us internal revenue service: p15b--2003

8/14/2019 US Internal Revenue Service: p15b--2003

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ContentsDepartment of the TreasuryInternal Revenue Service Important Changes . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Publication 15-B 1. Fringe Benefit Overview . . . . . . . . . . . . . . . . . . . 2(Rev. January 2003) Are Fringe Benefits Taxable? . . . . . . . . . . . . . . . 2Cat. No. 29744N Cafeteria Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2. Fringe Benefit Exclusion Rules . . . . . . . . . . . . . 3Accident and Health Benefits . . . . . . . . . . . . . . . 4Employers Achievement Awards . . . . . . . . . . . . . . . . . . . . . 5Adoption Assistance . . . . . . . . . . . . . . . . . . . . . . 6Athletic Facilities . . . . . . . . . . . . . . . . . . . . . . . . . 6Tax Guide to De Minimis (Minimal) Benefits . . . . . . . . . . . . . . . 6Dependent Care Assistance . . . . . . . . . . . . . . . . 7Educational Assistance . . . . . . . . . . . . . . . . . . . 7Fringe Employee Discounts . . . . . . . . . . . . . . . . . . . . . . 8Employee Stock Options . . . . . . . . . . . . . . . . . . 8Group-Term Life Insurance Coverage . . . . . . . . . 9Benefits Lodging on Your Business Premises . . . . . . . . . 11Meals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Moving Expense Reimbursements . . . . . . . . . . . 13

For Benefits Provided No-Additional-Cost Services . . . . . . . . . . . . . . . . 14Retirement Planning Services . . . . . . . . . . . . . . . 14in 2003Transportation (Commuting) Benefits . . . . . . . . . 14Tuition Reduction . . . . . . . . . . . . . . . . . . . . . . . . 15Working Condition Benefits . . . . . . . . . . . . . . . . . 16

3. Fringe Benefit Valuation Rules . . . . . . . . . . . . . 17General Valuation Rule . . . . . . . . . . . . . . . . . . . 17Cents-Per-Mile Rule . . . . . . . . . . . . . . . . . . . . . . 18Commuting Rule . . . . . . . . . . . . . . . . . . . . . . . . . 18Lease Value Rule . . . . . . . . . . . . . . . . . . . . . . . . 19Unsafe Conditions Commuting Rule . . . . . . . . . . 21

4. Rules for Withholding, Depositing, and

Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22How To Get Forms and Publications . . . . . . . . . . . 23

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Important Changes

Cents-per-mile rule. The standard mileage rate you canuse under the cents-per-mile rule to value the personal useof a vehicle you provide to an employee in 2003 is reducedto 36 cents a mile. See Cents-Per-Mile Rule in section 3.

Increase in qualified parking exclusion. Beginning Jan-

uary 1, 2003, employers can exclude up to $190 per monthfrom an employees wages for qualified parking. See Qual-ified Transportation Benefits in section 2.

Form 5500. If you maintain a cafeteria plan, an educa-tional assistance program, or an adoption assistance pro-gram, you are no longer required to file Form 5500, AnnualReturn/Report of Employee Benefit Plan, or Schedule F(Form 5500) reporting information about the plan unlessyou also have an annual reporting requirement underTitle I of the Employee Retirement Income Security Act of1974 (ERISA). For more information, see Notice 2002-24.You can find Notice 2002-24 on page 785 of Internal


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Revenue Bulletin 2002-16 at www.irs.gov/pub/irs-irbs/ Including taxable benefits in pay. You must include in airb02-16.pdf. recipients pay the amount by which the value of a fringe

benefit is more than the sum of the following amounts.

Any amount the law excludes from pay.Introduction Any amount the recipient paid for the benefit.

This publication supplements Circular E (Pub. 15),The rules used to determine the value of a fringe benefitEmployers Tax Guide, and Publication 15-A, Employersare discussed in section 3.Supplemental Tax Guide. It contains specialized and de-

tailed information on the employment tax treatment of If the recipient of a taxable fringe benefit is your em-fringe benefits.

ployee, the benefit is subject to employment taxes andmust be reported on Form W-2, Wage and Tax Statement.Comments and suggestions. We welcome your com- However, you can use special rules to withhold, deposit,ments about this publication and your suggestions for and report the employment taxes. These rules are dis-future editions. You can e-mail us while visiting our web cussed in section 4.site at www.irs.gov. You can write to us at the following

If the recipient of a taxable fringe benefit is not youraddress:employee, the benefit is not subject to employment taxes.

Internal Revenue Service However, you may have to report the benefit on one of theTax Forms and Publications following information returns.W:CAR:MP:T1111 Constitution Ave. NW If the recipientWashington, DC 20224 receives the benefit as: Use:

We respond to many letters by telephone. It would be An independent contractor Form 1099-MISChelpful if you would include your daytime phone number,

A partner Schedule K-1 (Formincluding the area code, in your correspondence.1065)

An S corporation shareholder Schedule K-1 (Form1120S)1. Fringe Benefit Overview

A fringe benefit is a form of pay for the performance of For more information, see the instructions for the formsservices. For example, you provide an employee with a listed above.fringe benefit when you allow the employee to use abusiness vehicle to commute to and from work. Cafeteria Plans

Performance of services. A person who performs serv- A cafeteria plan, including a flexible spending arrange-ices for you does not have to be your employee. A person ment, is a written plan that allows your employees tomay perform services for you as an independent contrac- choose between receiving cash or taxable benefits instead

tor, partner, or director. Also, for fringe benefit purposes, of certain qualified benefits for which the law provides antreat a person who agrees not to perform services (such as exclusion from wages. If an employee chooses to receive aunder a covenant not to compete) as performing services. qualified benefit under the plan, the fact that the employee

could have received cash or a taxable benefit instead willProvider of benefit. You are the provider of a fringe not make the qualified benefit taxable.benefit if it is provided for services performed for you. You Generally, a cafeteria plan does not include any planmay be the provider of the benefit even if it was actually that offers a benefit that defers pay. However, a cafeteriafurnished by another person. You are the provider of a plan can include a qualified 401(k) plan as a benefit. Also,fringe benefit that your client or customer provides to your certain life insurance plans maintained by educational in-employee for services the employee performs for you. stitutions can be offered as a benefit even though they

defer pay.Recipient of benefit. The person who performs servicesfor you is the recipient of a fringe benefit provided for those Qualified benefits. Qualified benefits include the follow-services. That person may be the recipient even if the

ing benefits discussed in section 2.benefit is provided to someone who did not perform serv-ices for you. For example, your employee may be the Accident and health benefits (but not medical sav-recipient of a fringe benefit that you provide to a member of ings accounts or long-term care insurance).the employees family.

Adoption assistance.

Dependent care assistance.Are Fringe Benefits Taxable? Group-term life insurance coverage (including costs

Any fringe benefit that you provide is taxable and must bethat cannot be excluded from wages).

included in the recipients pay unless the law specificallyexcludes it. Section 2 discusses the exclusions that applyto certain fringe benefits. Any benefit not excluded under Benefits not allowed. A cafeteria plan cannot includethe rules discussed in section 2 is taxable. the following benefits discussed in section 2.

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taxable benefits they could have selected. A plan favors Archer medical savings accounts. (See Accident

key employees if more than 25% of the total of the nontax-and Health Benefits.)

able benefits you provide for all employees under the plan Athletic facilities. go to key employees. However, a plan you maintain under

a collective bargaining agreement does not favor key em- De minimis (minimal) benefits.

ployees. Educational assistance. A key employee during 2003 is generally an employee

who is either of the following: Employee discounts.

1) An officer having annual pay of more than Lodging on your business premises.$130,000.

Meals.2) An employee who for 2003 was either of the follow-

Moving expense reimbursements. ing: No-additional-cost services.

a) A 5% owner of your business. Transportation (commuting) benefits.

b) A 1% owner of your business whose annual pay Tuition reduction. was more than $150,000.

Working condition benefits.

Form 5500. If you maintain a cafeteria plan, ERISA mayIt also cannot include scholarships or fellowships (dis-

require you to file Form 5500, Annual Report/Report ofcussed in Publication 520, Scholarships and Fellow-

Employee Benefit Plan. See the Instructions for Formships).

5500.

Employee. For these plans, treat the following individualsMore information. For more information about cafeteriaas employees.plans, see section 125 of the Internal Revenue Code and

A current common-law employee (see section 2 in its regulations.Circular E (Pub 15) for more information).

