(See also Publication 15-B irs.gov)

Transcription

1 Fringe Benefits Fringe and Special Benefits Reporting (See also Publication 15-B irs.gov) Any fringe benefit provided is taxable and must be included in the recipients pay unless the law specifically excludes it. If the recipient of a taxable fringe benefit is an employee, the benefit is subject to employment taxes and must be reported on Form W-2. If the recipient of the taxable fringe benefit is not an employee, the benefit is not subject to employment taxes. However, you have to report the benefit on one of the following: If the recipient receives the benefit as: Use Form: Independent Contractor Misc A Partner K-1 Recipient: As defined by the Internal Revenue Service, the person who performs the service even if the benefit is provided to some who did not perform services for you. For example, an employee may be the recipient of a fringe benefit you provide to a member of the employee s family. What are fringe benefits? It is a form of payment an employee receives for the performance of a service (Note: Does not have to be an employee). An example would be the use of a company automobile, which allows the employee to commute to and from work. Examples of fringe benefits: Achievement awards Adoption assistance Athletic facilities Educational assistance Employee discounts Employer-provided cell phones Group-term life Insurance Moving Expense Reimbursements Personal use of company automobile or other dual use property Note: This is not a complete listing. See Publication 15-B page 5 for complete listing. When are fringe benefits deemed paid and are they taxable? This choice can be varied among your employees and the employer has no requirement to notify the employee or IRS of the date selected. You may elect to handle fringe benefits as paid by the pay period, monthly, quarterly or on any other basis, as long as you report the benefits as being paid at least annually. Employers may change methods at any time, as long as they treat all 7-1

2 benefits provided in a calendar year as paid by December 31 of the calendar year (see Special Account Rule exception that follows). The employer has the option to consider a single fringe benefit paid throughout the calendar year even if it is only paid one time during the year. When employers select the payment dates, they report the taxes on their required tax returns (i.e., Form 941) in the same tax period in which they treated them as paid. This election does not apply to a fringe benefit where real property or investment personal property is transferred. Employer-provided non-cash taxable fringe benefits are subject to federal income, social security, Medicare and unemployment tax rules. What is the Special Accounting Rule? The employer may elect to handle the value of IRS defined fringe benefits provided in November and December, or any other shorter period during that time, as being paid in the subsequent year. This only applies to the benefits actually provided during November and December, not to benefits, which were treated as being paid during those months. IRS restricts this method to be used only on: Personal use of company vehicles Personal use of company plane Non-cash transportation benefits When used, an employer is required to notify the affected employees between the time of the employee s last paycheck of the calendar year and at or near the time the employer provides the employees with their Form W-2. This rule cannot be used for fringe benefits where the employer transfers real property or investment personal property to the employee. How do I withhold on fringe benefits? The employer has two options in determining how to withhold federal income taxes on fringe benefits: Aggregate Method add the value of the fringe benefit to the employee s regular wages for a payroll period and calculate the taxes to be withheld on the total wages, or Supplemental Rate withhold federal income tax on the value of the fringe benefit at the supplemental rate of 25% (2013) or 39.6% if supplemental wage payments exceed $1,000,000 during the year and Virginia income tax at the supplemental rate of 5.75%.** **Note: Supplemental state rates vary from state to state. Contact your Dixon Hughes Goodman representative for other state rates. Although the employer may elect not to withhold federal income tax on the value of an employee s personal use of company vehicles, social security and Medicare taxes must be withheld where applicable. If you choose not to withhold income tax, you must notify the employee in writing within 30 days after the vehicle is provided or by January

3 How do I gross-up an employee s wages and why would I? If an employer pays the employee s taxes, it is referred to as grossing up and the taxes paid become compensation to the employee. When you gross-up the employee s records, the employer-paid taxes are reported as federal, state and local wages. In addition, this amount must be reported under federal and state unemployment wages. See below and the following page for examples of gross-up calculations. To determine the employee s gross-up, use the following formula: Amount of payment = Taxable Income 100% - % of employee tax due 7-3

4 Example: Fringe benefits equal $3, FYE 2013 Taxes: Formula: 25.00% FIT 6.20% Social Security $3, Gross = $4, % Medicare 100% % 5.75% Virginia 38.40% Total Wages: 4, Reported in boxes 1, 3, 5, and 16 on Form W-2 Verification: Gross Tax Rate $4, x 25.00% $1, FIT $4, x 6.20% Social Security $4, x 1.45% Medicare $4, x 5.75% Virginia Total Tax $1, Proof: Gross: $4, Taxes: (1,870.13) Net: $3,

