Chapter 4: Payroll Benefit Basics
Payroll Source
FPC Review Course 2013
Presented by:
Carmela Miller, CPP
howardcarmmiller@msn.com
Chapter 4
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4.1 Fringe Benefits
4.2 Prizes and Awards
4.3 Company Vehicles
4.4 Group-Term Insurance
4.5 Deferred Compensation
4.6 Section 125 Flexible Benefit Plans
4.1 Fringe Benefits
Taxable Compensation
• Back Pay Awards
• Bonuses, Overtime Pay, Regular Wages, Tips
• Sick pay and disability benefits
• Commissions
• Company Vehicle (personal use)
• Dismissal and Severance Pay or Final Vacation
• Employee-paid commuter fees in excess of $125/month
• Bicycle Commuters reimbursement of $20/month
• Employer-paid parking greater than $240/month
• Fringe Benefits (unless specifically excluded)
• Gifts, Gift Certificates, Prizes and Awards
• Group Legal Services
• Group Term Life Insurance over $50,000
• Non-accountable reimbursed business expenses
• Noncash fringes, unless excluded by the Internal Revenue Code
• Non-Qualified Moving Expenses
Fringe Benefits, Cont.
Non-Taxable Compensation
• Dependent Child Care assistance (up to $5000) under a
Section 129 plan
• Company vehicle (Business use only)
• De minimis fringes
• Educational assistance for job-related courses (no limit)
• Group-term life insurance premium ($50,000 or less of
coverage)
• Medical/Dental/Health plans (Employer Contributions)
• Qualified employee discounts on employer
goods/services
Fringe Benefits, Cont.
Non-Taxable Compensation
• Qualified moving expenses
• Qualified transportation fringes ($125 Transit/$125 Car
Pooling)
• Reimbursed business expenses (if accounted for in a
timely manner)
• Working condition fringes which would be deductible if
paid by employee
• Non-job-related education assistance up to $5,250
under a qualified plan
• Long-term care insurance
• Health Savings Accounts
Fringe Benefits
Fair Market Value of
Non-Cash Compensation
In general, the fair market value of a fringe market value of a
fringe benefit is determined on the basis of all the facts and
circumstances. Specifically, the fair market value of a fringe
benefit is the amount the employee would have paid a third
party to buy or lease the fringe benefit. When determining
the value of the benefit, keep the following two statements in
mind:
The employee’s perceived value of the benefit is not
relevant
The amount the employer paid for the benefit is not a
determining factor.
Fringe Benefits, Cont.
Imputed Income
• Imputed Income the value of the benefits employees
receive that need to be included in the employee’s
income.
• Imputing income reduces employee’s net pay by
increasing taxes.
• Employee does not receive additional pay in the form
of cash
– Example is the group-term life insurance
*** Inputting should occur as often as possible.
Inputting at year end could be reduce the
employee income drastically and result in
little of none net pay.
Fringe Benefits, Cont.
Example of Imputed Income
An employee has $50.00 included in income for non-cash taxable fringe benefit. The
employee’s salary is $1,500.00 for the monthly pay period. A calculation of the employee’s taxes
follows:
Pay Without
Pay With Imputed
Salary
Imputed Income
Income
$1,500.00
$1,500.00
Noncash Taxable
Fringe Benefit
Taxable Pay
50.00
$ 1,500.00
$1,550.00
Federal Income Tax
(35.55)
(43.05)
Social Security Tax
(63.00)
(65.10)
Medicare Tax
(21.75)
(22.48)
Non-cash Fringe
benefit
Net Pay
(50.00)
$ 1,379.70
$1,369.37
Fringe Benefits Cont.
Noncash fringe benefits
• Benefits must be recognized as income
• Taxable income requires all
income/employment taxes be withheld and
deposited.
• Employers must collect the tax from the
employee or PAY the tax on behalf of the
employee.
Fringe Benefits Cont.
Non-reportable Fringe Benefits
Most cases these benefits are not reported on W2. Benefits are so
small in value it is unreasonable or administratively impractical to
account for.
Section 132 benefits include:
• De minimis fringe benefits
– Occasional typing of a personal letter or use of phone for
personal use
– Occasional personal use of the copier (<15% of total use of the
machine)
– Occasional parties, donuts, coffee for employees
– Occasional tickets to the theater or sporting events
– Occasional supper money for working late
– Traditional holiday gifts like a turkey or a ham (Cash gifts, cards
or gift certificates that are treated like cash are taxable)
Fringe Benefits Cont.
No-Additional Cost Services
A good example of this is free flights for airline
employees or free telephone service for employees of AT
&T.
Qualified Employee Discounts
To qualify property and services must be offered
for sale to customers in the ordinary course of an
employer’s line of business.
– Discount is not greater than 20% of retail price
– Discount on property is not greater than the gross profit
earned on the property at the price normally sold to
customers.