A full-time life insurance agent who is a current stat-utory employee. 2. Fringe Benefit Exclusion

A leased employee who has provided services to Rulesyou on a substantially full-time basis for at least ayear if the services are performed under your pri- This section discusses the exclusion rules that apply tomary direction or control. fringe benefits. These rules exclude all or part of the value

of certain benefits from the recipients pay.Exception for S corporation shareholders. Do not The excluded benefits are not subject to Federal income

treat a 2% shareholder of an S corporation as an employee tax withholding. Also, in most cases, they are not subject to

of the corporation. A 2% shareholder for this purpose is social security, Medicare, or Federal unemploymentsomeone who directly or indirectly owns (at any time dur- (FUTA) tax and are not reported on Form W-2.ing the year) more than 2% of the corporations stock or This section discusses the exclusion rules for the follow-stock with more than 2% of the voting power. ing fringe benefits.

Plans that favor highly compensated employees. If Accident and health benefits.your plan favors highly compensated employees as to

Achievement awards.eligibility to participate, contributions, or benefits, you mustinclude in their wages the value of taxable benefits they Archer medical savings accounts. (See Accidentcould have selected. A plan you maintain under a collec- and Health Benefits in section 2.)tive bargaining agreement does not favor highly compen-

Athletic facilities.sated employees.A highly compensated employee for this purpose is any De minimis (minimal) benefits.

of the following employees. Dependent care assistance.

1) An officer. Educational assistance.

2) A shareholder who owns more than 5% of the voting Employee discounts.

power or value of all classes of the employers stock. Employee stock options.

3) An employee who is highly compensated based on Group-term life insurance coverage.the facts and circumstances.

Lodging on your business premises.4) A spouse or dependent of a person described in (1),(2), or (3).

Meals.

Moving expense reimbursements.Plans that favor key employees. If your plan favors key

No-additional-cost services.employees, you must include in their wages the value of

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Transportation (commuting) benefits. See Table 21 below for an overview of the employ-ment tax treatment of these benefits.

Tuition reduction.

Working condition benefits.

Table 21. Special Rules for Various Types of Fringe Benefits(For more information, see the full discussion in this section.)

Treatment Under Employment Taxes

Type of Fringe Benefit Income Tax Withholding Social Security and Medicare Federal Unemployment (FUTA)

Exempt1,2, except for certain Exempt, except for certain Exemptlong-term care benefits payments to S corporation

Accident and health benefitsemployees who are 2%shareholders.

Achievement awards Exempt1 up to $1,600 ($400 for nonqualified awards).

Adoption assistance Exempt1 Taxable Taxable

Exempt if substantially all use during the calendar year is by employees, their spouses, and theirAthletic facilities

dependent children.

De minimis (minimal) benefits Exempt Exempt Exempt

Dependent care assistance Exempt3

up to certain limits, $5,000 ($2,500 for married employee filing separate return).

Educational assistance Exempt up to $5,250 of benefits each year. (See Educational Assistance on page 7.)

Employee discounts Exempt4 up to certain limits. (See Employee Discounts on page 8.)

Employee stock options See Employee Stock Options on page 8.

Exempt Exempt1,5 up to cost of $50,000 ExemptGroup-term life insurance

of coverage. (Special rules applycoverage

to former employees.)

Lodging on your business Exempt1 if furnished for your convenience as a condition of employment.premises

Exempt if furnished on your business premises for your convenience.Meals

Exempt if de minimis.

Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them.

No-additional cost services Exempt4 Exempt4 Exempt4

Exempt1 up to certain limits if for rides in a commuter highway vehicle ($100), transit passes ($100), orqualified parking ($190). (See Transportation (Commuting Benefits) on page 14.)Transportation (commuting)

benefitsExempt if de minimis.

Tuition reduction Exempt4 if for undergraduate education (or graduate education if the employee performs teaching orresearch activities).

Working condition benefits Exempt Exempt Exempt

1 Exemption does not apply to S corporation employees who are 2% shareholders. See page 3.2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees.3 Exemption does not apply to certain highly compensated employees under a program that favors those employees.4 Exemption does not apply to certain highly compensated employees.5 Exemption does not apply to certain key employees under a plan that favors those employees.

Accident and Health Benefits Contributions to the cost of accident or health insur-ance.

This exclusion applies to contributions you make to an Contributions to a separate trust or fund that pro-accident or health plan for an employee, including the

vides accident or health benefits directly or throughfollowing:insurance.

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Contributions to Archer MSAs (discussed in Publi- health benefits that you provide to the employee in thecation 969, Medical Savings Accounts (MSAs)). employees wages subject to Federal income tax withhold-

ing. However, you can exclude the value of these benefitsThis exclusion also applies to payments that you make (other than payments for specific injuries or il lnesses) from

(directly or indirectly) to an employee under an accident or the employees wages subject to social security, Medicare,health plan for employees that are either of the following: and Federal unemployment (FUTA) taxes.

Payments or reimbursements of medical expenses. Exception for highly compensated employees. Ifyour plan is a self-insured medical reimbursement plan

Payments for specific injuries or illnesses (such asthat favors highly compensated employees, you must in-the loss of the use of an arm or leg). The paymentsclude all or part of the amounts you pay to these employ-

must be figured without regard to any period of ab- ees in their wages subject to Federal income taxsence from work.withholding. However, you can exclude these amounts(other than payments for specific injuries or il lnesses) from

Accident or health plan. This is an arrangement that the employees wages subject to social security, Medicare,provides benefits for your employees, their spouses, and and Federal unemployment (FUTA) taxes.their dependents in the event of personal injury or sick- A self-insured plan is a plan that reimburses your em-ness. The plan may be insured or noninsured and does not ployees for medical expenses not covered by an accidentneed to be in writing. or health insurance policy.

A highly compensated employee for this exception isEmployee. For this exclusion, treat the following individu-any of the following individuals.als as employees.

One of the five highest paid officers. A current common-law employee.

An employee who owns (directly or indirectly) more A full-time life insurance agent who is a current stat-

than 10% in value of the employers stock.utory employee. An employee who is among the highest paid 25% of A retired employee.

all employees (other than those who can be ex- A former employee that you maintain coverage for cluded from the plan).

based on the employment relationship.

For more information on this exception, see section A widow or widower of an individual who died while105(h) of the Internal Revenue Code and its regulations.an employee.

A widow or widower of a retired employee.Achievement Awards

For the exclusion of contributions to an accident orhealth plan, a leased employee who has provided This exclusion applies to the value of any tangible personalservices to you on a substantially full-time basis for property that you give to an employee as an award forat least a year if the services are performed under either length of service or safety achievement. Theyour primary direction or control.

exclusion does not apply to awards of cash, cashequivalents, gift certificates, or other intangible propertyException for S corporation shareholders. Do not such as vacations, meals, lodging, tickets to theater or

treat a 2% shareholder of an S corporation as an employee sporting events, stocks, bonds, and other securities. Theof the corporation for this purpose. A 2% shareholder is award must meet the requirements for employee achieve-someone who directly or indirectly owns (at any time dur- ment awards discussed in chapter 2 of Publication 535,ing the year) more than 2% of the corporations stock or Business Expenses.stock with more than 2% of the voting power.

Employee. For this exclusion, treat the following individu-Exclusion from wages. You can generally exclude the als as employees.value of accident or health benefits that you provide to an

A current employee.employee from the employees wages.

A former common-law employee that you maintainException for certain long-term care benefits. Youcoverage for in consideration of or based on ancannot exclude contributions to the cost of long-term care

agreement relating to prior service as an employee.insurance from an employees wages subject to Federalincome tax withholding if the coverage is provided through A leased employee who has provided services to

a flexible spending or similar arrangement. This is a benefityou on a substantially full-time basis for at least a

program that reimburses specified expenses up to a maxi-year if the services are performed under your pri-

mum amount that is reasonably available to the employeemary direction or control.

and is less than 5 times the total cost of the insurance.However, you can exclude these contributions from the

Exception for S corporation shareholders. Do notemployees wages subject to social security, Medicare,

treat a 2% shareholder of an S corporation as an employeeand Federal unemployment (FUTA) taxes.

of the corporation. A 2% shareholder is someone whodirectly or indirectly owns (at any time during the year)S corporation shareholders. Because you cannotmore than 2% of the corporations stock or stock withtreat a 2% shareholder of an S corporation as an employeemore than 2% of the voting power.for this exclusion, you must include the value of accident or

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Exclusion from wages. You can generally exclude the On-premises facility. The athletic facility must be locatedvalue of achievement awards that you give to an employee on premises you own or lease. It does not have to befrom the employees wages if their cost is not more than located on your business premises. However, the exclu-the amount that you can deduct as a business expense for sion does not apply to an athletic facility for residential use,the year. The excludable annual amount is $1,600 ($400 such as athletic facilities that are part of a resort.for awards that are not qualified plan awards). See chap-ter 2 of Pub. 535 for more information on the limit on

Employee. For this exclusion, treat the following individu-deductions for employee achievement awards.als as employees.

