Publication 15 |
2000 Tax Year |
Chapter 5 Wages & Other Compensation
Wages subject to Federal employment taxes include all pay you give
an employee for services performed. The pay may be in cash or in other
forms. It includes salaries, vacation allowances, bonuses,
commissions, and fringe benefits. It does not matter how you measure
or make the payments. Also, compensation paid to a former employee for
services performed while still employed is wages subject to employment
taxes. See section 6 for a discussion of tips and section 7 for a
discussion of supplemental wages. Also see section 15 for exceptions
to the general rules for wages. Pub. 15-A, Employer's
Supplemental Tax Guide, provides additional information on wages and
other compensation, including:
- Adoption assistance
- Awards
- Back pay
- Below-market loans
- Cafeteria plans
- Deferred compensation
- Dependent care assistance
- Educational assistance
- Employee stock options
- Group-term life insurance
- Leave sharing
- Outplacement services
- Retirement plans
- Supplemental unemployment benefits
- Withholding for idle time
Employee business expense reimbursements.
A reimbursement or allowance arrangement is a system by which you
substantiate and pay the advances, reimbursements, and charges for
your employees' business expenses. How you report a reimbursement or
allowance amount depends on whether you have an accountable or a
nonaccountable plan. If a single payment includes both wages and an
expense reimbursement, you must specify the amount of the
reimbursement.
These rules apply to all ordinary and necessary employee business
expenses that would otherwise qualify for a deduction by the employee.
Accountable plan.
To be an accountable plan, your reimbursement or allowance
arrangement must require your employees to meet all three of the
following rules.
- They must have paid or incurred deductible expenses while
performing services as your employees.
- They must adequately account to you for these expenses
within a reasonable period of time.
- They must return any amounts in excess of expenses within a
reasonable period of time.
Amounts paid under an accountable plan are not wages and are not
subject to income tax withholding and payment of social security,
Medicare, and Federal unemployment (FUTA) taxes.
If the expenses covered by this arrangement are not substantiated
or amounts in excess of expenses are not returned within a reasonable
period of time, the amount is treated as paid under a nonaccountable
plan. This amount is subject to income tax withholding and payment of
social security, Medicare, and FUTA taxes for the first payroll period
following the end of the reasonable period.
A reasonable period of time depends on the facts and circumstances.
Generally, it is considered reasonable if your employees receive the
advance within 30 days of the time they incur the expense, adequately
account for the expenses within 60 days after the expenses were paid
or incurred, and they return any amounts in excess of expenses within
120 days after the expense was paid or incurred. Also, it is
considered reasonable if you give your employees a periodic statement
(at least quarterly) that asks them to either return or adequately
account for outstanding amounts and they do so within 120 days.
Nonaccountable plan.
Payments to your employee for travel and other necessary expenses
of your business under a nonaccountable plan are wages and are treated
as supplemental wages and subject to income tax withholding and
payment of social security, Medicare, and FUTA taxes. Your payments
are treated as paid under a nonaccountable plan if:
- Your employee is not required to or does not substantiate
timely those expenses to you with receipts or other documentation
or
- You advance an amount to your employee for business expenses
and your employee is not required to or does not return timely any
amount he or she does not use for business expenses.
See section 7 for more information on supplemental wages.
Per diem or other fixed allowance.
You may reimburse your employees by travel days, or miles, or some
other fixed allowance. In these cases, your employee is considered to
have accounted to you if the payments do not exceed rates established
by the Federal Government. The 2000 standard mileage rate for auto
expenses was 32.5 cents per mile. The rate for 2001 is 34.5 cents per
mile.
The government per diem
rates for meals and lodging in the continental United States are
listed in Pub. 1542, Per Diem Rates. Other than the amount
of these expenses, your employees' business expenses must be
substantiated (for example, the business purpose of the travel or the
number of business miles driven).
If the per diem or allowance paid exceeds the amounts specified,
you must report the excess amount as wages. This excess amount is
subject to income tax withholding and payment of social security,
Medicare, and FUTA taxes. Show the amount equal to the specified
amount in box 13 of Form W-2 (box 12 on the 2001 form), using code L.