5 Example: Fringe benefits equal $1, Employee within $1, of social security limit FYE 2013 Step 1: $1, x 6.20% = $93.00 Step 2: $93.00 (social security tax) + $1, (net fringe benefit) = $1, Step 3: Calculate other taxes: 25.00% FIT 1.45% Medicare 5.75% Virginia 32.20% Total Step 4: Apply formula: $1, (from Step 2) 100% % Gross = $1, Wages: $1, Reported in boxes 1, 5, and 16 on Form W-2) $1, Reported in box 3 of Form W-2) Verification: Tax Gross Rate $1, x 25.00% $ FIT $1, x 1.45% $ Medicare $1, x 5.75% $ Virginia Step 1 $ Social Security Total Tax $ Total Taxes Proof: Gross: $1, Taxes: (612.09) Net: $1, Note: The above calculation does not include 0.9% additional Medicare tax. Assumption in calculation is that individual has not exceeded $200, in gross wages. 7-5

6 How do I handle fringe benefits paid to a 2% S-Corp shareholder? Employee fringe benefits paid on behalf of the two-percent or more shareholders are subject to special rules. These rules are as follows: Benefits are included on the Form W-2 as federal and state taxable wages All of the benefits, except for health insurance, are subject to social security and Medicare tax The benefits then become fully deductible by the corporation as compensation S-Corporation shareholders receive 100% of self-employed health insurance deduction on their 2013 individual tax return The benefits affected by these rules include: Group-term life insurance coverage Medical reimbursement plans and disability plans Payments to accident and health plans Meals and lodging furnished for the convenience of the employer Cafeteria plans Dependent care assistance Adoption assistance programs Some fringe benefits are not covered by the special rules. The costs of these fringe benefits are deductible by the corporation, up to the limits specified by the relevant code section, regardless of the percentage of stock that the recipient shareholder owns. These include: Pension and profit sharing plans Death benefit exclusion, if paid from a qualified plan No-additional-cost services, qualified employee discounts, working condition fringes, and de minimis fringes. FRINGE & SPECIAL BENEFITS Fringe Benefit Exclusion Rules Certain fringe benefits are excluded from an employee s pay fully or partially depending on the benefit. The excluded benefits are not subject to Federal income tax withholding. In addition, in most cases, they are not subject to social security, Medicare, or Federal unemployment (FUTA) tax and are not reported on Form W

7 De Minimus Fringe Benefits A de minimus benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impractical. Note: Cash and cash equivalent fringe benefits (for example, use of gift cards, charge cards, or credit cards) no matter how small, are never excludable as a de minimus benefit, except for the occasional meal money or transportation fare. Examples of de minimus benefits are: Copy machine use (85% business use required) Holiday gifts, other than cash or cash equivalents, with a low FMV Meals Occasional parties and picnics Occasional tickets for entertainment or sporting events Transportation fare Flowers, fruit, books special circumstance items Employer-Provided Cell Phones The value of an employer-provided cell phone, primarily noncompensatory business reasons, is excludable from an employee s income as a working condition fringe benefit. Noncompensatory business purpose provided primarily for noncompensatory business purposes if there are substantial business reasons: Need to contact employee at all times for work-related emergencies, Requirement that employee be available to speak to clients when away from office, Need to speak to clients in other time zones outside normal working hours. Group Term Life Insurance Group term life insurance must meet all of the following conditions: Provide a general death benefit that is not included in income Provide to a group of employees (at least 10 full-time employees at some time during the year). See expectations (Pub 15-B pg. 12) if you have less than 10 employees Amount of insurance to each employee based on a formula (employee s age, years of service, and pay or position Provided under a policy you carry directly or indirectly 7-7

8 You can generally exclude all group term life insurance coverage you provide to an employee from the employee s wages subject to FITW (Federal income tax withholding). In addition, you can exclude the cost up to $50,000 of coverage from wages subject to social security and Medicare tax. Exception for Key Employees If your group term life insurance plan favors key employees or former employees who is an officer having an annual salary of more than $165,000, an employee who owns more than 5% of the business or a 1% owner whose compensation exceeds $150,000. If an exception is met, you must include the entire cost of the insurance in your key employees wages. This amount is subject to Social Security and Medicare; however, it is exempt from federal income tax and FUTA. The cost of this insurance is included in boxes 1, 3, 5 and 16 of From W-2. Coverage in Excess of $50,000 You must include in your employees wages, subject to social security and Medicare tax, the cost of coverage in excess of $50,000; reduced by the amount the employee paid toward the insurance. Report this benefit as wages in Boxes 1, 3, 5, and 16 of the employee s Form W-2 with a Code C in Box 12. Exceptions to Excess GTL There are three exceptions when the excess group term life (GTL) would not be taxable to the employee and they are as follows: The beneficiary of the policy is the company The beneficiary of the policy is a charitable organization The employee terminates during the year due to permanent disability How do I calculate the benefit that is included in the employee s income? If an employer-provided GTL policy is discriminatory or where the policy provides coverage in excess of $50,000, the value of the insurance benefit to be included in the employee s income is calculated by use of the IRS Uniform Premium Table

