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Payroll Tax Rules, Employee Benefits,

and Income Tax Reporting

Winter Conference

February 2016

Karen M. Field

KPMG LLP

1©2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member f irms affiliated with KPMG

International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Notice

The following information is not intended to be “written advice concerning one or more Federal tax

matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and is not intended to address the

circumstances of any particular individual or entity. Although we endeavor to provide accurate and

timely information, there can be no guarantee that such information is accurate as of the date it is

received or that it will continue to be accurate in the future. No one should act on such information

without appropriate professional advice after a thorough examination of the particular situation.

1



Federal Income Tax Reporting and Withholding

Section 61 – compensation paid to employees is included in income unless otherwise

excluded

■ If income AROSE OUT OF employment relationship, it is usually taxable compensation

unless specifically excluded

Section 6041 – must report income on Form W-2

Section 3402 – must withhold federal income tax

Section 3121 – must withhold FICA/Medicare

Form 941 – quarterly report of compensation paid and withholding



Non-employee Compensation

Non-employee compensation – Report on Form 1099-MISC Box 7

■ No withholding

■ Subject to SECA

Taxable injury payments and other non-employment settlements – 1099-MISC Box 3



Taxable Compensation

Section 1.61 or section 83 - taxable compensation

■ Form W-2 if arises out of employment relationship (NOT 1099-MISC unless earned as non-

employee or no longer alive!)

■ Usually DO WITHHOLDING FIRST

– Withhold by holding back other compensation

– Withhold by obtaining check from employee



Withholding Timing and Method

Federal

■ Regular

– payroll withholding deposited within 2-5 days after payroll (for most employers) – based on

weekday of payment

– Follows Form W-4 – whatever the W-4 says, goes (between ee and IRS unless IRS

contacts the employer

■ Supplemental

– Any non-regular wages (bonuses), can generally be run through payroll but OPTIONAL

supplemental withholding is typical

– 25% flat rate (39.6% rate once a person’s supplemental wage > 1 million.

■ Next Day rule – deposit FASTER



Taxable Fringe Benefits Payroll

Section 102(c) – “Gifts” to employees from employers are generally compensation

Section 1.61-21

■ Non-cash benefits (that do not fall into section 83 property or one of the fringe benefit

exclusions)

■ Taxable at FMV of the benefit in an arms-length transaction

■ Subject to FICA/Medicare and FIT withholding during the calendar year – employer can

choose when during the calendar year.

– Lag method – benefits earned in last 2 months of calendar year



Deferred Compensation - Payroll

Section 457(b)

Vested (usually) deferred compensation, up to $18,000 per year per person

Section 3121(v)(2) – withhold FICA/Medicare on any amounts contributed that are vested

during year of contribution.

Withhold on other income, usually.

Withhold FIT in year of DISTRIBUTION – taxable at proper distribution




Section 457(f)

ANY deferral of compensation, contractual, annual that is unvested must be taxed in the year

of vesting

Vesting = lapse of the last substantial risk of forfeiture

■ Ignore “for cause” risk of forfeiture, ignore most “non-complete risks of forfeiture. “You

leave, you lose” is the usual substantial risk of forfeiture

Subject to FIT and FICA/Medicare in year of vesting, no matter when paid

Exception for INVOLUNTARY severance

■ Does not resemble other deferred compensation

■ Paid over less than 2 years after termination

■ Total is less than 2 x prior compensation (IRS may narrow this)




Qualified Plans

– Generally 20% mandatory withholding unless rolled over or annuity payments (withheld

by plan administrator, not employer)

■ 401(k) – elective deferrals –

– FICA/Medicare as deferred

– 401(k) amounts no federal taxation until distributed- withheld by plan administrator

■ Employee after-tax contributions –

– FICA/Medicare as contributed

– subject to federal income tax as contributed (withheld by employer)

■ Employer contributions –

– not subject to FICA/Medicare

– Subject to federal taxation as distributed (plan administrator)



