FRINGE BENEFITS Sponsored by Commonwealth of Northern Marianas Islands, Division of Revenue & Taxation March 2, 2010 1 Federal, State and Local Governments (FSLG) FSLG Specialist Clark Fletcher Tel: 425.489.4042 www.clark.m.fletcher@irs.gov 2 FRINGE BENEFITS GENERAL RULES 3 1
WHAT IS A FRINGE BENEFIT? 1. Cash, or cash equivalent; 2. Property; and/or 3. Services Paid in addition to regular wages 4 VALUING NON-CASH FRINGE BENEFITS Fair-Market Value (FMV) What it would cost to buy the benefit from a thirdparty (arm s-length transaction) 5 ARE FRINGE BENEFITS TAXABLE? 1. Subject to taxation in year the benefit is provided 2. Taxable to recipient unless specifically excluded by the Internal Revenue Code 6 2
TYPES OF TAXABILITY Taxable Non-taxable Partially taxable Deferred taxation 7 REPORT TAXABLE FRINGE BENEFITS: Employees : Form W-2 Independent Contractors: Form 1099-MISC 8 FRINGE BENEFIT CODE SECTIONS Examples: IRC 117(d) - Qualified Tuition Reductions IRC 119 - Meals and Lodging IRC 125 - Cafeteria Plans IRC 127 - Educational Assistance Programs IRC 129 - Dependent Care Assistance IRC 132 - General Fringe Benefit Section 9 3
NON-TAXABLE FRINGES IRC 132: (b) No-Additional Cost Service (c) Qualified Employee Discounts (d) Working Condition Fringe Benefits (e) De Minimis Fringe Benefits (f) Qualified Transportation Fringe Benefits (g) Qualified Moving Expense Reimbursements 10 SPECIAL ACCOUNTING RULES 1. Timing of Taxability - Calendar Year 2. Option to Treat When Paid 3. Alternative Rule for ITW 4. Special Accounting Period 5. Employer s Election 11 1. TIMING OF TAXABILITY Calendar Year Cash Basis Include Taxable Fringe Benefits in Wages When Received 12 4
2. OPTION TO TREAT WHEN PAID Treat Taxable Fringe Benefits as PAID: Each Payroll Period Quarterly Semi-Annually Annual 13 3. ALTERNATIVE RULE FOR INCOME TAX WITHHOLDING Two Methods of Withholding: 1. Add to Regular Wages; or 2. Use Supplemental Wage Rate - 25% Flat Rate (2009) 14 4. SPECIAL ACCOUNTING PERIOD Benefits Paid in November and December Can Be Treat as Paid in Subsequent Year 15 5
5. Employer Election To Not Withhold Tax Employer-provided Vehicles only 1. Written election to inform employee required 2. Inclusion in FICA wages 16 ACCOUNTABLE PLANS Determining taxability of amounts received in addition to wages 17 WHAT IS AN ACCOUNTABLE PLAN? Allowance or Reimbursement arrangement whereby amounts received are NON- TAXABLE, IF certain rules are met 18 6
THREE ACOUNTABLE PLAN RULES 1. Business Connection 2. Adequate Accounting 3. Excess returned 19 1. Business Connection The Amount Must Be 1. Directly Related to Trade or Business, AND 2. Deductible on 1040 20 2. Adequate Accounting Whomever Incurs the Expenditure Must Verify Date Time Place Amount Business Purpose 21 7
Documentary Evidence Original receipts Contemporaneous records Original Receipt Exclusions: Travel Per diem expenses < $75.00 individual expenditure Qualified transportation expenses IF receipt not readily attainable 22 3. Return Excess Timely Within a reasonable period of time (usually set by statute or policy), or Within Timeliness Safe Harbors 23 TIMELINESS SAFE HARBORS Fixed Rate Method - 150 days Periodic Statement Method - 210 days Other Reasonable Method 24 8
NON-ACCOUNTABLE PLAN Any Amount Received That Does Not Meet ALL Three Accountable Plan Rules Becomes Taxable To The Recipient 25 COMMON FRINGE BENEFITS Working Condition Fringe Benefit _IRC 132(d) De minimus Fringe Benefit _IRC 132(e) Meals and Lodging Provided by The Employer _IRC 119 Non-travel Meals _IRC 274(k) 26 WORKING CONDITION FRINGE BENEFIT IRC 132(d) Definition: Any Property or Service that employee would have been entitled to deduct on Form 1040, if employer hadn t provided it 27 9
