Publication 15b |
2003 Tax Year |
Publication 15-B Main Contents
This is archived information that pertains only to the 2003 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
1. Fringe Benefit Overview
A fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit
when you allow the
employee to use a business vehicle to commute to and from work.
Performance of services.
A person who performs services for you does not have to be your employee. A person may perform services for you as
an independent contractor,
partner, or director. Also, for fringe benefit purposes, treat a person who agrees not to perform services (such as under
a covenant not to compete)
as performing services.
Provider of benefit.
You are the provider of a fringe benefit if it is provided for services performed for you. You may be the provider
of the benefit even if it was
actually furnished by another person. You are the provider of a fringe benefit your client or customer provides to your employee
for services the
employee performs for you.
Recipient of benefit.
The person who performs services for you is the recipient of a fringe benefit provided for those services. That person
may be the recipient even if
the benefit is provided to someone who did not perform services for you. For example, your employee may be the recipient of
a fringe benefit you
provide to a member of the employee's family.
Are Fringe Benefits Taxable?
Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes
it. Section 2 discusses
the exclusions that apply to certain fringe benefits. Any benefit not excluded under the rules discussed in section 2 is taxable.
Including taxable benefits in pay.
You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the
following amounts.
-
Any amount the law excludes from pay.
-
Any amount the recipient paid for the benefit.
The rules used to determine the value of a fringe benefit are discussed in section 3.
If the recipient of a taxable fringe benefit is your employee, the benefit is subject to employment taxes and must
be reported on Form W-2,
Wage and Tax Statement. However, you can use special rules to withhold, deposit, and report the employment taxes. These rules
are discussed in
section 4.
If the recipient of a taxable fringe benefit is not your employee, the benefit is not subject to employment taxes.
However, you may have to report
the benefit on one of the following information returns.
For more information, see the instructions for the forms listed above.
Cafeteria Plans
A cafeteria plan, including a flexible spending arrangement, is a written plan that allows your employees to choose between
receiving cash or
taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee
chooses to receive a
qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not
make the qualified benefit
taxable.
Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. However, a cafeteria plan can
include a qualified
401(k) plan as a benefit. Also, certain life insurance plans maintained by educational institutions can be offered as a benefit
even though they defer
pay.
Qualified benefits.
Qualified benefits include the following benefits discussed in section 2.
-
Accident and health benefits (but not medical savings accounts or long-term care insurance).
-
Adoption assistance.
-
Dependent care assistance.
-
Group-term life insurance coverage (including costs that cannot be excluded from wages).
Benefits not allowed.
A cafeteria plan cannot include the following benefits discussed in section 2.
-
Archer medical savings accounts. (See Accident and Health Benefits.)
-
Athletic facilities.
-
De minimis (minimal) benefits.
-
Educational assistance.
-
Employee discounts.
-
Lodging on your business premises.
-
Meals.
-
Moving expense reimbursements.
-
No-additional-cost services.
-
Transportation (commuting) benefits.
-
Tuition reduction.
-
Working condition benefits.
It also cannot include scholarships or fellowships (discussed in Publication 970, Tax Benefits for Education).
Employee.
For these plans, treat the following individuals as employees.
-
A current common-law employee (see section 2 in Circular E (Pub 15) for more information).
-
A full-time life insurance agent who is a current statutory employee.
-
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services
are performed
under your primary direction or control.
Exception for S corporation shareholders.
Do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder for this purpose is someone who
directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than
2% of the voting power.
Plans that favor highly compensated employees.
If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you
must include in their wages the
value of taxable benefits they could have selected. A plan you maintain under a collective bargaining agreement does not favor
highly compensated
employees.
A highly compensated employee for this purpose is any of the following employees.
-
An officer.
-
A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock.
-
An employee who is highly compensated based on the facts and circumstances.
-
A spouse or dependent of a person described in (1), (2), or (3).
Plans that favor key employees.
If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected.
A plan favors key
employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key
employees. However, a plan
you maintain under a collective bargaining agreement does not favor key employees.
A key employee during 2004 is generally an employee who is either of the following:
-
An officer having annual pay of more than $130,000.
-
An employee who for 2004 was either of the following:
-
A 5% owner of your business.
-
A 1% owner of your business whose annual pay was more than $150,000.
More information.
For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations.
2. Fringe Benefit Exclusion Rules
This section discusses the exclusion rules that apply to fringe benefits. These rules exclude all or part of the value of
certain benefits from the
recipient's pay.
The excluded benefits are not subject to Federal income tax withholding. Also, in most cases, they are not subject to social
security, Medicare, or
Federal unemployment (FUTA) tax and are not reported on Form W-2.
This section discusses the exclusion rules for the following fringe benefits.
-
Accident and health benefits.
-
Achievement awards.
-
Archer medical savings accounts.
-
Athletic facilities.
-
De minimis (minimal) benefits.
-
Dependent care assistance.
-
Educational assistance.
-
Employee discounts.
-
Employee stock options.
-
Group-term life insurance coverage.
-
Lodging on your business premises.
-
Meals.
-
Moving expense reimbursements.
-
No-additional-cost services.
-
Transportation (commuting) benefits.
-
Tuition reduction.
-
Working condition benefits.
See Table 2–1 for an overview of the employment tax treatment of these benefits.
Table 2–1. Special Rules for Various Types of Fringe Benefits (For more information, see the full discussion in this section.)
|
Treatment Under Employment Taxes |
Type of Fringe Benefit |
Income Tax Withholding |
Social Security and Medicare |
Federal Unemployment (FUTA) |
Accident and health benefits |
Exempt
1,2, except for certain long-term care benefits
|
Exempt, except for certain payments to S corporation employees who are 2% shareholders. |
Exempt |
Achievement awards |
Exempt
1 up to $1,600 ($400 for nonqualified awards).
|
Adoption assistance |
Exempt
1 |
Taxable |
Taxable |
Athletic facilities |
Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent
children.
|
De minimis (minimal) benefits |
Exempt |
Exempt |
Exempt |
Dependent care assistance |
Exempt
3 up to certain limits, $5,000 ($2,500 for married employee filing separate return).
|
Educational assistance |
Exempt up to $5,250 of benefits each year. (See Educational Assistance on page 7.)
|
Employee discounts |
Exempt
4 up to certain limits. (See Employee Discounts on page 8.)
|
Employee stock options |
See Employee Stock Options on page 8.
|
Group-term life insurance coverage |
Exempt |
Exempt
1,5 up to cost of $50,000 of coverage. (Special rules apply to former employees.)
|
Exempt |
Lodging on your business premises |
Exempt
1 if furnished for your convenience as a condition of employment.
|
Meals |
Exempt if furnished on your business premises for your convenience. |
Exempt if de minimis. |
Moving expense reimbursements |
Exempt
1 if expenses would be deductible if the employee had paid them.
|
No-additional cost services |
Exempt
4 |
Exempt
4 |
Exempt
4 |
Transportation (commuting) benefits |
Exempt
1 up to certain limits if for rides in a commuter highway vehicle ($100), transit passes ($100), or qualified parking ($195).
(See
Transportation (Commuting Benefits) on page 14.)
|
Exempt if de minimis. |
Tuition reduction |
Exempt
4 if for undergraduate education (or graduate education if the employee performs teaching or research activities).
|
Working condition benefits |
Exempt |
Exempt |
Exempt |
1 Exemption does not apply to S corporation employees who are 2% shareholders. See page 3.
|
2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees.
|
3 Exemption does not apply to certain highly compensated employees under a program that favors those employees.
|
4 Exemption does not apply to certain highly compensated employees.
|
5 Exemption does not apply to certain key employees under a plan that favors those employees.
|
Accident and Health Benefits
This exclusion applies to contributions you make to an accident or health plan for an employee, including the following:
-
Contributions to the cost of accident or health insurance.
-
Contributions to a separate trust or fund that provides accident or health benefits directly or through insurance.
-
Contributions to Archer MSAs (discussed in Publication 969, Medical Savings Accounts (MSAs)).
This exclusion also applies to payments you make (directly or indirectly) to an employee under an accident or health plan
for employees that are
either of the following:
-
Payments or reimbursements of medical expenses.
-
Payments for specific injuries or illnesses (such as the loss of the use of an arm or leg). The payments must be figured without
regard to
any period of absence from work.
Accident or health plan.
This is an arrangement that provides benefits for your employees, their spouses, and their dependents in the event
of personal injury or sickness.
The plan may be insured or noninsured and does not need to be in writing.
Employee.
For this exclusion, treat the following individuals as employees.
-
A current common-law employee.
-
A full-time life insurance agent who is a current statutory employee.
-
A retired employee.
-
A former employee you maintain coverage for based on the employment relationship.
-
A widow or widower of an individual who died while an employee.
-
A widow or widower of a retired employee.
-
For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a
substantially
full-time basis for at least a year if the services are performed under your primary direction or control.
Exception for S corporation shareholders.
Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder
is someone who directly or
indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting
power.
Exclusion from wages.
You can generally exclude the value of accident or health benefits you provide to an employee from the employee's
wages.
Exception for certain long-term care benefits.
You cannot exclude contributions to the cost of long-term care insurance from an employee's wages subject to Federal
income tax withholding if the
coverage is provided through a flexible spending or similar arrangement. This is a benefit program that reimburses specified
expenses up to a maximum
amount that is reasonably available to the employee and is less than 5 times the total cost of the insurance. However, you
can exclude these
contributions from the employee's wages subject to social security, Medicare, and Federal unemployment (FUTA) taxes.
S corporation shareholders.
Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include
the value of accident or health
benefits you provide to the employee in the employee's wages subject to Federal income tax withholding. However, you can exclude
the value of these
benefits (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare,
and FUTA taxes.
Exception for highly compensated employees.
If your plan is a self-insured medical reimbursement plan that favors highly compensated employees, you must include
all or part of the amounts you
pay to these employees in their wages subject to Federal income tax withholding. However, you can exclude these amounts (other
than payments for
specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes.