To determine for 2003 whether an achievementaward is a qualified plan award under the de-

A current employee.duction rules described in Pub. 535, treat anyCAUTION

! A former employee who retired or left on disability.employee who received more than $90,000 in pay for 2002

as a highly compensated employee. A widow or widower of an individual who died while

an employee.

If the cost of awards given to an employee is more than A widow or widower of a former employee who re-

your allowable deduction, include in the employees wages tired or left on disability.the larger of the following amounts.

A leased employee who has provided services to The part of the cost that is more than your allowable you on a substantially full-time basis for at least a

deduction (up to the value of the awards). year if the services are performed under your pri-mary direction or control. The amount by which the value of the awards ex-

ceeds your allowable deduction. A partner who performs services for a partnership.

Exclude the remaining value of the awards from theemployees wages.

De Minimis (Minimal) BenefitsAdoption Assistance You can exclude the value of a de minimis benefit that you

provide to an employee from the employees wages. A deYou must exclude all payments or reimbursements you

minimis benefit is any property or service that you providemake under an adoption assistance program for anto an employee and has so little value (taking into accountemployees qualified adoption expenses from thehow frequently you provide similar benefits to your employ-employees wages subject to Federal income tax withhold-ees) that accounting for it would be unreasonable or ad-ing. However, you cannot exclude these payments fromministratively impracticable. Cash, no matter how little, iswages subject to social security, Medicare, and Federalnever excludable as a de minimis benefit, except for occa-unemployment (FUTA) taxes. For more information, see

Publication 968, Tax Benefits for Adoption. sional meal money or transportation fare.You must report all qualifying adoption expenses you

Examples of de minimis benefits include the following:paid or reimbursed under your adoption assistance pro-gram for each employee for the year in box 12 of the Occasional personal use of a company copying ma-employees Form W-2. Use Code T to identify this chine if you sufficiently control its use so that at leastamount. 85% of its use is for business purposes.

Employee. For this exclusion, do not treat a 2% share- Holiday gifts, other than cash, with a low fair marketholder of an S corporation as an employee of the corpora- value.tion. A 2% shareholder is someone who directly or

Group-term life insurance payable on the death of anindirectly owns (at any time during the year) more than 2%employees spouse or dependent if the face amountof the corporations stock or stock with more than 2% of theis not more than $2,000.voting power.

Meals. See Meals on page 11.Form 5500. If you maintain an adoption assistance pro-

Occasional parties or picnics for employees andgram, ERISA may require you to file Form 5500. See the

their guests.Instructions for Form 5500.

Occasional tickets for entertainment or sportingAthletic Facilities events.

Transportation fare. See Transportation (Commut-You can exclude the value of an employees use of aning) Benefits on page 14.on-premises gym or other athletic facility that you operate

from an employees wages if substantially all use of the Occasional typing of personal letters by a company

facility during the calendar year is by your employees, their secretary.spouses, and their dependent children. For this purpose,an employees dependent child is a child or stepchild who

Employee. For this exclusion, treat any recipient of a deis the employees dependent or who, if both parents areminimis benefit as an employee.deceased, is age 24 or younger.

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Form W-2. Report the value of all dependent care assis-Dependent Care Assistancetance that you provide to an employee under a dependentcare assistance program in box 10 of the employees FormThis exclusion applies to household and dependent care

services that you pay for (directly or indirectly) or provide to W-2. Include any amounts you cannot exclude from thean employee under a dependent care assistance program employees wages in boxes 1, 3, and 5.that covers only your employees. The services must be fora qualifying persons care and must allow the employee to Educational Assistancework. These requirements are basically the same as thetests that the employee would have to meet to claim the This exclusion applies to educational assistance that youdependent care credit if the employee paid for the serv- provide to employees under an educational assistance

ices. For more information, see Qualifying Person Test program. The exclusion also applies to graduate leveland Work-Related Expense Test in Publication 503, courses.Child and Dependent Care Expenses.

Educational assistance means amounts that you pay orincur for your employees education expenses. These ex-Employee. For this exclusion, treat the following individu-penses generally include the cost of books, equipment,als as employees.fees, supplies, and tuition. However, these expenses do

A current employee. not include the cost of a course or other education involv-ing sports, games, or hobbies, unless the education: A leased employee who has provided services to

you on a substantially full-time basis for at least a Has a reasonable relationship to your business, or

year if the services are performed under your pri- Is required as part of a degree program.mary direction or control.

Yourself (if you are a sole proprietor).Education expenses do not include the cost of tools or

A partner who performs services for a partnership. supplies (other than textbooks) that your employee is al-lowed to keep at the end of the course. Nor do they includethe cost of lodging, meals, or transportation.Exclusion from wages. You can exclude the value of

benefits you provide to an employee under a dependentEducational assistance program. An educational assis-care assistance program from the employees wages if youtance program is a separate written plan that providesreasonably believe that the employee can exclude theeducational assistance only to your employees. The pro-benefits from gross income.gram qualifies only if all of the following tests are met.An employee can generally exclude from gross income

up to $5,000 of benefits received under a dependent care The program benefits employees who qualify under

assistance program each year. This limit is reduced to rules set up by you that do not favor highly compen-$2,500 for married employees filing separate returns. sated employees. To determine whether your pro-

However, the exclusion cannot be more than the earned gram meets this test, do not consider employeesincome of either: excluded from your program who are covered by a

collective bargaining agreement if there is evidence The employee, orthat educational assistance was a subject of

The employees spouse.good-faith bargaining.

Special rules apply to determine the earned income of a The program does not provide more than 5% of its

spouse who is either a student or not able to care forbenefits during the year for shareholders or owners.himself or herself. For more information on the earnedA shareholder or owner is someone who owns (onincome limit, see Pub. 503.any day of the year) more than 5% of the stock or of

Exception for highly compensated employees. You the capital or profits interest of your business.cannot exclude dependent care assistance from the

The program does not allow employees to choose towages of a highly compensated employee unless the ben-receive cash or other benefits that must be includedefits provided under the program do not favor highly com-in gross income instead of educational assistance.pensated employees and the program meets the

requirements described in section 129(d) of the Internal You give reasonable notice of the program to eligibleRevenue Code.

employees.For this exclusion, a highly compensated employee forYour program can cover former employees if their employ-2003 is an employee who meets either of the followingment is the reason for the coverage.tests.

For this exclusion, a highly compensated employee for1) The employee was a 5% owner at any time during

2003 is an employee who meets either of the followingthe year or the preceding year.

tests.2) The employee received more than $90,000 in pay for

1) The employee was a 5% owner at any time duringthe preceding year.the year or the preceding year.

You can choose to ignore test (2) if the employee was not2) The employee received more than $90,000 in pay foralso in the top 20% of employees when ranked by pay for

the preceding year.the preceding year.

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You can choose to ignore test (2) if the employee was not Exclusion from wages. You can generally exclude thealso in the top 20% of employees when ranked by pay for value of an employee discount that you provide to anthe preceding year. employee from the employees wages, up to the following

limits.Employee. For this exclusion, treat the following individu-als as employees. For a discount on services, 20% of the price that you

charge to nonemployee customers for the service. A current employee.

For a discount on merchandise or other property, A former employee who retired, left on disability, or

your gross profit percentage times the price that youwas laid off.

charge to nonemployee customers for the property.

