The hardest thing in the world to understand is the income tax. Albert Einstein FOUNDATIONS IN UNIVERSITY FINANCE UNIVERSITY TAX

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1 The hardest thing in the world to understand is the income tax. Albert Einstein FOUNDATIONS IN UNIVERSITY FINANCE UNIVERSITY TAX

University Tax Cassandra Franks, CPA Director, University Tax Services Financial Management Services Participant Outcomes Recognize when payment situations have tax consequences Payments made

2 University Tax Cassandra Franks, CPA Director, University Tax Services Financial Management Services Participant Outcomes Recognize when payment situations have tax consequences Payments made Payments received Locate and use the available resources to review procedures, inform stakeholder of potential tax issues, and appropriately report payments I N D I A N A U N I V E R S I T Y 1

3 University Tax: Our Agenda 1. Some Basics a. Why we should care about tax reporting b. About University Tax Services c. IU s tax status 2. Tax Reporting and Related Issues a T Payments made to students b. W-2 Payments made to employees c MISC Payments made to vendors d S Payments made to international individuals e. ST-103 Payments made with sales tax 3. Tax Support I N D I A N A U N I V E R S I T Y 2

4 University Tax: Basics We need a tax office because we: Receive funds from and provide funds to students Pay employees Engage in revenue-generating (auxiliary) activities Pay for services and rentals I N D I A N A U N I V E R S I T Y 3

5 University Tax Services: Mission Our mission is to contribute to the University's overall success by advancing compliance with Federal and State tax laws throughout the university community by acting as the unified resource for interpretation, education, and enforcement with regard to tax issues. I N D I A N A U N I V E R S I T Y 4

6 University Tax Services Organized as a full service department with 10 staff members Keeping IU compliant with: Internal Revenue Service Social Security Administration State and local jurisdictions IU policies I N D I A N A U N I V E R S I T Y 5

7 University Tax Services COMPLIANCE EDUCATION Payroll Tax Consultation Nonresident Alien Tax Sales Tax Full Service Office Seminars Web Resources Unrelated Business Income Tax Misc. Tax Forms Communication I N D I A N A U N I V E R S I T Y 6

8 About IU s Tax Status Indiana University maintains dual status: 1. Instrumentality of the State of Indiana Governmental Entity Sec. 115 Established by the State Legislature 2. Exempt Organization Nonprofit organization Sec. 501(c)(3) Indiana University s Primary Purpose: Teaching, research, and public service I N D I A N A U N I V E R S I T Y 7

9 Reality is IU is a BIG Taxpayer Total Payroll and Retirement Payments Retirement, $203,830,646, 33% Payroll Retirement Payroll, $417,558,519, 67% I N D I A N A U N I V E R S I T Y 8

10 Not just payroll tax Non-Payroll Tax Payments Other Tax, $96,129.21, 6% NRA, $473,572.52, 26% NRA UBIT Sales/Innkeepers Sales/Innkeepers, $1,034,317.33, 57% Other Tax UBIT, $203,146.00, 11% I N D I A N A U N I V E R S I T Y 9

11 Forms Reported , T 78% delivered electronically 52,116 W-2, 79% delivered electronically 9, E 5, Misc R K 2, S Weekly, Monthly, Quarterly, and Annual payments and returns (Total of 714 payments/returns) I N D I A N A U N I V E R S I T Y 10

12 Tax Reporting I N D I A N A U N I V E R S I T Y 11

13 FORM 1098-T Tuition Statement 107,802 forms, 78% electronic delivery I N D I A N A U N I V E R S I T Y 12

14 Form 1098-T Tuition Statement Reports Bursar Data (SIS) Payments received for qualified tuition and related expense Scholarships and grants Information only form for educational tax credits ONLY at this time Lifetime Learning and American Opportunity I N D I A N A U N I V E R S I T Y 13

15 Stipend: Defined sti pend noun 1. a periodic payment, especially a scholarship or fellowship allowance granted to a student. 2. fixed or regular pay; salary. stipend = payment Ask yourself What is my payee doing for the money? I N D I A N A U N I V E R S I T Y 14

16 Payments of Scholarship/Fellowship Must follow Federal Financial Aid Compliance and Department of Education Payments to students must be made through SIS Any exceptions paid on a DV must be approved by campus RARE! Payment to nonstudents need to be analyzed Policy SPA , Payments and fee Remissions to Graduate Students on Sponsored Programs I N D I A N A U N I V E R S I T Y 15