A self-insured plan is a plan that reimburses your employees for medical expenses not covered by an accident or health
insurance policy.
A highly compensated employee for this exception is any of the following individuals.
-
One of the five highest paid officers.
-
An employee who owns (directly or indirectly) more than 10% in value of the employer's stock.
-
An employee who is among the highest paid 25% of all employees (other than those who can be excluded from the plan).
For more information on this exception, see section 105(h) of the Internal Revenue Code and its regulations.
COBRA premiums.
The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a former
employee under the Combined
Omnibus Budget Reconciliation Act of 1986 (COBRA). The exclusion applies regardless of the length of employment, whether you
pay the premiums directly
or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary.
Achievement Awards
This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service
or safety achievement. The exclusion does not apply to awards of cash, cash equivalents, gift certificates, or other intangible
property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. The
award must meet the
requirements for employee achievement awards discussed in chapter 2 of Publication 535, Business Expenses.
Employee.
For this exclusion, treat the following individuals as employees.
-
A current employee.
-
A former common-law employee you maintain coverage for in consideration of or based on an agreement relating to prior service
as an
employee.
-
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services
are performed
under your primary direction or control.
Exception for S corporation shareholders.
Do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who
directly or indirectly owns
(at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.
Exclusion from wages.
You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their
cost is not more than the
amount you can deduct as a business expense for the year. The excludable annual amount is $1,600 ($400 for awards that are
not “qualified plan
awards”). See chapter 2 of Pub. 535 for more information on the limit on deductions for employee achievement awards.
To determine for 2004 whether an achievement award is a “qualified plan award” under the deduction rules described in Pub. 535, treat any
employee who received more than $90,000 in pay for 2003 as a highly compensated employee.
If the cost of awards given to an employee is more than your allowable deduction, include in the employee's wages
the larger of the following
amounts.
-
The part of the cost that is more than your allowable deduction (up to the value of the awards).
-
The amount by which the value of the awards exceeds your allowable deduction.
Exclude the remaining value of the awards from the employee's wages.
Adoption Assistance
You must exclude all payments or reimbursements you make under an adoption assistance program for an employee's qualified
adoption expenses from
the employee's wages subject to Federal income tax withholding. However, you cannot exclude these payments from wages subject
to social security,
Medicare, and Federal unemployment (FUTA) taxes. For more information, see Publication 968, Tax Benefits for Adoption.
You must report all qualifying adoption expenses you paid or reimbursed under your adoption assistance program for each employee
for the year in
box 12 of the employee's Form W-2. Use Code “T” to identify this amount.
Employee.
For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder
is someone who directly
or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the
voting power.
Athletic Facilities
You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's
wages if
substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children.
For this purpose, an
employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, is
age 24 or younger.
On-premises facility.
The athletic facility must be located on premises you own or lease. It does not have to be located on your business
premises. However, the
exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort.
Employee.
For this exclusion, treat the following individuals as employees.
-
A current employee.
-
A former employee who retired or left on disability.
-
A widow or widower of an individual who died while an employee.
-
A widow or widower of a former employee who retired or left on disability.
-
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services
are performed
under your primary direction or control.
-
A partner who performs services for a partnership.
De Minimis (Minimal) Benefits
You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. A de minimis benefit
is any property or
service that you provide to an employee and has so little value (taking into account how frequently you provide similar benefits
to your employees)
that accounting for it would be unreasonable or administratively impracticable. Cash, no matter how little, is never excludable
as a de minimis
benefit, except for occasional meal money or transportation fare.
Examples of de minimis benefits include the following:
-
Occasional personal use
of a company copying machine if you sufficiently control its use so that at least 85% of its use is for
business purposes.
-
Holiday
gifts, other than cash, with a low fair market value.
-
Group-term life
insurance payable on the death of an employee's spouse or dependent if the face amount is not more than
$2,000.
-
Meals. See Meals on page 11.
-
Occasional
parties or
picnics for employees and their guests.
-
Occasional
tickets for entertainment or sporting events.
-
Transportation fare. See Transportation (Commuting) Benefits on page 14.
-
Occasional
typing of personal letters by a company secretary.
Employee.
For this exclusion, treat any recipient of a de minimis benefit as an employee.
Dependent Care Assistance
This exclusion applies to household and dependent care services you pay for (directly or indirectly) or provide to an employee
under a dependent
care assistance program that covers only your employees. The services must be for a qualifying person's care and must allow
the employee to work.
These requirements are basically the same as the tests the employee would have to meet to claim the dependent care credit
if the employee paid for the
services. For more information, see Qualifying Person Test and Work-Related Expense Test in Publication 503, Child
and Dependent Care Expenses.
Employee.
For this exclusion, treat the following individuals as employees.
-
A current employee.
-
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services
are performed
under your primary direction or control.
-
Yourself (if you are a sole proprietor).
-
A partner who performs services for a partnership.
Exclusion from wages.
You can exclude the value of benefits you provide to an employee under a dependent care assistance program from the
employee's wages if you
reasonably believe that the employee can exclude the benefits from gross income.
An employee can generally exclude from gross income up to $5,000 of benefits received under a dependent care assistance
program each year. This
limit is reduced to $2,500 for married employees filing separate returns.
However, the exclusion cannot be more than the earned income of either:
-
The employee, or
-
The employee's spouse.
Special rules apply to determine the earned income of a spouse who is either a student or not able to care for himself or
herself. For more
information on the earned income limit, see Pub. 503.
Exception for highly compensated employees.
You cannot exclude dependent care assistance from the wages of a highly compensated employee unless the benefits provided
under the program do not
favor highly compensated employees and the program meets the requirements described in section 129(d) of the Internal Revenue
Code.
For this exclusion, a highly compensated employee for 2004 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 $90,000 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 when ranked by pay for the preceding
year.
Form W-2.
Report the value of all dependent care assistance you provide to an employee under a dependent care assistance program
in box 10 of the employee's
Form W-2. Include any amounts you cannot exclude from the employee's wages in boxes 1, 3, and 5.
Educational Assistance
This exclusion applies to educational assistance you provide to employees under an educational assistance program. The exclusion
also applies to
graduate level courses.
Educational assistance means amounts you pay or incur for your employees' education expenses. These expenses generally include
the cost of books,
equipment, fees, supplies, and tuition. However, these expenses do not include the cost of a course or other education involving
sports, games, or
hobbies, unless the education:
-
Has a reasonable relationship to your business, or
-
Is required as part of a degree program.
Education expenses do not include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at
the end of the course.
Nor do they include the cost of lodging, meals, or transportation.
Educational assistance program.
An educational assistance program is a separate written plan that provides educational assistance only to your employees.
The program qualifies
only if all of the following tests are met.
-
The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees. To determine
whether
your program meets this test, do not consider employees excluded from your program who are covered by a collective bargaining
agreement if there is
evidence that educational assistance was a subject of good-faith bargaining.
-
The program does not provide more than 5% of its benefits during the year for shareholders or owners. A shareholder or owner
is someone who
owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business.
-
The program does not allow employees to choose to receive cash or other benefits that must be included in gross income instead
of
educational assistance.
-
You give reasonable notice of the program to eligible employees.
Your program can cover former employees if their employment is the reason for the coverage.
For this exclusion, a highly compensated employee for 2004 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 $90,000 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 when ranked by pay for the preceding
year.
Employee.
For this exclusion, treat the following individuals as employees.
-
A current employee.
-
A former employee who retired, left on disability, or was laid off.
-
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services
are performed
under your primary direction or control.
-
Yourself (if you are a sole proprietor).
-
A partner who performs services for a partnership.
Exclusion from wages.
You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance
program from the employee's wages
each year.
Assistance over $5,250.
If you do not have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you
can exclude the value of these
benefits from wages if they are working condition benefits. Property or a service provided is a working condition benefit
to the extent that if the
employee paid for it, the amount paid would have been deductible as a business or depreciation expense. See Working Condition Benefits, on
page 15.
Employee Discounts
This exclusion applies to a price reduction you give an employee on property or services you offer to customers in the ordinary
course of the line
of business in which the employee performs substantial services. However, it does not apply to discounts on real property
or discounts on personal
property of a kind commonly held for investment (such as stocks or bonds).
Employee.
For this exclusion, treat the following individuals as employees.
-
A current employee.
-
A former employee who retired or left on disability.
-
A widow or widower of an individual who died while an employee.
-
A widow or widower of an employee who retired or left on disability.
-
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services
are performed
under your primary direction or control.
-
A partner who performs services for a partnership.
Exclusion from wages.
You can generally exclude the value of an employee discount you provide an employee from the employee's wages, up
to the following limits.
-
For a discount on services, 20% of the price you charge nonemployee customers for the service.
-
For a discount on merchandise or other property, your gross profit percentage times the price you charge nonemployee customers
for the
property.
Determine your gross profit percentage based on all property you offer to customers (including employee customers)
and your experience during the
tax year immediately before the tax year in which the discount is available. To figure your gross profit percentage, subtract
the total cost of the
property from the total sales price of the property and divide the result by the total sales price of the property.
Exception for highly compensated employees.
You cannot exclude from the wages of a highly compensated employee any part of the value of a discount that is not
available on the same terms to
one of the following groups.
-
All of your employees, or
-
A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees.
For this exclusion, a highly compensated employee for 2004 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 $90,000 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 when ranked by pay for the preceding
year.
Employee Stock Options
There are three classes of stock options—incentive stock options, employee stock purchase plan options, and nonstatutory (nonqualified)
stock
options.
Generally, for income tax purposes, incentive stock options and employee stock purchase plan options are excluded from wages
both when the options
are granted and when they are exercised (unless the stock is disposed of in a disqualifying disposition). However, the spread
(between the exercise
price and fair market value of the stock at the time of exercise) is included in wages subject to social security, Medicare,
and Federal unemployment
(FUTA) taxes when the options are exercised. Income tax withholding is not required at the time of exercise.
