Chapter 4: Payroll Benefit Basics

Payroll Source FPC Review Course 2013

Presented by: Carmela Miller, CPP

howardcarmmiller@msn.com

Chapter 4

• 4.1 Fringe Benefits• 4.2 Prizes and Awards• 4.3 Company Vehicles• 4.4 Group-Term Insurance• 4.5 Deferred Compensation• 4.6 Section 125 Flexible Benefit Plans

4.1 Fringe BenefitsTaxable Compensation• Back Pay Awards• Bonuses, Overtime Pay, Regular Wages, Tips• Sick pay and disability benefits• Commissions• Company Vehicle (personal use)• Dismissal and Severance Pay or Final Vacation• Employee-paid commuter fees in excess of $125/month• Bicycle Commuters reimbursement of $20/month• Employer-paid parking greater than $240/month• Fringe Benefits (unless specifically excluded)• Gifts, Gift Certificates, Prizes and Awards• Group Legal Services• Group Term Life Insurance over $50,000• Non-accountable reimbursed business expenses• Noncash fringes, unless excluded by the Internal Revenue Code• Non-Qualified Moving Expenses

Fringe Benefits, Cont.

Non-Taxable Compensation

• Dependent Child Care assistance (up to $5000) under a Section 129 plan

• Company vehicle (Business use only)• De minimis fringes• Educational assistance for job-related courses (no limit)• Group-term life insurance premium ($50,000 or less of

coverage)• Medical/Dental/Health plans (Employer Contributions)• Qualified employee discounts on employer goods/services

Fringe Benefits, Cont.

Non-Taxable Compensation

• Qualified moving expenses• Qualified transportation fringes ($125 Transit/$125 Car Pooling)• Reimbursed business expenses (if accounted for in a timely

manner)• Working condition fringes which would be deductible if paid by

employee• Non-job-related education assistance up to $5,250 under a

qualified plan• Long-term care insurance• Health Savings Accounts

Fringe BenefitsFair Market Value of

Non-Cash Compensation

In general, the fair market value of a fringe market value of a fringe benefit is determined on the basis of all the facts and circumstances. Specifically, the fair market value of a fringe benefit is the amount the employee would have paid a third party to buy or lease the fringe benefit. When determining the value of the benefit, keep the following two statements in mind:

The employee’s perceived value of the benefit is not relevant

The amount the employer paid for the benefit is not a determining factor.

Fringe Benefits, Cont.Imputed Income• Imputed Income the value of the benefits employees

receive that need to be included in the employee’s income.• Imputing income reduces employee’s net pay by increasing

taxes.• Employee does not receive additional pay in the form of

cash– Example is the group-term life insurance

*** Inputting should occur as often as possible. Inputting at year end could be reduce the employee income drastically and result in little of none net pay.

Fringe Benefits, Cont.Example of Imputed Income

An employee has $50.00 included in income for non-cash taxable fringe benefit. The employee’s salary is $1,500.00 for the monthly pay period. A calculation of the employee’s taxes follows:

Pay Without Imputed Income

Pay With Imputed Income

Salary $1,500.00 $1,500.00

Noncash Taxable Fringe Benefit

50.00

Taxable Pay $ 1,500.00 $1,550.00

Federal Income Tax (35.55) (43.05)

Social Security Tax (63.00) (65.10)

Medicare Tax (21.75)

(22.48)

Non-cash Fringe benefit

(50.00)

Net Pay $ 1,379.70 $1,369.37

Fringe Benefits Cont.

Noncash fringe benefits• Benefits must be recognized as income• Taxable income requires all

income/employment taxes be withheld and deposited.

• Employers must collect the tax from the employee or PAY the tax on behalf of the employee.

Fringe Benefits Cont.Non-reportable Fringe BenefitsMost cases these benefits are not reported on W2. Benefits are so small in value it is unreasonable or administratively impractical to account for.

Section 132 benefits include:• De minimis fringe benefits

– Occasional typing of a personal letter or use of phone for personal use

– Occasional personal use of the copier (<15% of total use of the machine)

– Occasional parties, donuts, coffee for employees– Occasional tickets to the theater or sporting events– Occasional supper money for working late– Traditional holiday gifts like a turkey or a ham (Cash gifts, cards or

gift certificates that are treated like cash are taxable)

Fringe Benefits Cont.

No-Additional Cost ServicesA good example of this is free flights for airline

employees or free telephone service for employees of AT &T.Qualified Employee Discounts

To qualify property and services must be offered for sale to customers in the ordinary course of an employer’s line of business.