WORKING CONDITION FRINGE BENEFIT-IRC 132(d) General Rules: 1. Must Relate to Employer s Business 2. Employee Could Have Deducted on Form 1040 3. Employee Must Substantiate Expenses 4. Additional requirements for certain benefits 28 WHO IS AN EMPLOYEE FOR WORKING CONDITION FRINGE BENEFITS? Current Employees Partners or Directors Independent Contractors Volunteers 29 DISQUALIFIED AS WORKING CONDITION FRINGE BENFITS: Cash or Cash Equivalent Payments (Accountable Plan Rules apply) Physical Exams (See IRC 105) Club Dues 30 10
DE MINIMUS FRINGE BENEFIT- IRC 132(e) 1. ANY property or service that is small in value, AND 2. Administrative burden to track, AND 3. Provided on an infrequent, not regular or re-occurring, basis 31 EXAMPLES OF DE MINIMIS FRINGE BENEFITS: Photocopier Use Group Meals, Picnics Coffee, Doughnuts, Soft Drinks Flowers, Fruit for Special Circumstances Local Telephone Calls Commuting Use of Employer s Vehicle ONCE a month 32 DISQUALIFIED AS DE MINIMIS FRINGE BENEFITS: Cash or Cash Equivalent Certain Transportation Fares Use of Employer s Vacation Property, Boats, Ski-Doos, ATVs, etc. Commuting Use of Employer s Vehicle More Than Once a Month 33 11
WHO IS EMPLOYEE FOR DE MINIMIS FRINGE BENEFITS? ANY RECIPIENT 34 CLIFF PROVISION: If benefit does NOT qualify as de minimis, then the Entire Amount is taxable, not just portion that exceeds de minimis limits! 35 MEALS AND LODGING IRC 119 36 12
MEALS FOR CONVENIENCE OF EMPLOYER Meals are Non-Taxable IF: 1. Provided in-kind, AND 2. On employer s premises, AND 3. For employer s convenience 37 LODGING FOR CONVENIENCE OF EMPLOYER Lodging is Non-Taxable, IF: 1. Provided in-kind, AND 2. On employer s premises, AND 3. For employer s convenience, AND 4. Required as condition of employment 38 MEALS AND LODGING 1. In-Kind Not cash (neither advance or reimbursement) Meals consumed on premises If employee has choice of meals/lodging or cash, meals or lodging are taxable 39 13
MEALS AND LODGING 2. On Employer s Premises Specific place where employee performs substantial duties On, not near must within business perimeter Can be temporary worksite of employer 40 MEALS AND LODGING 3. Convenience of Employer Provided for Substantial Non-Pay Reason Depends on facts and circumstances 41 LODGING FOR CONVENIENCE OF EMPLOYER 4. Required as Condition of Employment So Employee Can Perform Job Duties Example: Firefighters provided meals and lodging at fire station 42 14
MEALS AND LODGING Lodging for Educational Institutions Non-Taxable Campus Lodging Located on/near Campus Employee Pays Rent - 5% ALV or Rate Comparable to Students/Non-employees 43 MEALS AND LODGING Meals or Lodging Furnished with a Mandatory Fee Taxable wages reduced by mandatory charge amount If employee can elect to purchase, no reduction in taxable wages 44 MEAL REIMBURSEMENTS IRC 274(k) 45 15
MEAL REIMBURSEMENTS Meals While Traveling Meals While Not Traveling Meals with Meetings or Entertainment (IRC 274(k)) De minimis Meals for Overtime Work (IRC 132(e)) 46 MEAL REIMBURSEMENTS Meals While Traveling Overnight Non-taxable IF reimbursed under the Accountable Plan Rules 47 MEAL REIMBURSEMENTS Meals Not Away From Home 1. Meals with Meetings and/or Entertainment 2. De minimis Meals 48 16
MEAL REIMBURSEMENTS 1. Meetings and/or Entertainment Non-taxable, If meal meets either test: 1. Directly-Related Test; or 2. Associated With Test 49 MEAL REIMBURSEMENTS Directly Related Test: 1. Clear Business Setting; AND 2. Main Purpose of Meal is the Active Conduct of Business; AND 3. Business is Actually Conducted; AND 4. Expectation of Deriving Income or Other Specific Business Benefit 50 MEAL REIMBURSEMENTS Associated With Test: 1. Associated with the Active Conduct of Business; AND 2. Substantial Business Discussions/Negotiations Directly Preceding or Following Meal 51 17
MEAL REIMBURSEMENTS Active Conduct of Business Must Establish a Clear Business Reason for the Incurrence of the Meal Expense Depends on Facts and Circumstances Must Demonstrate the Business Discussion was Substantial in Relationship to the Meal 52 TRADE OR PROFESSIONAL ASSOCIATION MEETINGS Non-Taxable When: Necessary and directly-related expense to attending business meetings or conventions of certain exempt organizations Substantiation Required Examples of Meetings: Chamber of Commerce, Rotary, Kiwanis 53 MEAL REIMBURSEMENTS De Minimus Meals Non-Taxable, IF: 1. Meal is small in value, AND 2. Occasional (not provided routinely or often), AND 3. Provided for Overtime work Extends Normal Work Schedule Meal Consumed During the Overtime Period 54 18