Correcting Failure to Report or Withhold

Failed to withhold or report

Form 941c correction (if done correctly) is interest free

■ Do Form 941-X paying in FICA/Medicare

■ Do Form W-2c reporting income and FICA/Medicare properly to employees

■ Obtain Form 4669 (affidavit) from employees “you did not withhold but I did pay tax”

Go into IRS and negotiate – rare unless amounts are large or IRS is already in the door



Payroll Penalties

Failure to report on Form W-2

■ $100 employee, $100 IRS

100% penalty for failure to withhold FICA/Medicare

100% liability for tax (section 3403)

Section 6656 – progressively higher % of TAX over time for late deposit

Form 941 failure to file

Negligence penalties can also apply

■ 20% of tax



State Payroll Issues

Most states (not FL) require wage withholding

■ Regular

■ Supplemental

■ Multistate withholding

– Two states have the right to tax, both can.

■ If one state does not tax, the other will not cede right to tax.

■ Nonqualified deferred compensation rules

■ Qualified deferred compensation rules

■ Equity compensation rules (FL is unlikely to get the money)

FL State Unemployment (now “Re-employment Tax” rate for 2016)

■ Quarterly employer payment into fund

■ Beginning rate 2.7% of first $7,000 of wages

■ Recalculate after 10 quarters

Taxable Fringe Benefits



IRS Payroll Tax/Employment Tax Examinations

Reviews Compensation Reporting/Withholding issues

■ Highly Compensated Employee Compensation

■ Deferred Compensation

■ Taxable Fringe Benefits



IRS Examination List of Fringe Benefits

Gift cards

Inappropriate “tax free” education

Car or use of car, driver

Spousal/dependent travel

Employer or vendor-paid vacations

Free dining rooms (unless meet section 119 or 132(e)(2) direct cost rules)

Club memberships

Tax return or wealth management assistance

Security

Excludible Fringe Benefits



Excludible Fringe Benefits

Section 132

■ De minimis

■ Working Condition

■ On premise gym

■ Transportation Fringe/Parking

■ Employee Discounts

■ No-additional-cost benefit

■ Line of business rules

■ Discrimination rules



De Minimis

Definition of employee

Administratively difficult to handle

■ Almost never cash or cash equivalents!

■ Grocery certificate? TAM 200437030

Infrequent

Low value

■ MEALS (not every day…)

■ T-shirts, umbrellas

■ Branding does not help much!

■ $75-$100 (1.274-5(c)(2)(iii)(2))



On-premise Dining Rooms

Section 132(e)(2)

■ On business premise

■ Employer run or run for employer by management co

■ Non-discriminatory

■ Employee pays direct cost OR direct cost is included in income



Free Meals and Lodging

Section 119

■ Meals or lodging for employer’s convenience (NOT compensatory reasons)

■ On employer’s premise

■ Mandatory training on leased property? Free meals in remote areas on moving “business premise”?

Boyd Gaming and statute

■ 50% of employees rule

No discrimination rule on lodging

Free meals, section 119 passes through 132(e)(2) – discrimination rule applies



Working Condition Fringe Benefit

Most executive and director costs

■ D&O insurance

■ Offices provided to directors, independent contractors?

Definition of employee includes partners

If employee could have deducted in business of being an employee of THIS employer,

employer can provide tax free



Parking

Pre-tax payments for valuable parking or imputing value in income

Subject to indexed limit

■ Parking

■ Other transportation (subway cards, etc.)



Health Benefits (sections 104, 105, and 106)

Insured benefits

Medical check-ups for top people

Self-funded benefits

■ Definition of HCE

■ Definition of covered benefits

■ Discrimination rules



Education Benefits

Section 127

■ Discrimination rules apply

■ Broad array of classes available

Section 132(d)

■ No discrimination rules

■ Limited to improving “current job skills” – watch education that automatically prepares for

other career

Can ER pay for the CFOs MBA?

