Chapter 5: Gross Income From Employment Flashcards
Gross Income Related to Employment
- compensation for services is included ingross income:
- salary
- wages
- self-employment and business income
- fringe benefits
- commissions
- fees
- tips
- anything received in return for services
could be barter
Foreign Earned Income
exclusion applies if a qualified individual has a tax home in a foreign country, and must either:
1. qualify as a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year (bona fide resident test), or
2. qualify being present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months (physical presence test)
amount of exclusion:
- 2022: $112,000
- 2023: $120,000
Foreign Earned Income Continued
Bonda Fide resident:
- intent to work there for indefinite/long-term period
- establish permanent quarters for self and family
Or
Physical Presence test:
- 330 days in consecutive 12 months
- can begin on any day
- exemption prorateds by # of days
Foreign Housing Costs Exclusions
- applies to housing costs considered to be paid by an employer
- amount = total housing expenses less a base amount (16% of maximum annual exclusion which is $120,000)
- cannot exceed 30% of maximum foreign earned income (which is the $120,000)
- reduces the foreign earned income exclusion by a like amount
foreign income options for US taxation purposes
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Highly Compensated Employee (HCE)
Highly Compensated Employee (HCE):
- greater than 5% owner of the company
- compensation in excess of: $150,000 in 2023
HC = 2 letters, 2 rules: greater than 5% owner and comp > $150,000
Fringe Benefits
- taxable unless exception applies
- exluded benefits must normally be offered on a non-discriminatory basis
- if benefits available to highly-compensated (key) emplopyees are not available for non-highly compensated employees, the benefit is discriminatory
- may result in loss of exclusion for some or all employees
- not subject to income tax
- deductible by the employer
- not subject to employment or payroll tax
Key Employee
- greater than 5% owner
- greater than 1% owner with compensation > $150,000 (not indexed)
- officer with compensation > $215,000 in 2023
KEY = 3 letters, 3 rules: > 5% owner, > 1% owner with comp > $150,000, officer with comp > $215,000
Archer Medical Savings Accounts (MSA’s)
- established 1996-2005 by employers with 50 or fewer employees
- must have high deductible health insurance plan
- contributions by employer and employee
- max 65% deductible for individual, 75% for family
- distributions before 65 not used for medical expenses, they are taxable, plus a 20% penalty applies
- if they are used for medical expenses, they are NOT taxable
Health Savings Accounts (HSA’s)
- avaialble beginning in 2006. can be established by employer or employee
- must have high deductibel health insurance plan
- contributions by employer or employee (in 2023)
- not greater than $3,850 for individuals, and not greater than $7,750 for families
- distributions before 65 not used for medical expenses are taxable, plus 20% penalty applies
- a great account to have
HSA’s are considerred the “best tax shelter” in the tax law: you get deductions from the money put in (subject to the limits listed above) you can accumulate $ and have it invested in MF’s, stocks or bonds, whatever your administrator for the HSA will let you invest in. you have to have a high deductible health insurance plan. but you can have this money growing, earning money tax free and if the money comes out and is used for medical expenses, then its tax free. if not used for medical expenses, its taxable and subject to the 20% penalty.
theres no time limit on when to submit the medical bills. you can use this account to pay your medical bills in general bc its tax free when used towards medical bills
HSA Rules
- contribution not tied to the deductible
- if eligible during last month of year, deemed eligible for entire year
- can make one time, tax free IRA distribution to fund an HSA if the owner remains eligible for 12 months
- employer can make one time transfer to HSA from:
- Health reimbursement arrangement
- flexible spending plan
Life Insurance Premiums
(Permanent Insurance)
if the employer is purchasing permanent insurance for the employee on the employee, then its taxable to the employee
Life Insurance Premiums
(Group Term Insurance)
- cost of up to $50,000 in death benefit excluded
- amounts over this # are taxable to the employee
- if plan discriminates, key employees must include cost of group term insurance in income
- greater of table cost of actual cost to employer
other common fringe benefits:
(Employee Death Benefits)
excluded (not taxable) if:
- employer has no obligation to pay
- facts indicate gratuitous payments
other common fringe benefits:
(Disability Insurance)
- employer pays premium: beefits are taxable
- employee pays premium after-tax: benefits are excluded
other common fringe benefits:
(cafeteria plans)
- employee chooses cash or benefits
- benefits generally excluded from income
- avoids constructive receipt if:
- benefits are qualified
- plan does not favor HCE’s
- nontaxable benefits to Key Employees < 25% of nontaxable benefits provided to all employees
- useful when benefit needs vary
- helps manage fringe benefit costs for the employer; show value of benefits
Other Common Fringe Benefits
(Flexible Spending Accounts)
- employee election to pay for medical/dependent care costs with pre-tax dollars
- salary reductions also exempt from payroll tax
- amounts not spent are forfeited (if you don’t spend it, you lose it)
- entire amount available at beginning of year
- no recovery by employer if employee terminates employment
- Health Care FSA Maximum:
- $2,850 in 2022
- $3,050 in 2023
Other Employee Fringe Benefits
(meals)
- for the convenience of the employer
- on the employers business premises
- employer deduction for meals for convenience of employer limited to 50%
Other Employee Fringe Benefits