A leased employee who has provided services toyou on a substantially full-time basis for at least a Determine your gross profit percentage based on allyear if the services are performed under your pri- property that you offer to customers (including employeemary direction or control. customers) and your experience during the tax year imme-

diately before the tax year in which the discount is avail- Yourself (if you are a sole proprietor).

able. To figure your gross profit percentage, subtract the A partner who performs services for a partnership. total cost of the property from the total sales price of the

property and divide the result by the total sales price of theproperty.Exclusion from wages. You can exclude up to $5,250 of

educational assistance you provide to an employee under Exception for highly compensated employees. Youan educational assistance program from the employees cannot exclude from the wages of a highly compensatedwages each year. employee any part of the value of a discount that is not

available on the same terms to one of the following groups.Assistance over $5,250. If you do not have an educa-

tional assistance plan, or you provide an employee with All of your employees, orassistance exceeding $5,250, you can exclude the value A group of employees defined under a reasonableof these benefits from wages if they are working condition

classification you set up that does not favor highlybenefits. Property or a service provided is a working condi-compensated employees.tion benefit to the extent that if the employee paid for it, the

amount paid would have been deductible as a business orFor this exclusion, a highly compensated employee fordepreciation expense. See Working Condition Benefits,

2003 is an employee who meets either of the followingon page 16.tests.

Form 5500. If you maintain an educational assistanceprogram, ERISA may require you to file Form 5500. See 1) The employee was a 5% owner at any time duringthe Instructions for Form 5500. the year or the preceding year.

2) The employee received more than $90,000 in pay forthe preceding year.

You can choose to ignore test (2) if the employee was notEmployee Discountsalso in the top 20% of employees when ranked by pay forthe preceding year.This exclusion applies to a price reduction that you give an

employee on property or services you offer to customers inthe ordinary course of the line of business in which the Employee Stock Optionsemployee performs substantial services. However, it doesnot apply to discounts on real property or discounts on There are three classes of stock optionsincentive stockpersonal property of a kind commonly held for investment options, employee stock purchase plan options, and non-(such as stocks or bonds). statutory (nonqualified) stock options.

Generally, for income tax purposes, incentive stockEmployee. For this exclusion, treat the following individu-options and employee stock purchase plan options areals as employees.excluded from wages both when the options are granted

A current employee. and when they are exercised (unless the stock is disposed

of in a disqualifying disposition). However, the spread A former employee who retired or left on disability.(between the exercise price and fair market value of the

A widow or widower of an individual who died while stock at the time of exercise) is included in wages subjectan employee. to social security, Medicare, and Federal unemployment

(FUTA) taxes when the options are exercised. Income tax A widow or widower of an employee who retired orwithholding is not required at the time of exercise.left on disability.

The spread on nonstatutory options normally is included A leased employee who has provided services to in wages for income tax purposes when the options are

you on a substantially full-time basis for at least aexercised. (See Regulations section 1.83-7.) The spread

year if the services are performed under your pri-on nonstatutory options is also subject to social security,

mary direction or control.Medicare, and FUTA taxes, and income tax withholding atthe time of exercise. A partner who performs services for a partnership.

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The IRS will not enforce the application of social secur- Insurance provided under a policy that provides apermanent benefit (an economic value that extendsity, Medicare, and FUTA taxes at the time of exercise onbeyond one policy year, such as paid-up or cashthe spread on incentive stock options and employee stocksurrender value), unless certain requirements arepurchase plan options until further guidance is issued. Inmet. See Regulations section 1.79-1 for details.addition, if stock acquired pursuant to the exercise of an

incentive stock option or employee stock purchase planoption is subsequently sold in a disqualifying disposition, Employee. For this exclusion, treat the following individu-the income is not subject to income tax withholding. (How- als as employees.ever, the income should be reported to the employee or

1) A current common-law employee.former employee, generally in box 1 of Form W-2.) See

Notice 2002-47 for more information. You can find Notice 2) A full-time life insurance agent who is a current statu-2002-47 on page 97 of Internal Revenue Bulletin 2002-28 tory employee.at www.irs.gov/pub/irs-irbs/irb02-28.pdf.

3) An individual who was formerly your employee underAn employee who transfers his or her interest in non-

(1) or (2), above.statutory stock options to the employees former spouse

4) A leased employee who has provided services toincident to a divorce is not required to include an amount inyou on a substantially full-time basis for at least agross income upon the transfer. The former spouse, ratheryear if the services are performed under your pri-than the employee, is required to include an amount inmary direction and control.gross income when the former spouse exercises the stock

options. See Revenue Ruling 2002-22 for details. You canException for S corporation shareholders. Do notfind Revenue Ruling 2002-22 on page 849 of Internal

treat a 2% shareholder of an S corporation as an employeeRevenue Bulletin 2002-19 at www.irs.gov/pub/irs-irbs/of the corporation. A 2% shareholder is someone whoirb02-19.pdf.directly or indirectly owns (at any time during the year)

For more information about employee stock options, more than 2% of the corporations stock or stock with moresee sections 421, 422, and 423 of the Internal Revenue

than 2% of the voting power.Code and their related regulations.

The 10-employee rule. Generally, life insurance is notgroup-term life insurance unless you provide it to at leastGroup-Term Life Insurance Coverage10 full-time employees at some time during the year.

For this rule, count employees who choose not to re-This exclusion applies to life insurance coverage thatceive the insurance unless, to receive it, they must contrib-meets all of the following conditions.ute to the cost of benefits other than the group-term life

It provides a general death benefit that is not in- insurance. For example, count an employee who couldcluded in income. receive insurance by paying part of the cost, even if that

employee chooses not to receive it. However, do not count You provide it to a group of employees. See The

an employee who must pay part or all of the cost of10-employee rule below.permanent benefits to get insurance, unless that employee

It provides an amount of insurance to each em- chooses to receive it.ployee based on a formula that prevents individual

Exceptions. Even if you do not meet the 10-employeeselection. This formula must use factors such as the

rule, two exceptions allow you to treat insurance asemployees age, years of service, pay, or position.

group-term life insurance.Under the first exception, you do not have to meet the You provide it under a policy that you carry directly

10-employee rule if all of the following conditions are met.or indirectly. Even if you do not pay any of thepolicys cost, you are considered to carry it if you

1) If evidence that the employee is insurable is re-arrange for payment of its cost by your employeesquired, it is limited to a medical questionnaire (com-and charge at least one employee less than, and atpleted by the employee) that does not require a

least one other employee more than, the cost of hisphysical.

or her insurance. Determine the cost of the insur-2) You provide the insurance to all of your full-timeance, for this purpose, as explained under Cover-

employees or, if the insurer requires the evidenceage over the limiton page 10.

mentioned in (1), to all full-time employees who pro-vide evidence the insurer accepts.Group-term life insurance does not include the following

insurance. 3) You figure the coverage based on either a uniformpercentage of pay or the insurers coverage brack- Insurance that does not provide general death bene-ets.fits, such as travel insurance or a policy providing

only accidental death benefits. Under the second exception, you do not have to meetthe 10-employee rule if all of the following conditions are

Life insurance on the life of your employees spousemet.or dependent. However, you may be able to exclude

the cost of this insurance from the employees You provide the insurance under a common planwages as a de minimis benefit. See De Minimis covering your employees and the employees of at(Minimal) Benefits on page 6. least one other employer that is not related to you.

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The insurance is restricted to, but mandatory for, all Your plan does not favor key employees as to partici-of your employees who belong to, or are repre- pation if at least one of the following is true.sented by, an organization (such as a union) that

It benefits at least 70% of your employees.carries on substantial activities besides obtaining in-surance.

At least 85% of the participating employees are not Evidence of whether an employee is insurable does key employees.

not affect an employees eligibility for insurance or It benefits employees who qualify under a set ofthe amount of insurance that employee gets.

rules you set up that do not favor key employees.

To apply either exception, do not consider employees

Your plan meets this participation test if it is part of awho were denied insurance for any of the following rea- cafeteria plan (discussed in section 1) and it meets thesons.participation test for those plans.

They were 65 or older.When applying this test, do not consider employees

They customarily work 20 hours or less a week or 5 who:months or less in a calendar year.

Have not completed 3 years of service. They have not been employed for the waiting periodgiven in the policy. (This waiting period cannot be Are part-time or seasonal.more than 6 months.)

Are nonresident aliens who receive no U.S. sourceearned income from you.

