an employer’s tax guide to gifts, prizes, business - lorman education services · an employer’s...

An Employer’s Tax Guide to Gifts, Prizes, Business Expenses, Fringe Benefits

and Other Payments to Employees

Presented By:William Hays Weissman, Littler Mendelson P.C.

This manual was created for online viewing. State specific information in this manual is used for illustration and is an example only.

mail: P.O. Box 509 Eau Claire, WI 54702-0509 • telephone: 866-352-9539 • fax: 715-833-3953email: customerservice@lorman.com • website: www.lorman.com • seminar id: 391845

An Employer’s Tax Guide to Gifts, Prizes, Business Expenses, Fringe Benefits

and Other Payments to Employees

© 2013 Lorman Education Services. All Rights Reserved.

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mail: P.O. Box 509 Eau Claire, WI 54702-0509 • telephone: 866-352-9539 • fax: 715-833-3953email: customerservice@lorman.com • website: www.lorman.com • seminar id: 391845

Prepared By:William Hays Weissman, Littler Mendelson P.C.

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An Employer’s Tax Guide toGifts, Prizes, Bonuses, Business Expenses and Other Payments to Employees

Prepared and Presented by:

William Hays WeissmanLittler Mendelson P.C.

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LITTLER MENDELSON, P.C.

An Employer’s Tax Guide to Gifts, Prizes, Bonuses, Business Expenses And Other Payments

To Employees

presented by:

William Hays Weissman, Esq.Littler Mendelson, ShareholderWalnut Creek Office

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Today’s Agenda Payments to Employees:

The Basics

Gifts, Prizes and Awards

Other Payments to Employees

Travel Expenses

Leave Sharing, Disaster Payments and Tool Plans

Payments to Employees: The Basics

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Wage and Tax Basics

The IRS takes the position that all remuneration from employment (“any services, of whatever nature, performed … by an employee for the person employing him”), including previously unpaid or back wages as well as front pay are wages for federal income tax purposes

– Rev. Rul. 72-268

– All wages are subject to income tax withholding, FICA, FUTA and state counterparts

Payments to Employees = Wages

If an employer gives something to an employees, whether cash or not, it is likely wages

The definition of “wages”is very broad

All exemptions from wages are expressly stated, not implied

Wages are subject to taxes

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Gifts, Prizesand Awards

Taxable Gifts and Awards

Employers cannot give gifts to employees

– IRC § 102(c)(1) (“Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.”)

Employer awards are generally taxable wages

– Gross income includes amounts received as prizes and awards with certain limited exceptions

• IRC § 74

• This includes cash and noncash gifts (e.g., clock radio)

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Achievement andLongevity Awards

Exception to general rule that awards are taxable

– Be given for length of service or safety achievement.

– Be tangible personal property, other than cash, gift certificates or equivalent items.

– Be given under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation.

– Be given as part of a meaningful presentation.

– Be no more than the specified dollar limits ($1,600 or $400 if not a qualified plan award).

• IRC § 274(j)(3)(A)

De Minimis Gifts

Employers may give gifts to employees as de minimis fringe benefits

– Amount must be so small that it would be administratively burdensome to account for it

– Old rule of thumb was $25 in value, but IRS recently suggested it could be $50 and that there is no set amount

– Cash, no matter how little, is never de minimis

• This includes gift cards, no matter the amount

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Example: The Travel Award

Company provides top salespersons with expense paid trip to Mexico for a week with a guest

Trip includes airfare, hotel

There is a welcome reception on the first night and an awards dinner on the third night; otherwise, they are free to do what they want

Purpose of trip is to boost morale and entice salespersons to do well in coming year

Travel Award Taxable

Treas. Reg. § 1.162-2(b)-(c) provides detailed guidance on when such trips are nontaxable business trips versus award

– Trip must be primarily for business purposes

– Based on facts and circumstances, but generally at least 50% or more time must be business related

