ABOUT YOUR FACILITATOR MICHAEL PAPPAS, CPP

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1 Institute for Professional Development Payroll Basics Seminar-June 26, 2015 Jumping Brook Country Club Neptune, NJ PAYROLL BASICS Employer-Employee Relationship Wage & Hour Laws Taxable & Non-taxable Income ABOUT YOUR FACILITATOR MICHAEL PAPPAS, CPP CERTIFIED PAYROLL PROFESSIONAL (CPP) SINCE 1995 PAYROLL CONSULTANT SINCE 2002 PRIOR TO 2002 WORKED IN THE SECURITIES INDUSTRY FOR SEVERAL FIRMS MANAGING PAYROLL OPERATION RANGING FROM 2,000 TO 25,000 EMPLOYEES MEMBER OF THE AMERICAN PAYROLL ASSOCIATION S (APÅ) NATIONAL SPEAKERS BUREAU FROM 2007 TO 2013 MEMBER OF THE BOARD OF CONTRIBUTING WRITERS FOR PAYTECH MAGAZINE PRESIDENT OF THE NEW YORK METRO CHAPTER-APA PRESIDENT OF JERSEY SHORE CHAPTER-APA CHAIRPERSON OF THE NEW JERSEY STATEWIDE PAYROLL CONFERENCE

2 EMPLOYER-EMPLOYEE RELATIONSHIP Identifying an employee Employment status determined by law State Law method of determining an employee FLSA employee classifications 3 IDENTIFYING AN EMPLOYEE WHY IS IT NECESSARY? If an employee, employer must: Report all compensation paid to the employee (Form W-2), as well as Withhold, remit & report Social Security, Medicare, federal, state & local taxes, and Match & remit Social Security & Medicare taxes, and pay federal & state unemployment tax (public sector employers are exempt from unemployment taxes) If not an employee no withholding required just reporting of compensation paid (Form MISC) 4 2

3 EMPLOYMENT STATUS BY LAW HOW DO YOU DETERMINE STATUS? IRS uses Common Law Test which uses 3 factors: Behavioral Control Does the company control or have the right to control what the worker does and how the worker does the job? Financial Control Are the business aspects controlled by the payer? Type of Relationship Is it a continuing relationship and is work performed a key aspect of the business? Are there employee benefits? (see appendix for examples) 5 EMPLOYMENT STATUS BY LAW IF NOT SURE OF STATUS: File Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding Form may be filed by employer or employee. IRS will review facts and circumstances and officially determine the worker s status. 6 3

4 EMPLOYMENT STATUS BY LAW REASONABLE BASIS TEST 530 of the Revenue Act of 1978 says Employer may treat an employee as an independent contractor if it has a reasonable basis for doing so. Reasonable basis may be any one or more of the following or any other reasonable basis: a court decision, IRS published ruling to support your position, IRS technical advise sent to employer, a private letter ruling a prior IRS audit, a long standing practice in your industry, OR demonstrate, in some other manner, any other reasonable basis for treating worker as an independent contractor 7 EMPLOYMENT STATUS BY LAW The Internal Revenue Code deems some individuals to be employees or independent contractors regardless of their classification under the Common Law or Reasonable Basis tests So, an individual normally classified as an independent contractor is now a STATUTORY EMPLOYEE, and an individual normally classified as an employee is now a STATUTORY NON-EMPLOYEE 8 4

5 EMPLOYMENT STATUS BY LAW STATUTORY EMPLOYEES A full-time traveling or city salesperson who solicits orders from wholesalers, restaurants, or similar establishments on behalf of a principal. The merchandise sold must be for resale (e.g., food sold to a restaurant) or for supplies used in the buyer's business; A full-time life insurance agent whose principal business activity is selling life insurance and/or annuity contracts for one life insurance company; An agent-driver or commission-driver engaged in distributing meat, vegetables, bakery goods, beverages (other than milk), or laundry or dry cleaning services; and A home worker performing work on material or goods furnished by the employer. 9 EMPLOYMENT STATUS BY LAW STATUTORY EMPLOYEES GENERAL REQUIREMENTS: The service contract states or implies that substantially all the services are to be performed personally by the individual. The individual does not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities). The services are performed on a continuing basis for the same employer When all these requirements are met the employer must withhold, match and remit Social Security and Medicare taxes, and generally pay FUTA & SUI taxes (exception full-time insurance salesmen if ALL earnings are from commissions) 10 5

6 EMPLOYMENT STATUS BY LAW STATUTORY NON-EMPLOYEES Direct sellers Persons engaged in selling or soliciting the sale of consumer products in the home or place of business, other than permanent retail establishments, or to any buyer on a buy-sell, a depositcommission, or similar basis for resale in the home or at a place of business, other than a permanent retail establishment. This category also includes persons in the business of distributing or selling newspapers or shopping news, including related services Licensed real estate agents This category includes those engaged in appraisal for real estate sales, provided they earn income based on sales or other output. Certain companion sitters This category includes individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. 11 EMPLOYMENT STATUS BY LAW GENERAL REQUIREMENTS Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked, and Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes. When all these requirements are met the employer may treat these individuals as independent contractors Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes 12 6

7 STATE LAW METHOD OF DETERMINING AN EMPLOYEE For Unemployment Insurance more than half of the states will use the ABC test instead of the Common Law test to determine employment relationship status. Some of those states will only apply 2 of the 3 criteria to make that decision. New Jersey uses the ABC test 13 STATE LAW METHOD OF DETERMINING AN EMPLOYEE The ABC Test: Absence of Control The individual has been and will continue to be free from control or direction over the performance of the service, both under his contract of service and in fact Business is away and/or unusual The service performed is either outside the usual course of the business for which the service is performed, or that the service is performed outside of all the places of business of the enterprise for which the service is performed Customarily an independent contractor The individual is customarily engaged in an independently established trade, occupation, profession or business. If the individual meets all of this criteria the individual will be considered an independent contractor 14 7

8 STATE LAW METHOD OF DETERMINING AN EMPLOYEE For Worker Compensation, the State of New Jersey courts uses two tests to determine employment relationship: the right to control test, and the relative nature of the work test In recent years, the courts have placed a greater reliance on the relative nature of the work test. 15 STATE LAW METHOD OF DETERMINING AN EMPLOYEE The Right to Control Test The employer had the right to direct the manner in which the business or work shall be done, as well as the results accomplished. The requirement of control is sufficiently met where its extent is commensurate with that degree of supervision which is necessary and appropriate, considering the type of work to be done and the capabilities of the particular person doing it. The Relative Nature of the Work Test The court must determine: (1) whether the work performed by worker was an integral part of the regular business of the employer; and (2) whether the worker demonstrated substantial economic dependence upon the employer. If this type of relationship existed then the worker is deemed to be an employee. 16 8