9 Uniform Premium Table 1 IRC Section 79 Fair Market Value of GTL Insurance p/$1,000 of Excess Benefit p/month Age Bracket As of 12/31 Under 25 $ to to to to to to to to to and above 2.06 Figure the monthly cost of insurance by coverage over $50,000 1,000 age factor cost (from IRS Uniform Premium Table 1 based on age of employee at December 31). Note: Prorate the cost if less than a full month s coverage. If GTL insurance in excess of $50,000 is offered through a flexible benefit (Section 125) plan, the total amount that is included in gross income (subject to federal, social security, and Medicare tax) is the greater of: The employee s pretax contribution toward the purchase of the insurance, or The insurance cost as determined under the IRS Uniform Premium Table 1 Example Calculation: Employee A s coverage is $75,000 (excess $25,000). Employee A is 51 years old at December 31 and pays $5.00 a month towards the insurance costs. $25,000 $1,000 = $0.23 = $5.75 $ $5.00 = $0.75 The $0.75 is the monthly benefit that is subject to social security and Medicare tax. This amount must be added monthly to the employee s wages. What do I do if I have former employees with GTL? With a former employee, you do not have the opportunity to collect the social security and Medicare tax, since you have no paychecks. Therefore, any uncollected social security and Medicare taxes are reported in Box 12 with a Code M for social security tax and Code N for Medicare tax. 7-9

10 Do I report it on Form 940 if it is not subject to FUTA? Yes. Although the value in excess of $50,000 is not taxable for FUTA purposes, it is reportable as total wages on Line 3 and as excludable wages on Line 4 on Form 940. How do I handle GTL offered to dependents? Group term life insurance payable on the death of an employee s spouse or dependent is a de minimus benefit if the face amount is not more than $2,000. However, if the face value exceeds $2,000, the de minimus value no longer applies and the entire GTL insurance coverage would be calculated by using the rates in the IRS Uniform Premium Table 1 in the same manner as when calculating GTL for the employee (i.e., subtract any employee payroll deduction for the dependent GTL). Either use the rate associated with the dependent s age or use the under age 25 rate if your policy does not permit dependent coverage for any dependent age 25 or older. MEALS Is there a free meal? Any meal or meal money you provide an employee that has so little value (taking into account how frequently you provide meals) that accounting for it would be unreasonable or administratively impractical is de minimus (free). Examples of those are: Coffee, doughnuts and soft drinks Occasional parties or picnics Occasional meals or meal money provided to enable employees to work overtime o Caution: Note de minimus if based on hours worked For accounting purposes, de minimus meal expenses are considered 100% deductible not subject to the 50% limitation. Meals on Business Premises You can exclude the value of meals you furnish to an employee from the employee s wages if the following apply: Furnished on the business premises Furnished for the convenience of the employer This exclusion does not apply if you allow your employee to choose to receive additional pay instead of meals. 7-10

11 What does for the convenience really mean? There must be a substantial business reason for the meals. Examples of those are: Employees are available for emergency calls. You must be able to show that these emergency calls have occurred or can reasonably be expected to occur Short meal periods. If the nature of your business restricts an employee to have a short meal period (i.e., 30 to 45 minutes) and employees cannot be expected to eat elsewhere in such a short time or if peak workloads occur during a normal lunch hour (i.e., bank tellers or waitresses and waiters) Proper meals are not available. Meals qualify for this treatment if there are not sufficient eating facilities near the place of employment MOVING EXPENSES What expenses are deductible moving expenses and not considered wages? Deductible moving expenses paid directly or indirectly to the employee include the following: Moving household goods and personal effects from the former home to the new home (this includes storage up to 30 days), and Traveling, including lodging, from the former home to the new home NO MEALS Deductible moving expenses do not include any expenses for meals. Should you reimburse your employee for any expense other than noted above, it is considered taxable wages. Do I report deductible moving expenses on the Form W-2? Yes, deductible moving expenses paid directly to your employee are reported in Box 12 of the employee s Form W-2 with a Code P. Expenses that do not qualify as excludable fringe benefits must be reported as income at the time they are paid to the employee and required taxes remitted. Are there any requirements that could make deductible reimbursements taxable? Yes, there are the time and distance tests; failure to meet the requirements and all reimbursements are taxable. 7-11

12 Time Test An employee must be employed at the new place of work at least 39 weeks. However, the 39- week test does not apply if the employee is unable to meet due to death, disability, transfer (by employer) or involuntary separation. A self-employed individual must meet a 78-week test. Distance Test The new place of employment must be at least 50 miles farther from your former home than your old main job location was from your former home. What items would be considered taxable to the employee? The following is a list of items that if you as employer pay the employee for you must include in the employees Form W-2 as compensation: Pre-moving house hunting trips Temporary living expenses in the general are of new workplace Selling (or settling an unexpired lease) the old residence and buying (or acquiring a lease on) the new residence Real estate transactions Any meals connected with the relocation Mileage in excess of $.24 per mile January-December 31, (Note: 2014 mileage rate currently not available) Are these expenses subject to withholding taxes? These expenses are considered income and subject to taxation (FITW, FICA, and FUTA). A review of your company s relocation policy might be necessary, especially if your company reimburses house hunting trips and temporary living expenses for employees. Reimbursements that are generally not deductible by individuals on their personal income tax returns may have additional funds (grossed-up) added to cover the taxes due. This can become very costly because of the 25% supplemental wage-withholding rate (2013). What are the Form W-2 reporting requirements? Form W-2 reporting requirements for moving reimbursements made in 2013 are as follows: Qualified moving expenses are not reported in Box 1, 3, 5, or 16 on Form W-2 Qualified moving expenses an employer pays to a third party on behalf of an employee (e.g., to the moving company) and qualified services that an employer furnishes in-kind to an employee are not reported on Form W-2 Qualified moving expenses an employer reimburses directly to the employee must be reported in Box 12 with Code P 7-12