Exclusion from wages. You can generally exclude the Are not included in the plan but are in a unit ofcost of up to $50,000 of group-term life insurance from the

employees covered by a collective bargaining agree-wages of an insured employee. You can exclude the same

ment, if the benefits provided under the plan wereamount from the employees wages when figuring socialsecurity and Medicare taxes. In addition, you do not have the subject of good-faith bargaining between youto withhold Federal income tax or pay Federal unemploy- and employee representatives.ment (FUTA) tax on any group-term life insurance that youprovide to an employee. Your plan does not favor key employees as to benefits if

all benefits available to participating key employees areException for key employees. Generally, if youralso available to all other participating employees. Yourgroup-term life insurance plan favors key employees as toplan does not favor key employees just because theparticipation or benefits, you must include the entire cost

of the insurance in your key employees wages. (This amount of insurance you provide to your employees isexception generally does not apply to church plans.) When uniformly related to their pay.figuring social security and Medicare taxes, you must also

S corporation shareholders. Because you cannotinclude the entire cost in the employees wages. Includetreat a 2% shareholder of an S corporation as an employeethe cost in boxes 1, 3, and 5 of Form W-2. However, you do

for this exclusion, you must include the cost of allnot have to withhold Federal income tax or pay Federal group-term life insurance coverage that you provide to theunemployment (FUTA) tax on the cost of any group-term2% shareholder in his or her wages. When figuring sociallife insurance that you provide to an employee.

For this purpose, the cost of the insurance is the greater security and Medicare taxes, you must also include theof the following amounts. cost of this coverage in the 2% shareholders wages.

Include the cost in boxes 1, 3, and 5 of Form W-2. How- The premiums that you pay for the employees insur-

ever, you do not have to withhold Federal income tax orance.pay Federal unemployment tax on the cost of any

The cost that you figure using the table shown latergroup-term life insurance coverage you provide to the 2%

under Coverage over the limit.shareholder.

For this exclusion, a key employee during 2003 is an Coverage over the limit. You must include in youremployee or former employee who is one of the following employees wages subject to social security and Medicareindividuals. See section 416(i) for more information. taxes the cost of group-term life insurance that is more

than the cost of $50,000 of coverage, reduced by the1) An officer having annual pay of more than $130,000.amount the employee paid toward the insurance. Report it

2) An individual who for 2003 was either of the follow- as wages in boxes 1, 3, and 5 of the employees Form W-2.ing: Also, show it in box 12 with code C.

Figure the monthly cost of the insurance to include in thea) A 5% owner of your business.employees wages by multiplying the number of thousandsb) A 1% owner of your business whose annual payof dollars of insurance coverage over $50,000 (figured towas more than $150,000.the nearest $100) by the cost shown in the following table.Use the employees age on the last day of the tax year.A former employee who was a key employee uponYou must prorate the cost from the table if less than a fullretirement or separation from service is also a key em-month of coverage is involved.ployee.

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Cost Per $1,000 of Protection The exclusion does not apply if you allow your employeeFor One Month to choose to receive additional pay instead of lodging.

On your business premises. For this exclusion, yourAge Costbusiness premises is generally your employees place ofUnder 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .05work. (For special rules that apply to lodging furnished in a25 through 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .06camp located in a foreign country, see section 119(c) of the30 through 34 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .08Internal Revenue Code and its regulations.)35 through 39 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .09

40 through 44 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10For your convenience. Whether or not you furnish lodg-45 through 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15ing for your convenience as an employer depends on all50 through 54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

the facts and circumstances. You furnish the lodging to55 through 59 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 your employee for your convenience if you do this for a60 through 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66substantial business reason other than to provide the em-65 through 69 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27ployee with additional pay. This is true even if a law or an70 and older . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.06employment contract provides that the lodging is furnished

You figure the total cost to include in the employees as pay. However, a written statement that the lodging iswages by multiplying the monthly cost by the number of full furnished for your convenience is not sufficient.months coverage at that cost.

Condition of employment. Lodging meets this test if yourequire your employees to accept the lodging becauseExample. Toms employer provides him withthey need to live on your business premises to be able togroup-term life insurance coverage of $200,000. Tom is 45properly perform their duties. Examples include employ-years old, is not a key employee, and pays $100 per yearees who must be available at all times and employees whotoward the cost of the insurance. Toms employer mustcould not perform their required duties without being fur-include $170 in his wages. The total cost of the insurance,nished the lodging.$360 ($.15 200 12), is reduced by the cost of $50,000 of

It does not matter whether you must furnish the lodgingcoverage, $90 ($.15 50 12), and by the $100 Tom paysas pay under the terms of an employment contract or a lawfor the insurance. The employer includes $170 in boxes 1,fixing the terms of employment.3, and 5 of Toms Form W-2. The employer also enters

$170 in box 12 with code C.Example. A hospital gives Joan, an employee of the

Coverage for dependents. Group-term life insurance hospital, the choice of living at the hospital free of charge orcoverage paid by the employer for the spouse or depen- living elsewhere and receiving a cash allowance in additiondents of an employee may be excludable from income as a to her regular salary. If Joan chooses to live at the hospital,de minimis fringe benefit (see page 6). The part of this the hospital cannot exclude the value of the lodging fromcoverage that the employee paid on an after-tax basis is her wages because she is not required to live at thealso excludable from income. For this purpose, the cost is hospital to properly perform the duties of her employment.figured using the monthly cost table above.

S corporation shareholder-employee. For this exclu-Former employees. For group-term life insurance over

sion, do not treat a 2% shareholder of an S corporation as

$50,000 provided to former employees (including retirees), an employee of the corporation. A 2% shareholder isthe former employees must pay the employees share ofsomeone who directly or indirectly owns (at any time dur-

social security and Medicare taxes with their income taxing the year) more than 2% of the corporations stock or

returns. You are not required to collect those taxes. Usestock with more than 2% of the voting power.

the table above to determine the amount of social securityand Medicare taxes owed by the former employee for

Mealscoverage provided after separation from service. Reportthose uncollected amounts separately in box 12 on Form

This section discusses the exclusion rules that apply to deW-2 using codes M and N. See the Instructions forminimis meals and meals on your business premises.Forms W-2 and W-3.

Lodging on Your Business Premises De Minimis Meals

This exclusion applies to any meal or meal money that youYou can exclude the value of lodging that you furnish to an

provide to an employee if it has so little value (taking intoemployee from the employees wages if it meets the follow- account how frequently you provide meals to your employ-ing tests.ees) that accounting for it would be unreasonable or ad-

It is furnished on your business premises.ministratively impracticable. The exclusion applies, for

It is furnished for your convenience. example, to the following items.

The employee must accept it as a condition of em- Coffee, doughnuts, or soft drinks.ployment.

Occasional meals or meal money provided to enableDifferent tests may apply to lodging furnished by educa- an employee to work overtime. (However, the exclu-tional institutions. See section 119(d) of the Internal Reve- sion does not apply to meal money figured on thenue Code for details. basis of hours worked.)

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Occasional parties or picnics for employees and Meals on Your Business Premisestheir guests.

You can exclude the value of meals that you furnish to anemployee from the employees wages if they meet theThis exclusion also applies to meals that you provide atfollowing tests.an employer-operated eating facility for employees if

the annual revenue from the facility equals or exceeds the They are furnished on your business premises.direct costs of the facility. For this purpose, your revenue

They are furnished for your convenience.from providing a meal is considered equal to the facilitysdirect operating costs to provide that meal if its value can

This exclusion does not apply if you allow your em-be excluded from an employees wages as explainedployee to choose to receive additional pay instead of

under Meals on Your Business Premises later. meals.If food or beverages that you furnish to employ-

On your business premises. Generally, for this exclu-ees qualify as a de minimis benefit, you cansion, the employees place of work is your business prem-deduct their full cost. The 50% limit on deductions

TIP

ises.for the cost of meals does not apply. The deduction limit onmeals is discussed in chapter 2 of Pub. 535. For your convenience. Whether you furnish meals for

your convenience as an employer depends on all the factsand circumstances. You furnish the meals to your em-ployee for your convenience if you do this for a substantialEmployee. For this exclusion, treat any recipient of a debusiness reason other than to provide the employee with

minimis meal as an employee.additional pay. This is true even if a law or an employmentcontract provides that the meals are furnished as pay.

Employer-operated eating facility for employees. AnHowever, a written statement that the meals are furnished

employer-operated eating facility for employees is an eat-

for your convenience is not sufficient.ing facility that meets all the following conditions.Meals excluded for all employees if excluded for

You own or lease the facility. more than half. If more than half of your employees whoare furnished meals on your business premises are fur- You operate the facility. (You are considered to op-nished the meals for your convenience, you can treat allerate the eating facility if you have a contract withmeals that you furnish to employees on your businessanother to operate it.)premises as furnished for your convenience.

