Employers of domestic employees

Employers who hire domestic workers will deduct the payments made on their personal 1040 on Schedule H. No withholding for social security and Medicare is required for babysitters under the age of 18 unless the employment is their principal occupation.

Form 943 – Employers Annual Tax Return for Agricultural Employees

Filed (frequency) annually. Filed to employers who pay wages to one or more farm workers to whom

federal income tax, social security and Medicare tax apply. To report wages and employment taxes of household employees in a private

home on a farm operated for profit.

Annual reporting by small employers

Beginning is 2006, employers with total annual employment taxes of $________ or less will file Form _____, Employer’s Annual Federal Tax Return rather than Form 941 and will be able to deposit their tax liability annually.

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Making adjustments, correcting returns and obtaining refunds and credits

When errors are made in withholding or reporting federal income, social security, and Medicare taxes, employers must follow established methods set forth in the IRC to correct the errors and pay the correct amount of taxes. The procedure for correction depends on:

_____________________________ _____________________________ _____________________________

Beginning in 2010, adjustments are made on Form _________.

Scenario 1: FIT, SS, Med underpaid and discovered before filing: ___________________________________________________________________

___________________________________________________________________ Scenario 2: SS, Med underpaid and discovered after filing: ___________________________________________________________________ ___________________________________________________________________

Scenario 3: FIT underpaid and discovered after filing: ____________________________________________________________________ _____________________________________________________________________

Scenario 4: FIT, SS, Med overpaid and discovered before filing: _____________________________________________________________________ ______________________________________________________________________

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Scenario 5: SS, Med overpaid and discovered after filing: _________________________________________________________________ _________________________________________________________________

Scenario 6: FIT overpaid and discovered after filing:

_________________________________________________________________ _________________________________________________________________

Requirements for interest-free adjustments of overpayments

Once an employer repays or reimburses an employee, the employer may report both the employee and employer portions of social security and medicare taxes as an overpayment on Form ___________.

Penalties for Late Reporting and Paying Tax

Unless an employer has reasonable cause and no willful neglect, late filing and payments result in an “addition to tax” due. The amount varies by how late the return is filed or how late a deposit is made.

Information Reporting for Employees – Form W-2

Once an employer has paid wages to and withheld taxes from its employees, it must then report to the employees the amounts paid and withheld so the employees can complete their personal income tax returns.

The employer accomplishes this with Form _____, the Wage and Tax Statement.

Form W-2 is filed by any employer engaged in a trade or business that pays compensation to an employee for work performed.

Copy A of Form W-2 must be filed to the _____ by the last day of _________ after the year to which the filing applies.

Copies B, C, and 2 are the employee’s copies of From W-2 and must be sent to the employee by _______ of the year after the year to which the form relates.

With consent, an employer can provide employees’ copies of Form W-2 electronically.

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Employers going out of business face accelerated W-2 due dates.

Such employers are required to file their Final Form 941 by the end of the month following ___________________ during which they went out of business. They must furnish the copies of Form W-2 to the employees by the same date. Copy A must be sent to the SSA by the end of __________________ following the end of the quarter during which the employer went out of business.

Filing Extension

If an employer needs an extension for filing Copy A to the SSA, they may request it by filing Form ______, Application for Extension of Time to File Information Returns.

Box-by-Box Instructions for Form W-2

Review this information in the Payroll Source and become familiar with the various boxes on the W-2, particularly the numbered boxes.

One tip that might help is knowing that the first 6 numbered boxes reflect FIT, SS, & Medi respectively. The odd-numbered boxes (1, 3, 5) are for the wages and the even-numbered boxes (2, 4, 6) are for the taxes. Another “tip” is knowing that box 8 is for Allocated Tips, which are reported for anything under 8% of the gross receipts.

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Electronic Reporting Requirements

Employers filing 250 or more Forms W-2 must file them electronically.

Form W-3

If filing paper W-2 forms, the employer must send them along with Form W-3, Transmittal of Wage and Tax Statements. The due date for filing Form W-3 is the same as the due date for filing paper copies of Form W-2 to the SSA.

Correcting Information Statements

When errors have been made on a previously file Form W-2 or W-3, the employer must correct them by filing Forms ______ and _______.

If the only correction made is to employees’ addresses, then a Form W-2c does not need to be filed.

Electronic Filing Requirement

Employers filing 250 or more Forms W-2c must file them electronically to correct forms for the immediate prior year.

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Information Returns for Nonemployee Payments – 1099 Series

Most reportable payments must be reported on a form in the 1099 series. Similar to Form W-2, an annual 1099 information statement must be sent to the nonemployee payee detailing the payments and any withholding, while a copy is sent to the _____ along with a transmittal form (Form 1096). For both of these if the employer is filing more than 250, they must be filed electronically.

1099-MISC: _____________________________________________________ 1099-R: ________________________________________________________

_______________________________________________________________

Penalties for Incorrect or Late Information Returns and Statements

Failure to file

The general penalties are as follows:

_______________________________________________________________ _______________________________________________________________

_______________________________________________________________ _______________________________________________________________

Penalties will be waived for an employer if it can prove there was a reasonable cause for failing to file. Reasons might include:

______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

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W-2/SSN Mismatch Penalties

The IRS may assess a $50 against employers for each 2010 Form W-2 that contains a mismatch between the employee’s name and social security number.

Failure to provide information statements to employees

If an employer fails to provide an employee or other payee with a require information statement on time or incorrect, a penalty of $_____ per statement may be imposed, up to a maximum of $_______.

Electronic Reporting Requirements

Form W-2 Requirements – Employers that file more than _____W2s must file them electronically.

Forms 1099 & 8027 & 1042-S Requirements – Employers that file more than ______ forms are also required to file electronically.

Electronic wage reporting over the internet

Employers that are required to file electronically must file their Forms W-2 over the internet through SSA’s _______________________________.

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Reporting Special Wage Payments to the SSA

Examples of Special Wage Payments (SWPs) include:

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

Reporting Requirements

Employers must report special wage payments for federal income, social security, and Medicare tax purposes in the year the payments are received on Form W-2.

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Section 9 – Other Deductions From Pay

Objectives

Discuss Levies and Garnishments

Calculate Disposable Earnings and Take Home Pay

Review Other Deductions from Pay

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Involuntary Deductions

An Involuntary Deduction is a deduction from an employee’s paycheck over which an employee or employer has no control.

Things to remember when processing involuntary withholdings include:

The employer or employee has no control over the withholding. The employer is required by law to deduct a certain amount of the employee’s pay and remit it to a person or government agency to satisfy the employee’s debt.

Failure to deduct and remit these amounts will generally subject the employer

to a penalty equal to the amount required to be deducted plus possible fines and interest.

If there is not enough pay left in the employee’s wages after any exempt

amounts have been taken into consideration to pay all the orders, the employer must decide which order should be deducted first.

Key Considerations: The employer must always choose the option that will be most favorable to the employee. These options include federal limits, state limits, specific percentage amounts requested, specific dollar amounts requested, and dollar amounts in excess requested.

Tax Levies

Employees who fail to pay their taxes timely may become subject to a federal or state tax “levy” after other collection efforts have been exhausted. The levy requires the employer to deduct the amount owed (plus penalties and interest) from the employee’s wages and remit it to the proper government agency.

A federal tax levy is accomplished by “______________” or “_____________” an employee’s wages to the extent that they are not exempt from the levy.