Wages not paid in money.
If in the course of your trade or business you pay your employees
in a medium that is neither cash nor a readily negotiable instrument,
such as a check, you are said to pay them "in kind." Payments in
kind may be in the form of goods, lodging, food, clothing, or
services. Generally, the fair market value of such payments at the
time they are provided is subject to income tax withholding and social
security, Medicare, and FUTA taxes.
However, noncash payments for household work, agricultural labor,
and service not in the employer's trade or business are exempt from
social security, Medicare, and FUTA taxes. Withhold income tax on
these payments only if you and the employee agree to do so. However,
noncash payments for agricultural labor, such as commodity wages, are
treated as cash payments subject to employment taxes if the substance
of the transaction is a cash payment.
Moving expenses.
Reimbursed and employer-paid qualified moving expenses (those that
would otherwise be deductible by the employee) are not includible in
an employee's income unless you have knowledge that the employee
deducted the expenses in a prior year. Reimbursed and employer-paid
nonqualified moving expenses are includible in income and are subject
to employment taxes and income tax withholding. For more information
on moving expenses, see Pub. 521, Moving Expenses.
Meals and lodging.
The value of meals is not taxable income and is not subject to
income tax withholding and social security, Medicare, and FUTA taxes
if the meals are furnished for the employer's convenience and on the
employer's premises. The value of lodging is not subject to income tax
withholding and social security, Medicare, and FUTA taxes if the
lodging is furnished for the employer's convenience, on the employer's
premises, and as a condition of employment.
"For the convenience of the employer" means that you have a
substantial business reason for providing the meals and lodging other
than to provide additional compensation to the employee. For example,
meals you provide at the place of work so an employee is available for
emergencies during his or her lunch period are generally considered to
be for your convenience.
However, whether meals or lodging are provided for the convenience
of the employer depends on all the facts and circumstances. A written
statement that the meals or lodging are for your convenience is not
sufficient.
50% test.
If over 50% of the employees who are provided meals on an
employer's business premises receive these meals for the convenience
of the employer, all meals provided on the premises are treated as
furnished for the convenience of the employer. If this 50% test is
met, the value of the meals is excludable for all employees and is not
subject to income tax withholding or employment taxes.
For more information, see Pub. 15-B, Employer's Tax
Guide to Fringe Benefits.
Health insurance plans.
If you pay the cost of an accident or health insurance plan for
your employees, which may include an employee's spouse and dependents,
your payments are not wages and are not subject to social security,
Medicare, and FUTA taxes, or income tax withholding. Generally, this
exclusion applies to qualified long-term care insurance contracts.
However, the cost of health insurance benefits must be included in the
wages of S corporation employees who own more than 2% of the S
corporation (2% shareholders).
Medical savings accounts.
Your contributions to an employee's medical savings account (MSA)
are not subject to social security, Medicare, or FUTA taxes, or income
tax withholding if it is reasonable to believe at the time of payment
of the contributions that they will be excludable from the income of
the employee. To the extent that it is not reasonable to
believe they will be excludable, your contributions are subject to
these taxes. Employee contributions to their MSA through a payroll
deduction plan must be included in wages and are subject to social
security, Medicare, and FUTA taxes, and income tax withholding.
Medical care reimbursements.
Medical care reimbursements paid for an employee under an
employer's self-insured medical reimbursement plan are not wages and
are not subject to social security, Medicare, and FUTA taxes, or
income tax withholding.
Fringe benefits.
You generally must include fringe benefits in an employee's gross
income (but see Nontaxable fringe benefits below). The
benefits are subject to income tax withholding and employment taxes.
Fringe benefits include cars you provide, flights on aircraft you
provide, free or discounted commercial flights, vacations, discounts
on property or services, memberships in country clubs or other social
clubs, and tickets to entertainment or sporting events. In general,
the amount you must include is the amount by which the fair market
value of the benefits is more than the sum of what the employee paid
for it plus any amount the law excludes. There are other special rules
you and your employees may use to value certain fringe benefits. See
Pub. 15-B for more information.
