Preparing for an Internal Revenue Service Review for a Housing Authority Prepared by Urlaub & Co., PLLC, Certified Public Accountants (580) 332-4802 Presented by Ronald Urlaub, CPA 1 Objectives To understand the purpose of the Federal, State and Local Government Division FSLG Fringe Benefit Guide To obtain an understanding and identify taxable fringe benefits provided to employees The proper classification and reporting of employees and contractors 2 Federal, State & Local Government Division (FSLG) The primary objective of the FSLG is to ensure compliance with federal employment tax laws by governmental entities through the use of review and examination activities as well as through educational programs. 3 1
Why the Crack Down? Governmental entities have provided certain types of fringe benefits to employees that have not been properly reflected. Employee/Contractor information has not been properly reported to the Internal Revenue Service. The Internal Revenue Service is conducting compliance checks to train governmental entities. 4 FSLG Fringe Benefit Guide The guide, created by the IRS office of FSLG, was designed to provide governmental entities a basic understanding of the Federal tax rules relating to employee fringe benefits and reporting. http://www.irs.gov/pub/irs-tege/fringe_benefit_fslg_2013.pdf 5 Board of Commissioners Elected and Appointed Officials - With the exception of fee-based officials, discussed in section 4, elected and appointed officials are generally employees for Federal income tax withholding purposes. Under section 3401(c) of the Internal Revenue Code, these officials are subject to income tax withholding. 6 2
Employee Compensation Compensation includes any property or services provided in exchange for services. The term wages means remuneration for services performed by an employee for an employer, unless specifically excluded by statute. 7 Fringe Benefit A fringe benefit is a form of pay for the performance of services in addition to stated pay including property, services, or cash) Fringe benefits are classified into the following categories Taxable - Taxable fringe benefits are to be included as gross income wages. Nontaxable - Excluded from wages by a specific statute. Partially Taxable - Part is excluded by statute and part is taxable. Tax Deferred - Benefit is subject to tax later. 8 Travel Advances Travel advances are not treated as wages when they are paid under an accountable plan. What is an accountable plan? An accountable plan provides that There is a business connection to the expenditure. There must be adequate accounting by the recipient within a reasonable period of time. Excess reimbursements or advances must be returned. 9 3
Travel Allowance Most travel allowances are considered as taxable income due to the fact that they the participant does not account for the actual mileage. Example: A Housing Authority provides a travel allowance of $200 per month to an employee. The employee does not track the actual usage. 10 Travel Allowance Example A Housing Authority provides a travel allowance of $200 per month to an employee. The employee does not track the actual usage. Is the travel allowance considered as a taxable wage? 11 Travel Allowance Example A Housing Authority provides a travel allowance of $200 per month to an employee. The employee does not track the actual usage. Is the travel allowance considered as a taxable wage? Yes, since the Housing Authority does not require the employee to substantiate the usage, the plan is not considered accountable. 12 4
Travel Allowance If the employee substantiated the mileage each month, would the allowance amount still be considered taxable? 13 Travel Allowance If the employee substantiated the mileage each month, would the allowance amount still be considered taxable? The amount of actual cost would not be considered as taxable, but the remaining portion would be considered taxable, unless returned back to the PHA. 14 Use of a PHA Provided Vehicle If a PHA provided vehicle is used for both business and personal purposes, only the substantiated amount would be considered as non-taxable. The personal use of the vehicle is considered taxable to the employee as wages. 15 5
What is Considered Personal Use? Personal Use Commuting between residence and work Vacation, weekend use Separate records for business and personal mileage are required. If records are not maintained by the employee, the value of all use of the automobile is considered taxable wages to the employee. 16 Valuing Personal Use of Employer- Provided Vehicle Step One Compute personal use based on miles driven. Step Two Apply Valuation Rule using the general valuation rule or special automobile valuation rules. 17 Valuation Methods General Valuation Rule Special Automobile Valuation Rules Automobile Lease Valuation Rule Vehicle Cents-Per-Mile Rule Commuting Rule 18 6
General Valuation Example An employee has driven the vehicle 10,000 miles, of which 2,000 miles are considered personal. Step Determine the Fair Market Value $4,000 Multiply the percent of personal use 20% Amount to be included in wages $ 800 19 Automobile Lease Valuation Rule The value for purposes of the lease valuation rule are as follows: Determine the fair market value of vehicle provided to the employee. Use IRS Table in Publication 15-B to compute annual lease value. Multiply the annual lease value by the percentage of personal use computed in Step 1. If provided, multiply 5.5 cents per personal use miles. 20 Commuting Valuation Rule Personal use for commuting can be valued at $1.50 each way if: The vehicle is owned by the PHA. The vehicle is provided the employee for business use. The PHA requires employees to commute in the vehicle for valid non-compensatory business reasons. The PHA has a written policy prohibiting personal use other than commuting. Employee does not use the vehicle for other than de minimis personal use. There are restrictions for the use of this method for any employee that s salary is greater than a Executive Level V. 21 7