13 Qualified moving expenses are not taxable for FUTA, but are reported on Line 3 and excluded on Line 4 of the Form 940 Nonqualified expenses, whether paid to the employee or to a third party, must be reported as wages in Box 1, 3, 5, and 16 and are subject to federal income tax withholding, and applicable social security, Medicare, and FUTA taxes THIRD PARTY SICK PAY What is it? Sick pay generally means any amount paid under a plan because of an employee s temporary absence from work due to injury, sickness, or disability. It may be paid by either the employer or a third party, such as an insurance company. Sick pay includes both short and long-term benefits. The following are not considered sick pay: Disability retirement payments Worker s compensation Payments in the nature of workers compensation public employees Medical expense payments Payments unrelated to absence from work A sick pay plan is a plan or system established by an employer under which sick pay is available to employees generally or to a class of classes of employees. Sick pay to an employee by a third party in an insurance arrangement, but not as an agent of the employer, requires special treatment at year-end. The IRS reconciles an entity s social security and Medicare wages reported on quarterly Form 941 with the same wages reported annually on Forms W-2 and W-3 filed at the end of the year. A third party that makes payments of sick pay other than as an agent of the employer, is liable for federal income tax withholding (if requested by the employee) and the employee part of the social security and Medicare taxes. The third party is also liable for the employer part of the social security and Medicare taxes and FUTA tax, unless the third party transfers this liability to the employer to whom the employee works. This liability is transferred if the third party takes the following steps: Withholds the employee social security and Medicare taxes from sick pay payments Makes timely deposits of the employee social security and Medicare taxes, and Notifies the employer of the payments on which employee taxes were withheld and deposited. 7-13

14 How do I report sick pay on Form W-2? You may either combine the sick pay with other wages or prepare a single Form W-2 for each employee, or you may prepare a separate Form W-2, one reporting sick pay and the other reporting regular earnings. A Form W-2 must be prepared even if all the sick pay is nontaxable. Box 1 sick pay the employee must include in income Box 2 any federal income tax withheld from the sick pay Box 3 sick pay subject to social security tax Box 4 employee social security withholding from sick pay Box 5 sick pay subject to Medicare tax Box 6 employee Medicare tax withheld Box 12 any sick pay that was paid by a third party and was not federal income tax (enter Code J) EDUCATIONAL ASSISTANCE This exclusion applies to educational assistance you provide to employees under an educational assistance program. Educational assistance means amounts you pay or incur for your employees education expenses. These expenses generally include the cost of books, equipment, fees, supplies and tuition. However, these expenses do not include the cost of a course or other education involving sports, games, or hobbies, unless the education: Has a reasonable relationship to your business, or Is required as part of a degree program Education expenses do not include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. Nor do they include the costs of lodging, meals, or transportation. Exclusion from wages You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee s wages each year. This exclusion has become permanent and IRC 127 will no longer be subject to expiration. What do I have to do as an employer? An educational assistance program is a separate written plan that provides educational assistance only to your employees. The program qualifies only is all of the following tests are met: The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees. 7-14

15 The program does not provide more than 5% of it benefits during the year for shareholders or owners. The program does not allow employees to choose to receive cash or other benefits that must included in gross income instead of educational assistance You give reasonable notice of the program to eligible employees Who is eligible? A current employee A former employee who retired, left on disability, or was laid off A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services performed under you primary direction or control A partner who performs services for a partnership ADOPTION ASSISTANCE You may reimburse your employees for qualified adoption expenses up to $12,970 (2013). Qualified expenses are adoption fees, court costs, attorney fees and traveling expenses, including meals and lodging. Reimbursements are exempt from federal income tax, but are subject to social security, Medicare and FUTA. Expenses incurred for qualified expenses are reported in Box 12 of the employee s Form W-2 with a code T. Employer must have a separate written plan and employees must know this plan is in existence, otherwise reimbursements are not tax-free. Note: Made permanent as part of the IRC by the American Taxpayer Relief Act of INTEREST-FREE OR BELOW-MARKET INTEREST RATE LOANS If an employer lends an employee $10,000 or more at an interest rate less than the current applicable Federal rate (AFR), the difference between the interest paid and the interest that would be paid under the AFR is considered additional compensation to the employee. This rule applies to a loan of less than $10,000 if one of its principal purposes is the avoidance of Federal tax. This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not income tax withholding. The AFR s are established monthly and published by the IRS. You can obtain these rates by calling or visit the IRS website at