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The employer receives notice of the levy when the IRS sends _______________, Notice of Levy on Wages, Salary, and Other Income. The form consists of six parts:

Part 1 is the employer’s copy informing the employer of the amount of the levy and the employer’s obligation to withhold and remit the levy amount.

Part 2 it the employee’s copy of the levy. Parts 3-5 require the employee to provide information to the employer and the

IRS regarding his or her tax filing status and any dependents who can be claimed as personal exemptions (except children covered by a child support order against the employee that takes priority over the levy).

Parts 3-4 must be returned to the employer within three days of the date that the employee received the form. After completing the reverse side, the employer keeps part 4 and sends part 3 to the IRS.

Part 5 is the employee’s copy of the tax filing status and exemption information. Part 6 is retained by the IRS.

Tax levies must be satisfied before all other garnishment or attachment orders except for child support orders that were in effect before the stat of the levy.

All amounts paid to an employee are subject to levy unless specifically exempt by IRS regulations. The wages exempt from levy include:

Unemployment compensation Workers compensation Annuity and pension payment under the Railroad Retirement Tax Act and to

certain armed forces personnel Certain armed service connected disability payments Certain public assistance payments (welfare and supplemental Social Security) Amounts ordered withheld under a previously issued court order for child

support

In addition, each employee is entitled to an amount exempt from levy equal to the employee’s standard deduction and personal exemptions – including one for the employee – divided by the number of pay periods in the year.

If the employee does not return a completed and verified Form 668-W, the employer must withhold as if the employee’s filing status is ____________________________ ___________________________________________________________________

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If the employee does not complete a new Part 3 Form 668-W each year, the employer must continue to use the table for the year during which the levy notice was received.

Take home pay: The amount of an employee’s wages that is ultimately subject to the federal tax levy is the amount remaining after the exempt amount has been subtracted from the employee’s “take home pay”. The following items can be deducted from the employee’s wages when determining “take home pay”:

_______________________________________________, even if amounts increase while the levy is in effect due to salary or tax rate increases or changes in the employee’s W-4 form

_______________________________________________ in effect before the employer received the levy, including child support withholding orders and other garnishments, elective deferrals, health and life insurance, charitable donations, etc.

_______________________________________________ beyond the employee’s control such as elective deferrals of a certain percentage of salary and those caused by increases in the cost of benefits such as health or life insurance premiums

________________________________________________ and made as a condition of employment, such as required union dues

New Voluntary Deductions

Once the employee’s take-home pay has been determined, all but the exempt amount is subject to the levy. The exempt amount is determined by using the IRS Table (Publication 1494).

Special Conditions: If the employee has two jobs and only one employer receives the levy notice, the employer must withhold as usual unless notified by the IRS differently.

When to stop withholding: The employer must continue to withhold until the receipt of _________________, Release of Levy/Release of Property from Levy.

When employment ends: If a notice is received after termination the employer must return Part 3 of Form 668-W to the IRS with the employee’s last known address on the back. If the employee terminates while the notice is in effect, the employer notifies IRS of last known address and new employer’s information if known. The employer must continue deducting the levy on all final payments to the employee.

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Penalties: The employer must withhold and pay over amounts not exempt from levy after receiving Form 668-W or are liable for the full amount required to be withheld, plus interest from the wage payment date. In addition, the employer is liable for a penalty equal to 50% of the amount recoverable by the IRS after the failure unless there is a genuine dispute as to the amount to be withheld.

Voluntary Payroll Deduction Agreement: Employees who owe federal taxes may be able to avoid the imposition of a federal tax levy through a “Payroll Deduction Agreement.”

Child Support Withholding Orders

Since January 1, 1994, all initial orders for child support require wage withholding unless both parents or the court and one parent agree to a different method of payment. Even if such an agreement is reached, wage withholding will become automatic once the non-custodial parent owing the child support is ___________ late in paying support. This is called being in “___________.” The non-custodial parent who is in arrears can be subject to an automatic withholding of payments from wages without the custodial parent’s need to present their request in court.

Maximum Amount to Withhold

Under the Consumer Credit Protection Act (CCPA), the maximum amount that can be withheld from an employee’s wages for spousal or child support is:

Situation Percentage

The employee is supporting another spouse and/or children

The employee is not supporting another spouse and/or children

The employee is supporting another spouse and/or children and is in arrears

The employee is not supporting another spouse and/or children and is in arrears

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Calculating disposable earnings: Disposable earnings are different from “take home pay” and are determined by subtracting _______________________________ from an employee’s gross earnings. Deductions required by law include FIT, SIT, CIT, SS, Med, SUI/SDI, and mandated payments for state employee retirement systems.

Voluntary deductions (health and life insurance, retirement plans) ________________ from earnings to calculate disposable earnings.

Wages already subject to withholding for tax levies, bankruptcy orders, other child support withholding orders, or wage garnishments are not considered deductions required by law. Therefore, they ___________________ subtracted from gross earnings when determining the maximum amount subject to child support withholding. However, if the tax levy or other order has priority over the current child support withholding order, the amount required to be deducted under the order having priority must be taken into account when determining whether the CCPA maximum has been reached.

Enforcement of Withholding Orders from Other States:

One of the most troublesome issues for employers is handling child support withholding orders issued by a court or agency in a state other than the state where the employee works. The Uniform Interstate Family Support Act (UIFSA), a model law developed by the American Bar Association and the Uniform Law Commission (ULC), was drafted to address this issue. Under the UIFSA, an employer must put into effect a child support withholding order that it receives directly from another state’s child support enforcement agency so long as the order appears “regular on its face.”

Electronic Data Processing & Payments

Federal law requires the states to develop automated data processing systems that can manage the state’s child support program, including a state case registry, and receive amounts withheld for child support and accompanying accounting information by electronic means.

This means that several steps must take place to implement electronic payment child support withholding orders.

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What Employers Must Do:

_____________________________________________ will provide employers with the agency’s bank account information

Employers will have to modify their systems to set up a payroll deduction with the ACH file information

Systems changes may be required to send an additional batch behind the payroll ACH file

Other solutions besides modifying the existing payroll system may be needed Once the employer’s system is ready to transmit, they should contact each

State Disbursement Unit (SDU) to which payments will be made. The ACH file for payroll and child support withholding must be sent to the

employer’s originating depository financial institution (ODFI)

Multiple Withholding Orders: If an employer receives more than one child support withholding order for an employee, _______ governs how they must be handled. If the orders are from different states, the law in the worked-in state applies. States handle this problem in one of several ways:

Allocate the available wages to each order depending on its percentage in

relation to the total amount required to be withheld Allocate the available wages equally toward each order until each order is

individually complied with or the maximum amount of allowable withholding is reached. Current support must be calculated prior to past due amounts

Give the orders priority depending on when the employer received the orders. This method is currently only used in Montana.

When medical support has also been ordered, nearly all states require its satisfaction after current child support obligations

Collecting Arrearages: _________________________________must be paid before any past due amounts. The total current support and arrearages may never exceed the applicable state or federal maximum withholding amount. Where more than one order has been received for an employee, generally current amounts due on each must be paid before any past due amounts.

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Medical Child Support Orders:

All states have passed laws allowing courts to require medical child support as part of a child support order and requiring employers to enroll children and withhold premiums from the employee’s pay to the same extent as other employees with similar coverage.

All employer sponsored group health plans are required to comply with state laws regulating medical child support and to honor “qualified medical child support orders” under the same group health plan for which the noncustodial parent is eligible.