9 FLSA EMPLOYEE CLASSIFICATIONS The Fair Labor Standards Act (FLSA) requires that all employees are to be paid a minimum wage and an overtime premium equal to 50% of their Regular Rate of Pay for all hours worked over 40 in a workweek unless they meet one of the Exempt Employee tests. The Exempt (or White collar) categories are: Administrative Executive Professional Computer-related professional, and Outside Salesperson Job title has no weight. The determination is made based on: Employee s primary duties, Employee s level of discretion, and Whether a minimum salary requirement is met (see appendix for examples & exceptions) 17 FLSA EMPLOYEE CLASSIFICATIONS ADMINISTRATIVE EMPLOYEE: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week (in NJ it is $400 per week & includes commissioned salespeople) The employee s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer s customers; and The employee s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. 18 9

10 FLSA EMPLOYEE CLASSIFICATIONS EXECUTIVE EMPLOYEE: The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week; The employee s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and The employee must have the authority to hire or fire other employees, or the employee s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight. 19 FLSA EMPLOYEE CLASSIFICATIONS LEARNED PROFESSIONAL EMPLOYEE: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week; The employee s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; The advanced knowledge must be in a field of science or learning; and The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction. Salary requirement does not apply to teachers and employees practicing law or medicine 20 10

11 FLSA EMPLOYEE CLASSIFICATIONS CREATIVE PROFESSIONAL EMPLOYEE: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week; The employee s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. 21 FLSA EMPLOYEE CLASSIFICATIONS COMPUTER-RELATED PROFESSIONAL EMPLOYEE The employee must be compensated either on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour; (Not Applicable in NJ) The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below; The employee s primary duty must consist of: 1. The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; 2. The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; 3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or 4. A combination of the aforementioned duties, the performance of which requires the same level of skills

12 FLSA EMPLOYEE CLASSIFICATIONS OUTSIDE SALESPERSON EMPLOYEE: The employee s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and The employee must be customarily and regularly engaged away from the employer s place or places of business. There is no minimum salary requirement. 23 WAGE & HOUR LAWS Workweek Hours Worked Regular Rate of Pay Overtime Calculation Compensable Time Issues 24 12

13 WORKWEEK A workweek is ANY fixed and regularly recurring 7 consecutive 24 hour periods (168 hours). Does not have to coincide with calendar week. Can start on any day of the week at any time during the day. May change the workweek if change is intended to be permanent and not designed to evade the overtime requirement. May establish different workweeks for different facilities or groups of employees. Each workweek stands alone and is the longest period of time used in determining overtime. 25 WORKWEEK CHANGING THE WORK WEEK Can be necessitated by many different business forces Must follow certain steps to ensure FLSA standards are met Assume that the overlapping hours were worked in only the "old" workweek, compute FLSA straight-time and overtime pay due for each of the workweeks, and then total the sums; Perform the same calculation assuming instead that the overlapping hours were worked in the "new" workweek; and Pay the employee the greater of the two totals. (see example in appendix) 26 13

14 WORKWEEK FLSA Exemption to the workweek (8/80 rule) for Hospitals & Nursing Homes May use a fixed consecutive 14-day period to determine overtime compensation Must meet following conditions: employer must have a prior agreement or understanding with the affected employees before the work is performed. must pay employee overtime rate for all hours worked in excess of 8 in a workday or 80 in a fourteen-day period whichever results in a higher pay for the employee. 27 HOURS WORKED Under FLSA: Employee s overtime calculation is based on ALL hours physically worked. Do not have add into the calculation any holidays, vacation days, sick days, etc. when calculating if employee worked over 40 hours in the workweek. This does not preclude employer from doing so under company policies. Overtime payments cannot be offset by any payments for hours not worked. Example: John work 12 hours a day for 4 days and had the 5th day off as a paid holiday. John is entitled to be paid for 8 hours of overtime and the holiday pay may not be used to offset the overtime payment 28 14

15 REGULAR RATE OF PAY What is Regular Rate of Pay? The regular rate includes an employee s hourly rate plus the value of some other types of compensation such as nondiscretionary bonuses and shift differentials. It also includes the value of any non-cash payments, such as meals, lodging, etc. The only remuneration excluded from the regular rate under the FLSA are certain specified types of payments like discretionary bonuses, gifts, contributions to certain welfare plans, payments made to certain profit-sharing and savings plans, and pay for foregoing holidays and vacations. Why do we need to know the Regular Rate of Pay? In order to calculate the additional 50% premium for all nonexempt employees who work more than 40 hours in a workweek. 29 REGULAR RATE OF PAY How do you calculate Regular Rate of Pay? The regular rate of pay is the average hourly rate calculated by dividing the total pay for employment (except the statutory exclusions) in any workweek by the total number of hours actually worked. In general, hours worked includes all time an employee must be on duty, or on the employer's premises or at any other prescribed place of work. Also included is any additional time the employee is suffered or permitted (i.e., allowed) to work

16 REGULAR RATE OF PAY Examples: Alan is paid $12 per hour for working the 1 st shift and an additional $1 per hour for 2 nd shift work. During the week Alan worked 20 hours on the 1 st shift and 22 hours on the 2 nd shift. Alan Regular Rate of Pay is calculated as follows: $12 x 20 hrs = $240 + $13 x 22 hrs = $286 Totaling $526 $526 / 42 hrs = $12.52 (Alan s Regular Rate of Pay) Jane is paid $10 per hour and works 44 hours during the week. She also receives a production bonus of $48 for exceeding her quota. Jane s Regular Rate of Pay is calculated as follows: $10 x 44 hrs= $ $484 / 44 = $11 (Jane s Regular Rate of Pay) 31 REGULAR RATE OF PAY How do you calculate the Regular Rate of Pay for a salaried nonexempt person? Take weekly salary and divide it by 40 hours Example: Betty is paid $500 per week for a 40 hour workweek. Calculation: $500/40 = $12.50 (Betty s Regular Rate of Pay) 32 16

