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
insert pic of chart
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%