Fringe Benefits Cont.
Working Condition Fringes
Business use of a company car or plane
Subscriptions to business periodicals
Fees to join professional organizations
Use of Athletic Facilities
Facility must be located on employee
premises, and operated by the employer. (If can
be used by public, exclusion does not apply.)
QUIZ TIME
COMPANY VEHICLES
 Business use of a vehicle is nontaxable
 Personal usage is taxable
 Accounting procedures for properly taxing
company vehicles require proper documentation
 Business miles driven
 Date of trip
 Purpose of trip
 Expenses incurred
COMPANY VEHICLES
 Reporting requirements – Personal usage
 Federal tax is optional
 SS/MED must be withheld
 Reported on the W2
 Reported at least once a year
 Fringe provided in November and December may
be reported in following year.
 This means that if the expense was incurred in
Nov or Dec 2012 you can report it in Jan 2013
when you do the 2012 W2’s
COMPANY VEHICLES
Valuation Method
 3 Safe Harbor Methods
o Annual Lease value method
o Cents per mile method
o Commuting Value method
**** WARNING!! Once you decide on a method it
MUST be used throughout the time the employee has
the vehicle!
COMPANY VEHICLES
Annual Lease Method
1.
Find the cars fair market value
2.
Use the table to find the Annual Lease Value (ALV)
3.
Divide the personal miles driven by the total driven
4.
Multiply the FMV by the personal miles driven.
*** REMEMBER: If the employee has the car less than a
year and more than 30 days you MUST pro-rate to get the
Annual Lease Value (ALV)
PRO-RATE FORMULA: ALV (number of days driven/365)
COMPANY VEHICLES
Safe Harbor 2 ***Cents per mile method***
o 2012 $0.555
 Vehicle put in service in 2012
 Under $15,900 value
 Fleet, under $21,100 or SUV fleet under $21,900
o Qualifications
 Business expectations use throughout the year
 Vehicle must be driven 10,000 miles annually
(including personal use) and be used primarily by
employees
COMPANY VEHICLES
Safe Harbor 3
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**Commuting Valuation Method**
Include $1.50 one way or $3.00 roundtrip if
company vehicle is (includes car pools):
Not by a “Control Employee”
Restricted to driving between work and home
Non-compensatory business reasons
Check your understanding
A salesperson drives a company owned vehicle
valued at $12,000. In the year, he logs 10,000
miles for business and 5,000 miles for personal
use.
1. Use the annual lease value method to
calculate the value of his personal use of the
vehicle.
Answer
Lease value of a $12,000 vehicle is $3,600.
$3,600 x 1/3 = $1,200.
Check your understanding
2. Determining the value of the salesperson’s
personal use of this vehicle using the cents-permile method based on 10,000 business miles
and 5,200 personal miles.
Answer
A: 5,200 x $0.5555 per mile = $2, 286.00
Check your understanding
3. What federal taxes, if any must the
salesperson’s employer withhold for his
personal use of the company vehicle?
a. Social Security tax and Medicare Only
b. Federal Income tax only
c. Federal income tax, social security tax
and Medicare tax
d. No taxes are required to be withheld
GTL- Group Term Life Insurance
o Group Term Life
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GTL>$50,000 is taxable income
Exempt from FIT Withholding
Taxable for SS/Med
Holds true even EE pays via cafeteria plan
Exempt from FUTA – Federal Unemployment Tax
Calculating the value excess GTL – Must use Chart
Calculating the Value of Excess GTL
1.
2.
3.
4.
Determine the amount of coverage
Amount of coverage minus $50,000 = Excess Coverage
Excess coverage/1,000 x Value from the Table =Taxable Value per month.
Taxable Value minus EE after tax contributions = Taxable value of GTL
per month.
EXAMPLE: Employee age 32
1. Coverage 30,000 x2 = $60,000 Amount of Coverage
2. $60,000 - $50,000 = $10,000 Excess Coverage
3. $10,000/$1,000 x .08 = $ 0.80 (.08 taken from chart)
4. $0.80 Benefit Value per month
5. $0.80 - $0.00 (EE Contrib) = $0.80 Taxable value of GTL per month
NOTE: Pretax contributions do not reduce the taxable value
After tax contributions cannot reduce the taxable value below $0
Dependent GTL
o Dependent GTL < $2,000 excluded as a de
minimis
o Dependent GTL > $2,000 includes entire
amount
o Fully Taxable Subject to all withholding
o If not withheld for SS/Med Employer is liable
for these amounts
o Exempt from FUTA
Deferred Compensation
Deferred Compensation Plans
Qualified Plans
401(K)
Non-Qualified Plans
403 (b)
457 (b)
Deferred Compensation
o Qualified vs. Non-Qualified Plans
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“Qualified” means not taxable
Deferral of current income until retirement
Qualified plans must meet provisions of IRS 401
Be written and communicated to employees
Exclusive benefit for employees or beneficiaries
Non Transferable, Non Forfeitable, (Vested)
Satisfy eligibility and vesting rules of employer
Cannot discriminate in favor of HCE, Officers,
Shareholders
 Benefits may vary based on tenure
Deferred Compensation
o 401 (k) – Qualified Plan
 2012 Maximum contribution
$ 17,000
 Catch Up Contribution (Age 50+) $ 5,500
 Non-Taxable for Federal or State Income Tax (except in
Pennsylvania)
 401(k) Taxable for Social Security/Medicare and usually for
403(b) and 457(b)
o Annual MAX on all plans combined is $50,000 in 2012
or 100% of eligible compensation whichever is less
 Employer Options
 Plans may offer:
 Employee match
 Ceilings for contributions
 Caps for matching
Deferred Compensation
o 403(b) Plan for tax-exempt organizations, as
Public Schools, Colleges, Universities, Religious
Groups, Charities..
