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Gross income is income from whatever
source derived (IRC section 61)
Fringe benefits or “perks” provided to
employees are included in income as wages
unless expressively exempted under the IRC
AP often issues checks to pay for fringe
benefits or reimbursements to employees or
contractors
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Wages are subject to tax withholding, FICA,
FUTA, W-2 reporting, state and local
withholding payroll taxes
Compensation to independent contractors is
reportable on Form 1099-MISC, Box 7
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No additional cost services
Qualified employee discounts
Working condition fringes
De minimis fringes
Qualified transportation fringes
Qualified moving expenses
Qualified retirement expenses
Qualified military base realignment and closure
fringes
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Non-Taxable Employee Expense
Reimbursements – Accountable Plan
 Accountable expenses
• Must have receipt
• Show business connection
 Non-Accountable expenses
• Per Diem Allowance - varies from city to city - see pub.
1542 from IRS
• Mileage reimbursement up to 56.5¢ per mile - anything
over must be taxed (Jan 1, 2013)
• De Minimis up to $75.00*
 Most “allowances” are taxable
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Cash - taxable
Gift Certificates – usually taxable
Tangible Property – nontaxable if de
minimis
Achievement Awards
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Safety or Service
Tangible property only
Up to $1600 –non-taxable if qualified plan
Up to $400 – non-taxable if not qualified
No-Additional-Cost Service
 Services offered for sale to customers in
ordinary course of business of the
employer in which the employee is
performing services
 Employer incurs no substantial
additional cost in providing service to
the employee
 Take lost revenue into consideration
when determining whether substantial
additional cost is incurred
Qualified Employee Discounts
 Discount given to employees on qualified
property that does not exceed profit
margin, or on qualified services that do not
exceed 20% of the price offered to
customers
 Qualified property or services - personal
property or services provided to customers
in the ordinary course of business
 Does not include real property or personal
property held for investment
Qualified Employee Discounts
 “Employee” includes current and former
employees who left because of
retirement or disability, and their
widow(er)s, spouses, and dependent
children
 Company discounts must be followed if
the employee is highly compensated (see
Notice 2007-87, 2007-45 I.R.B. 966)
 Qualified employee discounts must be
provided on a non-discriminatory basis
Working Condition Fringe
• Property or service provided to an
employee to the extent that, if the
employee paid the expense, it would be
deductable under IRC Sec. 162 or 167
• The term “employee” includes a current
employee, partner who performs services,
director, or independent contractor
Examples of
working condition
fringes
•Business
travel
•Business use of a company
car or airplane
•Chauffeur or body guard
provided for security
protection
•Club dues and membership
fees for professional
organizations
•Outplacement services
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Business use
◦ Substantiation
◦ Written policy
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Personal use
◦ Commuting
◦ De minimis
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Personal use by employee or family member
included in income
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Valuation depends upon primary purpose of flight
and whether employee is a “control employee”
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Value determined by FMV unless Standard
Industry Fare Level formula is elected
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In June 2007, proposed regulations issued (REG147171-05) relating to deduction for business use
of aircraft for entertainment purposes
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Must have a bona fide business-oriented
security concern and an overall security
program (24-hour basis or security study) for
the employee to exclude the excess of the
value of the transportation provided by the
employer over the amount that the employee
would have paid for the same mode of
transportation absent the bona fide security
concern
For air transportation, the phrase “same mode
of transportation” means comparable air
transportation
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Special rule for club dues disallows a
business deduction for membership
dues paid to a club organized for
business, pleasure, recreation, or
other social purposes:
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Country clubs
Golf and athletic clubs
Airline clubs
Hotel clubs
Clubs operated to provide meals under
circumstances that are not conducive to
business discussion
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If provided solely for executives,
outplacement services are not excluded
from gross income
The service must be provided to all
classes of employees:
◦ Level of service can differ greatly from that
provided to lower level employees (Revenue
Ruling 92-69, 1992-2 C.B. 51)
◦ Services must also meet requirements of a
working condition fringe benefit outlined in
IRC Sec. 132
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If the purchased or leased skybox is used
personally by the top executives of the
corporation, the value of the benefit will be
taxable income to the executives
Similarly, the costs of sports and
entertainment tickets
Even so, the company may lose the ability to
deduct the full costs unless FMV treated as
wages
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Special recordkeeping rules apply to
computers, except for those used exclusively
at the business establishment and owned or
leased by the person operating the business
Detailed records are required to establish
business use of computers that can be taken
home or are kept at home by the executives
There are no recordkeeping exceptions like
“no personal use” available for computers
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Small in value and infrequent in nature
Examples:
◦ Coffee, donuts, soft drinks
◦ Occasional meals or meal money provided to enable
an employee to work overtime
◦ Occasional parties or picnics for employees and
their guests
◦ Cash is never de minimis, no matter how little
 Cash ex.: Cash, gift cards, US savings bonds, vacation
travel certificates, etc.