17 FORM W-2 Wage and Tax Statement 52,116 forms, 79% electronic delivery I N D I A N A U N I V E R S I T Y 16

18 Form W-2 Wage and Tax Statement Reports Payroll Data (HRMS): Wages Taxes withheld Additional reportable amounts I N D I A N A U N I V E R S I T Y 17

19 Form W-2 Wage and Tax Statement Additional Reportable Amounts: Non-Cash Fringes Graduate-level tuition benefit reported by Tax/HR Reported provided by HR and Bursar automatically applied to Employee s paycheck, Tax notifies EE via For tuition paid by department on behalf of employee, call Tax may be other reporting issues if not considered a Working Condition Fringe Benefit = REQUIRED for the position Prizes and awards reported by departments Need to complete a Prize Data Collection Form from Tax website for all prizes given, not just to employees Also see policy VII-4 Drawings, Games and Prizes Gifts to employees (clothing, other items) reported by departments Non-cash (or cash) items given to employees Also see policy FIN-ACC-I-590 on Gifts to Employees or Non- Employees I N D I A N A U N I V E R S I T Y 18

20 Form W-2 Wage and Tax Statement Additional Reportable Amounts: Non-Cash Fringes Moving expenses reported by departments, reviewed by Tax Submit DV using 5070 object code, Tax reviews for allowable vs. unallowable Also see policy FIN-ACC-I-310 on Moving Expenses New policy in draft for 2016!!! Complimentary tickets (Athletic or Entertainment) reported by Tax Department to submit to Tax for payroll reporting Personal use of an IU vehicle reported by Tax Tax issues questionnaires each year department to report personal use of car I N D I A N A U N I V E R S I T Y 19

21 Form W-2 Wage and Tax Statement IRS Accountable Plan Exclusion from taxable wages (when certain rules are followed): 60 day rule applies Travel reimbursements Handled by Travel Management Services See Policy FIN-TRV-2.0 for Reimbursement of Travel Expenditures Reimbursement for out of pocket expenses Policy for FIN-ACC-I-620 Reimbursement Under the Accountable Plan Reimbursements need to be substantiated within 60 days or deemed taxable income to individual I N D I A N A U N I V E R S I T Y 20

22 Form W-2 Wage and Tax Statement Withholding income tax in other states Over 200 employees living and working in 40 registered states New Primary Work Location field in HRMS Driven by Hire, Promote, Demote, Transfer or Maintain Job Data edoc Tax is notified by departments of the change in location this drives tax withholding and paychecks I N D I A N A U N I V E R S I T Y 21

23 FORM 1099-MISC Miscellaneous Income 5,734 forms I N D I A N A U N I V E R S I T Y 22

24 Form 1099-MISC Miscellaneous Income Reports KFS Data: Rents, Royalties, other income, medical and health care payments and nonemployee compensation To corporations and non-corporations Prizes and Awards! I N D I A N A U N I V E R S I T Y 23

25 Form 1099-MISC Miscellaneous Income Object Codes DRIVE Tax Reporting SEE FULL LISTING ON FMS TAX WEBSITE! Rents Royalties Form 1099-MISC Other Income Nonemployee Compensation Medical & Healthcare I N D I A N A U N I V E R S I T Y 24

26 Form 1099-MISC Miscellaneous Income Object Codes Drive Tax Reporting Rents Costume Rentals: 4610 Equipment Rentals: 4615, 4620, 5391 Space Rental: 4680, 4694 Rents I N D I A N A U N I V E R S I T Y 25

27 Form 1099-MISC Miscellaneous Income Object Codes Drive Tax Reporting Royalties Royalties: 4506, 4673, 4674, 4675, 4676 Rights and Permissions: 4670, 7671 Royalties I N D I A N A U N I V E R S I T Y 26

28 Form 1099-MISC Miscellaneous Income Object Codes Drive Tax Reporting Other Income Research participants/participant fee: 4061, 4087, 4561 Prize and award: 4866 Other Income I N D I A N A U N I V E R S I T Y 27