States must also enact specific laws to make sure both insurers and employers comply with these orders. Each state’s laws must:

__________________________________________ under a parent’s coverage to a child because the child was born out of wedlock, is not a dependent on the parent’s income tax, or does not live with the parent or in the insurer’s service area

Where a qualified medical child support order exists, require insurers and employers to allow the parent to enroll the child without restrictions (e.g. at times other than open enrollment) and to enroll the child themselves if the parent does not do it

Where a qualified medical child support order exists, require _______________ ___________________________________________________ (if required by the employer’s plan) and pay it to the insurer

Require insurers to make it easier for custodial parents to submit and collect on claims where the noncustodial parent’s insurer carries the child’s coverage

Permit state Medicaid agencies to garnish an employee’s wages so the state can be reimbursed for payments made to the employee on behalf of a child who is eligible for Medicaid

Creditor Garnishments

When an employee has a debt that remains unpaid, a wage garnishment is one legal means by which the person who is owed the money can obtain payment. These may also be known as “______________________” or “________________”. The employer can be required to withhold a portion of the employee’s wages for a wage garnishment only if the creditor first brings a court proceeding where proof of the debt is offered and the employee has a chance to respond.

Garnishment Limits: The federal Consumer Credit Protection Act (CCPA) Title III places restrictions on states in the regulation of both the amount that may be garnished and the freedom to discharge an employee because the employee’s wages have been garnished.

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The CCPA states that the maximum amount of an employee’s “disposable earnings” that can be garnished to repay a dept is the lesser of:

____ percent of the employee’s disposable earnings for the week OR the amount by which the employee’s disposable earnings for the week exceed

30 times the federal minimum hourly wage then in effect.

Disposable earnings are determined by subtracting all deductions required by law from an employee’s gross earnings including withholding for federal, state, or local income tax, social security or Medicare tax, state unemployment and disability tax, and mandated payments for state employee retirement systems. In some states, health insurance contributions may be included in the calculation of disposable pay, especially if the contributions are mandated under a child support order.

Other creditor garnishment items to remember:

Tips given directly to employees by customers are _____________________ _______________________________ but service charges added automatically to the bill and then given to the employee are considered.

The federal garnishment maximum applies no matter how many garnishments are received for an employee.

If a child support withholding order, tax levy, or bankruptcy order has priority over the creditor garnishment and constitutes at least 25% of the employee’s disposable wages, no amount can be withheld for the creditor garnishment.

Employers are prohibited by the CCPA from terminating an employee because the employee’s “earnings have been subject to garnishment for any one indebtedness.”

Generally, public sector employees’ wages are exempt from garnishment unless specifically provided otherwise by state law.

Bankruptcy Orders

Bankruptcy is governed by the federal Bankruptcy Act and is issued under Chapter ___. When an employer receives a bankruptcy order from the trustee of a court-approved plan requiring a certain amount of the employee’s wages to be paid to the trustee to satisfy the employee’s creditors, the employer must stop withholding on any other garnishments against the employee. REASON: Debts underlying the previous garnishments will be paid by the trustee out of the money withheld under the bankruptcy order.

Federal bankruptcy law prohibits employers from terminating an employee because they become the subject of a bankruptcy proceeding.

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Student Loan Collections

Garnishments for student loans are subject to the following restrictions:

The maximum amount subject to garnishment is the lesser of _____% of disposable earnings or the amount of disposable pay that exceeds 30 times the federal minimum wage

When an employee has multiple student loan garnishments, the maximum amount that can be garnished in total is the CCPA limit of ____% of disposable earnings or the amount of disposable pay that exceeds 30 times the federal minimum wage

Employees may not be discharged for a student loan garnishment Employees must receive 30 days notice before withholding begins (and allowed

a chance to work out a repayment schedule) Priority for deduction is governed by the Debt Collection Improvement Act of

1996 and the Final Rule was published in the Federal Register of May 6, 1998 If the employee loses their job, they are granted a grace period of 12 months

from the date of new re-employment before deductions resumed If the employer fails to withhold they are liable for the amount plus punitive

damages, court costs, and attorney fees

Federal Agency Debt Collections

The Debt Collection Improvement Act of 1996 was designed to allow garnishments of wages of individuals who fail to pay non-tax debts to government agencies. The following rules apply:

The maximum garnishment is the lesser of ___% of disposable pay or the amount that exceeds 30 times the federal minimum wage ($_______ weekly)

Employees may not be discharged due to this type of garnishment Employees must be notified in advance of the withholding Multiple garnishments may be ordered but the amount for all garnishments may

not exceed the maximum amount

Voluntary Deductions

An employee can voluntarily agree to a wage deduction that must be implemented by the payroll department. These deductions include amounts for wage assignments, charitable deductions, wages withheld to purchase savings bonds, or credit union loan repayments. Because the employee authorizes these amounts, they are permitted even if they bring the employee under minimum wage.

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Wage Assignments

Wage assignments are voluntary agreements by the employee to have a portion of their wages assigned to a third party, usually to secure a debt. The assignment gives the creditor an opportunity to recover unpaid amounts of the employee defaults. Garnishment limits do not apply and federal or state laws do not restrict these items.

Union Dues

In order for union dues to be deducted from an employee’s wages, a written agreement must be obtained. These amounts can only be used for dues, initiation fees, and assessments.

Credit Union Deductions

When it is time to repay a credit union loan or place funds in a savings account, the employee may wish to have a portion of his or her wages deducted by the employer and paid over to the credit union. Employers must have a written authorization for the deduction.

U.S. Savings Bonds

Savings Bond deductions allow employees to purchase Series EE U.S. Savings Bonds in denominations beginning at $100. The purchase price of the bond is ½ of the bond’s denomination or “face value.” These are purchased with after-tax dollars and mature after 12 years. Taxes are then paid on the interest of the bonds when they are redeemed.

Charitable Contributions

Employers can work with national or local charities to provide their employees an opportunity to make voluntary donations to those charities through payroll deductions. Employees should obtain receipts for donations made in excess of $______ to a charitable organization in one lump sum. An employee’s check stub can serve as proof that a donation was made on his/her behalf.

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Section 10 – Recordkeeping and Record Retention

Objectives

Discuss record retention requirements

Review federal anti-discrimination laws

Explain methods of storage for retained records

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Record Retention for FLSA

Federal recordkeeping requirements are issued by the Wage and Hour division of the Department of Labor under the Fair Labor Standards Act. The FLSA requires certain records be kept by all covered employers for all employees (with some exceptions for exempt employees) and retained for either 2 or 3 years.

Most records related to the FLSA must be kept for 3 years. However, there are a number of items that only have a 2-year retention period. Records that must be kept for at least two years from their last date of entry include:

____________________________________________________________ ___________________________________________________________

_____________________________________________________________ ___________________________________________________________

_____________________________________________________________ ___________________________________________________________

Records that must be kept for a t least two years from their last effective date include:

_____________________________________________________________ _____________________________________________________________

White Collar Employees

Employees exempt from the minimum wage and overtime provision.

*Remember: CAPES (Computer, Administrative, Professional, Executive, outside Sales)

Employers do not need to keep records related to regular rate of pay, hours worked, straight-time earnings and overtime pay, and deductions.

Employers must keep records for the basis on which wages are paid so total pay for each pay period can be calculated.

Hospital Employees

Hospitals must keep records of the written agreement allowing the use of a 14-day work period between the hospital and the employee.