MEAL REIMBURSEMENTS - De Minimus Meals Taxable, IF Based on number of hours worked Negotiated by contract Stated in policy or statute 55 MEAL REIMBURSEMENTS Substantiation Under Accountable Plan Rules Use Actual Receipts Method Use Actual and/or Per Diem Method for Overnight Travel 56 TAKE A BREAK! 57 19
VEHICLES USED FOR THE EMPLOYER S BUSINESS Any use, or reimbursement for the use, of a vehicle for commuting between the work place and residence (or other non-business location) is a taxable fringe benefit, unless specifically exempted by the Internal Revenue Code 58 VEHICLES USED FOR THE EMPLOYER S BUSINESS SUBSTANTIATION REQUIREMENTS User required to provide substantiation to Employer Date, Business Purpose, Place of Each Trip (Accountable Plan rules) Contemporaneous Record of Expense 59 VEHICLES USED FOR THE EMPLOYER S BUSINESS Employee Vehicles Employer-provided Vehicles 60 20
EMPLOYEE S VEHICLE Reimbursed business mileage use is non-taxable IF at or below the standard federal mileage rates 61 STANDARD MILEAGE RATES 2008: $.485 Per Mile $.505 Per Mile (March 19) $.585 Per Mile (August 1) 2009: $.55 Per Mile 2010: $.50 Per Mile (January 1) 62 EMPLOYEE VEHICLE Reimbursements reportable are on Form W-2 Non-taxable Reimbursements up to mileage rate = Box 12, L -coded Excess Reimbursements = Boxes 1, 3, and 5 (subject to withholding taxes) 63 21
EMPLOYEE S VEHICLE If an employee chooses NOT to take a mileage reimbursement from the employer, then the employee can NOT take a mileage deduction on Form 1040 64 EMPLOYER - PROVIDED VEHICLES 65 EMPLOYER - PROVIDED VEHICLES Personal use is taxable unless: De minimus non-taxable personal use; or Qualified Non-personal Use vehicle 66 22
DE MINIMUS NON-TAXABLE PERSONAL USE Small personal detour while on business (i.e. driving to lunch while out of office), or Infrequent and occasional use for commuting (not more than one day per month) 67 SUBSTANTIATION REQUIREMENTS Accountable Plan rules All business mileage must be recorded by the user In absence of records ALL use of the vehicle is taxed to the user If records are kept only personal use is taxed 68 EMPLOYER - PROVIDED VEHICLES Valuation Methods 1. General Valuation Method 2. Three Special Valuation Rules 1. Automobile Lease Valuation (ALV) Rule 2. Vehicle Cents-Per-Mile Rule 3. Commuting Rule 69 23
VALUATION METHODS 1. Personal miles/total miles = Percentage of personal use rate 2. Select General or ALV valuation method 3. Multiply percentage of personal use by chosen valuation method 70 1. GENERAL VALUATION METHOD - Multiply Percentage of Personal Use x Fair Market Value* of vehicle *FMV = cost to commercially lease vehicle at an arm s-length transaction 71 2. SPECIAL VALUATION RULES Automobile Lease Valuation (ALV) Rule Determine FMV Establish ALV using IRS Tables (Pub 15-B) Multiply percentage of personal use by the stated automobile lease value, and Multiply personal miles x 5.5 cents if employer provides fuel 72 24
AUTOMOBILE LEASE VALUATION (ALV) RULE: Value remains in effect until December 31st of 4th full calendar year after the year in which the ALV rule was first applied 73 Vehicle Cents-Per-Mile Rule Requirements 1. Vehicle must be used: - regularly 50% or more in employer s business; or - in commuter pool; or - be driven 10,000 miles or more per year 74 Vehicle Cents-Per-Mile Rule Requirements 2. Vehicles with FMV greater than $15,300 (cars) or $16,000 (trucks) are NOT eligible * Use cents-per-mile rule until vehicle no longer meets requirements (*inflation-adjusted) 75 25