The facility is on or near your business premises.Food service employees. Meals you furnish to a res-

You provide meals (food, drinks, and related serv- taurant or other food service employee during, or immedi-ices) at the facility during, or immediately before or ately before or after, the employees working hours areafter, the employees workday. furnished for your convenience. For example, if a waitress

works through the breakfast and lunch periods, you canexclude from her wages the value of the breakfast andExclusion from wages. You can generally exclude the

lunch that you furnish in your restaurant for each day shevalue of de minimis meals that you provide to an employee works.from the employees wages.

Exception for highly compensated employees. You Example. You operate a restaurant business. You fur-nish your employee, Carol, who is a waitress working 7cannot exclude from the wages of a highly compensateda.m. to 4 p.m., two meals during each workday. Youemployee the value of a meal provided at an employer-encourage but do not require Carol to have her breakfastoperated eating facility that is not available on the sameon the business premises before starting work. She mustterms to one of the following groups.have her lunch on the premises. Since Carol is a food

All of your employees. service employee and works during the normal breakfastand lunch periods, you can exclude from her wages the A group of employees defined under a reasonablevalue of her breakfast and lunch.classification you set up that does not favor highly

If you also allow Carol to have meals on your businesscompensated employees.premises without charge on her days off, you cannot ex-

clude the value of those meals from her wages.For this exclusion, a highly compensated employee for2003 is an employee who meets either of the following Employees available for emergency calls. Meals thattests. you furnish during working hours so an employee will be

available for emergency calls during the meal period are1) The employee was a 5% owner at any time during furnished for your convenience. You must be able to show

the year or the preceding year. that these emergency calls have occurred or can reasona-bly be expected to occur.2) The employee received more than $90,000 in pay for

the preceding year.Example. A hospital maintains a cafeteria on its prem-

You can choose to ignore test (2) if the employee was not ises where all of its 230 employees may get meals at noalso in the top 20% of employees when ranked by pay for charge during their working hours. The hospital furnishesthe preceding year. meals to have 120 employees available for emergencies.

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Each of these employees is, at times, called upon to an employee of the corporation. A 2% shareholder isperform services during the meal period. Although the someone who directly or indirectly owns (at any time dur-hospital does not require these employees to remain on ing the year) more than 2% of the corporations stock orthe premises, they rarely leave the hospital during their stock with more than 2% of the voting power.meal period. Since the hospital furnishes meals on itspremises to its employees so that more than half of them Moving Expense Reimbursementsare available for emergency calls during meal periods, thehospital can exclude the value of these meals from the This exclusion applies to any amount that you give to anwages of all of its employees. employee, directly or indirectly (including services fur-

nished in kind), as payment for, or reimbursement of,Short meal periods. Meals that you furnish during

moving expenses. You must make the reimbursementsworking hours are furnished for your convenience if the under rules similar to those described in chapter 13 of Pub.nature of your business restricts an employee to a short535 for reimbursements of expenses for travel, meals, andmeal period (such as 30 or 45 minutes) and the employeeentertainment under accountable plans.cannot be expected to eat elsewhere in such a short time.

The exclusion applies only to reimbursements of mov-For example, meals can qualify for this treatment if youring expenses that the employee could deduct if he or shepeak workload occurs during the normal lunch hour. How-had paid or incurred them without reimbursement. How-ever, they do not qualify if the reason for the short mealever, it does not apply if the employee actually deductedperiod is to allow the employee to leave earlier in the day.the expenses in a previous year.

Deductible moving expenses include only the reasona-Example. Frank is a bank teller who works from 9 a.m.ble expenses of:to 5 p.m. The bank furnishes his lunch without charge in a

cafeteria that the bank maintains on its premises. The bank Moving household goods and personal effects fromfurnishes these meals to Frank to limit his lunch period to the former home to the new home, and30 minutes, since the banks peak workload occurs during

Traveling (including lodging) from the former homethe normal lunch period. If Frank got his lunch elsewhere, it to the new home.would take him much longer than 30 minutes and the bankstrictly enforces the time limit. The bank can exclude thevalue of these meals from Franks wages. Deductible moving expenses do not include any

expenses for meals and must meet both the dis-Proper meals not otherwise available. Meals that youtance test and the time test. The distance test isCAUTION

!furnish during working hours are furnished for your conve-

met if the new job location is at least 50 miles farther fromnience if the employee could not otherwise eat properthe employees old home than the old job location was.meals within a reasonable period of time. For example,The time test is met if the employee works at least 39meals can qualify for this treatment if there are insufficientweeks during the first 12 months after arriving in the gen-eating facilities near the place of employment.eral area of the new job location.

Meals after work hours. Meals that you furnish to anemployee immediately after working hours are furnished

For more information on deductible moving expenses,for your convenience if you would have furnished them

see Publication 521, Moving Expenses.during working hours for a substantial nonpay businessreason but, because of the work duties, they were not Employee. For this exclusion, treat the following individu-eaten during working hours. als as employees.

Meals that you furnish to promote goodwill, boost A current employee.

morale, or attract prospective employees. Meals that A leased employee who has provided services toyou furnish to promote goodwill, boost morale, or attract

you on a substantially full-time basis for at least aprospective employees are not considered furnished foryear if the services are performed under your pri-your convenience. However, you may be able to excludemary direction or control.their value as discussed under De Minimis Meals on

page 11.Exception for S corporation shareholders. Do not

Meals furnished on nonworkdays or with lodging. treat a 2% shareholder of an S corporation as an employeeYou generally cannot exclude from an employees wages of the corporation. A 2% shareholder is someone whothe value of meals that you furnish on a day when the

directly or indirectly owns (at any time during the year)employee is not working. However, you can exclude these more than 2% of the corporations stock or stock withmeals if they are furnished with lodging that is excluded more than 2% of the voting power.from the employees wages as discussed under Lodging

Exclusion from wages. You can generally exclude quali-on Your Business Premises on page 11.fying moving expense reimbursements that you provide to

Meals with a charge. The fact that you charge for thean employee from the employees wages. If you paid the

meals and that your employees may accept or decline thereimbursements directly to the employee, report the

meals is not taken into account in determining whether oramount in box 12 of Form W-2 with the code P. Do not

not meals are furnished for your convenience.report payments to a third party for the employees moving

S corporation shareholder-employee. For this exclu- expenses or the value of moving services that you pro-sion, do not treat a 2% shareholder of an S corporation as vided in kind.

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has not reached age 25. Treat a child of divorced parentsNo-Additional-Cost Servicesas a dependent of both parents.

Treat any use of air transportation by the parent of anThis exclusion applies to a service that you provide to anemployee as use by the employee. This rule does notemployee if it does not cause you to incur any substantialapply to use by the parent of a person considered anadditional costs. The service must be offered to customersemployee because of item (3) above.in the ordinary course of the line of business in which the

employee performs substantial services. Exclusion from wages. You can generally exclude theGenerally, no-additional-cost services are excess ca- value of a no-additional-cost service that you provide to an

pacity services, such as airline, bus, or train tickets; hotel employee from the employees wages.rooms; or telephone services provided free or at a reduced

Exception for highly compensated employees. Youprice to employees working in those lines of business. cannot exclude from the wages of a highly compensatedemployee the value of a no-additional-cost service that isSubstantial additional costs. To determine whether ornot available on the same terms to one of the followingnot you incur substantial additional costs to provide agroups.service to an employee, count any lost revenue as a cost.

Do not reduce the costs you incur by any amount that the All of your employees, oremployee pays for the service. You are considered to incur

A group of employees defined under a reasonablesubstantial additional costs if you or your employees spendclassification you set up that does not favor highlya substantial amount of time in providing the service, evencompensated employees.if the time spent would otherwise be idle or if the services

are provided outside of normal business hours.For this exclusion, a highly compensated employee for

2003 is an employee who meets either of the followingReciprocal agreements. A no-additional-cost service

tests.provided to your employee by an unrelated employer may

qualify as a no-additional-cost service if all the following 1) The employee was a 5% owner at any time duringtests are met: the year or the preceding year.