For 14-day work periods the employer must record:

The time and day this period begins The Hours worked each day Straight time and overtime premium earnings paid in this period.

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Tipped Employees

Employers using the tip credit to pay employees must keep records for:

Records must note that employee’s wages are earned partly in tips. Amount reported by the employee to the employer as tips on Form ________ Amount of tip credit taken by employer Hours worked and straight-time earnings for time worked other than as a tipped

employee. Hours worked and straight time earnings for time worked as tipped employee. .

Forms of Records and Availability for Inspection

There is no requirement in either the FLSA or its regulations that employers keep records in any particular form. Records only need to be accurate, complete, and able to be understood. Employers may store their records on microfilm or microfiche, but they must _______________________________________.

If an employer keeps their records in a central location, then they must be made available for inspection within ___________.

Penalties for Recordkeeping Violations

Willful violations can bring criminal penalty of up to $__________ and/or imprisonment for up to _____ months.

*Note – Employers can suffer heavy financial losses if involved in an employee generated lawsuit. In these cases, incomplete records will weigh against the employer.

Government Contractors

For government contractors, separate logs of occupational injuries and illnesses must be retained for 5 years under the Walsh-Healey Public Contracts. OSHA has a similar requirement that logs of injuries on the job and logs of death in the workplace be maintained for 5 years.

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Internal Revenue Code

The IRC requires all employers that withhold and pay FIT, SS, and Med. taxes to maintain records for each employee. The documents include those associated with the employees’ income tax withholding.

Retention Period

The above mentioned records must be kept for at least ___ years after the tax due date.

Example: An employee complete Form W-4 and is terminated on March 2nd of the current year. The employer must retain the Form W-4 until four years from______. This date is the last time a filing was done using the information on the Form W-4.

If an employer files a claim for a refund, credit, or abatement of withheld income and employment taxes, these records must be kept for at least ____ years after the filing date of the claim.

Form 941

IRS requires 4 years of retention after the tax is due or paid

FUTA Records

Employers subject to FUTA must keep records for at least ___ years after the later of the due date of Form 940 or the date the required FUTA tax was paid.

Here’s a good tip:

Remember that the tax forms belong to the IRS and the SSA. These agencies have 3 letters and they require 4 years of record retention.

3 letters = 4 years

Remember: These years apply to the date that the information on the return was last used.

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Penalties for Faulty Recordkeeping

Willful non-compliance of recordkeeping regulations is a misdemeanor punishable by a fine of up to $_________ ($____________ for corporations) and/or imprisonment for up to 1 year, plus costs of prosecution.

Federal Anti-Discrimination Laws

Federal laws that prohibit discrimination by employers in hiring, firing, disciplining, compensating, or making other decisions involving employees have their own set of recordkeeping requirements.

Civil Rights Act of 1964 (Title VII)

This act prohibits employers from discriminating against employees on the basis of:

_______________ _______________ _______________ _______________ _______________

There are no general recordkeeping requirements under the law issued by Equal Employment Opportunity Commission (EEOC). However, employers must make and keep employee records related to _________________________________________ _____________________________________________________________________

These records must be kept for at least ____________ from the date of action. These rules also apply to the ______________________________________________________.

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Age Discrimination in Employment Act of 1967 (ADEA)

Prohibits employers from making __________,___________________, or other ____________ decisions based on the age of individuals who are at least 40 years of age.

The following records must be retained for at least 3 years

___________________________ ___________________________ ___________________________ ___________________________ ___________________________ ___________________________

Other records must be retained for 1 year Records required by ADEA must be made available for EEOC inspection within

72 hours.

Immigration Reform and Control Act (IRCA)

Employers must maintain Form __________ (Employment Eligibility Verification) for at least _______ year(s) after the date of hire or _________ after the date of termination – whichever is greater.

The form must be available within ________ days upon request from the Department of Labor.

Family and Medical Leave Act (FMLA) of 1993

This Act generally requires employers with 50 or more employees to grant employees up to ____________________ of unpaid leave to care for a newborn, newly adopted child, or parent, child or spouse who is seriously ill.

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Some requirements are:

Medical records for FMLA must be kept separate and confidential Covered employers with no eligible employees for FMLA need only keep the

basic payroll and identifying employee data. The Department of Labor may only inspect the employer’s records once during

a 12-month period. The record format is flexible and need not be kept in any particular order or

form. The recordkeeping requirements for these follow those of the Fair Labor

Standards Act (FLSA) and can vary depending on the records. Refer back to 10.1 of this chapter for more details.

Here’s a good tip: Remember that these forms belong to the FMLA, IRCA and FLSA.

These agencies have 4 letters and they require 3 years of record retention.

4 letters = 3 years

State Unemployment Insurance and State Wage-Hour Laws

In addition to the federal recordkeeping requirements, each state has their own laws requiring that certain payroll and employment records be made and preserved by employers. Most state wage-hour laws have recordkeeping requirements similar to those under the Fair Labor Standards Act.

Employee Master File

To comply with the varying federal and state recordkeeping requirements, employers should create a master file of employee data that meets the most stringent of those requirements. In general, if the federal requirements are met, state requirements will be met as well.

There are no legal requirements as to how often employee information should be updated, but the records should be as up-to-date as possible.

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Record Retention Summary

The following table presents a summary of the retention periods on payroll documents:

Retention Period Hints

IRS/SSA/Tax Deposits/Filing

FMLA/FLSA/IRCA/BCIS Compliance

Payroll Processing Payroll

Fill in the following blanks based on the record retention rules:

Document Agency Retained for:

Verification of tax deposits

Form I-9

Copies of Quarterly Tax Returns

Wage and hours records for minimum wage compliance

Employee time cards

Canceled checks showing tax deposits

Name, address, and occupation of each exempt employee

Work time schedules

Form W-4

Total wages and tips to verify tip allocation

Overtime information to verify OT compliance

Time cards to verify overtime compliance

Payroll register to verify withholding

Form 940

Returned W-2s

Form W-3

Injury Logs (Walsh-Healey)

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Section 11 – Payroll Accounting

Objectives

Explain the Accounting Principles

Understand Journal Entries and Recording Payroll Transactions

Discuss Accounting Periods and Accruals

Balance and Reconcile Payroll Accounts

Create a Basic Understanding of Financial Statements

Discuss Other Accounting Challenges

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Accounting Principles

The Financial Accounting Standards Board (FASB) has set all standards for recording financial transactions since 1974. Prior to 1974, a variety of organizations set the concepts and principles, which have come to be known as the Generally Accepted Accounting Principles (GAAP). They include:

Business Entity Concept – Every organization that operates separately is treated as a business entity and the transactions for each entity should be kept separate from all other transactions.

Continuing Concern Concept – Assumes that a business entity will continue to operate indefinitely as a business.

Time Period Concept – Each organization must determine its own 12-month accounting period based on the type of business it is engaged in (fiscal year). The end of the fiscal year for a business generally coincides with their least busy time of year.

Cost Principle – Because each business is considered an ongoing concern, goods and services purchased (assets) are recorded at their cost.

Objectivity Principle – Transactions must be recorded objectively and without bias to insure that the information is useful to lenders and investors.

Matching Principle – Expenses and revenue are recorded in the accounting period in which they are incurred or earned.

Realization Principle – Revenue is recognized (or realized) and reported when earned, which is during the accounting period when the good have been transferred or the services provided. The amount realized is the actual cash received or the fair market value of goods or services received.