17 OVERTIME CALCULATION Under FLSA, every non-exempt individual must be paid an overtime premium for all hours physically worked over 40 hours in a workweek. The premium is set to be 50% of the individual s Regular Rate of Pay. Let s do some calculations: Arthur is paid $12 per hour and works 43 hours during the workweek. What is Arthur s total weekly compensation? Calculation: 43 x $12 = $516 $516/43 = $12 (ROR) x 50% = $6 $6 x 3 = $18 $ = $534 (see more examples in appendix) 33 COMPENSABLE TIME ISSUES In the private sector, there is no such thing as compensatory time off. An employee must be paid for every hour worked. In the public sector, there is compensatory time off for non-exempt employees at the rate of 1½ hours for each hour of overtime worked as long as certain conditions are met. They are: Agreement must be in effect prior to worked being performed Employee must be given time off within a reasonable period of time after request taking into consideration work schedule, staffing requirements and available substitutes. Payment for comp time for terminated employee must be at the greater of the employee s rate at the time of termination or the employee s average rate over the last 3 years

18 COMPENSABLE TIME ISSUES With certain exceptions public employee may only accumulate 240 hours of compensatory time (160 hours of overtime hours) Exceptions to hours are: public safety, emergency response and seasonal employees. Firefighters (includes paramedics, emergency medical technicians, rescue workers, ambulance personnel, and hazardous material workers trained and engaged in fire prevention and suppression or respond to emergency situations) and police are not subject to overtime or compensatory time off until the ratio of hours worked to number of days worked in the work period exceeds a certain ratio. (see appendix for ratios on each category) 35 COMPENSABLE TIME ISSUES UNAUTHORIZED OVERTIME & OFF-THE-CLOCK WORK If the employee works unauthorized overtime, the employee must receive overtime pay for all hours worked, but can be disciplined for violating the employer s policy. Employees coming in early or staying late to finish work must be compensated for those hours, provided that the employer knew or should have known the employee was working: Pre-shift time setting up equipment. Post-shift time dropping off mail or packages on the way home or other work-related activities

19 COMPENSABLE TIME ISSUES MEAL PERIODS Bona fide meal periods are not work time and need not be compensated. Bona fide meal periods do not include coffee breaks or time for snacks. Employee must be completely relieved from duty for the purposes of eating regular meals. Ordinarily 30 minutes or more is long enough for a bona fide meal period (NJ follows federal rules). It is not necessary that an employee be permitted to leave the premises if he/she is otherwise completely freed from duties during the meal period. Employee is not relieved if he/she is required to perform any duties, whether active or inactive, while eating. i.e., An office employee who is required to eat at his desk and stand by for a call is not relieved of his duties 37 COMPENSABLE TIME ISSUES REST PERIODS Breaks lasting from five to 20 minutes are considered part of the workday, for which employees must be paid. Employers usually give breaks to promote efficiency of the employee 38 19

20 COMPENSABLE TIME ISSUES WAITING TIME Compensable Waiting Time (also referred to as Engaged to be Waiting ): Employee is not able to use the time effectively for his/her own purposes. Time is controlled by and belongs to the employer Example: Truck driver told to wait on premise while truck is being repaired. Non-compensable Waiting Time (also referred to as Waiting to be Engaged ): Employee is completely relieved from duty and able to use the time effectively for his/her own purposes. Employee must be told in advance that he/she may leave the job and will not have to commence work until a specified hour Example: Same truck driver but told to come back in 4 hours when truck is ready. 39 COMPENSABLE TIME ISSUES ON-CALL TIME Compensable On-Call Time: An employee is required to remain on employer s premises, or so close that he/she cannot use the time effectively for his/her own purposes. Non-Compensable On-Call Time: An employee is not required to remain on the premises and just needs to tell employer where they can be reached. Be careful with this issue. The greater the restrictions in regard to response time, allowed geographic area, frequency of calls and personal activities, the more likely the on-call time is compensable

21 COMPENSABLE TIME ISSUES LECTURES, MEETINGS, AND TRAINING PROGRAM ATTENDANCE Attendance at lectures, meetings, training programs and similar activities are NOT working time if the following criteria are met: Attendance is outside employee s regular working hours; Attendance is voluntary; Course, lecture, or meeting is not directly related to the employee s job; and Employee does not perform any productive work during such attendance. 41 COMPENSABLE TIME ISSUES LECTURES, MEETINGS, AND TRAINING PROGRAM ATTENDANCE (cont d) If attendance is not voluntary, it is compensable time. Is it directly related to employee s job? If designed to help employee handle his/her job more effectively, it is related to the job. If it is training for another job or a new or additional skill, then it is not job-related even if the course incidentally improves skills in doing regular work. Independent training, courses and college after hours are not compensable time. If employer offers a lecture or training session for the benefit of employees, voluntary attendance outside of work hours is not hours worked, even if it is job-related or paid for by employer

22 COMPENSABLE TIME ISSUES MEETINGS AND CONVENTIONS Non-exempt employees must be compensated for all hours worked at an organization s meeting or convention. Attendance at a meal during a conference is not hours worked if held outside normal working hours and attendance is purely voluntary. Employee must not be led to believe that nonattendance would adversely affect his or her employment. Free time spent at hotel is not compensable time even though the employee is only there because of business 43 COMPENSABLE TIME ISSUES INTERNS The U.S. DOL has released a six-part test to help determine whether an individual qualifies as an intern instead of an employee. Individuals qualify as interns if each of the following criteria are satisfied: The internship, even though it includes actual operation of employer facilities, is similar to training given in an educational environment; The internship experience is for the benefit of the intern; Intern does not displace regular employees, but works under close supervision of existing staff; 44 22

23 COMPENSABLE TIME ISSUES INTERNS (cont d) Employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded; Intern is not necessarily entitled to a job at the conclusion of the internship; and Employer and the intern understand that the intern is not entitled to wages for the time spent in the internship (note: tuition assistance and nominal stipends for students are not considered wages for purposes of this criterion) 45 COMPENSABLE TIME ISSUES INTERNS (cont d) Key considerations of whether an individual is an intern or employee: Did the individual contemplate receiving compensation for the work? Did the employer receive an immediate advantage from the work completed? NOTE U.S. DOL draws distinction between for-profit and non-profit orgs: Unpaid internships in the public sector and for non-profit charitable organizations, where intern volunteers without expectation of compensation, are generally permissible