The service is the same type of service generally 2) The employee received more than $90,000 in pay forprovided to customers in both the line of business in the preceding year.which the employee works and the line of business

You can choose to ignore test (2) if the employee was notin which the service is provided.also in the top 20% of employees when ranked by pay for

You and the employer providing the service have a the preceding year.written reciprocal agreement under which a group ofemployees of each employer, all of whom perform Retirement Planning Servicessubstantial services in the same line of business,may receive no-additional-cost services from the You may exclude from an employees wages the value ofother employer. any retirement planning advice or information that you

provide to your employee or his or her spouse if you Neither you nor the other employer incurs any sub- maintain a qualified retirement plan. In addition to em-stantial additional cost either in providing the serviceployer plan advice and information, the services providedor because of the written agreement.may include general advice and information on retirement.However, the exclusion does not apply to services for tax

Employee. For this exclusion, treat the following individu- preparation, accounting, legal, or brokerage services.als as employees.

Transportation (Commuting) Benefits1) A current employee.2) A former employee who retired or left on disability. This section discusses exclusion rules that apply to bene-

fits that you provide to your employees for their personal3) A widow or widower of an individual who died whiletransportation, such as commuting to and from work.an employee.These rules apply to the following transportation benefits.

4) A widow or widower of a former employee who re- De minimis transportation benefits.

tired or left on disability. Qualified transportation benefits.5) A leased employee who has provided services to

you on a substantially full-time basis for at least a Special rules that apply to demonstrator cars and qualifiedyear if the services are performed under your pri- nonpersonal-use vehicles are discussed under Workingmary direction or control. Condition Benefits on page 16.

6) A partner who performs services for a partnership.De Minimis Transportation Benefits

Treat services that you provide to the spouse or depen-dent child of an employee as provided to the employee. You can exclude the value of any de minimis transportationFor this fringe benefit, dependent child means any son, benefit that you provide to an employee from thestepson, daughter, or stepdaughter who is a dependent of employees wages. A de minimis transportation benefit isthe employee, or both of whose parents have died and who any transportation benefit that you provide to an employee

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if it has so little value (taking into account how frequently commuter highway vehicles, or carpools. It does not in-you provide transportation to your employees) that ac- clude parking at or near your employees home.counting for it would be unreasonable or administratively

Employee. For this exclusion, treat the following individu-impracticable. For example, it applies to occasional trans-als as employees.portation fare that you give to an employee because the

employee is working overtime if the benefit is reasonable A current employee.and is not based on hours worked.

A leased employee who has provided services toyou on a substantially full-time basis for at least aEmployee. For this exclusion, treat any recipient of a deyear if the services are performed under your pri-minimis transportation benefit as an employee.mary direction or control.

Qualified Transportation Benefits Exception for S corporation shareholders. Do nottreat a 2% shareholder of an S corporation as an employee

This exclusion applies to the following benefits. of the corporation. A 2% shareholder is someone whodirectly or indirectly owns (at any time during the year) A ride in a commuter highway vehicle between themore than 2% of the corporations stock or stock withemployees home and work place.more than 2% of the voting power.

A transit pass.Relation to other fringe benefits. You cannot exclude a

Qualified parking.qualified transportation benefit that you provide to an em-

The exclusion applies whether you provide only one or a ployee under the de minimis or working condition benefitcombination of these benefits to your employees. rules. However, if you provide a local transportation benefit

other than by transit pass or commuter highway vehicle, orQualified transportation benefits can be provided directlyto a person other than an employee, you may be able to

by you or through a bona fide reimbursement arrange- exclude all or part of the benefit under other fringe benefitment. However, cash reimbursements for transit passesrules (de minimis, working condition, etc.).qualify only if a voucher or a similar item that the employee

can exchange only for a transit pass is not readily available Exclusion from wages. You can generally exclude thefor direct distribution by you to your employee. A voucher is value of transportation benefits that you provide to anreadily available for direct distribution only if an employee employee during 2003 from the employees wages up tocan obtain it from a voucher provider that does not impose the following limits.fare media charges or other restrictions that effectively

$100 per month for combined commuter highwayprevent the employer from obtaining vouchers. See Regu-vehicle transportation and transit passes.lations section 1.132-9 for more information.

You can exclude qualified transportation fringe benefits $190 per month for qualified parking.from an employees wages even if you provide them inplace of pay. For information about providing qualified Benefits more than the limit. If the value of a benefittransportation fringe benefits under a compensation reduc- for any month is more than its limit, include in the

t i on ag r eemen t , see Regu la t i ons sec t i on employees wages the amount over the limit minus any1.132-9(b)(Q-11). amount the employee paid for the benefit. You cannot

exclude the excess from the employees wages as a deCommuter highway vehicle. A commuter highway vehi- minimis transportation benefit.cle is any highway vehicle that seats at least 6 adults (notincluding the driver). In addition, you must reasonably More information. For more information on qualifiedexpect that at least 80% of the vehicle mileage will be for transportation benefits, including van pools, and how totransporting employees between their homes and work determine the value of parking, see Regulations sectionplace with employees occupying at least one-half of the 1.132-9.vehicles seats (not including the drivers).

Tuition ReductionTransit pass. A transit pass is any pass, token, farecard,voucher, or similar item entitling a person to ride, free of An educational organization can exclude the value of acharge or at a reduced rate, one of the following: qualified tuition reduction that it provides to an employee

from the employees wages. On mass transit.A tuition reduction for undergraduate education gener-

In a vehicle that seats at least 6 adults (not including ally qualifies for this exclusion if it is for the education ofthe driver) if a person in the business of transporting one of the following individuals.persons for pay or hire operates it.

1) A current employee.Mass transit may be publicly or privately operated andincludes bus, rail, or ferry. 2) A former employee who retired or left on disability.

3) A widow or widower of an individual who died whileQualified parking. Qualified parking is parking that you

an employee.provide to your employees on or near your business prem-ises. It includes parking on or near the location from which 4) A widow or widower of a former employee who re-your employees commute to work using mass transit, tired or left on disability.

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5) A dependent child or spouse of any individual listed see the special rules for certain demonstrator cars andin (1) through (4) above. qualified nonpersonal-use vehicles discussed below.

However, instead of excluding the value of the workingA tuition reduction for graduate education qualifies forcondition benefit, you can include the entire annual leasethis exclusion only if it is for the education of a graduatevalue of the car in the employees wages. The employeestudent who performs teaching or research activities forcan then claim any deductible business expense for thethe educational organization.car as an itemized deduction on his or her personal incomeFor more information on this exclusion, see Pub. 520,tax return. This option is available only if you use the leaseScholarships and Fellowships.value rule (discussed in section 3) to value the benefit.

Working Condition Benefits Demonstrator cars. All of the use of a demonstrator carby your full-time auto salesperson generally qualifies as aThis exclusion applies to property and services that you

working condition benefit if the use is primarily to facilitateprovide to an employee so that the employee can perform

the services that the salesperson provided for you andhis or her job. It applies to the extent that the employee

there are substantial restrictions on personal use. Forcould deduct the cost of the property or services as a

more information and the definition of full-time auto sales-business expense or depreciation expense if he or she had

person, see Regulations section 1.132-5(o).paid for it. The employee must meet any substantiationrequirements that apply to the deduction. Examples of

Qualified nonpersonal-use vehicles. All of anworking condition benefits include an employees use of aemployees use of a qualified nonpersonal-use vehicle is acompany car for business and job-related education pro-working condition benefit. A qualified nonpersonal-use ve-vided to an employee.hicle is any vehicle that the employee is not likely to use

This exclusion also applies to a cash payment that youmore than minimally for personal purposes because of its

provide for an employees expenses for a specific or prear-design. Qualified nonpersonal-use vehicles generally in-

ranged business activity for which a deduction is allowableclude all of the following vehicles.to the employee. You must require the employee to verify

that the payment is actually used for those expenses and Clearly marked police and fire vehicles.to return any unused part of the payment.

Unmarked vehicles used by law enforcement officersFor information on deductible employee business ex-if the use is officially authorized.

penses, see Unreimbursed Employee Expenses in Pub.529, Miscellaneous Deductions. An ambulance or hearse used for its specific pur-

pose.The exclusion does not apply to the following items.

Any vehicle designed to carry cargo with a loaded A service or property provided under a flexiblegross vehicle weight over 14,000 pounds.spending account in which you agree to provide the

employee, over a time period, a certain level of un- Delivery trucks with seating for the driver only, or the

specified noncash benefits with a predetermined driver plus a folding jump seat.cash value.

A passenger bus with a capacity of at least 20 pas-

A physical examination program that you provide, sengers used for its specific purpose.even if mandatory. School buses.