Nontaxable fringe benefits.
Some fringe benefits are not taxable if certain conditions are met.
See Pub. 15-B for details. Examples are:
- Services provided to your employees at no additional cost to
you.
- Qualified employee discounts.
- Working condition fringes that are property or services the
employee could deduct as a business expense if he or she had paid for
it. Examples include a company car for business use and subscriptions
to business magazines.
- Minimal value fringes (including an occasional cab ride when
an employee must work overtime, local transportation benefits provided
because of unsafe conditions and unusual circumstances, and meals you
provide at eating places you run for your employees if the meals are
not furnished at below cost).
- Qualified transportation fringes subject to specified
conditions and dollar limitations (including transportation in a
commuter highway vehicle, any transit pass, and qualified
parking).
- Qualified moving expense reimbursement. See page 9 for
details.
- The use of on-premises athletic facilities if substantially
all the use is by employees, their spouses, and their dependent
children.
- Qualified tuition reduction, which an educational
organization provides its employees for education. For more
information, see Pub. 520, Scholarships and
Fellowships.
However, do not exclude the following fringe benefits from the
income of highly compensated employees unless the benefit is available
to employees on a nondiscriminatory basis.
- No-additional-cost services (item 1 above).
- Qualified employee discounts (item 2 above).
- Meals provided at an employer operated eating facility
(included in item 4 above).
- Reduced tuition for education (item 8 above).
For more information, including the definition of a highly
compensated employee, see Pub. 15-B.
When fringe benefits are treated as paid.
You may choose to treat certain noncash fringe benefits as paid by
the pay period, or by the quarter, or on any other basis you choose as
long as you treat the benefits as paid at least once a year. You do
not have to make a formal choice of payment dates or notify the IRS of
the dates you choose. You do not have to make this choice for all
employees. You may change methods as often as you like, as long as you
treat all benefits provided in a calendar year as paid by December 31
of the calendar year. See Pub.15-A for more information, including a
discussion of the special accounting rule for fringe benefits provided
during November and December.
Valuation of fringe benefits.
Generally, you must determine the value of fringe benefits no later
than January 31 of the next year. Prior to January 31, you may
reasonably estimate the value of the fringe benefits for purposes of
withholding and depositing on time.
Withholding on fringe benefits.
You may add the value of fringe benefits to regular wages for a
payroll period and figure withholding taxes on the total, or you may
withhold Federal income tax on the value of the fringe benefits at the
flat 28% supplemental wage rate.
You may choose not to withhold income tax on the value of an
employee's personal use of a vehicle you provide. You must, however,
withhold social security and Medicare taxes on the use of the vehicle.
See Pub. 15-A for more information on this election.
Depositing taxes on fringe benefits.
Once you choose payment dates for fringe benefits (discussed
above), you must deposit taxes in the same deposit period you treat
the fringe benefits as paid. To avoid a penalty, deposit the taxes
following the general deposit rules for that deposit period.
If you determine by January 31 that you overestimated the value of
a fringe benefit at the time you withheld and deposited for it, you
may claim a refund for the overpayment or have it applied to your next
employment tax return (see Valuation of fringe benefits
above). If you underestimated the value and deposited too
little, you may be subject to the failure to deposit penalty. See
section 11 for information on deposit penalties.
If you deposited the required amount of taxes but withheld a lesser
amount from the employee, you can recover from the employee the social
security, Medicare, or income taxes you deposited on his or her
behalf, and included in the employee's Form W-2. However, you must
recover the income taxes before April 1 of the following year.
Sick pay.
In general, sick pay is any amount you pay, under a plan you take
part in, to an employee who is unable to work because of sickness or
injury. These amounts are sometimes paid by a third party, such as an
insurance company or employees' trust. In either case, these payments
are subject to social security, Medicare, and FUTA taxes. Sick pay
becomes exempt from these taxes after the end of 6 calendar months
after the calendar month the employee last worked for the employer.
The payments are also subject to income tax. See Pub. 15-A for more
information.
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