29 Payments for Prizes/Awards Reportable as Other Income, Reported on 1099-MISC Recognition of special achievement, special skill, knowledge, or special renown in a certain area Cash or non-cash prize reportable See IU Policy VII-4 Drawing, Games and Prizes Other Income I N D I A N A U N I V E R S I T Y 28

30 Form 1099-MISC Miscellaneous Income Object Codes Drive Tax Reporting Medical and Healthcare Physician Fees: 4563 Laboratory Service: 5074 Fees Medical: 4524 Medical & Healthcare I N D I A N A U N I V E R S I T Y 29

31 Form 1099-MISC Miscellaneous Income Object Codes Drive Tax Reporting Nonemployee Compensation Over 80 object codes, from artist to waste disposal Nonemployee Compensation I N D I A N A U N I V E R S I T Y 30

32 Form 1099-MISC Miscellaneous Income Object Codes Drive Tax Reporting Common Errors Nonemployee Comp COMMON ERROR Graphic Designer 4166 Printing and Duplication, instead of 4520 Contracted Services I N D I A N A U N I V E R S I T Y 31

33 Form 1099-MISC Miscellaneous Income Object Codes Drive Tax Reporting Common Errors Nonemployee Comp COMMON ERROR Guest Speaker 4013 Conference & Workshops, instead of 4535 Honoraria I N D I A N A U N I V E R S I T Y 32

34 Form 1099-MISC Miscellaneous Income Object Codes Drive Tax Reporting Common Errors Nonemployee Comp COMMON ERROR Employee Reimbursement Use of service or rental object codes Creates 1099-MISC for employee I N D I A N A U N I V E R S I T Y 33

35 misclassification I N D I A N A U N I V E R S I T Y 34

36 Employee vs Independent Contractor Misclassification W-2 or 1099-MISC Misclassification: Results in the wrong tax form generation: W-2 v MISC Is a hot topic for IRS Can be avoided by following IU Policy IV-220 Determination of Employee or Independent Contractor Status Deem to be an employee unless meets criteria Complete the Interactive Independent Contractor Questionnaire see Tax website! I N D I A N A U N I V E R S I T Y 35

37 Independent Contractor Employee I N D I A N A U N I V E R S I T Y 36

38 Employee vs Independent Contractor Misclassification W-2 or 1099-MISC Attributes of a Independent Contractor: Service is of short duration Established business Determines how to do the work Risk of financial loss Hires/pays workers Not teaching, researching, or providing instruction this is IU s mission! I N D I A N A U N I V E R S I T Y 37

39 Employee vs Independent Contractor Misclassification W-2 or 1099-MISC Attributes of an Employee Service is of longer duration Provided tasks, tools, and instruction Protected from risk of financial loss Teaching/Research Services provided to support primary purpose of institution Similar services provided by other employees I N D I A N A U N I V E R S I T Y 38

40 Case Studies I N D I A N A U N I V E R S I T Y 39

41 FORM 1042-S Foreign Person s U.S. Source Income Subject to Withholding 2,070 forms I N D I A N A U N I V E R S I T Y 40

42 Form 1042-S Foreign Person s U.S. Source Income Subject to Withholding Reports KFS, HRMS and SIS Data All income types paid to nonresident aliens under a different tax code than U.S. persons Similar to W-2 and 1099-MISC for U.S. persons I N D I A N A U N I V E R S I T Y 41

43 U.S. Person vs Non-U.S. Person Type of Payment Wages (Employment) Independent Contractor U.S. Person Withhold Tax Yes No Reportable Yes W-2 Yes 1099-MISC Non-U.S. Person Withhold Tax Yes Yes Reportable Yes Yes Services by Corporation No No Yes Yes Royalty No Yes 1099-MISC Yes Yes Prize & Award No Yes 1099-MISC Yes Yes Scholarship/Fellowship No No Info 1098-T Yes Yes Purchase of product No No No No Rental/Lease No Yes 1099-MISC Yes Yes I N D I A N A U N I V E R S I T Y 42

44 Form 1042-S Foreign Person s U.S. Source Income Subject to Withholding Who are nonresident aliens? Foreign visitors International Students International Teachers or Researchers Enter the U.S. on a non-immigration visa, such as F-1, J-1, B-1 Have not passed the substantial presence test I N D I A N A U N I V E R S I T Y 43