24 COMPENSABLE TIME ISSUES INTERNS (cont d) Intern who receives academic credit from his/her educational institution for completion of internship with the employer will easily qualify as a intern/ trainee. Examples when an intern will not be considered a trainee: Intern is used to substitute for regular workers or to supplement the employer s work force. But for the intern, the employer would have hired additional employees or asked its existing staff to work additional hours. The intern is engaged in the employer s routine operations and/or the employer is dependent on the intern s work. 47 COMPENSABLE TIME ISSUES TRAVEL TIME Governed by The Portal to Portal Act of 1947 & applies to all employees covered by FLSA Travel to and from work is not considered work time regardless of traveling to a fixed location or different jobs sites Exception to this rule is when: Employee called from home to work for emergency situation and must travel a substantial distance to get there. Employee who regularly works at a fixed location in one city is given a special one-day work assignment in another city. Travel time that is not part of employee s ordinary commute is compensable time

25 COMPENSABLE TIME ISSUES TRAVEL AWAY FROM HOME Travel that keeps employee away from home overnight is travel away from home. Travel away from home is compensable time when it cuts across employee s workday. Employee is simply substituting travel for other duties. The time is not only hours worked on regular working days during normal working hours but also during the corresponding hours on non-working days. If an employee regularly works from 9:00 a.m. to 5:00 p.m. from Monday through Friday, the travel time during these hours is work time on Saturday and Sunday as well as on the other days. Regular meal period time is not counted. 49 COMPENSABLE TIME ISSUES TRAVEL AWAY FROM HOME (cont d) U.S. DOL has said it will not consider as working time the time spent in travel away from home outside of regular working hours as a passenger on an airplane, train, boat, bus, or automobile. Example: Employee normally works from 9:00 a.m. 5:00 p.m., and has a flight leaving at 5:00 p.m. from Washington, DC to a conference in New York and will then be taken by cab to the hotel from the airport, the two hours or so of this trip are not counted as working time. However, if employee is offered public transportation but requests permission to drive his/her car instead, employer may count as hours worked either the time spent driving the car or the time it would have had to count as hours worked during working hours if the employee had used the public mode of transportation

26 COMPENSABLE TIME ISSUES PRELIMARY AND POSTLIMARY ACTIVITIES The Portal to Portal Act of 1947 says that activities before or after an employee s principal work activity are not compensable unless a contract or the custom of the employer makes them so. That means that time spent before and after working changing clothes is not compensable unless the work clothes are an integral part of the work activity. The same applies to cleanup before and after work. Example: Sam works at a chemical plant and must wear protective gear in order to not be exposed to the effects of the chemical. At the end of Sam s shift he must remove the clothes and be washed down to make sure none of the chemicals have transferred to his body. All this time would be compensable. 51 COMPENSABLE TIME ISSUES MISCELLANEOUS ISSUES Time Waiting for/receiving Medical Attention: Time spent waiting for and receiving medical attention on the premises or at the direction of employer during employee's normal working hours on days when he/she is working constitutes hours worked. Remedial Education: An employer who provides remedial education to its workers may employ the worker for up to10 hours over the 40 hour workweek and pay only straight-time rather than overtime. In order to meet this exemption the program must: Be for employees who have not graduated high school or attained an eighth grade level education, Provide reading and other basic skills at the eighth grade level or below, and Not include job specific training 52 26

27 TAXABLE & NON-TAXABLE COMPENSATION Determining what is income Non-taxable fringe benefits Taxable fringe benefits 53 DETERMING WHAT IS INCOME The Internal Revenue Code broadly defines gross income as: compensation for services, including fees, commissions, fringe benefits and similar items. It also broadly defines wages as: all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash

28 DETERMINING INCLUDABLE AMOUNT OF NON-CASH BENEFIT Determine Fair Market (FMV) Value of Benefit. FMV is the amount an individual would pay for the benefit in the open market at an arms length transaction. Subtract from the FMV any amount the employee paid for the benefit with after-tax dollars. (EPA) Subtract from the FMV any amount excludable by law (AEL). The balance is the amount included in the employee s income (IFBA). Formula: FMV - (EPA + AEL) = IFBA 55 DETERMINING INCLUDABLE AMOUNT OF NON-CASH BENEFIT Example: Oscar s employer pays for Oscar to park his car in a commercial parking lot. The cost of the monthly parking is $ Oscar pays $40.00 per month toward the cost with after-tax dollars and in 2014 the amount excludable by law is up to $ per month. The amount included in Oscar s income each month is: $ ($ $40.00) = $

29 NON-TAXABLE FRINGE BENEFITS No additional cost services Qualified employee discounts Qualified transportation expenses Qualified Moving Expenses Qualified retirement planning expenses Working Condition Fringes De minimis fringes On premises athletic facilities 57 NO ADDITIONAL COST SERVICES Employees can take advantage of employer services with no tax consequences when these same services are sold to customers as part of the employer s regular line of business. Certain conditions apply: The free service must be one that is regularly offered for sale to customers (not employees) in the everyday course of the employer s business in which the employee works. The employer bears no substantial additional cost, such as lost revenue and additional labor. The service is available on equal terms to each member of a group of employees and does not discriminate in favor of highly compensated employees. Employees also include former employees who have left due to retirement or disability, including their widow(ers), spouses and dependent children. Examples include: Free or reduced-price standby travel to employees of an airline company Free telephone service to employees of a telephone company 58 29

30 QUALIFIED EMPLOYEE DISCOUNTS Employers may offer discounted goods or services to employees without adding the fair market value of the discounts to the employees income if the discount on goods does not exceed the gross profit percentage when the goods are sold to customers. (Total Sales Cost of Goods Sold) / Total Sales The discount on goods may not exceed 20% of the price the goods are offered to customers. Any excess discount is considered taxable income to the employee. The goods and services must be offered to customers in the line of business in which the employee normally works. The discount is available on equal terms to each member of a group of employees and does not discriminate in favor of highly compensated employees. Real estate, including investment properties, does not qualify for the discount. Neither does personal property held for investment purpose, i.e., stocks, bonds & currency. Employees also include former employees who have left due to retirement or disability, including their widow(ers), spouses and dependent children. 59 QUALIFIED TRANSPORTATION EXPENSES Employer-provided qualified transportation benefits may be excluded from the income of an employee up to certain limits. The qualified benefits include: Transportation between home and work in a commuter highway vehicle provided by the employer (e.g. vanpool) if: The vehicle seats at least 6 people, not including the driver; At least 80% of the vehicle s mileage can be expected to be for commuting; and, At least ½ of the vehicles seating capacity is used by employees. The excluded benefit is limited to a maximum of $130 per month (Congress passed bill in Dec 2014 to raise amount to $250 per month retro to 1/1/2014 but only for 2014). Transit passes, vouchers, tokens, fare cards or reimbursement for them by the employer to a limit of $130 per month. (Congress passed bill in Dec 2014 to raise amount to $250 per month retro to 1/1/2014 but only for 2014)