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Meals furnished on the employer’s business
premises for the convenience of the
employer are excluded from income
Employer-operated eating facilities - Must
meet certain tests for the income to be
excluded as a de minimis fringe
◦ This income exclusion is available to highly
compensated employees only if the “direct
operating cost” test of Reg. Sec. 1.132-7(a)(1)(i) is
satisfied
◦ The nondiscrimination rules under Reg. Sec.
1.132-8 must also be met
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Qualified Transportation Fringe
• Only employees: The definition of
employees in this context does not include
partners, independent contractors, or 2%
shareholders of an S corporation
• Transportation in a commuter highway
vehicle between the employee’s residence
and place of employment
• Transit pass, voucher, token, fare card, or
reimbursement for them by the employer
Qualified Transportation Fringe
• Qualified parking
• 2013 exclusion from wages:
– $245 per month for combined commuter
highway vehicle transportation and
transit passes
– $245 per month for qualified parking
• Benefits more than the limit: If the
value of a benefit for any month is
more than its limit, include in the
employee’s wages the amount over
the limit minus any amount the
employee paid for the benefit
Qualified Moving Expense
Reimbursement
 Expenses that would be deductible
under IRC Sec. 217 if incurred by the
individual
 Must meet time and distance tests
 Cost of moving personal belongings and
traveling to new location only; no meals
and temporary lodging
 Brokerage fees, property taxes,
insurance, etc., are taxable wages
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Wealth Management - The use of financial
planning services is in lieu of compensation
and is usually a taxable fringe benefit
Qualified Retirement Planning - Beginning
with the year 2002, Sec. 132(a)(7) excludes
qualified retirement planning services from
gross income
◦ Services are defined as any retirement planning
advice or information provided to an employee
and his/her spouse by an employer maintaining a
qualified employer plan
◦ Employer may not discriminate in favor of highly
compensated executives
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No-cost or low-cost loans to employees
can be disguised compensation
Reg. Sec. 1.61-12(a) provides that, if an
individual performs services for a
creditor and the creditor in turn cancels
the debt, the debtor realizes income in
the amount of the debt as compensation
for services
Discharge of indebtedness income by an
employee from an employer under these
circumstances is includable in wages
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Factors that are indicative of a bona fide
loan are:
◦ Existence of a promissory note
◦ Cash payments according to a specified
repayment schedule
◦ Interest is charged
◦ Loan is secured by collateral
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IRC Sec. 7872 imputes interest on below
market loans
De minimis exception if loans, in
aggregate, do not exceed $10,000
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Sarbanes-Oxley
Personal loans to
officers and directors
of public companies
are banned by the
enactment of the
Sarbanes-Oxley Act
of 2002
Law does not apply
to private companies
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Accident and health benefits
Adoption assistance
Athletic facilities
Dependent care assistance
Educational assistance
Service achievement awards
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Group term life insurance
Health savings account
Lodging on business premises
Tuition reduction
Employee stock options
Golden parachute
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Employer may pay employee’s FICA tax
Payment of the FICA is a payment of
wages for FICA and income tax
purposes
Use the gross-up formula listed in Pub.
15-B
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Non-cash fringe benefits, such as personal
use of employer’s vehicle or a trip won by
high sales performed, fall under a special rule
for considering when paid:
◦ Employer may treat the benefit as paid in any pay
period, or on a quarterly, semi-annual or annual
basis
◦ All fringes provided in a calendar year must be
treated as paid by December 31 of that year
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If it is taxable to the employee:
◦ Accounts Payable may pay it but….
 They must report the payment to payroll so they can
tax the employee
◦ Payroll may pay it and….
 They must properly tax the employee for the benefit
Webinar Disclaimer
This webinar is from an auditor’s point of view. It is possible your
company attorney may disagree with our interpretation. That
is okay. It does not mean we are right or that we have given
you wrong information. You may have an exception to the rule
that your attorney knows about.
IRS Circular 230
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Any tax advice included in this written or electronic communication was
not intended or written to be used, and it cannot be used by the
taxpayer, for the purpose of avoiding any penalties that may be imposed
on taxpayer by any governmental taxing authority or agency.
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