Any item to the extent that the employee could de- Tractors and other special-purpose farm vehicles.duct its cost as an expense for a trade or business

other than your trade or business.Pickup trucks. A pickup truck with a loaded gross vehi-

cle weight of 14,000 pounds or less is a qualifiedEmployee. For this exclusion, treat the following individu- nonpersonal-use vehicle if it has been specially modifiedals as employees. so that it is not likely to be used more than minimally for

personal purposes. For example, a pickup truck qualifies if A current employee.it is clearly marked with permanently affixed decals, spe-

A partner who performs services for a partnership. cial painting, or other advertising associated with yourtrade, business, or function and meets either of the follow- A director of your company.ing requirements.

An independent contractor who performs servicesfor you. 1) It is equipped with at least one of the followingitems.

Vehicle allocation rules. If you provide a car for ana) A hydraulic lift gate.

employees use, the amount that you can exclude as ab) Permanent tanks or drums.working condition benefit is the amount that would be

allowable as a deductible business expense if the em-c) Permanent side boards or panels that materially

ployee paid for its use. That is, if the employee uses the carraise the level of the sides of the truck bed.

for both business and personal use, the value of the work-d) Other heavy equipment (such as an electric gen-ing condition benefit is the part determined to be for busi-

erator, welder, boom, or crane used to tow auto-ness use of the vehicle. See Business use of your carmobiles and other vehicles).under Personal Expenses in chapter 1 of Pub. 535. Also,

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2) It is used primarily to transport a particular type of Exclusion from wages. You can generally exclude theload (other than over the public highways) in a con- value of a working condition benefit that you provide to anstruction, manufacturing, processing, farming, min- employee from the employees wages.ing, drilling, timbering, or other similar operation for

Exception for independent contractors. You cannotwhich it was specially designed or significantly modi-

exclude the value of parking or the use of consumer goodsfied.

that you provide in a product testing program from thecompensation that you pay to an independent contractor

Vans. A van with a loaded gross vehicle weight ofwho performs services for you.

14,000 pounds or less is a qualified nonpersonal-use vehi-Exception for company directors. You cannot ex-cle if it has been specially modified so that it is not likely to

clude the value of the use of consumer goods that yoube used more than minimally for personal purposes. For provide in a product testing program from the compensa-example, a van qualifies if it is clearly marked with perma-tion that you pay to a director.nently affixed decals, special painting, or other advertising

associated with your trade, business, or function and has aseat for the driver only (or the driver and one other person)and either of the following items. 3. Fringe Benefit Valuation Permanent shelving that fills most of the cargo area. Rules An open cargo area and the van always carries

This section discusses the rules that you must use tomerchandise, material, or equipment used in yourdetermine the value of a fringe benefit that you provide totrade, business, or function.an employee. You must determine the value of any benefitthat you cannot exclude under the rules in section 2 or for

Education. Certain job-related education that you provide which the amount you can exclude is limited. See Includ-

to an employee may qualify for exclusion as a working ing taxable benefits in pay on page 2.condition benefit. To qualify, the education must meet the In most cases, you must use the general valuation rulesame requirements that would apply for determining to value a fringe benefit. However, you may be able to usewhether the employee could deduct the expenses had the a special valuation rule to determine the value of certainemployee paid the expenses. The education must meet at benefits.least one of the following tests.

This section does not discuss the special valuation ruleused to value meals provided at an employer-operated

The education is required by the employer or by laweating facility for employees. For that rule, see Regulationsfor the employee to keep his or her present salary,section 1.61-21(j). This section also does not discuss thestatus, or job. The required education must serve aspecial valuation rules used to value the use of aircraft. Forbona fide business purpose of the employer.those rules see Regulations sections 1.61-21(g) and (h).

The education maintains or improves skills neededin the job. General Valuation Rule

However, even if the education meets one or both of the You must use the general valuation rule to determine theabove tests, it is not qualifying education if it: value of most fringe benefits. Under this rule, the value of a

fringe benefit is its fair market value. Is needed to meet the minimum educational require-

ments of the employees present trade or business,Fair market value. The fair market value (FMV) of a fringeorbenefit is the amount an employee would have to pay a

Is part of a program of study that will qualify the third party in an arms-length transaction to buy or leaseemployee for a new trade or business. the benefit. Determine this amount on the basis of all the

facts and circumstances.Neither the amount that the employee considers to beOutplacement services. An employees use of outplace-

the value of the fringe benefit nor the cost you incur toment services qualifies as a working condition benefit ifprovide the benefit determines its FMV.you provide the services to the employee on the basis of

need and you get a substantial business benefit from the

services distinct from the benefit that you would get from Employer-provided vehicles. In general, the FMV of anthe payment of additional wages. Substantial business employer-provided vehicle is the amount that the em-benefits include promoting a positive business image, ployee would have to pay to a third party to lease the samemaintaining employee morale, and avoiding wrongful ter- or similar vehicle on the same or comparable terms in themination suits. geographic area where the employee uses the vehicle. A

comparable lease term would be the amount of time thatOutplacement services do not qualify as a working con-the vehicle is available for the employees use, such as adition benefit if the employee can choose to receive cash1-year period.or taxable benefits in place of the services. If you maintain

a severance plan and permit employees to get outplace- Do not determine the FMV by multiplying ament services with reduced severance pay, include in the cents-per-mile rate times the number of miles driven un-employees wages the difference between the unreduced less the employee can prove that the vehicle could haveseverance and the reduced severance payments. been leased on a cents-per-mile basis.

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The vehicle is used during the year primarily byCents-Per-Mile Ruleemployees. Consider the vehicle used primarily byemployees if they use it consistently for commuting.Under this rule, you determine the value of a vehicle thatDo not treat the use of the vehicle by another individ-you provide to an employee for personal use by multiplyingual whose use would be taxed to the employee asthe standard mileage rate by the total miles that the em-use by the employee.ployee drives the vehicle for personal purposes. Personal

use is any use of the vehicle other than use in your trade orFor example, if only one employee uses a vehicle duringbusiness. This amount must be included in the employees

the calendar year and that employee drives the vehicle atwages or reimbursed by the employee. For 2003, theleast 10,000 miles in that year, the vehicle meets thestandard mileage rate is reduced to 36 cents a mile.

mileage test even if all miles driven by the employee areYou can use the cents-per-mile rule if either of the personal.following requirements is met.

You reasonably expect the vehicle to be regularly Consistency requirements. I f you use theused in your trade or business throughout the calen- cents-per-mile rule, the following requirements apply:dar year (or for a shorter period during which you

You must begin using the cents-per-mile rule on theown or lease it).first day that you make the vehicle available to any

The vehicle meets the mileage test. employee for personal use. However, if you use thecommuting rule below when you first make the vehi-cle available to any employee for personal use, youMaximum automobile value. You cannotusecan change to the cents-per-mile rule on the first daythe cents-per-mile rule for an automobile (anyfor which you do not use the commuting rule.4-wheeled vehicle, such as a car, pickup truck, orCAUTION

!van) if its value when you first make it available to any You must use the cents-per-mile rule for all lateremployee for personal use is more than an amount deter-

years in which you make the vehicle available to anymined by the IRS as the maximum automobile value for the employee and the vehicle qualifies, except that youyear. For example, you cannot use the cents-per-mile rule can use the commuting rule for any year duringfor an automobile that you first made available to an em- which use of the vehicle qualifies. However, if theployee in 2002 if its value at that time was more than vehicle does not qualify for the cents-per-mile rule$15,300. The maximum automobile value for 2003 will be during a later year, you can use for that year andpublished in a revenue procedure in the Internal Revenue thereafter any other rule for which the vehicle thenBulletin early in 2003. If you and the employee own or qualifies.lease the automobile together, see Regulations section

You must continue to use the cents-per-mile rule if1.61-21(e)(1)(iii)(B).you provide a replacement vehicle to the employeeand your primary reason for the replacement is toreduce Federal taxes.

Vehicle. For the cents-per-mile rule, a vehicle is any mo-torized wheeled vehicle, including an automobile, manu-

Items included in cents-per-mile rate. Thefactured primarily for use on public streets, roads, and cents-per-mile rate includes the value of maintenance andhighways.insurance for the vehicle. Do not reduce the rate by the

Regular use in your trade or business. A vehicle is value of any service included in the rate that you did notregularly used in your trade or business if at least one of provide. (You can take into account the services actuallyt

us internal revenue service: p15b--2003

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