Consistency Principle – Transactions must be recorded in a consistent manner based on the particular accounting method, principle, or period.

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Account Classifications

All of a company’s transactions are recorded and classified into various accounts using a “double entry” accounting system that is based on two equations:

Equation #1 – Balance Sheet

__________ - _____________ = _______________

Equation #2 – Income Statement & Statement of Retained Earnings (2 equations)

_____________ - _______________ = ___________________

________________ - _____________ + _______________ = _______________

In order for each equation to remain in balance, each entry must have two sides where one account is increased while the other is decreased.

Types of Accounts

The five types of accounts are:

________ Accounts – An Asset is anything that provides an economic benefit or value to the company over a period of time. The three types of assets include: Current; Property, Plant, and Equipment; and Intangible or Deferred.

________ Accounts – Expense accounts show the cost of goods and services

incurred over the accounting period.

_________ Accounts – Liability accounts hold debts that must be paid in the future.

_________ Accounts – Revenue accounts identify the amounts received for goods sold or services rendered during the accounting period.

_________ Accounts – Equity accounts represent the owner’s investment in

the company.

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Account Balances

The double entry accounting system is used to keep the accounting equation in balance. Each account will not balance but as a whole the entire group of accounts will balance.

Each type of account has a “normal” balance, either debit or credit. Do not think about a debit being positive and a credit being negative – the balance of an account actually depends on the type of account. Think of debit as left and credit as right.

Using the chart below, place an X in the column to indicate where each account’s normal balance would be.

Normal Balances

Account Type Debit Credit

Assets

Liabilities

Income/Revenue

Capital/Owners Equity

Expenses

For example, the cash account is an asset with a normal debit balance. When a check is written from the account it creates a credit entry and when a deposit is made to the account it creates a debit entry. The other side of the entry will depend on what is being paid or where the deposit is coming from.

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Another way to look at this is to define the increase or decrease to each account type.

Any Asset or Expense Account

Debit Credit

increases decreases

Any Liability, Income, or Equity Account

Debit Credit

decreases increases

Chart of Accounts

The Chart of Accounts lists each account by name and number with the number being used to identify the account. The numbering also identifies the type of account.

1 - Assets

2 - Liabilities

3 - Owners Equity

4 - Income

5 - Expenses

Journal Entries

The Journal is known as the “book of original entry” and is where all financial transactions are recorded in the double entry method. All journal entries are made up of at least one debit and one credit. Entries with multiple debits or credits are called Compound Entries.

Subsidiary ledgers are used to record specific types of entries. These subsidiary ledgers may include a Payroll Register for recording all payroll entries.

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After all entries have been recorded in the journal they are posted to the General Ledger, which is also known as “the book of final entry.” Financial statements are then prepared from the balances in the general ledger.

Recording Payroll Transactions

Payroll transactions are generally recorded first to the payroll register and then to the various accounts. Payroll expenses are recorded when the pay period ends, not necessarily when it is paid because the payroll becomes a liability to the company at period end date. The following is an example of a payroll processing:

Gross Pay $6,000

Federal income tax withheld 1,200

State income tax withheld 300

Social Security tax withheld 372

Medicare tax 87

Health insurance premiums 200

Employer Social Security $ 372

Employer Medicare 87

FUTA 48

SUI 324

Recording an individual payroll is really a multi-step process. The first step is to record the gross pay for the period.

Account/description Debit Credit Type of Account

Salary expense 6,000 Expense

Salaries/wages payable 6,000 Liability

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The next step is to record the amounts that were withheld from the employee and will be paid to a third party. These items include taxes, insurance premiums, garnishments, etc.

Account/description Debit Credit Type of Account

Salaries/wages payable 2,159 Liability

Federal income tax withheld 1,200 Liability

State income tax withheld 300 Liability

Social Security tax withheld 372 Liability

Medicare tax 87 Liability

Health insurance premiums 200 Liability

When the employees are actually paid, an entry must be made to reduce the liability and reduce the amount of cash.

Account/description Debit Credit Type of Account

Salaries/wages payable 3,841 Liability

Payroll checking account 3,841 Asset

The employer taxes must also be recorded in order for the company to incur the expense and show that they have taxes due.

Account/description Debit Credit Type of Account

Payroll tax expense 831 Expense

Social Security tax payable 372 Liability

Medicare tax payable 87 Liability

FUTA tax payable 48 Liability

SUI tax payable 324 Liability

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The final step would be to record the payment of taxes and other liabilities. Assuming that all of these items were paid at once, the entry would be:

Account/description Debit Credit Type of Account

Federal income tax withheld 1,200 Liability

State income tax withheld 300 Liability

Social Security tax withheld 372 Liability

Medicare tax 87 Liability

Health insurance premiums 200 Liability

Social Security tax payable 372 Liability

Medicare tax payable 87 Liability

FUTA tax payable 48 Liability

SUI tax payable 324 Liability

Payroll checking account 2,990 Asset

Accounting Periods

The tax year or accounting year can be the usual January 1 to December 31 but it does not have to be. Many companies adopt an accounting year that ends when the company is less busy. When an accounting year runs other than the calendar year it is called the “fiscal year.”

An accounting period is any time frame, monthly, quarterly, semi-annual, or annual, which is covered by an income statement.

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Accruals and Reversals

Cash basis accounting records revenue when it is received and expenses when they are actually paid for. This method of accounting is used by only a limited amount of small companies.

Most companies use Accrual Basis Accounting, which attempts to place earnings and expenses in the same accounting period, based on the Matching Principle. Under this system, all revenues are recorded when earned and expenses are recorded when incurred, whether or not they are actually paid.

Because payroll periods and accounting periods do not necessarily end at the same time, accruals need to be recorded to add payroll expenses that are incurred but not yet paid to the proper period. These entries are then reversed in the next period so that the actual payroll entries can be recorded, thus showing the expense and liabilities for the new accounting period only.

For example, Fred’s Fishing Supplies fiscal year ends on June 30. The last pay period ended June 20. The company must accrue 10 days of payroll in order to show the proper payroll expenses for the fiscal year. Considering a payroll of $3,000 per day, the following accrual entries would be made:

Account/description Debit Credit Type of Account

Accrued Payroll Expenses 30,000 Expense

Accrued Payroll Liability 30,000 Liability

Account/description Debit Credit Type of Account

Accrued Payroll Tax Expense 4,155 Expense

Accrued Social Security Payable 1,860 Liability

Accrued Medicare Payable 435 Liability

Accrued FUTA Payable 240 Liability

Accrued SUI Payable 1,620 Liability

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Accrued vacation time and nondiscretionary bonuses must also be recorded as an accrual at the time the amount is earned and then reversed when paid.

Balancing and Reconciling Payroll Accounts

In order to make sure that all payroll entries have been recorded and are in balance, periodic checking of each account, along with reporting at the end of the accounting periods, must be performed. This is done by comparing general ledger accounts ot the records for taxes withheld and paid.

Periodic Balancing and Reconciliation

Verification procedures should be followed in order to check the accuracy of payroll records. These include:

Check each pay period to make sure that the payroll register is accurate Make sure that taxes and deposits are reconciled before quarterly and annual

tax forms are filled Verify amounts on employee records before annual W-2 forms are sent to

employees

Payroll Bank Account Reconciliation

If an employer has a separate payroll bank account then the account should be at zero at the end of the accounting period. If the account is not at zero then the account should be reconciled.