16 AWARDS Awards and Prizes Under the Federal regulations, prizes and awards given by an employer to an employee are taxable and included in the employee s wags and subject to withholding unless excluded as a safety or length-of-service award. Achievement Awards for Safety or Length-of-Service The value of certain employee achievement awards can be excluded from income if the employer s cost, or in some instances the fair market value, of the award does not exceed the following limits: Non-qualified plan: Total deductible awards (both safety and length-of-service) for any one person cannot exceed $400 in a calendar year. Qualified plan: Total deductible awards (both safety and length-of-service) for any one person (including non-qualified plan awards) cannot exceed $1,600 in a calendar year. The average cost or, in some instances the fair market value, of all the individual achievement awards cannot exceed $400. The plan is considered qualified if it does not discriminate in favor of the highly compensated employees and is a written plan that has been publicized by the employer on a regular basis. If the qualified plan award exceeds $1,600, the amount that is includable in the employee s income and subject to Federal income and employment taxes, is the difference between the cost of the item and the employer s deductible amount of $1,600. Note: In order to be excluded from income, the award must be tangible property. The award must be presented in a meaningful ceremonious presentation. Tangible property does not include such items as cash, certificates (unless the certificate is specifically for a tangible property), stocks, bonds, tickets for sporting events, theater, vacations, meals, lodging, etc. Safety Awards To qualify as a safety award, the following must be met: Excluding de minimus fringe awards, not more than 10% of all employees may be entitled to this safety award Managers, professional, administrative and clerical employees are not eligible for safety awards The employee must work full-time with at least one year of service Length-of-Service Awards To qualify for exclusion from income the award must not have been: 7-16

17 Gifts Received during the employee s first five years of employment for the employer making the award, or Provided to an employee who received a previous award during that year or any of the preceding four years, excluding awards categorized under the de minimus benefits. Awards and prizes made as gifts by an employer to an employee are always includible in income and withholding is required unless they qualify under the de minimus fringe benefit rules. Cash Gifts Withhold on cash gifts to employees, no matter how small. The gifts are wages subject to FITW, FICA, and FUTA. In fact, even that portion of a gift certificate redeemable for cash is considered wages subject to withholding. Third-Party Gifts/Awards For an award to be considered wages subject to employment taxes, an employer-employee relationship must exist between the maker of the award and the recipient of the award. If no such relationship exists, the award does not constitute wages and is not subject to social security, Medicare, or Federal income tax withholding. However, cash awards or the fair market value of prizes and awards provided to an employer s workers by a manufacturer, supplier or other non-employer, must be reported by the non-employer on Form 1099-MISC if an individual is paid $600 or more in prizes during the year. FEDERAL STANDARD MILEAGE RATE Listed below are the 2014 and 2013 optional standard mileage rates for employees, selfemployed individuals, or other taxpayers to use in computing the deductible costs paid or incurred on or after January 1, These rates are used for employees operating a passenger automobile for business, charitable, medical, or moving expense purpose. Type Cents Per Mile 2014 Business Use Charitable Activities Medical Related 0.24 Moving Related 0.24 Cents Per Mile Reimbursement in excess of the approved standard rate per mile is subject to withholding and payment of employment taxes. Reimbursement at or below the standard mileage rate does not need to be included on W

18 Example: During 2013, an employer reimburses an employee for 4,000 miles of business travel at $0.59 per mile; the employer must report $ as taxable income to the employee on Form W-2 in Boxes 1, 3, 5, and 16; and $2, on Form W-2 in Box 12 with Code L. Code L Substantiated employee business expense reimbursements (nontaxable). QUALIFIED TRANSPORTATION The qualified transportation benefit exclusion applies to: A ride in a commuter highway vehicle between the employee s home and work place. Commuter highway vehicle - a vehicle that seats at least 6 adults (not including the driver). You must reasonably expect that at least 80% of the vehicle mileage will be for transporting employees between their homes and work place, with employees occupying at least half of the vehicle s seats (not including the driver). A Transit Pass (Commuting Assistance) A pass, token, fare card, voucher or similar item entitling a person to ride free of charge or at a reduced rate, is of the following: o o Mass transit may be publicly or privately operated and include bus, rail, or ferry. A vehicle that seats at least six adults (not including the driver) if a person in the business of transporting persons for pay or hire operates it. Qualified Parking Parking you provide to your employees on or near your business premises. It also includes parking on or near the location from which your employees commute to work using mass transit, commuter highway vehicles or carpools. It does not include parking at or near the employee s home. Exclusion from wages - you can generally exclude the value of transportation benefits you provide to an employee during 2013 from the employee s wages up to the following limits: Qualified Monthly Transportation Benefit Commuting Assistance * $ $ Qualified Parking $ $ Bicycle $ * Per month for the combine value of mass transit passes, reimbursement for mass transit expenses, and payment for vanpooling expenses. Bike sharing programs are not qualified nontaxable benefits. Benefits more than limits If the value of a benefit for any month is more than the limit, include in the employee s wages the amount over the limit minus any amount the employee paid for the benefit. 7-18