– Discount is not greater than 20% of retail price– Discount on property is not greater than the gross profit earned

on the property at the price normally sold to customers.

Fringe Benefits Cont.

Working Condition FringesBusiness use of a company car or planeSubscriptions to business periodicalsFees to join professional organizations

Use of Athletic FacilitiesFacility must be located on employee

premises, and operated by the employer. (If can be used by public, exclusion does not apply.)

QUIZ TIME

COMPANY VEHICLES

Business use of a vehicle is nontaxablePersonal usage is taxableAccounting procedures for properly taxing

company vehicles require proper documentationBusiness miles drivenDate of tripPurpose of tripExpenses incurred

COMPANY VEHICLES

Reporting requirements – Personal usageFederal tax is optionalSS/MED must be withheldReported on the W2Reported at least once a yearFringe provided in November and December may be

reported in following year.This means that if the expense was incurred in Nov or

Dec 2012 you can report it in Jan 2013 when you do the 2012 W2’s

COMPANY VEHICLES

Valuation Method 3 Safe Harbor Methods

oAnnual Lease value methodoCents per mile methodoCommuting Value method

**** WARNING!! Once you decide on a method it MUST be used throughout the time the employee has the vehicle!

COMPANY VEHICLESAnnual Lease Method1. Find the cars fair market value2. Use the table to find the Annual Lease Value (ALV)3. Divide the personal miles driven by the total driven4. Multiply the FMV by the personal miles driven.

*** REMEMBER: If the employee has the car less than a year and more than 30 days you MUST pro-rate to get the Annual Lease Value (ALV)

PRO-RATE FORMULA: ALV (number of days driven/365)

COMPANY VEHICLESSafe Harbor 2 ***Cents per mile method***o 2012 $0.555

Vehicle put in service in 2012 Under $15,900 value Fleet, under $21,100 or SUV fleet under $21,900

o Qualifications Business expectations use throughout the year Vehicle must be driven 10,000 miles annually

(including personal use) and be used primarily by employees

COMPANY VEHICLES

Safe Harbor 3

**Commuting Valuation Method** Include $1.50 one way or $3.00 roundtrip if

company vehicle is (includes car pools): Not by a “Control Employee” Restricted to driving between work and home Non-compensatory business reasons

Check your understanding

A salesperson drives a company owned vehicle valued at $12,000. In the year, he logs 10,000 miles for business and 5,000 miles for personal use.1. Use the annual lease value method to

calculate the value of his personal use of the vehicle.

Answer

Lease value of a $12,000 vehicle is $3,600. $3,600 x 1/3 = $1,200.

Check your understanding

2. Determining the value of the salesperson’s personal use of this vehicle using the cents-per-mile method based on 10,000 business miles and 5,200 personal miles.

Answer

A: 5,200 x $0.5555 per mile = $2, 286.00

Check your understanding

3. What federal taxes, if any must the salesperson’s employer withhold for his personal use of the company vehicle?

a. Social Security tax and Medicare Onlyb. Federal Income tax onlyc. Federal income tax, social security tax and

Medicare taxd. No taxes are required to be withheld

GTL- Group Term Life Insuranceo Group Term Life

GTL>$50,000 is taxable income Exempt from FIT Withholding Taxable for SS/Med Holds true even EE pays via cafeteria plan Exempt from FUTA – Federal Unemployment Tax Calculating the value excess GTL – Must use Chart

Calculating the Value of Excess GTL 1. Determine the amount of coverage2. Amount of coverage minus $50,000 = Excess Coverage3. Excess coverage/1,000 x Value from the Table =Taxable Value per month.4. Taxable Value minus EE after tax contributions = Taxable value of GTL per

month.

EXAMPLE: Employee age 325. Coverage 30,000 x2 = $60,000 Amount of Coverage6. $60,000 - $50,000 = $10,000 Excess Coverage7. $10,000/$1,000 x .08 = $ 0.80 (.08 taken from chart)8. $0.80 Benefit Value per month9. $0.80 - $0.00 (EE Contrib) = $0.80 Taxable value of GTL per month

NOTE: Pretax contributions do not reduce the taxable value After tax contributions cannot reduce the taxable value below $0

Dependent GTL

o Dependent GTL < $2,000 excluded as a de minimis

o Dependent GTL > $2,000 includes entire amount

o Fully Taxable Subject to all withholdingo If not withheld for SS/Med Employer is liable

for these amountso Exempt from FUTA

Deferred Compensation

Deferred Compensation Plans

Qualified Plans

401(K) 403 (b)

Non-Qualified Plans

457 (b)

