Publication 535 |
2001 Tax Year |
Kinds of Pay
Some of the ways you may provide pay to your employees are
discussed next.
Awards
You can generally deduct amounts you pay to your employees as
awards, whether paid in cash or property. (For awards paid in
property, see Property, later.) If you give property to an
employee as an employee achievement award, your deduction may be
limited.
Achievement awards.
An achievement award is an item of tangible personal property that
meets all the following requirements.
- It is given to an employee for length of service or safety
achievement.
- It is awarded as part of a meaningful presentation.
- It is awarded under conditions and circumstances that do not
create a significant likelihood of disguised pay.
Length-of-service award.
An award will not qualify
as a length-of-service award if either of the following applies.
- The employee receives the award during his or her first 5
years of employment.
- The employee received another length-of-service award (other
than one of very small value) during the same year or in any of the
prior 4 years.
Safety achievement award.
An award will not qualify
as a safety achievement award if either of the following applies.
- It is given to a manager, administrator, clerical employee,
or other professional employee.
- During the tax year, more than 10% of your employees,
excluding those listed in (1), have already received a safety
achievement award (other than one of very small value).
Deduction limit.
Your deduction for the cost of employee achievement awards given to
any one employee during the tax year is limited to the following
amounts.
- $400 for awards that are not qualified plan awards.
- $1,600 for all awards, whether or not qualified plan
awards.
Deduct achievement awards as a nonwage business expense on your
return or business schedule.
A qualified plan award is an achievement award given as part of an
established written plan or program that does not favor highly
compensated employees as to eligibility or benefits.
A highly compensated employee for 2001 is an employee who meets
either of the following tests.
- The employee was a 5% owner at any time during the year or
the preceding year.
- The employee received more than $85,000 in pay for the
preceding year.
You can choose to ignore test (2) if the employee was not also
in the top 20% of employees ranked by pay for the preceding year.
An award is not a qualified plan award if the average cost of all
the employee achievement awards given during the tax year (that would
be qualified plan awards except for this limit) is more than $400. To
figure this average cost, do not take into account awards of very
small value.
You may not owe employment taxes on the value of achievement awards
you provide to the employee. See Publication 15-B.
Bonuses
You can generally deduct a bonus paid to an employee if you
intended the bonus as additional pay for services, not as a gift, and
the services were actually performed. However, the total bonuses,
salaries, and other pay must be reasonable for the services performed.
If the bonus is paid in property, see Property, later.
Gifts of nominal value.
If, to promote employee
goodwill, you distribute turkeys, hams, or other merchandise of
nominal value to your employees at holidays, you can deduct the cost
of these items as a nonwage business expense. Your deduction for de
minimis gifts of food or drink are not subject to the 50% deduction
limit that generally applies to meals. For more information on this
deduction limit, see Meals and lodging, later.
Education Expenses
If you pay or reimburse education expenses for an employee, you can
deduct the payments. Deduct the payments on the "employee benefit
programs" line of your tax return or business schedule if they are
part of a qualified educational assistance program. For information on
educational assistance programs, see Educational Assistance
in section 2 of Publication 15-B.
Fringe Benefits
A fringe benefit is a form of pay provided to any person for the
performance of services by that person. The following are examples of
fringe benefits.
- Benefits under employee benefit programs.
- Meals and lodging.
- Use of a car.
- Flights on airplanes.
- Discounts on property or services.
- Memberships in country clubs or other social clubs.
- Tickets to entertainment or sporting events.
You can generally deduct the cost of fringe benefits you provide on
your tax return or business schedule in whatever category the cost
falls. For example, if you allow an employee to use a car or other
property you lease, deduct the cost of the lease as a rent or lease
expense. If you own the property, include your deduction for its cost
or other basis as a section 179 deduction or a depreciation deduction.
You may not owe employment taxes on the value of the fringe
benefits you provide to an employee. See Publication 15-B.
Employee benefit programs.
Employee benefit programs include the following.
- Accident and health plans.
- Adoption assistance.
- Cafeteria plans.
- Dependent care assistance.
- Educational assistance.
- Group-term life insurance coverage.
- Welfare benefit funds.
You can generally deduct amounts you spend on employee benefit
programs on the "employee benefit programs" line of your tax
return or business schedule. However, you may deduct certain costs on
other lines. For example, if you provide dependent care by operating a
dependent care facility for your employees, deduct your costs in
whatever categories they fall (depreciation, utilities, salaries,
etc.).
Group-term life insurance coverage.
You cannot deduct the cost of group-term life insurance coverage if
you are directly or indirectly the beneficiary of the policy. See
Nondeductible Premiums in chapter 7.
Welfare benefit funds.
A welfare benefit fund is a funded plan (or a funded arrangement
having the effect of a plan) that provides welfare benefits to your
employees, independent contractors, or their beneficiaries. Welfare
benefits are any benefits other than deferred compensation or
transfers of restricted property.
Your deduction for contributions to a welfare benefit fund is
limited to the fund's qualified cost for the tax year. If your
contributions to the fund are more than its qualified cost, you can
carry the excess over to the next tax year.
Generally, the fund's qualified cost is the total of the following
amounts, reduced by the after-tax income of the fund.