19 Note: If the employee receives cash for benefits, it is taxable compensation. Any changes to the substantiation procedures applicable to employer-provided cell phones will not become effective until the IRS and Treasury Department consider public comments and suggestions received in response of Notice and publish guidance announcing any simplified substantiation procedures. PERSONAL USE COMPANY VEHICLES Qualified Non-personal Use Vehicles All of an employee s use of a qualified non-personal use vehicle is a working condition benefit. A qualified non-personal use vehicle is any vehicle the employee is not likely to use more than minimally for personal purposes because of its design. Qualified non-personal use vehicles generally include all of the following vehicles: Clearly marked police and fire vehicles Unmarked vehicles used by law enforcement officers, if officially authorized An ambulance or hearse used for its specific purpose Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds Delivery trucks with seats for the driver only, or driver plus a folding jump seat A passenger bus with a capacity of at least 20 passengers used for its specific purpose School buses Tractors and other special purpose farm vehicles Pickup Trucks A pickup truck is a qualified non-personal use vehicle (14,000 pounds or less) only if it has been specifically modified so it is not likely to be used more than minimally for personal purposes. For example, a pickup truck qualifies if it is clearly marked with permanently affixed decals; special painting or other advertising associated with your trade, business or function and is equipped with at least one of the following items: A hydraulic lift gate Permanent tanks or drums Permanent sideboards or panels that materially raise the level of the sides of the truck bed Other heavy equipment (electric generator, welder, boom or crane used to tow automobiles or other vehicles 7-19

20 It is used primarily to transport a particular type of load (other than over public highway in a construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly modified. Vans A van (14,000 pounds or less) qualifies if it is clearly marked with permanently affixed decals, special painting, or other advertising associated with your trade, business, or function and has a seat for driver only (or the driver and one other person), and either of the following items: Permanent shelving that fills most of the cargo area An open cargo area and the van always carry merchandise, material, or equipment used in your trade, business or function. Demonstrator Cars Generally, all of the use of a demonstrator car by a full-time auto salesperson qualifies as a working condition benefit if the use is primarily to facilitate the services the salesperson provides for the dealer and there are substantial restrictions on personal use. See Regulations section (o) for more information. PERSONAL USE VALUATION METHODS Lease Value Rule Under this rule, you determine the value of an automobile you provide to an employee by using its annual lease value. For an automobile provided only part of the year, use either its provided annual lease value or the daily lease value. If an employee uses the automobile, you generally reduce the lease value by the amount that is excluded from the employee s wages as a working condition benefit. However, you can choose to include the entire lease value in the employee s wages. The employee can than claim any deductible business expense for the car as an itemized deduction on his or her personal income tax return. Automobile Under this rule, an automobile is any 4-wheeled vehicle manufactured primarily for use on public streets, roads or highways. Consistency Requirements If using the lease value rule, you must begin using the rule on the first day you make the automobile available to any employee for personal use. However, the following exceptions apply: If you use the commuting rule (discussed later) when you first make the automobile available to any employee for personal use, you can change to the lease value rule on the first day for which you do not use the commuting rule. 7-20

21 If you use the cents-per-mile rule (discussed later) when you first make the automobile available to any employee for personal use, you can change to the lease value rule on the first day on which the automobile no longer qualifies for the cents-per-mile rule. You must use this rule for all later years in which you make the automobile available to any employee, except that you can use the commuting rule for any year during which use of the automobile qualifies. You must continue to use this rule if you provide a replacement automobile to the employee and your primary reason for the replacement is to reduce federal taxes. ANNUAL LEASE VALUE To figure the annual lease value of an automobile, you must: Determine the fair market value (FMV) of the automobile on the first day it is available to any employee for personal use. FMV of an automobile is the amount a person would pay to buy it from a third party, in an arm s length transaction, in the area in which the automobile is bought or leased. That amount includes all purchase expenses, such as sales tax and title fees. Special rules apply if you have 20 or more automobiles or if you and an employee own or leased the automobile together. You do not have to include the value of a telephone or any specialized equipment added to, or carried in, the automobile if the equipment is necessary for your business. However, include the value of specialized equipment if the employee to whom the automobile is available uses the specialized equipment in a trade or business other than yours. 7-21