The spread on nonstatutory options normally is included in wages for income tax purposes when the options are exercised. (See
Regulations section
1.83-7.) The spread on nonstatutory options is also subject to social security, Medicare, and FUTA taxes, and income tax withholding
at the time of
exercise.
The IRS will not enforce the application of social security, Medicare, and FUTA taxes at the time of exercise on the spread
on incentive stock
options and employee stock purchase plan options until further guidance is issued. In addition, if stock acquired pursuant
to the exercise of an
incentive stock option or employee stock purchase plan option is subsequently sold in a disqualifying disposition, the income
is not subject to income
tax withholding. (However, the income should be reported to the employee or former employee, generally in box 1 of Form W-2.)
See Notice 2002-47 for
more information. You can find Notice 2002-47 on page 97 of Internal Revenue Bulletin 2002-28 at www.irs.gov/pub/irs-irbs/irb02-28.pdf.
An employee who transfers his or her interest in nonstatutory stock options to the employee's former spouse incident to a
divorce is not required
to include an amount in gross income upon the transfer. The former spouse, rather than the employee, is required to include
an amount in gross income
when the former spouse exercises the stock options. See Revenue Ruling 2002-22 for details. You can find Revenue Ruling 2002-22
on page 849 of
Internal Revenue Bulletin 2002-19 at www.irs.gov/pub/irs-irbs/irb02-19.pdf.
For more information about employee stock options, see sections 421, 422, and 423 of the Internal Revenue Code and their related
regulations.
Group-Term Life Insurance Coverage
This exclusion applies to life insurance coverage that meets all the following conditions.
-
It provides a general death benefit that is not included in income.
-
You provide it to a group of employees. See The 10-employee rule below.
-
It provides an amount of insurance to each employee based on a formula that prevents individual selection. This formula must
use factors
such as the employee's age, years of service, pay, or position.
-
You provide it under a policy you carry directly or indirectly. Even if you do not pay any of the policy's cost, you are considered
to carry
it if you arrange for payment of its cost by your employees and charge at least one employee less than, and at least one other
employee more than, the
cost of his or her insurance. Determine the cost of the insurance, for this purpose, as explained under Coverage over the limit on page
10.
Group-term life insurance does not include the following insurance.
-
Insurance that does not provide general death benefits, such as travel insurance or a policy providing only accidental death
benefits.
-
Life insurance on the life of your employee's spouse or dependent. However, you may be able to exclude the cost of this insurance
from the
employee's wages as a de minimis benefit. See De Minimis (Minimal) Benefits on page 6.
-
Insurance provided under a policy that provides a permanent benefit (an economic value that extends beyond 1 policy year,
such as paid-up or
cash surrender value), unless certain requirements are met. See Regulations section 1.79-1 for details.
Employee.
For this exclusion, treat the following individuals as employees.
-
A current common-law employee.
-
A full-time life insurance agent who is a current statutory employee.
-
An individual who was formerly your employee under (1) or (2), above.
-
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services
are performed
under your primary direction and control.
Exception for S corporation shareholders.
Do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who
directly or indirectly owns
(at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.
The 10-employee rule.
Generally, life insurance is not group-term life insurance unless you provide it to at least 10 full-time employees
at some time during the year.
For this rule, count employees who choose not to receive the insurance unless, to receive it, they must contribute
to the cost of benefits other
than the group-term life insurance. For example, count an employee who could receive insurance by paying part of the cost,
even if that employee
chooses not to receive it. However, do not count an employee who must pay part or all of the cost of permanent benefits to
get insurance, unless that
employee chooses to receive it.
Exceptions.
Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance.
Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met.
-
If evidence that the employee is insurable is required, it is limited to a medical questionnaire (completed by the employee)
that does not
require a physical.
-
You provide the insurance to all your full-time employees or, if the insurer requires the evidence mentioned in (1), to all
full-time
employees who provide evidence the insurer accepts.
-
You figure the coverage based on either a uniform percentage of pay or the insurer's coverage brackets.
Under the second exception, you do not have to meet the 10-employee rule if all the following conditions are met.
-
You provide the insurance under a common plan covering your employees and the employees of at least one other employer who
is not related to
you.
-
The insurance is restricted to, but mandatory for, all your employees who belong to, or are represented by, an organization
(such as a
union) that carries on substantial activities besides obtaining insurance.
-
Evidence of whether an employee is insurable does not affect an employee's eligibility for insurance or the amount of insurance
that
employee gets.
To apply either exception, do not consider employees who were denied insurance for any of the following reasons.
-
They were 65 or older.
-
They customarily work 20 hours or less a week or 5 months or less in a calendar year.
-
They have not been employed for the waiting period given in the policy. (This waiting period cannot be more than 6 months.)
Exclusion from wages.
You can generally exclude the cost of up to $50,000 of group-term life insurance from the wages of an insured employee.
You can exclude the same
amount from the employee's wages when figuring social security and Medicare taxes. In addition, you do not have to withhold
Federal income tax or pay
FUTA tax on any group-term life insurance you provide to an employee.
Exception for key employees.
Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include
the entire cost of the
insurance in your key employees' wages. (This exception generally does not apply to church plans.) When figuring social security
and Medicare taxes,
you must also include the entire cost in the employees' wages. Include the cost in boxes 1, 3, and 5 of Form W-2. However,
you do not have to withhold
Federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee.
For this purpose, the cost of the insurance is the greater of the following amounts.
-
The premiums you pay for the employee's insurance.
-
The cost you figure using the table shown later under Coverage over the limit.
For this exclusion, a key employee during 2004 is an employee or former employee who is one of the following individuals.
See section 416(i) for
more information.
-
An officer having annual pay of more than $130,000.
-
An individual who for 2004 was either of the following:
-
A 5% owner of your business.
-
A 1% owner of your business whose annual pay was more than $150,000.
A former employee who was a key employee upon retirement or separation from service is also a key employee.
Your plan does not favor key employees as to participation if at least one of the following is true.
-
It benefits at least 70% of your employees.
-
At least 85% of the participating employees are not key employees.
-
It benefits employees who qualify under a set of rules you set up that do not favor key employees.
Your plan meets this participation test if it is part of a cafeteria plan (discussed in section 1) and it meets the
participation test for those
plans.
When applying this test, do not consider employees who:
-
Have not completed 3 years of service.
-
Are part-time or seasonal.
-
Are nonresident aliens who receive no U.S. source earned income from you.
-
Are not included in the plan but are in a unit of employees covered by a collective bargaining agreement, if the benefits
provided under the
plan were the subject of good-faith bargaining between you and employee representatives.
Your plan does not favor key employees as to benefits if all benefits available to participating key employees are
also available to all other
participating employees. Your plan does not favor key employees just because the amount of insurance you provide to your employees
is uniformly
related to their pay.
S corporation shareholders.
Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include
the cost of all group-term life
insurance coverage you provide the 2% shareholder in his or her wages. When figuring social security and Medicare taxes, you
must also include the
cost of this coverage in the 2% shareholder's wages. Include the cost in boxes 1, 3, and 5 of Form W-2. However, you do not
have to withhold
Federal income tax or pay Federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2%
shareholder.
Coverage over the limit.
You must include in your employee's wages subject to social security and Medicare taxes the cost of group-term life
insurance that is more than the
cost of $50,000 of coverage, reduced by the amount the employee paid toward the insurance. Report it as wages in boxes 1,
3, and 5 of the employee's
Form W-2. Also, show it in box 12 with code C.
Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands
of dollars of insurance coverage
over $50,000 (figured to the nearest $100) by the cost shown in the following table. Use the employee's age on the last day
of the tax year. You must
prorate the cost from the table if less than a full month of coverage is involved.
Cost Per $1,000 of Protection For 1 Month
Age |
Cost |
Under 25 |
$ .05 |
25 through 29 |
.06 |
30 through 34 |
.08 |
35 through 39 |
.09 |
40 through 44 |
.10 |
45 through 49 |
.15 |
50 through 54 |
.23 |
55 through 59 |
.43 |
60 through 64 |
.66 |
65 through 69 |
1.27 |
70 and older |
2.06 |
You figure the total cost to include in the employee's wages by multiplying the monthly cost by the number of full months'
coverage at that
cost.
Example.
Tom's employer provides him with group-term life insurance coverage of $200,000. Tom is 45 years old, is not a key employee,
and pays $100 per year
toward the cost of the insurance. Tom's employer must include $170 in his wages. The total cost of the insurance, $360 ($.15
× 200 × 12),
is reduced by the cost of $50,000 of coverage, $90 ($.15 × 50 × 12), and by the $100 Tom pays for the insurance. The employer
includes
$170 in boxes 1, 3, and 5 of Tom's Form W-2. The employer also enters $170 in box 12 with code C.
Coverage for dependents.
Group-term life insurance coverage paid by the employer for the spouse or dependents of an employee may be excludable
from income as a de minimis
fringe benefit (see page 6). The part of this coverage that the employee paid on an after-tax basis is also excludable from
income. For this purpose,
the cost is figured using the monthly cost table above.
Former employees.
For group-term life insurance over $50,000 provided to former employees (including retirees), the former employees
must pay the employee's share of
social security and Medicare taxes with their income tax returns. You are not required to collect those taxes. Use the table
above to determine the
amount of social security and Medicare taxes owed by the former employee for coverage provided after separation from service.
Report those uncollected
amounts separately in box 12 on Form W-2 using codes M and N. See the Instructions for Forms W-2 and W-3.
Lodging on Your Business Premises
You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests.
-
It is furnished on your business premises.
-
It is furnished for your convenience.
-
The employee must accept it as a condition of employment.
Different tests may apply to lodging furnished by educational institutions. See section 119(d) of the Internal Revenue Code
for details.
The exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging.
On your business premises.