Financial Statements and Audits

The following accounting statements are prepared by most organizations:

Balance Sheet Statement of revenue and expenses (Income Statement) Statement of cash flows Notes to financial statements Report of independent auditors

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Balance Sheet

The Balance Sheet generally lists all Assets, Liabilities, and Owners Equity. Each major section is also divided into smaller sections:

Assets o Current assets o Plant, property and equipment o Deferred assets

Liabilities o Current liabilities o Long-term liabilities

Shareholder’s or Owners Equity

Income Statement

The Income Statement summarizes the revenues and expenses, which then determines the organization’s earnings. The items included:

Gross margin on sales Operating income Nonoperating revenue Nonoperating expenses Net earnings or loss Earnings per share

Notes to Financial Statements

The Financial Statement notes explain various elements of the financial statements, how they were constructed, and the company’s accounting policies that have an impact on the financial statements.

Auditing Financial Statements

All financial statements are audited by an independent CPA who determines if they accurately depict the company’s financial condition. The payroll department is also audited to make sure that all information gathered to report payroll is accurate and in compliance.

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Internal Controls

Internal controls are checks and balances used to make sure that financial data is accurate and that the company’s assets are secure. Some internal controls that affect the payroll department include:

Segregation of job duties

Rotation of job duties

Payroll distribution responsibilities

Phantom employees

Negative pay deductions

Payroll bank account

Blank checks

Time reporting

Computer system edits

Internal auditor

SOX impacts

Controlling Check Fraud

Several advances have been made in the area of reducing check fraud because of the advances in the ways that fraudulent checks can be produced.

Check 21 and Its Impact on Payroll

The Check Clearing for the 21st Century Act, also known as Check 21, went into affect on October 28, 2004 and was designed to promote innovation in the U.S. payments system while updating and eliminating some of the legal barriers governing how banks process paper checks.

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CPP Study Group 204

Section 12 – Payroll Systems and Technology

Objectives

Discuss the Objectives of a Payroll System

Review Advantages and Disadvantages of Various Payroll Systems Review the Steps Involved in Selecting a Payroll System Understand Security and Controls in a Computerized System Investigate the New Wave of Employee Self Service

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Objectives of a Computerized Payroll System

A computerized payroll system must first satisfy the needs of the customers, who are the employees, other departments, management, and reporting agencies. Then it must provide the following:

_____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________

Interfacing and Integration

The payroll system must also be able to interface or integrate with other systems including Human Resources, Benefits, and other departments within the company.

Interfacing – Working With Other Systems and Departments

An Interface is the point where two systems meet. Interfacing allows for entry of information just once and then the sharing of that information directly to other system, which cuts down on cost and the chances for errors. The internal and external systems which benefit from a direct interface with the payroll system include:

___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________

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Integration of Payroll and Human Resource Systems

An Integrated Human Resource Management System (IHRMS) provides a shared database for human resources, payroll, and benefits information

Hardware and Software Alternatives – Pros and Cons

There are generally four alternatives for the payroll manager or team looking to acquire a new payroll system:

________________________________________ ________________________________________ ________________________________________ ________________________________________

Service Bureaus

Pros Cons

In-House Mainframe or Minicomputer Systems

Pros Cons

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In-House Microcomputer (PC) Networks

Pros Cons

Off-the-shelf software

Pros Cons

Vendor-Supplied Software

Pros Cons

Customized Software

Pros Cons

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Selecting a Payroll System

There are several steps that should be followed during the process of selecting a payroll system. These are:

1. _______________________________________

2. _______________________________________

3. _______________________________________

4. _______________________________________

5. _______________________________________

6. _______________________________________

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Controls and Security

The project team should make sure that certain controls are put into place to detect errors and make certain employees are trained in spotting potential problems.

System Edits

This is a warning or alert built into the system that checks for errors and either corrects the error or notifies the operator. Some commonly used system edits are:

Periodic Data Auditing and Sampling

Data that falls within the acceptable system edit parameters may still be invalid. Periodic audits can identify such data invalidity.

Batch Controls

Batching the data into groups of similar data, developing totals of the data to be entered, and then comparing the totals of the data entered is one method of batch controls.

Correction procedures

If system-generated totals do not agree with the batch control totals, procedures must be in place to determine the error, how it was caused, and how it should be corrected.

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Balancing and Reconciliation

Accounting control procedures involving balancing and reconciliation also serve as controls. These procedures include:

____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________

System Documentation

Documentation is a very important part of a company’s overall control mechanism. The documentation should be simple and complete enough to allow an employee to perform functions described in the documentation with little or not other assistance.

What to include:

___________________________ ___________________________ ___________________________ ___________________________ ___________________________ ___________________________ ___________________________ ___________________________ ___________________________

What to leave out:

________________ ________________

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Providing Security

Personnel concerns

Some personnel-related security measures include:

___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________

System Security

Some automated system security measures include:

_________________________ _________________________ _________________________ _________________________ _________________________

Physical Plant Issues

The hardware for the payroll system must be protected against fire, temperature extremes, and other physical stressors that can damage the equipment. Such precautions include:

_________________________________ _________________________________ _________________________________ _________________________________ _________________________________ _________________________________ _________________________________

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Disaster Recovery

As part of the security measures for a payroll system, the project team needs to develop a plan that includes the following disaster recovery procedures.

______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________

Automated Time and Attendance

Labor costs are usually one of the largest expenses an organization faces. Time and attendance automation can help control these costs.

Time and attendance benefits

______________________________ ______________________________ ______________________________

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FLSA, FMLA and SOX Compliance

In today’s environment, compliance with legislative and regulatory requirements is essential Penalties are steep if an employer improperly tracks time or fails to comply with time and labor regulations. Some of the requirements an employer may be subject to are:

____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________

Time and Attendance Attributes ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________

Employee Self-Service and the Internet

In an effort to reduce costs that result from performing manual tasks and paperwork, many companies are using self-service applications which give employees access to their personnel data and allow them to review, print out, and/or update certain portions of that data. There are several ways that these applications can be delivered including:

____________________________________________ ____________________________________________ ____________________________________________

Implementing Internet Technology

Before companies can begin offering employee self-service over the internet or a corporate intranet, they have to go through many of the same processes that are used in selecting a new payroll/HRMS system. The steps that should be taken are to:

____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________

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System Terminology

In addition to the topics covered in the Payroll Source, be prepared to know about general system terminology. An additional job aid will be made available during our session called “System Terminology.” You may also want to consider doing some internet searches for sites such as www.webopedia.com which contain additional system terminology.

In particular, there is a section of this site dealing with data formats that you might find helpful: http://webopedia.com/Data/Data_Formats

Click on the terms to view their definitions.

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CPP Study Group 215

Section 13 - Managing a Payroll Department

Objectives

Review several Management Theories

Understand Necessary Management Skills

Review Specific Management Issues

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Management Theories

The skills needed to manage a payroll department are vastly different from those needed to work in the payroll department. There are many management theory, but below are some of the most commonly recognized theories.

Situational Leadership (Hershey, Blanchard, Johnson)

Emphasizes that successful managers use not just the management style that comes naturally to them, but whatever style fits the demands of the particular job or function and the employee or group of employees seeking to accomplish it. In particular, this theory indicates that the way managers handle their staff depends on two factors: tasks and relationships.