– Guest (e.g., spouse) has no business purpose and thus fair market value of trip for that person is taxable wages

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Tips When Giving Employees Gifts

Employees gifts such as a turkey, ham, gift basket or other item of nominal value given this holiday season will not be treated as either wages or income to the employee, and thus not subject to income or employment taxes

Gift values should be about $25.00 Gift cards or certificates will always be taxable wages If giving a taxable gift to employees, coordinate with the payroll

department so that the amount of the gift can be included in the employees' wages during a payroll period and appropriate income and payroll taxes can be withheld– Good idea to do before last pay period of the year, however, there

is a special rule for payments made in November or December -can be treated as paid in the following year

Other Payments to Employees

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Bonuses, Commissions, Severance

All three are wages for federal income and employment tax purposes

All are generally supplemental wages

– Can generally use flat rate withholding or aggregate method

– Rev. Rul. 2008-29 – examples of supplemental wages

There are some state employment tax exceptions to how severance is treated

– Designed so that a person receiving a severance is not disqualified from obtaining UI benefits

Tax Exempt Business Expenses

Accountable plans– The expenses must have a business connection– The employee must adequately account to his or her

employer for these expenses within a reasonable period of time

– The employee must return any excess reimbursement or allowance within a reasonable period of time

• IRC §§ 62(a)(2)(a), (c); Treas. Reg. §§ 1.62-2(c)(1), (d)-(f)

– Amounts paid to an employee under an accountable plan are exempt from income tax withholding and employment taxes

• Treas. Reg. § 1.62-2(c)(4).

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Taxable Business Expenses

Nonaccountable plans are plans that do not meet the accountable plan requirements

– Paying an employee a flat amount per month

– Not requiring employee to return receipts or other substantiation

– Not requiring employee to return excess payments

– Payments under a nonaccountable plans are taxable wages to the employee

Per diems

Per diems that do not exceed IRS limit meet the substantiation requirement of an accountable plan

– Per diems for lodging, meals and incidentals

– Incidentals include tips, mailing costs for filing travel vouchers, paying employer-sponsored charge card billings

– Incidentals do not include laundering services, telephone or fax charges, taxi or limousine fares

– Can pay only M&IE if pays lodging at actual expense or directly

– Must prorate day of travel at 75 percent

– Different rates apply across the US and by time of year

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The Company Car

Personal use of a company car must be segregated from business use and treated as taxable wages

Requires some kind of journal or log

Usually reimbursed based on standard mileage rate

– $0.565 per mile for business use in 2013

– Can use an actual expense method, but very cumbersome

– Special lease valuation rule for higher value vehicles

The Company Car Exception

Certain vehicles that cannot reasonably be used for personal use are exempt

– Ambulances, hearses, fire trucks, utility vehicles, garbage trucks, etc.

– Do not have to track personal use

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Employer Provided Lodging

Employer provided lodging

– Employee lives on employers premises for its convenience

– Exempt from tax

• Classic example is apartment manager that lives on site in case of problems

• Cannot have option to live there or take cash

Employer Provided Meals

Employer provided meals– Occasion office lunch is de minimis

fringe benefit and exempt from taxation

– Meals provided before, during or at end of shift on employers premises for its convenience are exempt from taxation

• Waitress that eats breakfast before starting shift

– If lunch is provided to more than 50 percent of workforce at location, exempt

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Fringe Benefits No additional cost services

– Provided in regular line of business and no additional cost

• E.g., plane tickets for airline employees, rooms for hotel employees

– Provided on equal terms (cannot discrimination in favor of “highly compensated employees”)

Qualified employee discounts– For goods, cannot exceed “gross profit percentage”

• (Total sales – COGS) / Total sales

– For services, 20 percent

– Same line of business, nondiscrimination rules apply

Fringe Benefits

Working condition fringes– Use of employer’s property related to the trade or

business

– Must be able to take a business deduction on personal return

• E.g., business use of company car, due in professional organizations, business periodical subscriptions, outplacement services, etc.