(Lodging)
- same conditions for meals, plus
- employee required to accept as condition of employment
Other Employee Fringe Benefits
(No Additional Cost Services)
- service offered for sale to customers
- in line of business in which employee works
- employer incurs no substantial cost
- taxable to HCE’s if plan is discriminatory
Other Employee Fringe Benefits
(Qualified Employee Discounts)
excluded from income if:
- products: no more than cost of goods
- Services: no more than 20%
if plan is discriminatory, HCE’s must recognize discount
Other Employee Fringe Benefits
(working condition fringe benefits)
employee would have been entitled to a deduction if paid personally
Other Employee Fringe Benefits
(De Minimis Fringe Benefits)
- any property or service where the value is so small as to make accounting impractical
- occasional meal money provided due to overtime work
- employer provided eating facilities if provided on non-discriminatory basis
Other Employee Fringe Benefits
(Qualified Transportation)
- transportation to work, transit passes, parking
- commuting linit: $300 per month for 2023
- parking limit: $300 per month for 2023
- may be discriminatory
- not deductible by employer after 2017 (TCJA)
Other Employee Fringe Benefits
(Qualified moving expenses reimbursements: before 2018 and after 2025)
- excluded from income if paid by employer
Other Employee Fringe Benefits
(Qualified Moving Expense Reimbursements: 2018 - 2025)
- not excludible from income unless attributable to in-kind moving and storage expenses for members of the US Armed Forces on active duty that move pursuant to a military order and incident to a permanent change of station
- sunsets for tax eyras beginning after December 31, 2025
Other Employee Fringe Benefits:
(Athletic Facilities)
- operated by the employer, and
- located on the employers premises, and
- “substantially all” of the use of the facility is by employees of the employer, their spouses or their dependent children
other employee fringe benefits:
(Qualified Retirement Planning Services)
- excluded if employer maintains qualified plan
- info about the qualified plan, plus general advice and info
- if discriminatroy, HCE’s must recognize income
other employee fringe benefits:
(educational assistance programs)
- up to $5,250 excluded from income per year
- written plan
- can cover tution, fees, books, supplies & equipment
- employee student loan payments (3/28/20 through 12/31/25)
- undergraduate and graduate education
- may not be used for sports, games, or hobby classes
other employee fringe benefits:
(Dependent Care Assistance)
- up to $5,000 excluded from income, but no more than earned income
- must allow the employee to work
- nondiscrimination requirements apply
other employee fringe benefits:
(Tuition reduction granted to employees of educational institutions)
- generally, applies o undergraduate education
- graduate education excluded if student performs teaching or research activities
other employee fringe benefits:
(adoption assistance programs)
- maximum exclusion is $15,950 (for 2023)
- phaseout applies ($239,230 - $279, 230 for 2023)
- must meet nondiscrimination requirements
other employee fringe benefits:
(employee achievement awards)
- must be tangible personal property
- to $1,600 (or $400 if not qualified)
other employee fringe benefits:
(combat pay and military benefits)
excluded items:
- combat zone pay
- housing and subsistence allowances
- death gratuity payments
other employee fringe benefits:
(parsonage)
- value of home or rental allowance furnsihed to minister is excluded
other employee fringe benefits:
(frequent flyer miles)
announcement 2002-18:
- frequent flyer miles and other promotiional benefts (through rental car agencies or hotels) attributable to taxpayers business that are exchanged for free travel and upgrades etc. are not currently considered income taxable
income taxation & employer retirement plans
- involves doctrine of constructive receipt
- employee deferrals
- election made before income earned
- excluded from current income
- employer contributions
- excluded from employees current income
- plan earnings
- tax deferred until distributions are made
- plan distributions
- generally taxed as ordinary income
- not subject to payroll taxes
- early distribution penalty - 10%
special retirement plan issues:
(Roth 401(k) & Roth 401(b) Plans)
- no tax deferral, theres no deduction when the $ is put in
- distributions are tax free if it is a qualified distribution - must meet both of the following requirements:
- account open for 5 years, and
- made after age 59.5, disability, or death
- distributions that are not qualified are taxed on a pro rata basis consisting of income and return of basis
special retirement plan issues:
(stock options: Non Qualified Stock Options (NQSO))
- grant: no income recognition
- Exercise: ordinary income on bargain element (excess of FMV over exercise price)
- Sale: LT or ST capital gain
special retirement plan issues:
(Stock Options: Incentive Stock Option (ISO))
- Grant: no income recognition
- Exercise: no income recognition
- Sale: LTCG if held for 2 years from date of grant and 1 year from date of exercise
special retirement plan issues:
(Comparison of ISO vs NQSO)
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government required benefits:
(unemployemnt compensation)
included in income, unless after tax contributions made
government required benefits:
(workers compensation)
- covers medical, rehab, lost income due to injuries and sickness
- benefits excluded from income
government required benefits:
(social security)
taxation depends on income (Modified AGI)
social security taxation
Modified AGI = AGI + :
- excluded municipal bond interest
- excluded foreign earned income and housing allowances
- excluded US savings bond interest
- excluded adoption assistance benefits
- deducted student loan interest expense
- excluded income from Guam, American Samoa, the Northern Marianna Islands & Puerto Rico