Task behavior (guidance) -> high task managers emphasize control over EEs Relational behavior (support) -> high relational managers place few restrictions

on communications with staff

___________________________ / ______________________________(Supporting) ____________________________________________________________________ ____________________________________________________________________ __________________________ / ________________________________(Coaching) ____________________________________________________________________ ____________________________________________________________________ __________________________ / ________________________________(Delegating) ____________________________________________________________________ ____________________________________________________________________ _________________________ / __________________________________(Directing)

____________________________________________________________________ ____________________________________________________________________

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Supporting

_____________ - ________________

Coaching

______________ - _______________

_____________ - ________________

Delegating

______________ - _______________

Directing

Principle-Centered Leadership (Covey)

Deals with four fundamental dimensions that grow out of leadership centered on principles such as integrity, justice, and the Golden Rule. This is summed up in a single statement: “Treat people the way you want to be treated.” The four dimensions are:

_________________________________________________________ _________________________________________________________ _________________________________________________________

_________________________________________________________ _________________________________________________________

Empowerment

The purpose is to give employees the tools to accomplish an objective and allow them the space to develop the methods of attaining those objectives.

The empowerment process involves five steps: 1. Establish the desired results 2. Provide guidelines 3. Identify resources available to accomplish the task 4. Hold people accountable 5. Identify consequences

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Management vs. Leadership (Kotter) Not in Payroll Source

According to John P. Kotter, management is important because managers produce order and consistency, keeping things running day-to-day. Leaders, on the other hand, produce change and movement, allowing a company to grow. Note: This theory is not mentioned in the Payroll Source, but may be on the exam.

Management

Produces order and consistency

In Action Leadership

Produces change and movement

In Action

Planning/

Budgeting

Setting targets and goals

Allocating financial and people resources

Vision Building/

Strategizing

Setting directions for departments or company

Creating change strategies

Organizing/

Staffing

Designing jobs Hiring Staff Monitoring and

tracking performance

Aligning People/

Communicating

Communicating new direction to staff

Keeping message/actions of leader credible and desirable to staff

Empowering employees

Controlling/

Problem Solving

Establishing quality targets

Monitoring results Creating fail-safe, risk-

free work processes

Motivating/

Inspiring

Communicating the vision, keeping the audiences’ values in mind

Satisfying basic human needs for achievement (recognition, self esteem, being a part of something important)

Tapping staffs’ energy to overcome obstacles

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Management Skills

There are certain fundamental skills that must be mastered and that make up the duties and responsibilities of most managerial positions.

Strategic Planning & Organizing

_________________________________________________________ _________________________________________________________ _________________________________________________________ _________________________________________________________

Staffing

Hiring the right employees __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ Delegating tasks and responsibilities __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________

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Training __________________________________________________________ __________________________________________________________ __________________________________________________________

Directing Employees

Providing feedback __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________

Example 1: Assume that Sonia in HR has been given the responsibility of maintaining new-hire files to ensure state and local compliance. Sonia has done an excellent job and a recent audit proved her efficiency. As she is walking past the manager in the hallway, he pats her on the back and says: “Sonia, good job”.

Is this effective feedback? Why or why not?

____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________

Listening ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

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Coaching – deals with performance improvements that can be gained by increasing technical knowledge and performance skills. Some of the work situations that may require coaching are: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Counseling – used to help an employee resolve a personal or attitude problem that is adversely affecting job performance. Occasions when you might need to counsel EEs include: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Leadership – while coaching and counseling are one-on-one, leadership must be provided to groups or an entire department. Qualities include: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

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Controlling Performance Steps to controlling performance: _______________________________________ _______________________________________ _______________________________________

Motivators – in general, most EEs are more or less motivated by any of five

different motivators: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Leadership – for EEs who place importance on leading others, influencing the

group, giving direction, and having control. Some ways to motivate them effectively are:

______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Affiliation – for EEs who place a good deal of emphasis on the social aspects of

the workplace – being liked by other EEs and accepted into the group. Some ways to motivate them effectively are:

______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Recognition – for EEs who are motivated by receiving recognition of their

efforts as evidence of their importance and prestige in the department. Some ways to motivate them effectively are:

______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

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Reporting

A manager must be able to communicate to his or her immediate supervisor, other department heads, and other management in written reports detailing payroll developments that will affect the organization. Reports required might include:

______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Some of the key questions you need to ask yourself when analyzing your reporting skills are:

______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Specific Management Issues

Up till now, this section has concentrated on the basic management skills a payroll manager must master to achieve success. Following are some more specific skills.

Conducting and Attending Meetings

Here are some guidelines for conducting meetings:

Plan according to the type of meeting ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ Meeting preparation – put together an agenda and prioritize the items Keep the meeting on track – start on time, review the agenda, move the

meeting along, end on time with a summary Promote participation – ask open-ended questions, don’t wait until the end of

the meeting to ask for questions or opinions Keep a written record – keep notes or have another attendee do so

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Keep Written Policies and Procedures

Items that should be documented include:

company policies on overtime, benefits, vacations, sick leave, termination, recordkeeping

procedures for handling payroll, tax deposits, quarterly returns, liabilities, direct deposit, account reconciliations, etc.

all aspects of and tasks involved in the payroll process disaster recovery plans payroll computer system user manuals payroll department job descriptions file descriptions

Crisis Management

The ability to prevent and control a crisis so that damage to the department and the company is minimal can sometimes make or break a manager’s career.

Preventing a crisis – be proactive ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Managing or controlling a crisis

______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

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After the crisis – lessons to be learned ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Extracting positives from the crisis

______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Time Management Prioritizing is up to the manager

Four combinations of time categories tell the manager what their priorities should be

Urgent & Important Not urgent but important Urgent but not important Not urgent and not important

Scheduling and delegating are keys to time management Controlling your email

Team Building

Characteristics of a successful team

Four stages of team development

Stage 1 ______________ Stage 2 ______________ Stage 3 ______________ Stage 4 ______________

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Managing different employee styles – different styles are: Contributors Collaborators Communicators Challengers

Performance Evaluations

These are a formal way of giving feedback. The purpose is to improve the employee’s performance in relation to the goals that have been set. Other reasons are:

______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Effective performance evaluations

Several elements are generally found in a successful system:

______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Ineffective performance evaluations

Three common mistakes:

______________________________________________________________ ______________________________________________________________ ______________________________________________________________

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Promoting Quality Customer Service in Payroll

What is customer service in payroll? There are several basic principles:

_______________________________ _______________________________ _______________________________ _______________________________ _______________________________

How to instill quality customer service values in your department

________________________________ ________________________________

Providing Customer Service in a Shared Services Environment

In payroll, shared services most often means the melding of employee service functions and integration of the processes they use so that employees have to make only one phone call or complete one e-mail to finish a transaction or get a problem solved.

Research Needs

One of the most important aspects of payroll manager’s responsibilities is keeping on top of current developments in the payroll field.

Tracking Tax Laws and Regulations

Payroll managers need to understand the basic federal payroll tax laws.

Employment Laws and Regulations

Payroll managers also need to be aware of wage-hour, garnishment, child support, immigration, anti-discrimination, family leave, and escheat laws and regulations.

Payroll Related Web Sites

It is critical for payroll professionals to be familiar with the most important and useful sites.

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Company Policies and Procedures

Once procedures have been documented, it is important for the payroll manager to make any changes necessitated by amendments to overall company policies and procedures or those used by other departments interfacing with payroll.

Union Contracts

Payroll managers in organizations that have employees working under a union contract have certain obligations to fulfill regarding those contracts.