For this exclusion, your business premises is generally your employee's place of work. (For special rules that apply
to lodging furnished in a camp
located in a foreign country, see section 119(c) of the Internal Revenue Code and its regulations.)
For your convenience.
Whether or not you furnish lodging for your convenience as an employer depends on all the facts and circumstances.
You furnish the lodging to your
employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional
pay. This is true
even if a law or an employment contract provides that the lodging is furnished as pay. However, a written statement that the
lodging is furnished for
your convenience is not sufficient.
Condition of employment.
Lodging meets this test if you require your employees to accept the lodging because they need to live on your business
premises to be able to
properly perform their duties. Examples include employees who must be available at all times and employees who could not perform
their required duties
without being furnished the lodging.
It does not matter whether you must furnish the lodging as pay under the terms of an employment contract or a law
fixing the terms of employment.
Example.
A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere
and receiving a cash
allowance in addition to her regular salary. If Joan chooses to live at the hospital, the hospital cannot exclude the value
of the lodging from her
wages because she is not required to live at the hospital to properly perform the duties of her employment.
S corporation shareholder-employee.
For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder
is someone who directly
or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the
voting power.
Meals
This section discusses the exclusion rules that apply to de minimis meals and meals on your business premises.
De Minimis Meals
This exclusion applies to any meal or meal money you provide to an employee if it has so little value (taking into account
how frequently you
provide meals to your employees) that accounting for it would be unreasonable or administratively impracticable. The exclusion
applies, for example,
to the following items.
-
Coffee, doughnuts, or soft drinks.
-
Occasional meals or meal money provided to enable an employee to work overtime. (However, the exclusion does not apply to
meal money figured
on the basis of hours worked.)
-
Occasional parties or picnics for employees and their guests.
This exclusion also applies to meals you provide at an employer-operated eating facility for employees if the annual revenue
from the facility
equals or exceeds the direct costs of the facility. For this purpose, your revenue from providing a meal is considered equal
to the facility's direct
operating costs to provide that meal if its value can be excluded from an employee's wages as explained under Meals on Your Business Premises
later.
If food or beverages you furnish to employees qualify as a de minimis benefit, you can deduct their full cost. The 50% limit
on deductions for the
cost of meals does not apply. The deduction limit on meals is discussed in chapter 2 of Pub. 535.
Employee.
For this exclusion, treat any recipient of a de minimis meal as an employee.
Employer-operated eating facility for employees.
An employer-operated eating facility for employees is an eating facility that meets all the following conditions.
-
You own or lease the facility.
-
You operate the facility. (You are considered to operate the eating facility if you have a contract with another to operate
it.)
-
The facility is on or near your business premises.
-
You provide meals (food, drinks, and related services) at the facility during, or immediately before or after, the employee's
workday.
Exclusion from wages.
You can generally exclude the value of de minimis meals you provide to an employee from the employee's wages.
Exception for highly compensated employees.
You cannot exclude from the wages of a highly compensated employee the value of a meal provided at an employer-
operated eating facility that is not available on the same terms to one of the following groups.
-
All of your employees.
-
A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees.
For this exclusion, a highly compensated employee for 2004 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 $90,000 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 when ranked by pay for the preceding
year.
Meals on Your Business Premises
You can exclude the value of meals you furnish to an employee from the employee's wages if they meet the following tests.
-
They are furnished on your business premises.
-
They are furnished for your convenience.
This exclusion does not apply if you allow your employee to choose to receive additional pay instead of meals.
On your business premises.
Generally, for this exclusion, the employee's place of work is your business premises.
For your convenience.
Whether you furnish meals for your convenience as an employer depends on all the facts and circumstances. You furnish
the meals to your employee
for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay.
This is true even if a
law or an employment contract provides that the meals are furnished as pay. However, a written statement that the meals are
furnished for your
convenience is not sufficient.
Meals excluded for all employees if excluded for more than half.
If more than half of your employees who are furnished meals on your business premises are furnished the meals for
your convenience, you can treat
all meals you furnish to employees on your business premises as furnished for your convenience.
Food service employees.
Meals you furnish to a restaurant or other food service employee during, or immediately before or after, the employee's
working hours are furnished
for your convenience. For example, if a waitress works through the breakfast and lunch periods, you can exclude from her wages
the value of the
breakfast and lunch you furnish in your restaurant for each day she works.
Example.
You operate a restaurant business. You furnish your employee, Carol, who is a waitress working 7 a.m. to 4 p.m., two meals
during each workday. You
encourage but do not require Carol to have her breakfast on the business premises before starting work. She must have her
lunch on the premises. Since
Carol is a food service employee and works during the normal breakfast and lunch periods, you can exclude from her wages the
value of her breakfast
and lunch.
If you also allow Carol to have meals on your business premises without charge on her days off, you cannot exclude the value
of those meals from
her wages.
Employees available for emergency calls.
Meals you furnish during working hours so an employee will be available for emergency calls during the meal period
are furnished for your
convenience. You must be able to show that these emergency calls have occurred or can reasonably be expected to occur.
Example.
A hospital maintains a cafeteria on its premises where all of its 230 employees may get meals at no charge during their working
hours. The hospital
furnishes meals to have 120 employees available for emergencies. Each of these employees is, at times, called upon to perform
services during the meal
period. Although the hospital does not require these employees to remain on the premises, they rarely leave the hospital during
their meal period.
Since the hospital furnishes meals on its premises to its employees so that more than half of them are available for emergency
calls during meal
periods, the hospital can exclude the value of these meals from the wages of all of its employees.
Short meal periods.
Meals you furnish during working hours are furnished for your convenience if the nature of your business restricts
an employee to a short meal
period (such as 30 or 45 minutes) and the employee cannot be expected to eat elsewhere in such a short time. For example,
meals can qualify for this
treatment if your peak workload occurs during the normal lunch hour. However, they do not qualify if the reason for the short
meal period is to allow
the employee to leave earlier in the day.
Example.
Frank is a bank teller who works from 9 a.m. to 5 p.m. The bank furnishes his lunch without charge in a cafeteria the bank
maintains on its
premises. The bank furnishes these meals to Frank to limit his lunch period to 30 minutes, since the bank's peak workload
occurs during the normal
lunch period. If Frank got his lunch elsewhere, it would take him much longer than 30 minutes and the bank strictly enforces
the time limit. The bank
can exclude the value of these meals from Frank's wages.
Proper meals not otherwise available.
Meals you furnish during working hours are furnished for your convenience if the employee could not otherwise eat
proper meals within a reasonable
period of time. For example, meals can qualify for this treatment if there are insufficient eating facilities near the place
of employment.
Meals after work hours.
Meals you furnish to an employee immediately after working hours are furnished for your convenience if you would have
furnished them during working
hours for a substantial nonpay business reason but, because of the work duties, they were not eaten during working hours.
Meals you furnish to promote goodwill, boost morale, or attract prospective employees.
Meals you furnish to promote goodwill, boost morale, or attract prospective employees are not considered furnished
for your convenience. However,
you may be able to exclude their value as discussed under De Minimis Meals on
page 11.
Meals furnished on nonworkdays or with lodging.
You generally cannot exclude from an employee's wages the value of meals you furnish on a day when the employee is
not working. However, you can
exclude these meals if they are furnished with lodging that is excluded from the employee's wages as discussed under Lodging on Your Business
Premises on page 11.
Meals with a charge.
The fact that you charge for the meals and that your employees may accept or decline the meals is not taken into account
in determining whether or
not meals are furnished for your convenience.
S corporation shareholder-employee.
For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder
is someone who directly
or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the
voting power.
Moving Expense Reimbursements
This exclusion applies to any amount you give an employee, directly or indirectly (including services furnished in kind),
as payment for, or
reimbursement of, moving expenses. You must make the reimbursements under rules similar to those described in chapter 13 of
Pub. 535 for
reimbursements of expenses for travel, meals, and entertainment under accountable plans.
The exclusion applies only to reimbursements of moving expenses that the employee could deduct if he or she had paid or incurred
them without
reimbursement. However, it does not apply if the employee actually deducted the expenses in a previous year.
Deductible moving expenses include only the reasonable expenses of:
-
Moving household goods and personal effects from the former home to the new home, and
-
Traveling (including lodging) from the former home to the new home.
Deductible moving expenses do not include any expenses for meals and must meet both the distance test and the time test. The
distance test is met
if the new job location is at least 50 miles farther from the employee's old home than the old job location was. The time
test is met if the employee
works at least 39 weeks during the first 12 months after arriving in the general area of the new job location.
For more information on deductible moving expenses, see Publication 521, Moving Expenses.
Employee.
For this exclusion, treat the following individuals as employees.
-
A current employee.
-
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services
are performed
under your primary direction or control.
Exception for S corporation shareholders.
Do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who
directly or indirectly owns
(at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.
Exclusion from wages.
You can generally exclude qualifying moving expense reimbursements you provide to an employee from the employee's
wages. If you paid the
reimbursements directly to the employee, report the amount in box 12 of Form W-2 with the code P. Do not report payments to
a third party for the
employee's moving expenses or the value of moving services you provided in kind.
No-Additional-Cost Services
This exclusion applies to a service you provide to an employee if it does not cause you to incur any substantial additional
costs. The service must
be offered to customers in the ordinary course of the line of business in which the employee performs substantial services.
Generally, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets; hotel rooms;
or telephone services
provided free or at a reduced price to employees working in those lines of business.
Substantial additional costs.
To determine whether you incur substantial additional costs to provide a service to an employee, count any lost revenue
as a cost. Do not reduce
the costs you incur by any amount the employee pays for the service. You are considered to incur substantial additional costs
if you or your employees
spend a substantial amount of time in providing the service, even if the time spent would otherwise be “idle” or if the services are provided
outside normal business hours.
Reciprocal agreements.