Can ER “groom” the up-and-coming manager for a new level by paying for education?



Other Excludible Fringe Benefits

Section 74 Prizes and Awards

■ 5 year awards

■ Tangible personal property

Employee Loans

■ Small loans, relocation loans

■ Watch TAM/Gales case

■ Section 127 PLR

Taxable Fringe Benefits



Regular Taxable Fringe Benefit Rules

Financial management

Tax assistance

Car and driver

Employer-paid vacations

■ Watch “facility” rule!

■ Watch employer-provided travel

■ Watch spousal travel



Fair Market Value

General Valuation Rules

■ what the employee would have to pay for the benefit in an arms length transaction (with a few

exceptions)

– Example: auto lease – what the employee could lease a car for, ignoring company

discounts. Same for planes – charter rate for use of plane.

Special Valuation Rules

■ 1.61-21 has special exceptions for use of a car, use of a company plane, commuting, etc.

■ If employer does not use special valuation timely, cannot go back an use the special methods.



Spousal Travel

Danville Plywood vs Disney case

■ Is spouse REALLY along to perform a business function – facts and circumstances but hard

to argue

Section 274(m)(3) – no deduction for spouse to travel unless also an employee traveling

on business

■ However, section 274(e) – generally deductible if included in employee income (but watch

company plane rules)

Section 1.61-21(a) – if fringe is provided because of the service of another person, that

person must include the FMV of the benefit in income. Definition of “employee” very

broad for this purpose



Security

Security study

SIFL rate

Home vs. work security

Family member security

Emergencies (country of assignment blow-ups)



Retired Employee Taxable Fringe Benefits

Retiree health policy

Cars

Watch 409A “In-kind Benefit rules!



Use of Automobile Fringe Benefits

Auto Lease rules

Commuting rule

FAVR



Auto Lease Rules

Employer-provided car

Employee uses for business and personal

Substantiate and report personal use (per quarter or monthly)

Auto lease value rules

■ Use current IRS table of car values

■ Can use fleet average but only for cars worth less than $19,000 (currently)

■ Annual lease value x personal use percentage = income

Watch car allowances!

Can toss whole value in income and allow them to deduct, but not very beneficial



Cars

Vehicle Cents per Mile Method

■ Car worth less than Annual Listed FMV (around $15,000)

■ Employer reasonably expects car will be used mostly by employee and regularly for business

■ 48.5 (indexed) cents for each mile of personal use



Cars

Commuter Value

■ $1.50 per one way commute

■ required to use vehicle

■ de minimis personal use

■ not a control employee



In-town Apartment

Section 119

■ SELDOM WORKS!

Section 62(c)

■ Not if the employee has chosen to live somewhere other than near the office (tax home) –

Flowers case

Temporary travel

■ Not if there is an expectation that this job will last beyond one year

Section 1.61-21 – taxable fringe benefit at FMV (probably long term rental value)



Other facilities

Owned or leased

Use

■ Fishing boats?

■ Resorts?

Effect of section 274(e) on other facilities

Reimbursement Exclusion Rules



Temporary Travel

Temporary vs. permanent

■ Is the job expected to be “temporary” (reasonably expected to last less than 1 year?)

■ Assignment letters?

■ Later extensions?

Tax home is where your office is, usually

■ Is a person’s post of duty somewhere other than the regular office?

CCAs

■ commuting, flexible work place, travel from home to other work sites, multiple long-term

assignments



Reimbursements

Section 62(c) - Employees

Accountable Plan Rules

■ Business reason for expense (is primary reason for travel a business reason?)

■ Substantiation within a reasonable period of time

■ Advances required to be paid back!

Watch Business Pre-tax “accountable” plans

QUESTIONS?

Thank you

Presentation by Karen Field

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm

of the KPMG network of independent member firms affiliated with KPMG International

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or

trademarks of KPMG International.

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