Deferred Compensationo Qualified vs. Non-Qualified Plans

“Qualified” means not taxable Deferral of current income until retirement Qualified plans must meet provisions of IRS 401 Be written and communicated to employees Exclusive benefit for employees or beneficiaries Non Transferable, Non Forfeitable, (Vested) Satisfy eligibility and vesting rules of employer Cannot discriminate in favor of HCE, Officers,

Shareholders Benefits may vary based on tenure

Deferred Compensationo 401 (k) – Qualified Plan

2012 Maximum contribution $ 17,000 Catch Up Contribution (Age 50+) $ 5,500 Non-Taxable for Federal or State Income Tax (except in

Pennsylvania) 401(k) Taxable for Social Security/Medicare and usually for 403(b)

and 457(b)o Annual MAX on all plans combined is $50,000 in 2012 or

100% of eligible compensation whichever is less Employer Options Plans may offer:

Employee match Ceilings for contributions Caps for matching

Deferred Compensationo 403(b) Plan for tax-exempt organizations, as Public

Schools, Colleges, Universities, Religious Groups, Charities.. 2012 Maximum Contributions $17,000 Catch Up Contribution $5,500 Non Taxable for Social Security/Medicare 2 plans available

Tax Sheltered Annuities (TSAs) Tax deferred annuity issued by a life insurance company

Tax Sheltered Custodial Accounts (TSCAs) Invested in mutual funds held by a qualifying custodian

Annual MAX on all plans combined is $50,000 or 100% of eligible compensation whichever is less.

Deferred Compensationo 457(b) Plan for Governmental Employees,

some tax exempt organizations

Complete deferral of wages sometimes 2012 Max Contribution $17,000 Max Catch Up $5,500 Not Taxable for Federal Income Tax May be taxable for Social Security/Medicare Treated in some ways as a non-qualified plan

Non-Qualified Plans

o Non-Qualified Deferred Compensation

Allows for discrimination in participation Includes Written Agreement No Federal tax until distribution Generally taxable when services are performed

NOTE: Always seek legal advice for these plans

Quiz Time

1. All of the following deferred compensation plans limit the employee to making a deferral contribution of $17,000 in 2012, EXCEPT:

a. 401(k)b. 403(b)c. 457(b)d. Non-Qualified

Quiz

2. An employee may provide all of the following features in a 401(k) plan EXCEPT:a) Matching contributionsb) Lower ceilings on contributionsc) Higher benefits for highly compensated

employeesd) Catch up contributions

Quiz3. A superintendent of schools who will be 49 years of age on December 31, 2012 earns $100,000. His school district has a 403(b) plan. What is the maximum that he can contribute to this before taxes in 2012?

a) $16,000b) $17,000c) $22,000d) $22,500

Quiz

4. Which of the following plans applies only to employees of public schools, colleges, and universities and public charities?

a) 401(k)b) 403(b)c) 457(b)d) Both b and c

Quiz

5. Payroll must withhold federal income tax from

a) Contributions to a 401(k) plansb) Contributions to a 457(b) plansc) Contributions to a non-qualified deferred

compensation plansd) Contributions to Roth 401(k) plans

Section 125 Flexible Benefit Plans

Means to accommodate the diverse structures of today’s Families

Known as cafeteria plansTax free benefitsOpen enrollment times or life status change

(marriage, divorce, death, birth, new employment)

Section 125 Flexible Benefit Plans Section 125 Benefits may include:

Offer for cash vs. benefit (qualified nontax benefit)

Medical/Dental – single, spouse, family Long term care insurance Group term life insurance

oWARNING! If converted to cash this becomes taxable Disability/accident coverage Dependent care – limit of $5,000 or $2,500 if

Married and filing separately

Section 125 Flexible Benefit Plans Section 125 Cont…..

Adoption assistance Vacation choices – buying additional time CODA – Cash or deferred arrangement (Only

401(k) plans, 403(b) and 457(b) plans cannot be included)

2 separate Flex accounts for qualified non covered expenses and dependent care

Health Savings accounts

Section 125 Tax Implications Cafeteria plans are not federal, social

security/Medicare taxableRemember 401(k) plans are the exception they

are taxable for SS/MedException: Cash received for selling of purchased

time, opting out of a benefit is fully taxableFlexible Spending Accounts (FSA) –

reimbursement fund previously mentioned – pretax $$ to cover medical expenses that are not eligible under plan

Flexible Spending Accounts

Flex Spending Use it or Lose it….Plain as can beEmployers must pay claim up to the annual

contribution electionEmployer can utilize the remaining balances at

the end of a plan year for overhead and administrative costs for the plan

QUESTIONS ???????