A no-additional-cost service provided to your employee by an unrelated employer may qualify as a no-additional-cost
service if all the
following tests are met:
-
The service is the same type of service generally provided to customers in both the line of business in which the employee
works and the
line of business in which the service is provided.
-
You and the employer providing the service have a written reciprocal agreement under which a group of employees of each employer,
all of
whom perform substantial services in the same line of business, may receive no-additional-cost services from the other employer.
-
Neither you nor the other employer incurs any substantial additional cost either in providing the service or because of the
written
agreement.
Employee.
For this exclusion, treat the following individuals as employees.
-
A current employee.
-
A former employee who retired or left on disability.
-
A widow or widower of an individual who died while an employee.
-
A widow or widower of a former employee who retired or left on disability.
-
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services
are performed
under your primary direction or control.
-
A partner who performs services for a partnership.
Treat services you provide to the spouse or dependent child of an employee as provided to the employee. For this fringe
benefit, “dependent
child” means any son, stepson, daughter, or stepdaughter who is a dependent of the employee, or both of whose parents have died
and who has not
reached age 25. Treat a child of divorced parents as a dependent of both parents.
Treat any use of air transportation by the parent of an employee as use by the employee. This rule does not apply
to use by the parent of a person
considered an employee because of item (3) above.
Exclusion from wages.
You can generally exclude the value of a no-additional-cost service you provide to an employee from the employee's
wages.
Exception for highly compensated employees.
You cannot exclude from the wages of a highly compensated employee the value of a no-additional-cost service that
is not available on the same
terms to one of the following groups.
-
All of your employees, or
-
A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees.
For this exclusion, a highly compensated employee for 2004 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 $90,000 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 when ranked by pay for the preceding
year.
Retirement Planning Services
You may exclude from an employee's wages the value of any retirement planning advice or information you provide to your employee
or his or her
spouse if you maintain a qualified retirement plan. In addition to employer plan advice and information, the services provided
may include general
advice and information on retirement. However, the exclusion does not apply to services for tax preparation, accounting, legal,
or brokerage services.
Transportation (Commuting) Benefits
This section discusses exclusion rules that apply to benefits you provide to your employees for their personal transportation,
such as commuting to
and from work. These rules apply to the following transportation benefits.
-
De minimis transportation benefits.
-
Qualified transportation benefits.
Special rules that apply to demonstrator cars and qualified nonpersonal-use vehicles are discussed under Working Condition Benefits
on page 15.
De Minimis Transportation Benefits
You can exclude the value of any de minimis transportation benefit you provide to an employee from the employee's wages. A
de minimis
transportation benefit is any transportation benefit you provide to an employee if it has so little value (taking into account
how frequently you
provide transportation to your employees) that accounting for it would be unreasonable or administratively impracticable.
For example, it applies to
occasional transportation fare you give an employee because the employee is working overtime if the benefit is reasonable
and is not based on hours
worked.
Employee.
For this exclusion, treat any recipient of a de minimis transportation benefit as an employee.
Qualified Transportation Benefits
This exclusion applies to the following benefits.
-
A ride in a commuter highway vehicle between the employee's home and work place.
-
A transit pass.
-
Qualified parking.
The exclusion applies whether you provide only one or a combination of these benefits to your employees.
Qualified transportation benefits can be provided directly by you or through a bona fide reimbursement arrangement. However,
cash reimbursements
for transit passes qualify only if a voucher or a similar item that the employee can exchange only for a transit pass is not
readily available for
direct distribution by you to your employee. A voucher is readily available for direct distribution only if an employee can
obtain it from a voucher
provider that does not impose fare media charges or other restrictions that effectively prevent the employer from obtaining
vouchers. See Regulations
section 1.132-9 for more information.
You can exclude qualified transportation fringe benefits from an employee's wages even if you provide them in place of pay.
For information about
providing qualified transportation fringe benefits under a compensation reduction agreement, see Regulations section 1.132-9(b)(Q-11).
Commuter highway vehicle.
A commuter highway vehicle is any highway vehicle that seats at least 6 adults (not including the driver). In addition,
you must reasonably expect
that at least 80% of the vehicle mileage will be for transporting employees between their homes and work place with employees
occupying at least
one-half of the vehicle's seats (not including the driver's).
Transit pass.
A transit pass is any pass, token, farecard, voucher, or similar item entitling a person to ride, free of charge or
at a reduced rate, one of the
following:
-
On mass transit.
-
In a vehicle that seats at least 6 adults (not including the driver) if a person in the business of transporting persons for
pay or hire
operates it.
Mass transit may be publicly or privately operated and includes bus, rail, or ferry.
Qualified parking.
Qualified parking is parking you provide to your employees on or near your business premises. It includes parking
on or near the location from
which your employees commute to work using mass transit, commuter highway vehicles, or carpools. It does not include parking
at or near your
employee's home.
Employee.
For this exclusion, treat the following individuals as employees.
-
A current employee.
-
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services
are performed
under your primary direction or control.
Exception for S corporation shareholders.
Do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who
directly or indirectly owns
(at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.
Relation to other fringe benefits.
You cannot exclude a qualified transportation benefit you provide to an employee under the de minimis or working condition
benefit rules. However,
if you provide a local transportation benefit other than by transit pass or commuter highway vehicle, or to a person other
than an employee, you may
be able to exclude all or part of the benefit under other fringe benefit rules (de minimis, working condition, etc.).
Exclusion from wages.
You can generally exclude the value of transportation benefits that you provide to an employee during 2004 from the
employee's wages up to the
following limits.
-
$100 per month for combined commuter highway vehicle transportation and transit passes.
-
$195 per month for qualified parking.
Benefits more than the limit.
If the value of a benefit for any month is more than its limit, include in the employee's wages the amount over the
limit minus any amount the
employee paid for the benefit. You cannot exclude the excess from the employee's wages as a de minimis transportation benefit.
More information.
For more information on qualified transportation benefits, including van pools, and how to determine the value of
parking, see Regulations section
1.132-9.
Tuition Reduction
An educational organization can exclude the value of a qualified tuition reduction it provides to an employee from the employee's
wages.
A tuition reduction for undergraduate education generally qualifies for this exclusion if it is for the education of one of the
following individuals.
-
A current employee.
-
A former employee who retired or left on disability.
-
A widow or widower of an individual who died while an employee.
-
A widow or widower of a former employee who retired or left on disability.
-
A dependent child or spouse of any individual listed in (1) through (4) above.
A tuition reduction for graduate education qualifies for this exclusion only if it is for the education of a graduate student who
performs teaching or research activities for the educational organization.
For more information on this exclusion, see Pub. 970, Tax Benefits for Education.
Working Condition Benefits
This exclusion applies to property and services you provide to an employee so that the employee can perform his or her job.
It applies to the
extent the employee could deduct the cost of the property or services as a business expense or depreciation expense if he
or she had paid for it. The
employee must meet any substantiation requirements that apply to the deduction. Examples of working condition benefits include
an employee's use of a
company car for business and job-related education provided to an employee.
This exclusion also applies to a cash payment you provide for an employee's expenses for a specific or prearranged business
activity for which a
deduction is allowable to the employee. You must require the employee to verify that the payment is actually used for those
expenses and to return any
unused part of the payment.
For information on deductible employee business expenses, see Unreimbursed Employee Expenses in Pub. 529, Miscellaneous
Deductions.
The exclusion does not apply to the following items.
-
A service or property provided under a flexible spending account in which you agree to provide the employee, over a time period,
a certain
level of unspecified noncash benefits with a predetermined cash value.
-
A physical examination program you provide, even if mandatory.
-
Any item to the extent the employee could deduct its cost as an expense for a trade or business other than your trade or
business.
Employee.
For this exclusion, treat the following individuals as employees.
-
A current employee.
-
A partner who performs services for a partnership.
-
A director of your company.
-
An independent contractor who performs services for you.
Vehicle allocation rules.
If you provide a car for an employee's use, the amount you can exclude as a working condition benefit is the amount
that would be allowable as a
deductible business expense if the employee paid for its use. That is, if the employee uses the car for both business and
personal use, the value of
the working condition benefit is the part determined to be for business use of the vehicle. See Business use of your car under
Personal Expenses in chapter 1 of Pub. 535. Also, see the special rules for certain demonstrator cars and qualified nonpersonal-use
vehicles discussed below.
However, instead of excluding the value of the working condition benefit, you can include the entire annual lease
value of the car in the
employee's wages. The employee can then claim any deductible business expense for the car as an itemized deduction on his
or her personal income tax
return. This option is available only if you use the lease value rule (discussed in section 3) to value the benefit.
Demonstrator cars.
All of the use of a demonstrator car by your full-time auto salesperson generally qualifies as a working condition
benefit if the use is primarily
to facilitate the services the salesperson provided for you and there are substantial restrictions on personal use. For more
information and the
definition of “full-time auto salesperson,” see Regulations section 1.132-5(o).
Qualified nonpersonal-use vehicles.
All of an employee's use of a qualified nonpersonal-use vehicle is a working condition benefit. A qualified nonpersonal-use
vehicle is any vehicle
the employee is not likely to use more than minimally for personal purposes because of its design. Qualified nonpersonal-use
vehicles generally
include all of the following vehicles.
-
Clearly marked police and fire vehicles.
-
Unmarked vehicles used by law enforcement officers if the use is officially authorized.
-
An ambulance or hearse used for its specific purpose.
-
Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.
-
Delivery trucks with seating for the driver only, or the driver plus a folding jump seat.
-
A passenger bus with a capacity of at least 20 passengers used for its specific purpose.
-
School buses.
-
Tractors and other special-purpose farm vehicles.
Pickup trucks.
A pickup truck with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal-use vehicle
if it has been specially modified
so it is not likely to be used more than minimally for personal purposes. For example, a pickup truck qualifies if it is clearly
marked with
permanently affixed decals, special painting, or other advertising associated with your trade, business, or function and meets
either of the following
requirements.
-
It is equipped with at least one of the following items.