31 QUALIFIED TRANSPORTATION EXPENSES (cont d) Parking provided on or near the employer s premise or a park & ride facility where the employee uses mass transportation, a van pool, a car pool or other means to commute to work, up to a maximum limit of $250. Bicycle commuting was added in 2009, with the following requirements: reasonable expenses incurred by the employee during the calendar year for commuting to work. Reasonable expenses include: The purchase of a bicycle, and Bicycle improvements, repair, and storage. These are considered reasonable expenses as long as the bicycle is regularly used for travel between the employee's residence and place of employment. 61 QUALIFIED MOVING EXPENSES A qualified moving expense includes the direct cost of moving household goods and personal effects, as well as travel and lodging expenses for moving from the old home to the new home. It does not include any other moving expenses, including the cost of meals during your travel from your old home to your new home 62 31

32 QUALIFIED RETIREMENT PLANNING EXPENSES You may exclude from an employee's wages the value of any retirement planning advice or information you provide to your employee and/or his/her spouse if: you maintain a qualified retirement plan as defined in section 219(g)(5) of the Internal Revenue Code. In addition to employer plan advice and information, the services provided may include general advice and information on retirement. However, the exclusion does not apply to services for tax preparation, accounting, legal, or brokerage services. You cannot exclude from the wages of a highly compensated employee retirement planning services that are not available on the same terms to each member of a group of employees normally provided education and information about the employer's qualified retirement plan. 63 WORKING CONDITION FRINGE BENEFITS The value of property or service provided to employees by an employer is excluded from gross income if the employees would have been allowed to deduct such expenses under I.R.C. 162 or 167 if they had paid for them. To be non-taxable the following conditions must be met: The property or services must be related to the employer s business. The employer must maintain the required records to substantiate the the business deductions. The term employee means current employee, partner, director or independent contractor performing services for the employer. Examples: Business use of a company car Dues and membership fees to professional organizations Subscriptions to business periodicals Job-related education 64 32

33 DE MINIMUS FRINGE BENEFITS In general, a de minimis benefit is one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. These include such items as: Controlled, occasional employee use of photocopier Occasional snacks, coffee, doughnuts, etc. Occasional tickets for entertainment events Holiday gifts Occasional meal money or transportation expense for working overtime Personal use of a cell phone provided by an employer primarily for business purposes Whether an item or service is de minimis depends on all the facts and circumstances. In determining whether a benefit is de minimis, you should always consider its frequency and its value. 65 DE MINIMUS FRINGE BENEFITS If a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. Cash or cash equivalent items provided by the employer are never excludable from income. An exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable

34 ON PREMISE ATHLETIC FACILITIES You can exclude the value of an employee's use of an onpremises gym or other athletic facility you operate if substantially all use of the facility during the calendar year is by employees, their spouses, and their dependent children. For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, has not attained the age of 25. To be excluded the following requirements must be met: The athletic facility must be located on premises the employer owns or leases. It does not have to be located on the business premises. However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort. Employees also include former employees who have left due to retirement or disability, including their widow(ers), spouses and dependent children, leased employee who has provided services on a substantially full-time basis for at least a year if the services are performed under the employer s primary direction or control, and a partner who performs services for a partnership. 67 TAXABLE FRINGE BENEFITS Personal use of employer-provided car and/or aircraft Discounts on property or services Club memberships Life Insurance Moving expenses Educational Assistance Adoption Assistance Employer business expense reimbursement Employer provided meals & lodgings Advance & Overpayment Awards & Prizes Back Pay Bonuses Employer-paid taxes (Gross-up) Golden Parachutes 68 34

35 SPECIAL ACCOUNTING RULE FOR NON-CASH FRINGE BENEFITS The value of non-cash fringe benefits added to an employee s Form W-2 may be accounted for using the Special Accounting Rule. You may count the value of these benefits provided in the months of November & December of current year as part of the following year. Use of the special accounting rule is optional, and you can elect to use the rule for some benefits but not others. You may cut off at the end of October for some and others at the end of November. This rule does not apply to the value of Group-term Life insurance and the non-qualified moving expense reimbursements. Once you institute this rule for a benefit, you must use it for all employees that receive the benefit. You are also required to notify your employees that you are using this rule. 69 PERSONAL USE OF EMPLOYER- PROVIDED CAR The value of the personal use of a company-provided vehicle is included with wages as compensation and reported on the employee s W-2. There are several exceptions: De minimus use of a car used primarily for business. Qualified non-personal use vehicle: car would be unlikely to be used for personal business. Demo vehicle for a full-time automobile salesperson. There are 4 methods that can be used for valuing the personal use of a company-provided vehicle: General valuation Leased value Cents-per-mile Commuting value 70 35

36 PERSONAL USE OF EMPLOYER- PROVIDED CAR GENERAL VALUATION METHOD Under this method, the value of a fringe benefit is its fair market value. The fair market value (FMV) of a fringe benefit is the amount an employee would have to pay a third party in an arm s length transaction to buy or lease the benefit. If this method is used the employer probably will include the entire amount as income to the employee. The employee would have to adjust his gross income on his tax return to reduce his gross income by the amount that would be considered for business use. It is more likely the employer would use one of the three Special Valuation methods: Annual Lease Value method Cents-per-mile method Commuting method 71 PERSONAL USE OF EMPLOYER- PROVIDED CAR Rules for using Special Valuation Methods: If using the Annual Lease value or Cent-per-mile method, it must be used in all subsequent years vehicle is provided to employees. Do not have to use same valuation method for all vehicles provided to employees. Employee must use same method on his/her tax return as used by employer. If one vehicle provided to more than one employee, employer must use same valuation method for all employees using vehicle and allocate vehicle s use based on facts of situation. All employees should keep a log of business and personal use of vehicle than should at least include the following: Date of use Mileage at beginning Mileage at end Business purpose 72 36

37 PERSONAL USE OF EMPLOYER- PROVIDED CAR ANNUAL LEASE VALUE METHOD Determine the FMV of the vehicle on the first date it is available for use by an employee. Using the IRS Annual Lease Value table read down column (1) until you come to the dollar range within which the FMV of the automobile falls. Then read across to column (2) to find the annual lease value. Determine personal use percentage of vehicle based on personal use miles as a percent of total miles use. Multiply the Annual Lease value from the table by that percentage to get value of personal use. If employee was not reimbursed for gas than add that amount to employees income for tax purposes. If employer paid for gas multiply the personal use miles by 5.5 and add that to employee s income as well. 73 PERSONAL USE OF EMPLOYER- PROVIDED CAR CENTS-PER-MILE METHOD May use this method if: Employer expects vehicle to be used primarily for business or vehicle is driven at least 10,000 a year and is used primarily by employees FMV of vehicle is not greater than $16,000 for 2015 Personal miles driven are multiplied by standard mileage rate (.575 for 2015 ). Example: Sam uses a company car with a FMV of $15,500. The car is driven 12,300 for the year and Sam s personal miles amount to 4,000. Amount added to Sam s income is 4,000 x.575 = $2, If employee pays for gas may deduct.055 from the calculation 74 37