- The cost you would have been able to deduct using the cash
method of accounting if you had paid for the benefits directly.
- The contributions added to a reserve account that are needed
to fund claims incurred but not paid as of the end of the year for
supplemental unemployment benefits, severance pay, or disability,
medical, or life insurance benefits.
For more information, see sections 419(c) and 419A of the Internal
Revenue Code and the related regulations.
Meals and lodging.
You can usually deduct the cost of furnishing meals and lodging to
your employees. However, you can generally deduct only 50% of the cost
of furnishing meals.
Deduct the cost on your tax return or business schedule in whatever
category the expense falls. For example, if you operate a restaurant,
deduct the cost of the meals you furnish to your employees as part of
the cost of goods sold. If you operate a nursing home, motel, or
rental property, deduct the cost of furnishing lodging to an employee
as expenses for utilities, linen service, salaries, depreciation, etc.
Deduction limit on meals.
You can generally deduct only 50% of the cost of furnishing meals
to your employees. However, you can deduct the full cost of the
following meals.
- Meals whose value you must include in an employee's pay. For
more information, see section 2 in Publication 15-B.
- Meals that qualify as a de minimis fringe benefit as
discussed in section 2 of Publication 15-B. This generally
includes meals you furnish to employees at your place of business if
more than half those employees are provided the meals for your
convenience.
- Meals you furnish to your employees at the work site when
you operate a restaurant or catering service.
- Meals you furnish to your employees as part of the expense
of providing recreational or social activities, such as a company
picnic.
- Meals you are required by federal law to furnish to crew
members of certain commercial vessels (or would be required to furnish
if the vessels were operated at sea.) This does not include meals you
furnish on vessels primarily providing luxury water transportation.
- Meals you furnish on an oil or gas platform or drilling rig
located offshore or in Alaska. This includes meals you furnish at a
support camp that is near and integral to an oil or gas drilling rig
located in Alaska.
Loans or Advances
You generally can deduct as wages a loan or advance you make to an
employee that you do not expect the employee to repay if it is for
personal services actually performed. The total must be reasonable
when you add the loan or advance to the employee's other pay. However,
if the employee performs no services, treat the amount you advanced to
the employee as a loan, which you cannot deduct unless it becomes a
bad debt. For information on the deduction for bad debts, see chapter
11.
Below-market interest rate loans.
On certain loans you make to an employee or shareholder, you are
treated as having received interest income and as having paid
compensation or dividends equal to that interest. See
Below-Market Loans in chapter 5 for more information.
Property
If you transfer property (including your company's stock) to an
employee as payment for services, you can generally deduct it as
wages. The amount you can deduct is its fair market value on the date
of the transfer minus any amount the employee paid for the property.
You can claim the deduction only for the tax year in which your
employee includes the property's value in income. Your employee is
deemed to have included the value in income if you report it on Form
W-2 in a timely manner.
You treat the deductible amount as received in exchange for the
property, and you must recognize any gain or loss realized on the
transfer. Your gain or loss is the difference between the fair market
value of the property and its adjusted basis on the date of transfer.
A corporation recognizes no gain or loss when it pays for services
with its own stock.
These rules also apply to property transferred to an independent
contractor, generally reported on Form 1099-MISC.
Restricted property.
If the property you transfer for services is subject to
restrictions that affect its value, you generally cannot deduct it and
do not report gain or loss until it is substantially vested in the
recipient. However, if the recipient pays for the property, you must
report any gain at the time of the transfer up to the amount paid.
"Substantially vested" means the property is not subject to a
substantial risk of forfeiture. The recipient is not likely to have to
give up his or her rights in the property in the future.
Reimbursements
for Business Expenses
You can generally deduct the amount you pay or reimburse employees
for business expenses they incur for you for items such as travel and
entertainment. However, your deduction for meal and entertainment
expenses is usually limited to 50% of the payment.
If you make the payment under an accountable plan,
deduct it in the category of the expense paid. For example, if
you pay an employee for travel expenses incurred on your behalf,
deduct this payment as a travel expense on your tax return or business
schedule. See the instructions for the form you file for information
on which lines to use.
If you make the payment under a nonaccountable plan,
deduct it as wages on your tax return or business schedule.
See Travel, Meals, and Entertainment in chapter 13 for
more information about deducting reimbursements and an explanation of
accountable and nonaccountable plans.
Sick Pay
You can deduct amounts you pay to your employees for sickness and
injury, including lump-sum amounts, as wages. However, your deduction
is limited to amounts not compensated by insurance or other means.
Vacation Pay
Vacation pay is an amount you pay to an employee while the employee
is on vacation. It includes an amount you pay an employee for unused
vacation leave. Vacation pay does not include any sick pay or holiday
pay.
You can ordinarily deduct vacation pay only in your tax year in
which the employee actually receives it. This rule applies regardless
of whether you use the cash method or an accrual method of accounting.
However, you can deduct vacation pay in your tax year in which the
employee earns it if it is vested by the end of that year and the
employee actually receives it within 2 1/2 months after
the end of that year. Generally, vacation pay is vested if it is
payable under an oral or written vacation pay plan that you told your
employees about before the tax year and its amount and your liability
for it are certain.
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