-
A hydraulic lift gate.
-
Permanent tanks or drums.
-
Permanent side boards or panels that materially raise the level of the sides of the truck bed.
-
Other heavy equipment (such as an electric generator, welder, boom, or crane used to tow automobiles and other vehicles).
-
It is used primarily to transport a particular type of load (other than over the public highways) in a construction, manufacturing,
processing, farming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly
modified.
Vans.
A van with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal-use vehicle if it has
been specially modified so it is
not likely to be used more than minimally for personal purposes. For example, a van qualifies if it is clearly marked with
permanently affixed decals,
special painting, or other advertising associated with your trade, business, or function and has a seat for the driver only
(or the driver and one
other person) and either of the following items.
-
Permanent shelving that fills most of the cargo area.
-
An open cargo area and the van always carries merchandise, material, or equipment used in your trade, business, or function.
Education.
Certain job-related education you provide to an employee may qualify for exclusion as a working condition benefit.
To qualify, the education must
meet the same requirements that would apply for determining whether the employee could deduct the expenses had the employee
paid the expenses. The
education must meet at least one of the following tests.
-
The education is required by the employer or by law for the employee to keep his or her present salary, status, or job. The
required
education must serve a bona fide business purpose of the employer.
-
The education maintains or improves skills needed in the job.
However, even if the education meets one or both of the above tests, it is not qualifying education if it:
-
Is needed to meet the minimum educational requirements of the employee's present trade or business, or
-
Is part of a program of study that will qualify the employee for a new trade or business.
Outplacement services.
An employee's use of outplacement services qualifies as a working condition benefit if you provide the services to
the employee on the basis of
need and you get a substantial business benefit from the services distinct from the benefit you would get from the payment
of additional wages.
Substantial business benefits include promoting a positive business image, maintaining employee morale, and avoiding wrongful
termination suits.
Outplacement services do not qualify as a working condition benefit if the employee can choose to receive cash or
taxable benefits in place of the
services. If you maintain a severance plan and permit employees to get outplacement services with reduced severance pay, include
in the employee's
wages the difference between the unreduced severance and the reduced severance payments.
Exclusion from wages.
You can generally exclude the value of a working condition benefit you provide to an employee from the employee's
wages.
Exception for independent contractors.
You cannot exclude the value of parking or the use of consumer goods you provide in a product testing program from
the compensation you pay to an
independent contractor who performs services for you.
Exception for company directors.
You cannot exclude the value of the use of consumer goods you provide in a product testing program from the compensation
you pay to a director.
3. Fringe Benefit Valuation Rules
This section discusses the rules you must use to determine the value of a fringe benefit you provide to an employee. You must
determine the value
of any benefit you cannot exclude under the rules in section 2 or for which the amount you can exclude is limited. See Including taxable benefits
in pay on page 2.
In most cases, you must use the general valuation rule to value a fringe benefit. However, you may be able to use a special
valuation rule to
determine the value of certain benefits.
This section does not discuss the special valuation rule used to value meals provided at an employer-operated eating facility
for employees. For
that rule, see Regulations section 1.61-21(j). This section also does not discuss the special valuation rules used to value
the use of aircraft. For
those rules, see Regulations sections 1.61-21(g) and (h).
General Valuation Rule
You must use the general valuation rule to determine the value of most fringe benefits. Under this rule, the value of a fringe
benefit is its fair
market value.
Fair market value.
The fair market value (FMV) of a fringe benefit is the amount an employee would have to pay a third party in an arm's-length
transaction to buy or
lease the benefit. Determine this amount on the basis of all the facts and circumstances.
Neither the amount the employee considers to be the value of the fringe benefit nor the cost you incur to provide
the benefit determines its FMV.
Employer-provided vehicles.
In general, the FMV of an employer-provided vehicle is the amount the employee would have to pay a third party to
lease the same or similar vehicle
on the same or comparable terms in the geographic area where the employee uses the vehicle. A comparable lease term would
be the amount of time the
vehicle is available for the employee's use, such as a 1-year period.
Do not determine the FMV by multiplying a cents-per-mile rate times the number of miles driven unless the employee
can prove the vehicle could have
been leased on a cents-per-mile basis.
Cents-Per-Mile Rule
Under this rule, you determine the value of a vehicle you provide to an employee for personal use by multiplying the standard
mileage rate by the
total miles the employee drives the vehicle for personal purposes. Personal use is any use of the vehicle other than use in
your trade or business.
This amount must be included in the employee's wages or reimbursed by the employee. For 2004, the standard mileage rate is
increased to 37.5 cents a
mile.
You can use the cents-per-mile rule if either of the following requirements is met.
-
You reasonably expect the vehicle to be regularly used in your trade or business throughout the calendar year (or for a shorter
period
during which you own or lease it).
-
The vehicle meets the mileage test.
Maximum automobile value. You cannot use the cents-per-mile rule for an automobile (any 4-wheeled vehicle, such as a car,
pickup truck, or van) if its value when you first make it available to any employee for personal use is more than an amount
determined by the IRS as
the maximum automobile value for the year. For example, you cannot use the cents-per-mile rule for an automobile that you
first made available to an
employee in 2003 if its value at that time was more than $15,200. The maximum automobile value for 2004 will be published
in a revenue procedure in
the Internal Revenue Bulletin early in 2004. If you and the employee own or lease the automobile together, see Regulations
section
1.61-21(e)(1)(iii)(B).
Vehicle.
For the cents-per-mile rule, a vehicle is any motorized wheeled vehicle, including an automobile, manufactured primarily
for use on public streets,
roads, and highways.
Regular use in your trade or business.
A vehicle is regularly used in your trade or business if at least one of the following conditions is met.
-
At least 50% of the vehicle's total annual mileage is for your trade or business.
-
You sponsor a commuting pool that generally uses the vehicle each workday to drive at least 3 employees to and from work.
-
The vehicle is regularly used in your trade or business on the basis of all of the facts and circumstances. Infrequent business
use of the
vehicle, such as for occasional trips to the airport or between your multiple business premises, is not regular use of the
vehicle in your trade or
business.
Mileage test.
A vehicle meets the mileage test for a calendar year if both of the following requirements are met.
-
The vehicle is actually driven at least 10,000 miles during the year. If you own or lease the vehicle only part of the year,
reduce the
10,000 mile requirement proportionately.
-
The vehicle is used during the year primarily by employees. Consider the vehicle used primarily by employees if they use it
consistently for
commuting. Do not treat the use of the vehicle by another individual whose use would be taxed to the employee as use by the
employee.
For example, if only one employee uses a vehicle during the calendar year and that employee drives the vehicle at
least 10,000 miles in that year,
the vehicle meets the mileage test even if all miles driven by the employee are personal.
Consistency requirements.
If you use the cents-per-mile rule, the following requirements apply:
-
You must begin using the cents-per-mile rule on the first day you make the vehicle available to any employee for personal
use. However, if
you use the commuting rule below when you first make the vehicle available to any employee for personal use, you can change
to the cents-per-mile rule
on the first day for which you do not use the commuting rule.
-
You must use the cents-per-mile rule for all later years in which you make the vehicle available to any employee and the vehicle
qualifies,
except that you can use the commuting rule for any year during which use of the vehicle qualifies. However, if the vehicle
does not qualify for the
cents-per-mile rule during a later year, you can use for that year and thereafter any other rule for which the vehicle then
qualifies.
-
You must continue to use the cents-per-mile rule if you provide a replacement vehicle to the employee and your primary reason
for the
replacement is to reduce Federal taxes.
Items included in cents-per-mile rate.
The cents-per-mile rate includes the value of maintenance and insurance for the vehicle. Do not reduce the rate by
the value of any service
included in the rate that you did not provide. (You can take into account the services actually provided for the vehicle by
using the General
Valuation Rule on page 17.)
For miles driven in the United States, its territories and possessions, Canada, and Mexico, the cents-per-mile rate
includes the value of fuel you
provide. If you do not provide fuel, you can reduce the rate by no more than 5.5 cents.
For special rules that apply to fuel you provide for miles driven outside the United States, Canada, and Mexico, see
Regulations section
1.61-21(e)(3)(ii)(B).
The value of any other service you provide for a vehicle is not included in the cents-per-mile rate. Use the general
valuation rule to value these
services.
Commuting Rule
Under this rule, you determine the value of a vehicle you provide to an employee for commuting use by multiplying each one-way
commute (that is,
from home to work or from work to home) by $1.50. If more than one employee commutes in the vehicle, this value applies to
each employee. This amount
must be included in the employee's wages or reimbursed by the employee.
You can use the commuting rule if all the following requirements are met.
-
You provide the vehicle to an employee for use in your trade or business and, for bona fide noncompensatory business reasons,
you require
the employee to commute in the vehicle. You will be treated as if you had met this requirement if the vehicle is generally
used each workday to carry
at least three employees to and from work in an employer-sponsored commuting pool.
-
You establish a written policy under which you do not allow the employee to use the vehicle for personal purposes, other than
for commuting
or de minimis personal use (such as a stop for a personal errand on the way between a business delivery and the employee's
home). Personal use of a
vehicle is all use that is not for your trade or business.
-
The employee does not use the vehicle for personal purposes, other than commuting and de minimis personal use.
-
If this vehicle is an automobile (any 4-wheeled vehicle, such as a car, pickup truck, or van), the employee who uses it for
commuting is not
a control employee (see below).
Vehicle.
For this rule, a vehicle is any motorized wheeled vehicle, including an automobile manufactured primarily for use
on public streets, roads, and
highways.
Control employee.
A control employee of a nongovernment employer for 2004 is generally any of the following employees.
-
A board or shareholder-appointed, confirmed, or elected officer whose pay is $80,000 or more.
-
A director.
-
An employee whose pay is $165,000 or more.
-
An employee who owns a 1% or more equity, capital, or profits interest in your business.
A control employee for a government employer for 2004 is either of the following.