38 PERSONAL USE OF EMPLOYER- PROVIDED CAR COMMUTING VALUE METHOD Personal use for commuting can be valued at $1.50 each way if all of the following conditions are met: The vehicle is owned or leased by the employer. The vehicle is provided to the employee for use in the business. The employer requires the employee to commute in the vehicle for a bona fide non-compensatory business reasons: The employer has a written policy prohibiting personal use other than commuting The employee does not use the vehicle for other than de minimis personal use. The employee who uses the vehicle is not a control employee. If more than one employee commutes in the vehicle, the $1.50 each-way rule applies to each employee. [Reg (f)] 75 PERSONAL USE OF EMPLOYER- PROVIDED AIRCRAFT The IRS allows employers to choose between two different methods. The fair market value or charter value of the flight. This method looks at the cost of chartering the same or comparable aircraft for the same or comparable flight. Determine the value of the flight using a formula that the IRS calls the Standard Industry Fare Level (SIFL). The SIFL method is based on the distance traveled, size of the aircraft, the number of people accompanying the employee, and a multiple that is higher or lower depending on whether the employee is classified as control or non-control. There are numerous other considerations, which are addressed in NBAA s Personal Use of Employer-Provided Aircraft Handbook. This is the more common method 76 38

39 CLUB MEMBERSHIPS Under the Omnibus Budget Reconciliation Act of 1993 company funds may be used to pay individual memberships and dues to clubs organized for business, pleasure, recreation, or other social purposes. These may include country clubs, golf and athletic clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Memberships or dues & expenses paid by the employer or reimbursed to the employee are taxable income to the employee, except for the portion of the membership or dues and expenses that is business related. The business purpose must be substantiated by the employee. 77 DISCOUNTS ON PROPERTY OR SERVICES These are items that do not fall under the Qualified Employee Discount (QED) exception: They are: All discounts in excess of the percentage allowed for goods or services under the QED exception. Residential or commercial real estate bought for any purpose. Personal property normally held for investment purpose, e.g., stock, bonds and currency Discounts on property or services not offered for sale to customer but primarily sold to employees and their families, e.i., company store Property or services provided by another employer pursuant to a written reciprocal agreement that exists between employers to provide discounts on property and services to employees of the other employer

40 GROUP-TERM LIFE INSURANCE " THROUGH EMPLOYER You can generally exclude the cost of up to $50,000 of group-term life insurance (GTL) from the wages of an insured employee. You must include in your employee's wages the cost of ALL group-term life insurance beyond $50,000 worth of coverage (rounded to the nearest thousand), reduced by the amount the employee paid toward the insurance with after tax dollars. Calculate the value using Table 1 in Regulation (d)(2). The table is also found in IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits, Table 2-2. The age bracket used from the table is determine by the employee s age as at December 31 of the year. The calculation using the table is the cost of $1000 of insurance for 1 month 79 " GROUP-TERM LIFE INSURANCE THROUGH EMPLOYER Five Year age* brackets Cost per $1,000 of protection for one month period Less than to to to to to to to to to and above

41 GROUP-TERM LIFE INSURANCE " THROUGH EMPLOYER Example 1 Sally was born April 23, 1957, (she was 57 yrs on December 31, 2014). The employer provides coverage equal to 2x her annual salary as of January 1, and her salary as of 1/1/2014 was $65,000. The employer s plan has a maximum coverage amount of $125,000. Sally contributes $25.00 per month in after-tax dollars toward the insurance premiums. Step 1: $65,000 x 2 = $130,000 max. coverage amount = $125,000 Step 2: $125,000 - $50,000 = $75,000 Step 3: Sally was 57 years old on 12/31/2013 Step 4: $.43 (from IRS table) x 75 (taxable benefit)= $32.25 Step 6: $ $25.00 = $7.25 per month of taxable income. For 2014 you would include in Sally s income $7.25 x 12 = $ $87.00 If Sally had not paid any premium for her coverage, or paid with pre-tax dollars, the entire $32.25 would be included in her income each month. (see another example in appendix) 81 MOVING EXPENSES Qualified moving expenses are not taxable income an employee as long as the move meets the time and distance test. The tests require that the new workplace must be at least 50 miles farther from the employee s old residence than the old work place (distance), and employee must work full time for at least 39 weeks during the first 12 months after arriving in the general area of their new job location (time). Qualified moving expenses are the direct cost of moving household goods and personal effects, as well as travel and lodging expenses for moving from the old home to the new home. Examples of taxable moving expenses: Meals during relocation; closing costs; house hunting costs; temporary living expenses of more than1night; storage costs in excess of 30 days; expenses incurred to sell old residence 82 41

42 EDUCATIONAL ASSISTANCE $5,250 of educational assistance benefits from an employer under an educational assistance program can excluded from income each year. Any amount of assistance over that amount is includable as income and taxable. Any employer-provided education that is jobrelated may be excluded from income as along as: The course is not required to meet minimum educational job requirements. The course is not taken to qualify for a promotion or transfer to a different type of work. The course is related to the employee s current job and maintains or improves knowledge and skills needed to perform the job. 83 ADOPTION ASSISTANCE For 2015, the maximum aggregate exclusion per child that an employer can provide an employee for adoption assistance under IRC Sec. 137(a)(2) or that an employee can claim for an adoption tax credit is $13,400 ($13,190 for 2014). This is the total amount of exclusion over all taxable years related to the particular adoption. All amounts of employer provided assistance must be report on Form W-2 in Box 12. For 2015, the exclusion will begin to be phased out for individuals with modified adjusted gross incomes greater than $201,010 (for $197, ) and will be entirely phased out for individuals with modified adjusted gross incomes of $ 241,010 ($237,880 for 2014) or more. Qualified adoption expenses include any and all costs directly relating to the adoption of an eligible child and that are reasonable and necessary for the adoption. Expenses include adoption fees, legal fees, court costs, and travel expenses (including meals and lodgings). An eligible child is any child age under the age of 18, or a child of any age who is a US citizen or resident alien and who is physically or mentally incapable of caring for himself or herself