45 Form 1042-S Foreign Person s U.S. Source Income Subject to Withholding Wages to Nonresident Aliens Special withholding tables apply Students, faculty and staff complete the International Tax Questionnaire Treaty benefits may be available University Tax Services determines tax status, based on the questionnaire (FNIS) I N D I A N A U N I V E R S I T Y 44

46 Form 1042-S Foreign Person s U.S. Source Income Subject to Withholding Scholarships to Students Non-qualified scholarships are subject to tax withholding Non-qualified scholarship: all scholarship less qualified educational expense (tuition), less book allowance Student Information System (SIS) automatically withholds federal and state tax. I N D I A N A U N I V E R S I T Y 45

47 Payments to Foreign Vendors NON-TAXABLE Payments for: Goods Services performed outside the U.S. Tax treaty TAXABLE Payments for: Services performed inside the U.S. Internet access used in the U.S. Royalties used inside the U.S. I N D I A N A U N I V E R S I T Y 46

48 Form 1042-S Foreign Person s U.S. Source Income Subject to Withholding Payments to Foreign Vendors U.S. or Foreign, as established on the KFS vendor record. (W-9 or W-8) All payments to foreign vendors require University Tax Service review KFS document initiators should leave a note if payment is for goods or foreign-sourced services I N D I A N A U N I V E R S I T Y 47

49 Form 1042-S Foreign Person s U.S. Source Income Subject to Withholding Short-term Visitor Preplanning Payment? Travel and/or Honorarium Set expectations! Invite letter is highly recommended Documents to collect Is the department going to pay the taxes? Is there a tax treaty? More information at FMS website Tax has assembled a committee of functional, central administrative departments to draft guide on making payments to foreign individuals 2016! I N D I A N A U N I V E R S I T Y 48

50 DRAFT Payment Guidelines I N D I A N A U N I V E R S I T Y 49

51 FORM ST-103 State of Indiana Sales and Use Tax Filed each month I N D I A N A U N I V E R S I T Y 50

Form ST-103 Indiana Sales and Use Tax Reports KFS Data: Sales tax collected on proprietary activities at the department level and remitted at time of sale

52 Form ST-103 Indiana Sales and Use Tax Reports KFS Data: Sales tax collected on proprietary activities at the department level and remitted at time of sale University Tax Services makes total University payment each month Total of $1,034, paid for sales taxes in 2015 I N D I A N A U N I V E R S I T Y 51

53 Collecting Sales Tax Associated with a private business Outside the scope of activities Proprietary activity (taxable) I N D I A N A U N I V E R S I T Y 52

54 Collecting Sales Tax I N D I A N A U N I V E R S I T Y 53

55 FORM 990-T Unrelated Business Income Tax Return Filed annually I N D I A N A U N I V E R S I T Y 54

Unrelated Business Income (UBI) IU does in fact pay income taxes Total of $203,146 for FY2014 Any revenue generating activity that s outside our IU mission of teaching and

56 Unrelated Business Income (UBI) IU does in fact pay income taxes Total of $203,146 for FY2014 Any revenue generating activity that s outside our IU mission of teaching and research Treasury requires RPAQ approval prior to initiation See IU Policy FIN-TRE-VI-121 Establishing and Modifying Revenue Producing Activities (RPA) I N D I A N A U N I V E R S I T Y 55

57 UBI Examples Advertising income Catering Corporate sponsorship payments Sports camps Use of facilities by the public Key UBIT Concept: How the Funds are Used Does Not Matter How the Funds are Earned Does Matter I N D I A N A U N I V E R S I T Y 56

58 In general, Tax analysis is based on Facts & Circumstances. The tax department is trained to provide guidance to the university community in order to keep the university in compliance, but we need your help. Know when to call and share your facts! When in doubt, I N D I A N A U N I V E R S I T Y 57

59 CONTACT INFOMATION University Tax Services Fax: I N D I A N A U N I V E R S I T Y 58

The hardest thing in the world to understand is the income tax. Albert Einstein FOUNDATIONS IN UNIVERSITY FINANCE UNIVERSITY TAX

The hardest thing in the world to understand is the income tax. Albert Einstein FOUNDATIONS IN UNIVERSITY FINANCE UNIVERSITY TAX University Tax Cassandra Franks, CPA Director, University Tax Services Financial