-
A government employee whose compensation is equal to or exceeds Federal Government Executive Level V. (See the Office of Personnel
Management website at www.opm.gov/oca/payrates/index.asp for 2004 compensation information.)
-
An elected official.
Highly compensated employee alternative.
Instead of using the preceding definition, you can choose to define a control employee as any highly compensated employee.
A highly compensated
employee for 2004 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 $90,000 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 when ranked by pay for the preceding
year.
Lease Value Rule
Under this rule, you determine the value of an automobile that you provide to an employee by using its annual lease value.
For an automobile
provided only part of the year, use either its prorated annual lease value or its daily lease value.
If the automobile is used by the employee in your business, you generally reduce the lease value by the amount that is excluded
from the employee's
wages as a working condition benefit. However, you can choose to include the entire lease value in the employee's wages. See
Vehicle allocation
rules on page 16.
Automobile.
For this rule, an automobile is any 4-wheeled vehicle (such as a car, pickup truck, or van) manufactured primarily
for use on public streets,
roads, and highways.
Consistency requirements.
If you use the lease value rule, the following requirements apply:
-
You must begin using this rule on the first day you make the automobile available to any employee for personal use. However,
the following
exceptions apply:
-
If you use the commuting rule (discussed earlier) when you first make the automobile available to any employee for personal
use, you can
change to the lease value rule on the first day for which you do not use the commuting rule.
-
If you use the cents-per-mile rule (discussed earlier) when you first make the automobile available to any employee for personal
use, you
can change to the lease value rule on the first day on which the automobile no longer qualifies for the cents-per-mile rule.
-
You must use this rule for all later years in which you make the automobile available to any employee, except that you can
use the commuting
rule for any year during which use of the automobile qualifies.
-
You must continue to use this rule if you provide a replacement automobile to the employee and your primary reason for the
replacement is to
reduce Federal taxes.
Annual Lease Value
Generally, you figure the annual lease value of an automobile as follows.
-
Determine the fair market value (FMV) of the automobile on the first date it is available to any employee for personal use.
-
Using the following Annual Lease Value Table, read down column (1) until you come to the dollar range within which the FMV of the
automobile falls. Then read across to column (2) to find the annual lease value.
Annual Lease Value Table
(1) |
(2) |
|
Annual |
|
Lease |
Automobile FMV |
Value |
$0 to 999 |
$ 600 |
1,000 to 1,999 |
850 |
2,000 to 2,999 |
1,100 |
3,000 to 3,999 |
1,350 |
4,000 to 4,999 |
1,600 |
5,000 to 5,999 |
1,850 |
6,000 to 6,999 |
2,100 |
7,000 to 7,999 |
2,350 |
8,000 to 8,999 |
2,600 |
9,000 to 9,999 |
2,850 |
10,000 to 10,999 |
3,100 |
11,000 to 11,999 |
3,350 |
12,000 to 12,999 |
3,600 |
13,000 to 13,999 |
3,850 |
14,000 to 14,999 |
4,100 |
15,000 to 15,999 |
4,350 |
16,000 to 16,999 |
4,600 |
17,000 to 17,999 |
4,850 |
18,000 to 18,999 |
5,100 |
19,000 to 19,999 |
5,350 |
20,000 to 20,999 |
5,600 |
21,000 to 21,999 |
5,850 |
22,000 to 22,999 |
6,100 |
23,000 to 23,999 |
6,350 |
24,000 to 24,999 |
6,600 |
25,000 to 25,999 |
6,850 |
26,000 to 27,999 |
7,250 |
28,000 to 29,999 |
7,750 |
30,000 to 31,999 |
8,250 |
32,000 to 33,999 |
8,750 |
34,000 to 35,999 |
9,250 |
36,000 to 37,999 |
9,750 |
38,000 to 39,999 |
10,250 |
40,000 to 41,999 |
10,750 |
42,000 to 43,999 |
11,250 |
44,000 to 45,999 |
11,750 |
46,000 to 47,999 |
12,250 |
48,000 to 49,999 |
12,750 |
50,000 to 51,999 |
13,250 |
52,000 to 53,999 |
13,750 |
54,000 to 55,999 |
14,250 |
56,000 to 57,999 |
14,750 |
58,000 to 59,999 |
15,250 |
For automobiles with a FMV of more than $59,999, the annual lease value equals (.25 × the FMV of the automobile) + $500.
FMV.
The FMV of an automobile is the amount a person would pay to buy it from a third party in an arm's-length transaction
in the area in which the
automobile is bought or leased. That amount includes all purchase expenses, such as sales tax and title fees.
If you have 20 or more automobiles, see Regulations section 1.61-21(d)(5)(v). If you and the employee own or lease
the automobile together, see
Regulations section 1.61-21(d)(2)(ii).
You do not have to include the value of a telephone or any specialized equipment added to, or carried in, the automobile
if the equipment is
necessary for your business. However, include the value of specialized equipment if the employee to whom the automobile is
available uses the
specialized equipment in a trade or business other than yours.
Neither the amount the employee considers to be the value of the benefit nor your cost for either buying or leasing
the automobile determines its
FMV. However, see Safe-harbor value, next.
Safe-harbor value.
You may be able to use a safe-
harbor value as the FMV. For an automobile you bought at arm's length, the safe-harbor value is your cost, including tax,
title, and other purchase
expenses. You cannot have been the manufacturer of the automobile.
For an automobile you lease, you can use any of the following as the safe-harbor value.
-
The manufacturer's invoice price (including options) plus 4%.
-
The manufacturer's suggested retail price minus 8% (including sales tax, title, and other expenses of purchase).
-
The retail value of the automobile reported by a nationally recognized pricing source if that retail value is reasonable for
the
automobile.
Items included in annual lease value table.
Each annual lease value in the table includes the value of maintenance and insurance for the automobile. Do not reduce
the annual lease value by
the value of any of these services that you did not provide. For example, do not reduce the annual lease value by the value
of a maintenance service
contract or insurance you did not provide. (You can take into account the services actually provided for the automobile by
using the general valuation
rule discussed earlier.)
Items not included.
The annual lease value does not include the value of fuel you provide to an employee for personal use, regardless
of whether you provide it,
reimburse its cost, or have it charged to you. You must include the value of the fuel separately in the employee's wages.
You can value fuel you
provided at FMV or at 5.5 cents per mile for all miles driven by the employee. However, you cannot value at 5.5 cents per
mile fuel you provide for
miles driven outside the United States (including its possessions and territories), Canada, and Mexico.
If you reimburse an employee for the cost of fuel, or have it charged to you, you generally value the fuel at the
amount you reimburse, or the
amount charged to you if it was bought at arm's length.
If you have 20 or more automobiles, see Regulations section 1.61-21(d)(3)(ii)(D).
If you provide any service other than maintenance and insurance for an automobile, you must add the FMV of that service
to the annual lease value
of the automobile to figure the value of the benefit.
4-year lease term.
The annual lease values in the table are based on a 4-year lease term. These values will generally stay the same for
the period that begins with
the first date you use this rule for the automobile and ends on December 31 of the fourth full calendar year following that
date.
Figure the annual lease value for each later 4-year period by determining the FMV of the automobile on January 1 of
the first year of the later
4-year period and selecting the amount in column (2) of the table that corresponds to the appropriate dollar range in column
(1).
Using the special accounting rule.
If you use the special accounting rule for fringe benefits discussed in section 4, you can figure the annual lease
value for each later 4-year
period at the beginning of the special accounting period that starts immediately before the January 1 date described in the
previous paragraph.
For example, assume that you use the special accounting rule and that, beginning on November 1, 2003, the special
accounting period is November 1
to October 31. You elected to use the lease value rule as of January 1, 2004. You can refigure the annual lease value on November
1, 2007, rather than
on January 1, 2008.
Transferring an automobile from one employee to another.
Unless the primary purpose of the transfer is to reduce Federal taxes, you can refigure the annual lease value based
on the FMV of the automobile
on January 1 of the calendar year of transfer.
However, if you use the special accounting rule for fringe benefits discussed in section 4, you can refigure the annual
lease value (based on the
FMV of the automobile) at the beginning of the special accounting period in which the transfer occurs.
Prorated Annual Lease Value
If you provide an automobile to an employee for a continuous period of 30 or more days but less than an entire calendar year,
you can prorate the
annual lease value. Figure the prorated annual lease value by multiplying the annual lease value by a fraction, using the
number of days of
availability as the numerator and 365 as the denominator.
If you provide an automobile continuously for at least 30 days, but the period covers 2 calendar years (2 special accounting
periods if you are
using the special accounting rule for fringe benefits discussed in section 4), you can use the prorated annual lease value
or the daily lease value.
If you have 20 or more automobiles, see Regulations section 1.61-21(d)(6).
If an automobile is unavailable to the employee because of his or her personal reasons (for example, if the employee is on
vacation), you cannot
take into account the periods of unavailability when you use a prorated annual lease value.
You cannot use a prorated annual lease value if the reduction of Federal tax is the main reason the automobile is unavailable.
Daily Lease Value
If you provide an automobile to an employee for a continuous period of less than 30 days, use the daily lease value to figure
its value. Figure the
daily lease value by multiplying the annual lease value by a fraction, using four times the number of days of availability
as the numerator and 365 as
the denominator.
However, you can apply a prorated annual lease value for a period of continuous availability of less than 30 days by treating
the automobile as if
it had been available for 30 days. Use a prorated annual lease value if it would result in a lower valuation than applying
the daily lease value to
the shorter period of availability.
Unsafe Conditions Commuting Rule
Under this rule, the value of commuting transportation you provide to a qualified employee solely because of unsafe conditions
is $1.50 for a
one-way commute (that is, from home to work or from work to home). This amount must be included in the employee's wages or
reimbursed by the employee.
You can use the unsafe conditions commuting rule if all of the following requirements are met.
-
The employee would ordinarily walk or use public transportation for commuting.