43 EMPLOYER BUSINESS EXPENSE REIMBURSEMENT All business related expenses reimbursed to an employee under an Accountable Plan are not considered income to the employee. An Accountable Plan is a plan that: expenses reimbursed are deductible as expenses of the business expenses are substantiated and adequately accounted for within a reasonable time period, and any excess monies advanced are returned within a reasonable time period. All expenses reimbursed under a nonaccountable plan are considered income to the employee and are taxable. 85 EMPLOYER PROVIDED" MEALS & LODGINGS Generally, meals provided to any employee is excludable from income if they are: furnished on the employer s premise, and furnished for the convenience of the employer. Lodgings are excludable from income if they are: furnished on the employer s business premise, for the convenience of the employer, and required as a condition of employment. Convenience of the employer means there is a substantial noncompensatory business reason. Some examples are: So employee may handle emergency calls during meal period, Short meal periods and employee not expected to eat elsewhere during that time, No eating facilities near employer s vicinity, Meals are for restaurant and food service employees for each meal period they work 86 43

44 ADVANCES & OVERPAYMENTS Overpayments and Advances (considered pre-paid wages) is considered income at the time they were issued, must be included in the employee s income and are subject to all taxes. If repaid during the same tax year the employee may reimburse the employer the net amount paid and the employer will exclude the gross amount paid from the employee s Form W-2. If repaid in a subsequent year, the employee must repay the gross amount received and then claim a deduction on employee s tax return for that year. If repaid in subsequent year, employer may reduce amount due by the social security and Medicare taxes but should get a written document that employee will not request a refund from IRS for those taxes. 87 AWARDS & PRIZES The value of cash or non-cash awards & prizes are generally considered income and subject to all taxes with the following exception: Awards for charitable, scientific, artistic or educational achievement are not taxable to the recipient if transferred to a charitable organization [IRC 74(b)] as long as: Award is for achievement Recipient is selected without entering any contest No substantial future services are required Recipient transfers the award to a charitable (IRC 170(c))organization prior to receiving the benefit Prize or award is not cash or cash equivalent, of nominal value and is provided infrequently

45 AWARDS & PRIZES (cont d) Employee achievement award of tangible personal property for length-of-service or safety (Cash awards are always taxable). In order to be excludable from wages, special requirements and dollar limitations must be met. A qualifying award: Must be a given for length-of-service or safety Cannot be a disguised wage Must be awarded as part of a meaningful presentation Must be an item of tangible personal property (Cannot be cash, cash equivalent, vacations, meals, lodging, theater or sports tickets, stocks, bonds.) 89 AWARDS & PRIZES (cont d) Length of Service Award must be given only once every 5 years. If given more often it is taxable income Safety award must meet following limitations to be excludable: Cannot be given to a manager, administrator, clerical employee, or other professional employee. No more than 10% of the employees, excluding those listed above may receive a safety achievement award (other than one of very small value). Eligible employees must have worked full-time for a minimum of one year prior to the award. Reg (d)(3) 90 45

46 AWARDS & PRIZES (cont d) Awards may be from a qualified or non-qualified award plan. A qualified plan award must meet the following requirements: Made under an established written plan, and Does not discriminate in favor of highly paid employees, and The average cost of all employee achievement awards (both qualified and nonqualified awards for length of service and safety) made during a single year does not exceed $400. Awards of $50 or less are not included in computing the average. Reg (c)(5); IRC 414(q)(1); Reg (c)(5). A non-qualified plan is one that: Discriminates in favor of highly compensated employees, and Does not have to be a written plan The maximum amount of excludable awards to a single employee during a calendar year is limited to: $400 for awards made under a nonqualified plan, or $1600 in total for awards made under both qualified and nonqualified plans 91 BACK PAY Back pay is pay received in a tax year or years for actual or deemed employment in an earlier tax year or years. For social security coverage and benefit purposes, all back pay, whether or not under a statute, is wages if it is payment for covered employment. Back pay credited as wages for social security purposes is different if it is awarded under a statute

47 BACK PAY These back pay payments are an award, determination, or agreement approved or sanctioned by a court or government agency responsible for enforcing a federal or state statute that protects an employee's right to employment or wages. Some examples are: Americans with Disabilities Act, Equal Pay Act, Fair Labor Standards Act, National Labor Relations Act For SSA purposes these type of back pay awards are credited to the year they should have been paid rather than the year actually paid. Damages for personal injury, interest, penalties, and legal fees included with back pay awards are not wages. 93 BONUSES Bonuses are considered compensation and therefore includable in the employee s income and subject to taxation. Examples: Signing Bonus Cancelation bonus Push money exception: This is when a manufacturer pays a retail salesman money to push their product. The payment is not considered wages because it is paid by a third party but the salesman must report the payment as income

48 GOLDEN PARACHUTES A golden parachute is an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Most definitions specify the employment termination is as a result of a merger or takeover, also known as "Change-in-control benefits Parachute payments result in excess parachute payments if the total parachute payments exceed a threshold. The threshold amount is three times the individual s base amount (the average annual compensation of the individual over the past five years. 95 GOLDEN PARACHUTES Any amounts that exceed the base amount are subject to all taxes as well as an additional 20% excise tax and are not allowed as a deduction on the corporation s tax return. Some examples of such payments are: Bonuses paid because of the consummation of the change in control, Retention bonuses paid after the change in control Accelerated vesting of stock options, restricted stock or other forms of equity-based compensation Fringe benefits, Severance payments, Accelerated vesting of non-qualified deferred compensation 96 48

49 EMPLOYER PAID TAXES " (GROSS UP) A practice usually in reference to an employer paying the taxes due on some portion of their employee s income, usually from a one-time payment. When an employer pays the employee s taxes, it is considered income to the employee and therefore taxable. To resolve a continuing cascade effect, the IRS approved a formula to determine the gross amount of the payment to be received if the employer pays the employee s taxes. Formula: Gross Amount = Net amount to be received 100% Total % of all taxes to be withheld 97 PAYROLL BASICS THANK YOU FOR ATTENDING! CONTACT INFORMATION MICHAEL PAPPAS, CPP Owner/Managing Director MP CONSULTING SERVICES 106 Mirage Boulevard Barnegat, NJ Phone: Fax: m.p.consulting@comcast.net 98 49

