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FEDERAL STATE AND LOCAL GOVERNMENTS

FRINGE BENEFITS

TAX EXEMPT/ GOVERNMENT ENTITIES:

  Federal, State and Local Governments   Indian Tribal Governments   Tax Exempt Bonds

FSLG Mission:   To provide government entities with top

quality service   by helping them understand and comply

with applicable tax laws, and   to protect the public interest by applying the

tax laws with integrity and fairness to all

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TOPICS:

  FRINGE BENEFITS (Employee Reimbursements)

  ACCOUNTABLE PLANS

  EMPLOYEE VS. INDEPENDENT

CONTRACTOR

WHAT IS A

FRINGE BENEFIT?

FRINGE BENEFITS:

  ANY PROPERTY, SERVICE OR CASH (Other than Salary, Provided by Employer)

  TAXABLE UNLESS EXCLUDED SPECIFICALLY BY LAW   Example: Medical Premiums IRC 106

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WHAT TO DO?

  Identify specific benefit provided to employee(s);

  Determine if benefit is excluded by law; and

  Determine if benefit is fully taxable, or only partially.

Non-Taxable Fringe Benefits:   No additional cost service   Qualified employee discounts   Working condition fringe   De minimis fringe   Qualified transportation expenses   Qualified Moving Expense

Reimbursements

TAXABLE FRINGE BENEFITS:

  INCLUDE in Employee’s wages and on W-2 (Never on 1099-MISC)

  Subject to Federal Withholding, Social Security and Medicare

  Even if benefit is received by/for spouse or child of employee

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ACCOUNTABLE PLAN

  Business Connection   Adequate ‘accounting’ by employee

in reasonable time period   Excess reimbursement returned in a

reasonable time period

NON-ACCOUNTABLE PLAN:

  DOES NOT MEET ALL 3 REQUIREMENTS FOR AN ACCOUNTABLE PLAN

  BENEFIT IS FULLY TAXABLE WHEN PAID

NON-TRAVEL FRINGE BENEFITS:

  Clothing   Equipment   Professional

Licenses   Awards   Bonuses

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AWARDS ARE TAXABLE

  CASH PRIZES OR AWARDS are always taxable

  PERFORMANCE AWARDS are always taxable

  NON-CASH:   Use Fair Market Value

AWARDS EXCEPTIONS:

  Certain Awards transferred to Charities   Pulitzer, Nobel Peace Prize

  Certain Employee Achievement Awards   Length of Service, Safety - Not Cash

  Nominal Holiday/Special Occasion Awards   Coffee mugs, plagues, etc.

REMEMBER:

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TRAVEL-RELATED FRINGE BENEFITS:

  Per Diem Allowances   for lodging, meals and/or incidentals   for business related travel   while away from home

MEAL ALLOWANCES WHILE TRAVELING ON BUSINESS:

  MEALS AWAY FROM HOME:   OVERNIGHT

  Accountable Plan - Not taxable   NOT OVERNIGHT

  Taxable as wages

  Meals with business meetings -   NOT taxable if:

  clear business setting *   directly related *

  Employer buys you lunch -   Taxable as wages *

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AUTOMOBILE EXPENSES:   EMPLOYEE CAR USED FOR

EMPLOYER’S BUSINESS:   2010 Federal Mileage Rate - $.50

  At this rate or less: Non-taxable to Employee

  Excess over this rate: Taxable to Employee - only the excess amount

  If Employee chooses not to get reimbursed, cannot claim on personal tax return.

  Substantiation required

SUBSTANTIATION:

  Employee reports to Employer:   Date, Purpose, Place of each trip   Mileage ‘at or near the time’ incurred   Examples: Diary, log, trip sheet,

expense statement or similar record   Commuting is always taxable - it is

non-business travel

EMPLOYER-PROVIDED VEHICLE:

  HOW DOES EMPLOYEE ACCOUNT FOR PERSONAL USE?

  Personal Use is taxable   Verified Business Use is not taxable   Employee can reimburse Employer for

personal use

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Personal Use:

  IF NO RECORD KEPT:   Value of ALL use is taxable

  IF RECORD KEPT:   Only Personal Use is taxable

VALUING PERSONAL USE - THREE RULES:

  Automobile Lease Valuation Rule*   Cents-Per-Mile Rule   Commuting Rule

GENERAL RULE: Lease Valuation Rule

  Compute Personal Use   Determine what employee would pay

to lease auto (FMV)   Multiply FMV by % of personal use

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SPECIAL ACCOUNTING RULES (Automobiles):

  Employer can elect to defer withholding   Employer can withhold at 28%   November and December benefits may

be treated as paid in next year   Employer can elect not to withhold FIT

  Employer must tell employee   Employer includes in wages/ W-2

EMPLOYEE OR INDEPENDENT CONTRACTOR?

  Determine Worker Status   Fringe benefit rules apply   Accountable Plan rules apply   Report payments on information

return:   W-2 for Employee   1099-MISC for Independent

Contractor

The IRS looks at THREE FACTORS TO

DETERMINE WORKER STATUS:

  BEHAVIORAL CONTROL   FINANCIAL CONTROL   RELATIONSHIP OF PARTIES

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BEHAVIORAL RELATIONSHP:

  IF the firm provides instructions:   on how to do the job,   what hours to work, what days, etc. ,   the worker is most likely an employee.

FINANCIAL CONTROL:

  If the firm provides an office,   all office supplies, computer   and other business equipment to the

worker,   the worker is an employee.

RELATIONSHIP OF THE PARTIES:

  If the firm provides benefits:   health insurance, life insurance,   retirement benefits, 40l(k) plan, 403(b)   the worker is an employee.

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INDEPENDENT CONTRACTOR

  Offers services to public   Operates own business   Bills for services   Doesn’t have to personally perform

work

COMMON MISCONCEPTIONS:

  EMPLOYEES CAN BE:   Part-time workers   Temporary workers   Probationary period   Workers who say they are

Independent Contractors

REPORTING FOR EMPLOYEES:   All Compensation: W-2   Awards   Backpay   Bonuses   Severance Pay   Taxable Fringe Benefits

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REPORTING FOR INDEPENDENT

CONTRACTORS:

  ALL COMPENSATION FOR SERVICES:   On 1099-MISC   If Non-Accountable Plan:

  Include Reimbursed Expenses on 1099

NEED MORE INFORMATION?

CALL US:

512-464-3129 Steve C. O’Brien

Federal State and Local Government Specialist

IRS CONTACTS:

  IRS INFORMATION   1-800-829-1040

  IRS PUBLICATIONS   1-800-829-3676

  INTERNET:   www.irs.gov

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ADDITIONAL NUMBERS:   EXEMPT ORG. /EMPLOYEE

PLANS HOTLINE: 877-829-5500

  FOREIGN (ALIEN) QUESTIONS: 202-874-1460

  INFORMATION RETURNS QUESTIONS: 304-263-8700

THANK YOU!