Vehicle Cents-Per-Mile Rule The use of this rule is based on a PHA meeting the following requirements: It is regularly used in the PHA s business or It is generally used each workday to transport at least three employees to and from work Driven by employees at least 10,000 miles per year. Computation: Multiply the standard mileage rate by number of personal miles driven. If fuel is not provided, the standard rate can be reduced up to 5.5 cents. 22 Vehicle Cents-Per-Mile Rule-Example An employee drives his PHA-provided car for 2,000 personal miles in 2009. The amount to be included as a wage is $1,100 (55 cents x 2,000 personal miles). 23 Work Clothes & Uniform Allowances Clothing or uniforms are excluded from wages of an employee if they are: Specifically required as a condition of employment, and Are not worn or adaptable to general usage as ordinary clothing To aid in the separation from general usage, PHAs can consider adding their logo to the shirts and pants. 24 8
Meals While Traveling Meals provided to reimburse employees for meals while traveling away from home overnight or while attending meetings or entertaining customers. Meals are divided into separate categories: Overnight Travel Meals Away From Tax Home But Not Overnight 25 Overnight Travel In order for travel reimbursements to be excludable from wages, employees must? Traveling away from home means: Employee must be traveling away from the general tax home area substantially longer than an ordinary day s work, and Employee needs to obtain substantial sleep or rest to meet the demands of the work while away from home. 26 Meals Away From Tax Home But Not Overnight Generally, these meals are taxable as wages to the employee because travel must be away from home overnight to be excludable. Example: An employee is required to travel from Houston to Galveston to work for the day. The employer agrees to pay for the employee s meals while in Wichita. The employee leaves home at 7:00 a.m. and returns home at 9:00 p.m. Before the employee returns in the evening, the employee takes a nap in his car for an hour. Although the employee is away from his tax home for substantially longer than a normal work day and even stops for rest, the employee is not considered to be away from home overnight. The rest is not considered substantial. Any meal money that the employee receives is taxable as wages. 27 9
Cash Awards Cash awards to employees are always taxable. Generally, the value of an award or prize given by an employer is taxable to an employee as wages, included on Form W-2, and subject to Federal income tax withholding, social security and Medicare. IRC 74; IRC 3121(a)(20) 28 Electronic Devices Electronic equipment, known as listed property, lends itself to personal use. With these requirements, strict substantiation requirements must be maintained. Employees are required to account for business and personal use. Business use is excludable from taxable wages. Personal use is included in the wages of the employee. 29 Cell Phones The IRS issued a notice 2011-72 providing information related to the tax treatment of employer-provided cell phones. Upon the employer providing an employee with a cell phone primarily for noncompensatory business reasons, the IRS will treat the employee s use of the cell phone for reasons related to the business as a working condition fringe benefit, the value of which is excludable from the employee s income. 30 10
EMPLOYEE VS. INDEPENDENT CONTRACTOR 31 INDEPENDENT CONTRACTOR DEFINED An individual who is not subject to the control or direction of another as to the means and methods for accomplishing a result. 32 EMPLOYEE DEFINED by Statute : IRC 3121(d) and Reg. 31.3121(d)-1 Any officer of a corporation. *Any individual under usual common law rules. Elected or appointed officials are employees. *Any individual who performs services that are included under an agreement entered into under Section 218 of Social Security Act. 33 11
COMMON LAW Employee IRC 3121(d)(2) Employer-employee relationship exists when the business for which the services are performed has the right to direct and control the worker who performs the services. 34 COMMON LAW (Continued) Worker is subject to the will and control of the business: not only as to what work shall be done, but also how work shall be done. 35 FACTORS: DIRECT/CONTROL See publication 1779 for a brief brochure Behavioral Control Financial Control Relationship of the Parties 36 12
BEHAVIORAL CONTROL Instructions when to do the work where to do the work what tools or equipment to use what work must be performed what routines or patterns must be used 37 BEHAVIORAL Evaluation Systems measures compliance with performance standards and is enforced 38 BEHAVIORAL CONTROL Training Periodic or on-going training provided by business about procedures to be followed and methods to be used. strong indication business wants services? 39 13
BEHAVIORAL CONTROL Training may include: orientation new product line government regulations voluntary attendance - no compensation 40 FINANCIAL CONTROL Significant investment Non-reimbursed expenses Services available to the market Method of payment 41 FINANCIAL CONTROL Opportunity for profit and loss Evidence of independent contractor Compensation based on hourly, daily, weekly basis evidence of employer-employee 42 14
RELATIONSHIP OF THE PARTIES Written contracts Employee benefits Discharge/Termination 43 Independent Contractor Makes own schedule Buys own products Has own phone number Furnishes own supplies Furnishes own equipment Makes a profit or loss as a result of his own business decisions 44 QUESTIONS.. Publication 963 is available on the internet at www.irs.gov (there are many examples of complex employment situations). If you are not sure about the status of a worker: Complete form SS-8 and send to IRS for determination. 45 15