50 PAYROLL BASICS APPENDIX 99 EMPLOYMENT STATUS EXAMPLES 1. Sam is an experienced plumber who advertises his services to the public. He has his own tools, supplies and van. Sam performs his services for all clients that request them. Sam is an independent contractor. 2. Jack is an experienced electrician who agrees to perform full-time services for the ABC Construction company. He uses his own tools and performs the work in the order designated by ABC in accordance with their specifications. ABC supplies Jack with all of the materials needed, frequently inspects his work, pays him on a piecemeal basis and covers him for workers compensation. Jack does not advertise and does not offer his services to any other companies. Jack is an employee

51 FLSA EMPLOYEE CLASSIFICATIONS Some Examples: Administrative: Insurance claim adjuster; Purchasing agent; Executive assistant Executive: Supervisor of 2 or more full-time employee; Department manager; Divisional Manager Learned Professional: CPA; Lawyer; Doctor; Registered Nurse Creative Professional: Actors; Music Composers; On air journalist Outside Salesperson: Door-to-door salesperson; traveling salesperson 101 FLSA EMPLOYEE CLASSIFICATIONS The white collar exemptions do not apply to the following regardless of their pay level or rank: Police Officers Detectives Deputy Sheriffs State Troopers Highway Patrol Officers Correctional Officers Parole or Probation Officers Investigators Inspectors Park Rangers Fire Fighters Paramedics Emergency Medical Technicians Hazardous Materials Workers Ambulance Personnel Similar employees Rescue Workers

52 FLSA EMPLOYEE CLASSIFICATIONS who perform work such as: preventing, controlling or extinguishing fires of any type; rescuing fire, crime or accident victims; preventing or detecting crimes; conducting investigations or inspections for violations of law; performing surveillance; pursuing, restraining and apprehending suspects; detaining or supervising suspected and convicted criminals, including those on probation or parole; interviewing witnesses; interrogating and fingerprinting suspects; preparing investigative reports; or other similar work. 103 WORKWEEK Example: Employee paid $10 per hour Old WW M T W Th F Sat Sun M T W Th New WW This employee's wages would be computed as follows: Pay for "old" workweek's hours: [(40 hrs. $10.00) + (20.25 OT hrs. 1.5 $10.00)] = $ Pay for "new" workweek's hours: ($10.00) (25.25 hrs.) = $ TOTAL DUE FOR ELEVEN-DAY PERIOD: $ Pay for "new" week's hours: [(40 hrs. $10.00) + (10.25 OT hrs. 1.5 $10.00)] = $ Pay for "old" week's hours: ($10.00) (35.25 hrs.) = $ TOTAL DUE FOR ELEVEN-DAY PERIOD: $

53 OVERTIME CALCULATION Eileen is paid $12.75 per hour and works 45 hours during the workweek. In addition she is paid a $100 performance bonus for keeping her error rate below 2% for the week. What is Eileen s total weekly compensation? Calculation: 45 x $12.75 =$ $ $100 = $ $673.75/45 = $14.97 (ROR) x 50% = 7.49 $7.49 x 5 = $37.45 $ $37.45 = $ OVERTIME CALCULATION Eleanor is paid $10 per hour and works 36 hours from Monday to Thursday and takes Friday off as a paid vacation day? What is Eleanor s total weekly compensation? Calculation: 36 x $10 = $360 8 x $10 = $80 $360 +$80 = $

54 OVERTIME CALCULATION William works a 40 hour workweek and receives a bi-weekly salary of $900. During week one William works 39 hours and during week 2 William works 41 hours. What is William s total bi-weekly compensation? Calculation $900/80 = $11.25 (ROR) x 50% = $5.625 Week One: $450 - $11.25 = $ Week Two: $ x $16.88 = $ Total Payment: $ = $ or $ x $16.88 = $ PERSONAL USE OF EMPLOYER- PROVIDED CAR ANNUAL LEASE VALUE METHOD Example: Auto value: $22,500 Personal Miles: 3750 Total Miles: Personal Use %: Fair Market Vale (FMV) Lease Value 18,000 to 18,999 5,100 19,000 to 19,999 5,350 20,000 to 20,999 5,600 21,000 to 21,999 5,850 22,000 to 22,999 6,100 23,000 to 23,999 6,350 24,000 to 24,999 6,600 25% x $6,100 = $1525 Employer paid for gas. So 3750 miles x.055 = $ Total added to income: $ = $

55 COMPENSABLE TIME ISSUES Number of Days Firefighters Policemen COMPENSABLE TIME ISSUES Number of days Firefighters Policemen

56 GROUP-TERM LIFE INSURANCE " THROUGH EMPLOYER Example 2 Arnold was born on September 15, His employer provides life insurance in the amount of 1.5 times annual salary at the beginning of each year. Arnold s salary as of January 1, 2014 was $75,000. The employer also offers the employees the right to purchase additional supplemental life insurance through a group policy up to 4 times the employee s salary as at the beginning of the year. The employee pays the full premium charged the employer by the insurance company. Arnold takes an additional 2 times his salary as supplemental insurance and pays $90 per month with after tax dollars Step 1: $75,000 x 1.5 = $112,500 Step 2: $75,000 x 2 = $150,000 Step 3: $112,500 + $150,000 =$262,500 Step 4: $262,500 rounded to next nearest $1000 = $263,000 Step 5 $263,000 - $50,000 = $213,000 Step 6: $.66 (from IRS Table; age 60-64) x 213 (taxable benefit) = $ Step 7: $ $90 = $50.58 monthly taxable income For 2014 Arnold had $ added to his income 111 EMPLOYER PAID TAXES " (GROSS UP) Example 1: ABC Corp agrees to pay Arthur a bonus $5, after all taxes. Arthur s YTD earnings are $65, The bonus is treated as supplemental wages and the state has a 2% supplemental rate. The calculation is as follows: 6.2% % + 25% + 2% = 34.65% 100% % = 65.35% $5, % = $7, Social Security tax: $7, % = $ Medicare tax: $7, % = $ Federal Tax: $7, % = $1, State Tax: $7, % = $ Total taxes: $ $ $1, $ = $2, Proof: $7, $2, = $5,

57 EMPLOYER PAID TAXES " (GROSS UP) Example 2: Sara, who works for XYZ Corp., is promoted to a new position in another state and XYZ agrees to pay her $25, net for her move. The state Sara is moving to has no state income tax. Sara s total YTD compensation at the time of the move is $1,100, The calculation is as follows: 1.45% % = 41.05% 100% % = 58.95% $25, % = $42, Medicare Tax: $42, % = $ Federal tax: $42, % = $16, Total Taxes: $16, $ = $17, Proof: $42, $17, = $25,