Additional Theories

As with the Payroll Systems chapter, there are additional theories that are not in the Payroll Source, but which might be on the exam. In our additional session handouts, also see “Additional Management Theories” and “Total Quality Management.”

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CPP Study Group 229

Section 14 – Payroll for U.S. Employees Abroad and Aliens in the U.S.

Objectives

Review FIT Withholding and Employment Taxes for U.S. Employees and Resident Aliens Working Abroad

Review Foreign Earned Income and Housing Exclusion Review U.S. Income Tax Treaties Discuss Employer Tax Reimbursement Policies Review Resident and Nonresident Alien Status Discuss FIT and Employment Taxes for Resident Aliens Review FIT and Employment Taxes for Nonresident Aliens Review Depositing and Reporting Requirements

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U.S. Citizens and Resident Aliens Working Abroad

In general, wages earned by U.S. citizens and resident aliens working in a foreign country are subject to federal income tax withholding. The exceptions would be for wages excluded under the foreign earned income exclusion or foreign housing exclusion. Wages may also be reduced for employees who are eligible for a tax credit for foreign tax payments. Wages may also be exempt from withholding if the employer is required to withhold foreign taxes under the law of that country.

Federal Income Tax Withholding

U.S. employers must withhold federal income tax unless the wages fit one of the exemptions below:

______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

Social Security and Medicare Taxes

In general wages paid to U.S. citizens and resident aliens working abroad for a U.S. employer are subject to social security and Medicare tax withholding, which the employer must match.

To alleviate the burden of double social security taxation and to integrate coverage of employees, the U.S. government has entered into binational social security agreements, also known as ________________________________.

Federal Unemployment Tax

In general, employment by U.S. citizens working abroad for a U.S. employer is covered by the Federal Unemployment Tax Act (FUTA) if the work performed would be covered in the U.S. FUTA does not apply to resident aliens working abroad or to American employees of foreign affiliates.

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Foreign Earned Income and Housing Cost Exclusion

U.S. citizens and resident alien employees working outside the U.S. who qualify for the foreign earned income exclusion can choose to exclude the first __________ of foreign earned income. They may also exclude certain housing cost amounts from their gross income.

To qualify, certain criteria must be met:

__________________ – The employee’s tax home must be in a foreign country for the entire period of residence or physical presence in that country during the year. In general, this is the location of his or her regular or principal place of business or employment.

___________________ – Employees must prove that they have been bona fide residents of a foreign country for an uninterrupted period that includes at least one full taxable year (January 1 through December 31 for calendar year taxpayers). This depends on several factors:

Whether the employee brings his or her family and they intend to make the

foreign country their home for the duration of the assignment Purchase of a home or signing a long-term lease Involvement in the culture and social life of the foreign country Terms of the employment agreement regarding the foreign assignment Type of visa or residence permit secured by the employer

____________________ – This test is met if the expatriate employee is physically present in a foreign country for 330 full days during any 12 – month period. These days do not have to be consecutive, and all periods spent in foreign countries during this period are totaled to determine whether the test has been met.

Foreign Housing Cost Exclusion

In addition to the foreign earned income exclusion, employees who have a foreign tax home and qualify under the bona fide residence or physical presence test can take an exclusion for reasonable foreign housing expenses exceeding a base housing amount.

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Housing expenses eligible for the exclusion include the reasonable expenses paid during the time that the employee qualified for the exclusion. Reasonable expenses do not include:

___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________

U.S. Income Tax Treaties

The U.S. has entered into more than 55 income tax treaties with foreign countries. These are designed to clarify each country’s taxing jurisdiction and to avoid double taxation of income.

Possible Treaty Benefits

Generally, reductions in taxes are not possible. However, the nondiscrimination clauses in most treaties allow them to qualify for the foreign earned income and housing cost exclusions under the bona fide resident and physical presence tests.

Other possible benefits are:

_________________________________ _________________________________ _________________________________ _________________________________ _________________________________

To claim a treaty benefit, the employee will have to produce proof of U.S. residency in the form of a letter from the IRS – Form 6166, Certification of U.S. Residency.

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Employer Tax Reimbursement Policies

Income and social security taxes are often higher in foreign countries than in the U.S. In general, most compensation and tax reimbursement policies are designed to ensure the employee will not have to pay combines taxes on income in the two countries exceeding the taxes that would have been paid if the employee had remained in the U.S.

Expatriate State Tax Issues

Generally, state income taxes are imposed on all state residents based on their total income, with the tax base being federal adjusted gross income or taxable income.

Resident and Nonresident Aliens Working in the U.S.

The taxation and reporting of income earned by foreign citizens (aliens) working in the U.S. depend on whether the employee is a resident or nonresident alien. In general, resident aliens are taxed on their worldwide income and their employers treat them the same way they treat U.S. citizens. Nonresident aliens, however, are taxed only on their income from U.S. sources, with some exceptions.

Determining Resident/Nonresident Alien Status

Generally, foreign citizens working in the U.S. are considered nonresident aliens unless they qualify as residents by meeting either one of two tests:

Lawful permanent resident or “green card” test – Based on the alien’s legal right to be in the U.S., not on their physical presence.

Substantial presence test – An alien is considered a U.S. resident for income tax purposes if:

They are present in the U.S. for at least 31 days during the current calendar year

The total number of days in the U.S. during the current calendar year, plus one-third of the U.S. days during the first preceding calendar year, plus one-sixth of the U.S. days during the second preceding calendar year is at least 183 days.

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Federal Income Tax Withholding and Employment Taxes for Resident Aliens

In general, wages paid to U.S. resident aliens are subject to federal and state income withholding and employment taxes to the same extent that wages paid to U.S. citizens are.

Federal Income Tax Withholding for Nonresident Aliens

Nonresident aliens are subject to the same federal income tax withholding requirements as other employees for all of their income that is from U.S. sources.

Social Security and Medicare Taxes for Nonresident Aliens

With several exceptions, social security and Medicare taxes generally apply to all wages paid for work performed in the U.S. The exceptions are:

_______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________

Federal Unemployment Tax for Nonresident Aliens

Generally, FUTA tax applies to all wages paid for work performed in the U.S. The exemptions from FUTA are generally the same as those under social security and Medicare taxes.

Wages earned by nonresident agricultural workers temporarily admitted to the U.S. under “H” visas are exempt from FUTA.

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CPP Study Group 235

Depositing and Reporting Obligations

Businesses paying nonresident aliens face different depositing and reporting obligations depending on whether the compensation is paid to an employee or a nonemployee and what type of compensation is paid.

Wages paid to employees - all taxes must be deposited according to the general rules and must be reported on form 941. Each employee must be sent a W-2.

Other compensation - Compensation paid to independent contractors for services, plus other nonwage income, may also be subject to withholding, but the depositing and reporting rules are not the same.

State Tax Issues for Nonresident Aliens

Compensation paid to nonresident aliens will generally be subject to state and local income taxes if the work was performed within the state.

Types of Visas

There two types of visas for foreign nationals seeking admission to the U.S. – immigrant visas and nonimmigrant visas.

Immigrant visas

Also called “green cards,” these are issued to foreign nationals entering the U.S. as lawful permanent residents.

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Nonimmigrant visas

Nonimmigrant or temporary visas are issued to foreign nationals who wish to enter the U.S. for a specific purpose and will not be in the country indefinitely.

Visa Type

B-1

D-1

E-1

E-2

E-3

F-1

H-1B

J-1

L-1

M-1

O-1 and O-2

P-1

Q

R-1

TN