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2012 Maximum Contributions $17,000
Catch Up Contribution $5,500
Non Taxable for Social Security/Medicare
2 plans available
 Tax Sheltered Annuities (TSAs)
 Tax deferred annuity issued by a life insurance company
 Tax Sheltered Custodial Accounts (TSCAs)
 Invested in mutual funds held by a qualifying custodian
Annual MAX on all plans combined is $50,000 or 100%
of eligible compensation whichever is less.
Deferred Compensation
o 457(b) Plan for Governmental Employees,
some tax exempt organizations
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Complete deferral of wages sometimes
2012 Max Contribution $17,000
Max Catch Up $5,500
Not Taxable for Federal Income Tax
May be taxable for Social Security/Medicare
Treated in some ways as a non-qualified plan
Non-Qualified Plans
o Non-Qualified Deferred Compensation
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Allows for discrimination in participation
Includes Written Agreement
No Federal tax until distribution
Generally taxable when services are performed
 NOTE: Always seek legal advice for these plans
Quiz Time
1. All of the following deferred compensation
plans limit the employee to making a deferral
contribution of $17,000 in 2012, EXCEPT:
a.
401(k)
b. 403(b)
c. 457(b)
d. Non-Qualified
Quiz
2. An employee may provide all of the following
features in a 401(k) plan EXCEPT:
a) Matching contributions
b) Lower ceilings on contributions
c) Higher benefits for highly compensated
employees
d) Catch up contributions
Quiz
3. A superintendent of schools who will be 49
years of age on December 31, 2012 earns
$100,000. His school district has a 403(b) plan.
What is the maximum that he can contribute to
this before taxes in 2012?
a)
b)
c)
d)
$16,000
$17,000
$22,000
$22,500
Quiz
4. Which of the following plans applies only to
employees of public schools, colleges, and
universities and public charities?
a)
b)
c)
d)
401(k)
403(b)
457(b)
Both b and c
Quiz
5. Payroll must withhold federal income tax from
a) Contributions to a 401(k) plans
b) Contributions to a 457(b) plans
c) Contributions to a non-qualified deferred
compensation plans
d) Contributions to Roth 401(k) plans
Section 125 Flexible Benefit Plans
Means to accommodate the diverse structures
of today’s Families
Known as cafeteria plans
Tax free benefits
Open enrollment times or life status change
(marriage, divorce, death, birth, new
employment)
Section 125 Flexible Benefit Plans
 Section 125 Benefits may include:
 Offer for cash vs. benefit (qualified nontax
benefit)
 Medical/Dental – single, spouse, family
 Long term care insurance
 Group term life insurance
o WARNING! If converted to cash this becomes taxable
 Disability/accident coverage
 Dependent care – limit of $5,000 or $2,500 if
Married and filing separately
Section 125 Flexible Benefit Plans
 Section 125 Cont…..
 Adoption assistance
 Vacation choices – buying additional time
 CODA – Cash or deferred arrangement (Only
401(k) plans, 403(b) and 457(b) plans cannot be
included)
 2 separate Flex accounts for qualified non covered
expenses and dependent care
 Health Savings accounts
Section 125 Tax Implications
 Cafeteria plans are not federal, social
security/Medicare taxable
 Remember 401(k) plans are the exception they
are taxable for SS/Med
 Exception: Cash received for selling of purchased
time, opting out of a benefit is fully taxable
 Flexible Spending Accounts (FSA) –
reimbursement fund previously mentioned –
pretax $$ to cover medical expenses that are not
eligible under plan
Flexible Spending Accounts
Flex Spending
 Use it or Lose it….Plain as can be
Employers must pay claim up to the annual
contribution election
Employer can utilize the remaining balances at
the end of a plan year for overhead and
administrative costs for the plan
QUESTIONS ???????