De minimis fringes– Value so small administratively impractical to account

• E.g., occasional use of copy machine, occasional tickets to theater or sporting events, coffee/donuts, etc.

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Cell Phones

Notice 2011-72

– Effective for periods after December 31, 2009

– Employer provided cell phone is not taxable, including personal use if there is a legitimate business reason for the cell phone

• Getting in touch with clients after hours

• Need to reach employees at all times for work-related emergencies

Moving Expenses

Initial Test: New workplace 50 miles further from old residence and must work in new location for 39 weeks

Transport of household goods and 30 days storage

Travel by most direct route from old home to new home

Does not include house hunting trips, closing costs, temporary living expenses

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Educational Expenses

May be a working condition fringe benefit if job related

– Cannot help employee obtain a new or different job

– E.g., a paralegal going to law school is not job related

– No limit on the amount

Non-job related education

– Pursuant to a written plan

– $5,250 per year tax exempt limit

– May be tied to a grade

– Made permanent in 2013

Other Property to Employees

Most other property given to an employee is likely to be wages

– E.g., country club dues

• May be partially exempt if for business use

– Personal use of property likely wages but not tracked and administratively burdensome

• E.g., personal use of company computer, which is listed property

– Special rules for personal use of company plane

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Travel Expenses

Temporary Travel Away from Home

Three requirements for expenses

– Reasonable and necessary

– Incurred while away from home

– Incurred in pursuit of a trade or business

Employee must be away from home for substantially longer than an ordinary day’s work, the employee cannot reasonably be expected to make the trip without being released from duty for sufficient time to obtain substantial sleep or rest

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What is a Tax Home?

A “tax home” is the city or location of the employee’s principal place of business

– It is not where the employee’s personal residence is located

– But can be a person’s residence if it qualifies as a home office

– Is possible for a person not to have a tax home

What is temporary?

If it the assignment is intended to last less than one year?

– How much of a break between assignments?

If longer than one year, IRS believes you should move to where your tax home is

– Otherwise employer is paying personal expenses indefinitely disguised as tax-exempt business expenses

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Commuting Expenses

General rule

– Commuting is a personal expense• $1.50 special commuting valuation rule

– Payment of personal expenses is wages

Exceptions

– Travel to temporary work locations• Rev. Rul. 99-7 – three situations

– Travel in employer non-personal use vehicles at requirement of the employer

– Transit passes

Leave Sharing, Disaster

Payments and Tool Plans

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Leave Sharing Programs

Intended to allow employees to help other employees for medical emergencies and natural disasters

– Employees can donate vacation, sick or PTO time to bank to be used by other employees in need

• Rev. Rul. 90-29, Rev. Proc. 2006-59

Leave Sharing Programs

Should have written plan and application form

Objective criteria for use of bank, including exhaustion of other available leave

Controls in place to ensure confidentiality

Controls in place to ensure employees do not donate all leave– Need to consider financial implications

to company

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Disaster Assistance Payments

Employers may make payments to employees for certain natural disasters, common carrier accidents and terrorist or military activities

– Does not include medical emergencies

– May be for reasonable living expenses or to replace a residence and its contents

– Exempt from employee’s income

• IRC § 139

Wage Recharacterization and Tool Plans

Common in auto industry and other industries with lots of hand tools

Employer pays employee reimbursement for tools used on the job

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Wage Recharacterization and Tool Plans

IRS has been cracking down because seek as tax avoidance

– Most plans fail accountable plan rules

– Keep wage even but shift portion to non-taxable reimbursement

– Rev. Rul. 2012-25; PLR 200930029

Thank You

COPYRIGHT 2010, LITTLER MENDELSON, P.C.

William Hays Weissman, Esq.Littler Mendelson, P.C.wweissman@littler.com925.927.4545

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Notes