Vehicle Cents-Per-Mile Rule Calculation: 1. Multiply personal miles x standard federal mileage rate 2. If fuel is NOT provided, reduce by 5.5 cents/mile 76 COMMUTING VALUATION RULE Charges user $1.50 for each commuting event Subject to the Accountable Plan rules All five requirements must be met 77 COMMUTING VALUATION RULE - REQUIREMENTS 1. Vehicle Owned/Leased by Employer, AND 2. Provided to employees for business use, AND 3. Employer requires employees to commute in vehicle for noncompensatory reasons, AND 4. Written Policy prohibiting personal use other than commuting, AND 5. Employees use limited to de minimus personal use 78 26
COMMUTING VALUATION RULE If more than one employee commutes in the vehicle, then ALL employees are charged for the commuting value Control Employees are Ineligible 79 COMMUTING VALUATION RULE Control Employee 1. Elected Official, or 2. Employee at Executive Level V @$145,700* Annual Salary, or 3. Highly-Compensated Employees @$110,000* (*inflation-adjusted) 80 EMPLOYER - PROVIDED VEHICLES Qualified Non-Personal Use Vehicle All use is Non-taxable to employee Recordkeeping/Substantiation is Not required 81 27
QUALIFIED NON-PERSONAL USE VEHICLE: By design, the vehicle is not likely to be used for personal use Clearly-marked police and fire vehicles Unmarked Law Enforcement Vehicles (Special rules apply) Certain special purpose vehicles (i.e., dump trucks) School buses 82 QUALIFIED NON-PERSONAL USE VEHICLE: Clearly Marked* Police/Fire Vehicles Employee must always be on call Employee must be required to use vehicle for commuting Personal use outside jurisdiction prohibited (*Marking on license plate doesn t qualify) 83 QUALIFIED NON-PERSONAL USE VEHICLE Unmarked Law Enforcement Vehicle Employer must authorize personal use Personal use incidental for use for Law Enforcement purposes Employer must be responsible for crime prevention and investigation Employee must be full-time Law Enforcement officer 84 28
QUALIFIED NON-PERSONAL USE VEHICLE Unmarked Law Enforcement Vehicle (Continued) Law Enforcement officer is authorized to carry weapons execute warrants make arrests 85 QUALIFIED NON-PERSONAL USE VEHICLE Qualified Specialized Utility/Repair Truck By Design To carry tools, equipment, materials, etc. Has permanent interior construction Employer must require the employee to commute for valid noncompensatory reasons (to perform services) 86 QUALIFIED NON-PERSONAL USE VEHICLE Vans and Pick-up Trucks Specifically modified, AND If GVW <14,000 pounds, must be clearly marked with permanent fixtures Vans Seat for Driver (or one other person), AND Outfitted with Permanent Shelving OR Open Cargo Space for Transport of Materials used in the Business 87 29
QUALIFIED NON-PERSONAL USE VEHICLE Pick-up Trucks Equipped With: Hydraulic Lift Gate; OR Permanent Tanks or Drums; OR Permanent Sideboards/Panels to Raise Side Levels of Truck Bed Or used as primary transport of loads/materials 88 SUBSTANTIATION Substantiation By Employee Not Required If Commute Value Rule Used, or If Qualified Non-Personal Use vehicle, or If Vehicle Not Used for Personal Use generally applies to motor pool vehicles other requirements 89 VEHICLE NOT USED FOR PERSONAL PURPOSES: Owned or Leased by Employer Provided to Employee for Business Use Kept on Employer s Premises Employee lives off-premises Written Policy Prohibiting Personal Use Employer Believes No Personal Use 90 30
VEHICLE NOT USED FOR PERSONAL OTHER THAN COMMUTING ($1.50 each way): Owned or Leased by Employer Provided to Employee for Business Use Employer Requires Employee to Commute for Valid Business Purpose Written Policy Prohibiting Personal Use Employee Does NOT have Personal Use 91 NON-PERSONAL USE VEHICLES: Employers Must Maintain : Written Policy Restricting Personal Use Internal Controls 92 RESOURCE LIST FSLG Fringe Benefit Training guide Publication 15-B, Employer s Guide to Fringe Benefits Publication 463, Travel, Entertainment, Gift and Car Expenses 93 31
Before Leaving Please Complete IRS Evaluation Forms 94 THANK YOU! 95 32