22 Using the following 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. AnnualLeaseValueTable Automobile Fair Annual Automobile Fair Annual Market Value Lease Market Value Lease $ $ 600 $22,000-22,999 $ 6,100 1,000-1, ,000-23,999 6,350 2,000-2,999 1,100 24,000-24,999 6,600 3,000-3,999 1,350 25,000-25,999 6,850 4,000-4,999 1,600 26,000-27,999 7,250 5,000-5,999 1,850 28,000-29,999 7,750 6,000-6,999 2,100 30,000-31,999 8,250 7,000-7,999 2,350 32,000-33,999 8,750 8,000-8,999 2,600 34,000-35,999 9,250 9,000-9,999 2,850 36,000-37,999 9,750 10,000-10,999 3,100 38,000-39,999 10,250 11,000-11,999 3,350 40,000-41,999 10,750 12,000-12,999 3,600 42,000-43,999 11,250 13,000-13,999 3,850 44,000-45,999 11,750 14,000-14,999 4,100 46,000-47,999 12,250 15,000-15,999 4,350 48,000-49,999 12,750 16,000-16,999 4,600 50,000-51,999 13,250 17,000-17,999 4,850 52,000-53,999 13,750 18,000-18,999 5,100 54,000-55,999 14,250 19,000-19,999 5,350 56,000-57,999 14,750 20,000-20,999 5,600 58,000-59,999 15,250 21,000-21,999 5,850 Above 60,000 25% of FMV + $500 Safe-harbor Value You may be able to use a safe-harbor value as the FMV. For an automobile you bought at an arm s length, the safe-harbor value is your cost, including tax, title, and other purchase expenses. You cannot be the manufacturer of the automobile. For an automobile you lease, you can use any of the following as the safe-harbor value: The manufacturer s invoice price (including options) plus 4% The manufacturer s suggested retail price minus 8% (including sales tax, title and other expenses of purchase) The retail value of the automobile reported by a nationally recognized pricing source if the retail value is reasonable for that automobile (example: Kelly Blue Book at

23 Items Included in Annual Lease Value Table Each annual lease value in the table includes the value of maintenance and insurance for the automobile. DO NOT reduce the annual lease value by the value of any of these services that you did not provide. For example, do not reduce the annual lease value by the value of maintenance service contracts or insurance you did not provide. Items Not Included in Annual Lease Value Table The annual lease value does not include the value of fuel you provide to an employee for personal use, regardless of whether you provide it, reimburse its cost or have it charged to you. You must include the value of the fuel separately in the employee s wages. You can value fuel you provided at the FMV or at 5.5 cents per mile for all miles driven by the employee. If you reimburse an employee for the cost of fuel or have it charged to you, you generally value the fuel at the amount you reimburse of the amount charged to you if it was bought at an arm s length. If you provide any service other than maintenance and insurance for an automobile, you must add the FMV of that service to the annual lease value of the automobile to figure the value of the benefit. 4-year Lease Term The annual lease values in the table are based on a 4-year lease term. These values will generally stay the same for the period that begins with the first day you use this rule for the automobile and ends on December 31 of the fourth full calendar year following that date. Figure the annual lease value for each later 4-year period by determining the FMV of the automobile on January 1 of the first year of the later 4-year period and selecting the amount in column 2 of the Annual Lease Value Table that corresponds to the appropriate dollar range in column 1. Special Accounting Rule You can treat the value of benefits provided during the last 2 months of the calendar year, or any shorter period within the last 2 months, as paid in the next year. Thus, the value of benefits actually provided in the last 2 months of 2012 would be treated as provided in 2013 together with the value of benefits provided in the first 10 months of This does not mean that all benefits treated as paid during the last 2 months of a calendar year can be deferred until next year. Only the value of benefits actually provided during the last 2 months of the calendar year can be treated as paid in the next calendar year. Limitations The special accounting rule cannot be used for a fringe benefit that is a transfer of tangible or intangible personal property of a kind normally held for investment, or a transfer of real property. 7-23

24 Transferring an Automobile from one Employee to Another Unless the primary purpose of the transfer is to reduce federal taxes, you can refigure the annual lease value based on the FMV of the automobile on January 1 of the calendar year of the transfer. However, if you use the special accounting rule for fringe benefits, you can refigure the annual lease value (based on FMV of automobile) at the beginning of the special accounting period in which the transfer occurs. Prorate Annual Lease Value If you provide an automobile to an employee for a continuous period of 30 or more days, but less than an entire calendar year, you can prorate the annual lease value. Figure the prorated annual lease value by a fraction, using the number of days of availability as the numerator and 365 as the denominator. Daily Lease Value If you provide an automobile to an employee for a continuous period of less than 30 days, use the daily lease value to figure its value using the same calculation as prorated annual lease value mentioned above. CENTS-PER-MILE RULE Under this rule, you determine the value of an automobile you provide to an employee for personal use by multiplying the standard mileage rate by the total number of personal miles driven by the employee. You cannot use the cents-per-mile rule for an automobile if it s value when you first make it available to any employee for personal use is more than an amount determined by the IRS as the maximum automobile value for the year. ( $16,000 passenger vehicle and $17,000 for a van or truck.) You can use the cents-per-mile rule if either of the following requirements is met: You reasonably expect the vehicle to be regularly used in your trade or business throughout the calendar year (or for a shorter period during which you own or lease it) The vehicle meets the mileage test Regular Use in Your Business A vehicle is regularly used in your trade or business if at least one of the following conditions is met: At least 50% of the vehicle s total annual mileage is for your trade or business 7-24