-
You have a written policy under which you do not provide the transportation for personal purposes other than commuting because
of unsafe
conditions.
-
The employee does not use the transportation for personal purposes other than commuting because of unsafe conditions.
These requirements must be met on a trip-by-trip basis.
Commuting transportation.
This is transportation to or from work using any motorized wheeled vehicle (including an automobile) manufactured
for use on public streets, roads,
and highways. You or the employee must buy the transportation from a party that is not related to you. If the employee buys
it, you must reimburse the
employee for its cost (for example, cab fare) under a bona fide reimbursement arrangement.
Qualified employee.
A qualified employee for 2004 is one who:
-
Performs services during the year,
-
Is paid on an hourly basis,
-
Is not claimed under section 213(a)(1) of the Fair Labor Standards Act of 1938 (as amended) to be exempt from the minimum
wage and maximum
hour provisions,
-
Is within a classification for which you actually pay, or have specified in writing that you will pay, overtime pay of at
least one and
one-half times the regular rate provided in section 207 of the 1938 Act, and
-
Receives pay of not more than $90,000 during the year.
However, an employee is not considered a qualified employee if you do not comply with the recordkeeping requirements concerning
the employee's
wages, hours, and other conditions and practices of employment under section 211(c) of the 1938 Act and the related regulations.
Unsafe conditions.
Unsafe conditions exist if, under the facts and circumstances, a reasonable person would consider it unsafe for the
employee to walk or use public
transportation at the time of day the employee must commute. One factor indicating whether it is unsafe is the history of
crime in the geographic area
surrounding the employee's workplace or home at the time of day the employee commutes.
4. Rules for Withholding, Depositing, and Reporting
Use the following guidelines for withholding, depositing, and reporting taxable noncash fringe benefits. For additional information
on how to
withhold on fringe benefits, see Circular E (Pub. 15), section 5.
Valuation of fringe benefits.
Generally, you must determine the value of noncash fringe benefits no later than January 31 of the next year. Before
January 31, you may reasonably
estimate the value of the fringe benefits for purposes of withholding and depositing on time.
Choice of period for withholding, depositing, and reporting.
For employment tax and withholding purposes, you can treat fringe benefits (including personal use of employer-provided
highway motor vehicles) as
paid on a pay period, quarter, semiannual, annual, or other basis. But the benefits must be treated as paid no less frequently
than annually. You do
not have to choose the same period for all employees. You can withhold more frequently for some employees than for others.
You can change the period as often as you like as long as you treat all of the benefits provided in a calendar year
as paid no later than December
31 of the calendar year.
You can also treat the value of a single fringe benefit as paid on one or more dates in the same calendar year, even
if the employee receives the
entire benefit at one time. For example, if your employee receives a fringe benefit valued at $1,000 in one pay period during
2004, you can treat it
as made in four payments of $250, each in a different pay period of 2004. You do not have to notify the IRS of the use of
the periods discussed above.
Transfer of property.
The above choice for reporting and withholding does not apply to a fringe benefit that is a transfer of tangible or
intangible personal property of
a kind normally held for investment, or a transfer of real property. For this kind of fringe benefit, you must use the actual
date the property was
transferred to the employee.
Withholding and depositing taxes.
You can add the value of fringe benefits to regular wages for a payroll period and figure income tax withholding on
the total. Or you can withhold
Federal income tax on the value of fringe benefits at the flat 25% rate applicable to supplemental wages.
You must withhold the applicable income, social security, and Medicare taxes on the date or dates you chose to treat
the benefits as paid. Deposit
the amounts withheld as discussed in section 11 of Circular E (Pub. 15).
Amount of deposit.
To estimate the amount of income tax withholding and employment taxes and to deposit them on time, make a reasonable
estimate of the value of the
fringe benefits provided on the date or dates you chose to treat the benefits as paid. Determine the estimated deposit by
figuring the amount you
would have had to deposit if you had paid cash wages equal to the estimated value of the fringe benefits and withheld taxes
from those cash wages.
Even if you do not know which employee will receive the fringe benefit on the date the deposit is due, you should follow this
procedure.
If you underestimate the value of the fringe benefits and deposit less than the amount you would have had to deposit
if the applicable taxes had
been withheld, you may be subject to a penalty.
If you overestimate the value of the fringe benefit and overdeposit, you can either claim a refund or have the overpayment
applied to your next
Form 941.
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 the employee's behalf and included on the employee's Form W-2. However,
you must recover the
income taxes before April 1 of the following year.
Paying your employee's share of social security and Medicare taxes.
If you choose to pay your employee's social security and Medicare taxes on fringe benefits without deducting them
from his or her pay, you must
include the amount of the payments in the employee's income. Also, if your employee leaves your employment and you have unpaid
and uncollected taxes
for noncash benefits, you are still liable for those taxes. You must add the uncollected employee share of social security
and Medicare tax to the
employee's wages. Follow the procedure discussed under Employee's Portion of Taxes Paid By Employer in section 7 of Pub. 15-A. Do not use
withheld Federal income tax to pay the social security and Medicare tax.
Special accounting rule.
You can treat the value of benefits provided during the last 2 months of the calendar year, or any shorter period
within the last 2 months, as paid
in the next year. Thus, the value of benefits actually provided in the last 2 months of 2003 would be treated as provided
in 2004 together with the
value of benefits provided in the first 10 months of 2004. This does not mean that all benefits treated as paid during the
last 2 months of a calendar
year can be deferred until the next year. Only the value of benefits actually provided during the last 2 months of the calendar
year can be treated as
paid in the next calendar year.
Limitation.
The special accounting rule cannot be used, however, for a fringe benefit that is a transfer of tangible or intangible
personal property of a kind
normally held for investment, or a transfer of real property.
Conformity rules.
Use of the special accounting rule is optional. You can use the rule for some fringe benefits but not others. The
period of use need not be the
same for each fringe benefit. However, if you use the rule for a particular fringe benefit, you must use it for all employees
who receive that
benefit.
If you use the special accounting rule, your employee also must use it for the same period you use it. But your employee
cannot use the special
accounting rule unless you do.
You do not have to notify the IRS if you use the special accounting rule. You may also, for appropriate reasons, change
the period for which you
use the rule without notifying the IRS. But you must report the income and deposit the withheld taxes as required for the
changed period.
Special rules for highway motor vehicles.
If an employee uses the employer's vehicle for personal purposes, the value of that use must be determined by the
employer and included in the
employee's wages. The value of the personal use must be based on fair market value or determined by using one of three special
valuation rules:
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The automobile lease valuation rule.
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The vehicle cents-per-mile rule.
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The commuting valuation rule (for commuting use only).
Election not to withhold income tax.
You can choose not to withhold income tax on the value of an employee's personal use of a highway motor vehicle you
provided. You do not have to
make this choice for all employees. You can withhold income tax from the wages of some employees but not others. You must,
however, withhold the
applicable social security and Medicare taxes on such benefits.
You can choose not to withhold income tax on an employee's personal use of a highway motor vehicle by:
-
Notifying the employee as described below that you choose not to withhold and
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Including the value of the benefits in boxes 1, 3, 5, and 14 on a timely furnished Form W-2. For use of a separate statement
in lieu of
using box 14, see the Instructions for Forms W-2 and W-3.
The notice must be in writing and must be provided to the employee by January 31 of the election year or within 30
days after a vehicle is first
provided to the employee, whichever is later. This notice must be provided in a manner reasonably expected to come to the
attention of the affected
employee. For example, the notice may be mailed to the employee, included with a paycheck, or posted where the employee could
reasonably be expected
to see it. You can also change your election not to withhold at any time by notifying the employee in the same manner.
Amount to report on Forms 941 and W-2.
The actual value of fringe benefits provided during a calendar year (or other period as explained under Special accounting rule on page
22) must be determined by January 31 of the following year. You must report the actual value on Forms 941 and W-2. If you
choose, you can use a
separate Form W-2 for fringe benefits and any other benefit information.
Include the value of the fringe benefit in box 1 of Form W-2. Also include it in boxes 3 and 5, if applicable. You
may show the total value of the
fringe benefits provided in the calendar year or other period in box 14 of Form W-2. However, if you provided your employee
with the use of a highway
motor vehicle and included 100% of its annual lease value in the employee's income, you must also report it separately in
box 14 or provide it in a
separate statement to the employee so that the employee can compute the value of any business use of the vehicle.
If you use the special accounting rule, you must notify the affected employees of the period in which you used it.
You must give this notice at or
near the date you give the Form W-2, but not earlier than with the employee's last paycheck of the calendar year.
How To Get Forms and Publications
Internet.
You can access the IRS website 24 hours a day, 7 days a week at www.irs.gov to:
-
Download forms, instructions, and publications.
-
See answers to frequently asked tax questions.
-
Search publications on-line by topic or keyword.
-
Send us comments or request help by email.
-
Sign up to receive local and national tax news by email.
You can also reach us using File Transfer Protocol at ftp.irs.gov.
CD-ROM.
Order Pub. 1796, Federal Tax Products on CD-ROM, and get:
-
Current year forms, instructions, and publications.
-
Prior year forms, instructions, and publications.
-
Frequently requested tax forms that may be filled in electronically, printed out for submission, and saved for recordkeeping.
-
Internal Revenue Bulletins.
Buy the CD-ROM on the Internet at www.irs.gov/cdorders from the National Technical Information Service (NTIS) for $22 (no handling fee)
or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the CD-ROM for $22 (plus a $5 handling fee).
By phone and in person.
You can order forms and publications 24 hours a day, 7 days a week, by calling 1-800-TAX-FORM (1-800-829-3676). You can also get most
forms and publications at your local IRS office.
By fax.
You can receive forms and publications by fax by calling 703-368-9694 using the phone attached to your fax machine. Follow the
directions from the prompts. When you order forms, enter the catalog number of the form you need. The items will be faxed
to you.
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