Western PA Chapter of the APA

TAXABILITY OF FRINGE BENEFITSWhat is a Fringe Benefit?

When Is It Taxable?

Presented By:

Tammie Downey, CPPVice President, WPA APA

AVP / Assistant Payroll Manager, First Commonwealth Bank

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Let’s Define a Fringe Benefit

• Cash• Cash equivalent items (i.e., gift cards/certificates)

• Property

• Services• In addition to regular wages

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Let’s Define Taxable

• Subject to withholding and reported on the W-2 in the year the benefit was provided

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Are Fringe Benefits Taxable?

• Taxable to employee unless specifically excluded

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How are Non-Cash Fringe Benefits Valued?

Fair Market Value (FMV):• What would it cost employee to buy benefit from an unrelated third party?

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Let’s Define a Working Condition Fringe Benefit

• Property or service that employee would have been entitled to deduct on a 1040 if employer hadn’t provided it

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Working Condition Fringe Benefit

• Must relate to employer’s business

• Employee could have deducted expense on 1040

• Employee must substantiate business use

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Let’s Define De Minimis Fringe Benefit

• Property or service• Small in value• Not provided to employee regularly

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How are de minimis fringe benefits reported?

• If the benefits qualify for exclusion• No reporting is necessary

• If the benefits are taxable• They should be included in wages on Form W-2• They are subject to income tax withholding

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Let’s Define A Per Diem Payment

• Method of reimbursing employees for business expenses for overnight travel• Lodging• Meals and incidental expenses (M&IE)

• Rates vary by city• Federal Per Diem rates can be found at www.gsa.gov

• If rules are met, the reimbursement is tax free• Accountable plan rules are followed• Per diem reimbursement is at or below federal rates• Receipts are not required

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Lodging Per Diem

• Use rate of city where you spend the night

• Room tax and energy charges are not part of lodging-they’re reimbursed separately

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M&IE Per Diem

• Meals

• Tips for food and luggage handling

• Laundry and dry cleaning for travel of less than 4 consecutive nights

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Per Diem – Other Rules

• Prorate M&IE for days employee departs and returns

• Employer may pay other tax-free business expenses in addition to per diem:• Room taxes• Cab• Telephone charges• Laundry

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Let’s Look At Accountable Plan Rules

• Publication 463, Travel, Entertainment, Gift, and Car Expenses• Employee is given allowance or reimbursement• Amounts are non-taxable, if certain rules are met

• Business connection• Directly related to trade or business• Deductible on 1040

• Adequate accounting• Verify Date, Time, Place, Amount, and Business Purpose

• Excess returned on a timely basis• Within a reasonable period of time

• Determination of the length of a reasonable period of time will depend on the facts and circumstances

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What is a Non-Accountable Plan?

• Does not meet ALL 3 RULES for Accountable Plans

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Commonly Provided Fringe Benefits

• Cell Phones• No longer considered listed property

• Payments In Lieu of Insurance• Receipts for insurance or medical expenses

• Non-taxable – No reporting required

• Cash Payments – No Accounting• Fully taxable• W-2 reportable

• Box 1 – Gross Compensation• Box 3 – SSA Wages

• Box 5 – Medicare Wages

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Commonly Provided Fringe Benefits

• Moving Expenses• IRC Section 132(g)

• Allows employer to reimburse employee

• IRC Section 217• Allows individual to deduct certain expenses

• Not taxable to employee if• They’re paid under an Accountable Plan• Meet specific tests under IRC 217

• Individual must be an employee who incurs the expenses• Expenses must:

• Closely relate to starting work at new job location• Be allowed under section 217• Meet time and distance tests

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Commonly Provided Fringe Benefits

• Moving Expenses – Travel Costs

• Non-taxable travel costs:• Moving other members of household• Airfare, car• Lodging while travelling• Parking fees, tolls

• Non-taxable moving costs – household goods and personal effects:• Packing, crating, transporting• Shipping car(s)• Shipping pet(s)• Storage & insurance (30 consecutive days)

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Commonly Provided Fringe Benefits

• Moving Expenses – Reimbursements• Reimbursements are not included in income if:

• The reimbursed expenses qualify under IRC 217• They are paid in the same calendar year they are deducted

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Commonly Provided Fringe Benefits

• Meal Allowances and Reimbursements• Meals while traveling

• Tax-exempt requirements:• Must be away from tax home over night or long enough to require substantial sleep or rest• No set number of hours or miles away• Substantiation required

• Meals while not traveling• De minimis meal allowances• Meals with meetings or entertainment

• Tax-exempt if meal meets test:• Directly Related test or Associated With test

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Commonly Provided Fringe Benefits

• Meal Allowances and Reimbursements

• Directly Related Meals are tax-exempt• Business meetings, conventions, conferences• Service club or professional meetings

• i.e., Rotary, Finance Officers Association, CPA, WPA APA

• Associated With Test• Meals with clear business purpose• Substantial business discussion immediately before or after a meal

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Commonly Provided Fringe Benefits

• De Minimis Meals are tax-exempt if meal is:

• Small in value and occasional

• Not provided regularly or often

• Provided so employee can work overtime• Generally, must be consumed during overtime• Not based on number of hours worked

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Commonly Provided Fringe Benefits

• Meal Allowance and Reimbursements

• Meals consumed en route to daily business events are not exempt• Breakfast and dinner while traveling to and from a daily convention or conference would

not be exempt

• If not staying at a hotel, there is no tax exempt meal reimbursement while traveling to and from event

• If everyone is responsible for their own arrangements during a lunch break, the reimbursement for lunch is fully taxable

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Commonly Provided Fringe Benefits

• Employee’s Car• Reimbursed business use is non-taxable if AT or BELOW Federal Mileage

Rate• 2015 - .575 cents/mile

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Commonly Provided Fringe Benefits

• Employer Provided Vehicles

• See Publication 15-B for valuation rules on employer provided vehicles

• Qualified non-personal use vehicle• By its design is unlikely to have personal use

• Clearly marked police and fire vehicles• School buses• Unmarked law enforcement vehicles• Special purpose vehicles; i.e., snow plows• Vans and pickups must be modified to qualify

• Use is tax-exempt

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Fringe Benefit Code Sections

A Few Examples:

• IRC 119, Meals and Lodging

• IRC 127, Educational Assistance

• IRC 132, General Fringe Benefit Section

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Where To Find Helpful Informationwww.irs.gov

Educational Resources• Publication 15, Employer’s Tax Guide (Circular E)• Publication 15-A, Employer’s Supplemental Tax Guide• Publication 15-B, Fringe Benefit Tax Guide• Publication 463, Travel, Entertainment, Gift, and Car Expenses• Publication 521, Moving Expenses• Publication 525, Taxable and Nontaxable Income• Publication 563, Federal-State Reference Guide• Publication 1542, Per Diem Rates• Publication 5137, Fringe Benefit Guide

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THANK YOU

Questions?

Additional Discussion?

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