25 Mileage Test You sponsor a commuting pool that generally uses the vehicle each workday to drive at least 3 employees to and from work The vehicle is regularly used in your trade or business based on all the facts and circumstances. Infrequent business use of the vehicle, such as for occasional trips to the airport or between your multiple business premises, is not regular use of the vehicle in your trade or business A vehicle meets the mileage test for a calendar year if both of the following requirements are met: The vehicle is actually driven at least 10,000 miles annually. If you own or lease the vehicle only part of the year, reduce the 10,000 miles requirement proportionately. Primarily employees use the vehicle during the year. Example: If only one employee uses the vehicle during the calendar year and that employee drives the vehicle at least 10,000 miles in that year, the vehicle meets the mileage test even if all the miles driven by the employee are personal. Consistency Requirements If you use the cents-per-mile rule, the following requirements apply: You must begin using this rule the first day you make the vehicle available to any employee for personal use. However, if you use the commuting rule when you first make the vehicle available to the employee for personal use, you can change to the cents-permile rule on the first day for which you do not use the commuting rule. You must use this rule for all later years in which you make the vehicle available to any employee and the vehicle qualifies, except that you can use the commuting rule for any year during which use of the vehicle qualifies. However, if the vehicle does not qualify for the cents-per-mile rule during a later year, you can use it for that year and thereafter any other rule for which the vehicle then qualifies. You must continue to use this rule if you provide a replacement vehicle to the employee and your primary reason for the replacement is to reduce federal taxes. Items Included in Cents-Per-Mile Rate The cents-per-mile rate includes the value of maintenance and insurance for the vehicle. Do not reduce the rate by the value of any service included in the rate that you did not provide. The value of any other service you provide for a vehicle that is not included in the cents-per-mile rate use the general valuation rule to value these services. 7-25

26 COMMUTING RATE Under this rule, you determine the value of a vehicle you provide to an employee for commuting use by multiplying each one-way commute (that is, from home to work or from work to home) by $1.50. If more than one employee commutes in the vehicle, this value applies to each employee. You can use the commuting rule if all of the following requirements are met: You provide the vehicle to an employee for use in your trade or business and, for bona fide non-compensating business reasons. You require the employee to commute in the vehicle. You will be treated as if you had met this requirement if the vehicle is generally used each workday to carry at least three employees to and from work in an employersponsored commuting pool. You establish a written policy under which you do not allow the employee to use the vehicle for personal purposes, other than for commuting or de minimus personal use (such as a stop for a personal errand on the way between a business delivery and the employee s home). Personal use of a vehicle is all use that is not for your trade or business. The employee does not use the vehicle for personal purposes, other than commuting and de minimus personal use. If this vehicle is an automobile, the employee who uses it for commuting is not a control employee. Who is a control employee? A control employee for 2013 is generally any of the following employees: A board or shareholder-appointed, confirmed, or elected officer whose pay is $100,000 or more A director An employee whose pay is $205,000 or more An employee who owns a 1% or more equity, capital, or profits interest in your business 7-26

27 BUSINESS EXPENSE REIMBURSEMENTS Accountable Plans Reimbursements or other expense allowances made under this type of plan are generally taxfree to the employee and do not require the reporting of income on the employee s Form W-2. An accountable plan must meet the following three requirements: Business Connection Expenses must be business related to the extent the employee could deduct them on his or her personal income tax return. Substantiation The employee must substantiate within a reasonable period of time the expenses with a detailed record that states the date, time, place, business purpose and amount of the expense. Return of Unsubstantiated Amounts Employees must return, within a reasonable time, any advances that exceed their substantiated expenses. There are two safe-harbor methods the IRS uses to meet this rule of reasonable time Method (Fixed Date Method) o o o Advance payments can be made no more than 30 days before an employee incurs the expenses Expenses are substantiated within 60 days after they are incurred or paid, and Excess advanced amounts are returned to the employer within 120 days after being paid or incurred. Periodic Statement Method o o Employer issues periodic statements to employees at least quarterly, identifying unsubstantiated advances or unreturned excess payments. Employees substantiate the expenses and refund any excess within 120 days after receiving the statement. If the arrangement fails to meet even ONE of these requirements, the method is a nonaccountable plan and all amounts paid are included on the employee s Form W-2 as taxable income and subject to withholding. Reimbursing an employee at the standard IRS mileage rate, or less, allows a mileage reimbursement plan to be classified as an accountable plan. Meals and Lodging The value of employer- provided meals and lodging to employees may be excluded from taxable wages when the meals or lodging are provided: On the employer s business premises, For the employer s convenience, and 7-27