Unit 5. Employee Compensation Flashcards
What is employee compensation
wages and other benefits
requirements for a compensation to be deducted
- ordinary and necessary expenses related to business
- reasonable amounts that similar businesses would normally pay
- proof that the services were preformed
expenses paid and incurred
Supplemental wage
Paid in addition to regular salary or wage. They are taxable for employee and deductible for by employer:
- bonuses, commissions, overtime pay
- taxable awards
- sick leave
- back pay
- retroactive pay increases
- severance pay
- moving expenses
How wages are valued paid not in cash?
by their fair market price at the time of payment.
If paid by property a business then recognize profit or loss as a difference between fair market price and its basis in the property.
A business should also insure that the amount of the payroll tax required to be withheld is available for payment in money
Can employment taxes be deducted?
Yes. but for self-employed individuals only one-half of his self-employment tax
Examples of taxed fringed benefits
- off-site athletic facilities
- concert and events tickets
- intangible property such as vacations, stocks, securities
- value of employer-provided life insurance over $50,000
- any cash benefit or gift cards, or credit cards
- transportation benefits
- emplyer-provided vehicles
Health and accident insurance premiums paid on behalf of an S corp shareholder
deductible as wages (W2) and subject to income tax withholding, but are no subject to Social Security, Medicare a or unemployment (FUTA) taxes
Health and accident insurance premiums paid for an employee
Deductible as business expenses
Health and accident insurance premiums paid for an employee or shareholder in C corp
all deductible.
That is one of the advantages of C corp. They can deduct many non-taxable fringe benefits
What is cafeteria plan (Section 125 Plans)?
A benefit plan that provides an employeee an opportunity to choose between receiving at least one taxable benefit (e.g. cash) and one nontaxable benefit.
Employees generally contribute a portion of their salaries on a pre-tax basis to pay for the qualified benefits (nontaxable)
Qualified cafeteria plan benefits examples
- accident and health insurance benefits
- adoption assitance
-group-term life insurance - HSAs (health savings accounts)
- FSAs (flexible spending arrangements, including DCFSA (Dependent Care FSA) and HCFSA (Health Care FCA)
Nondiscrimination Rules for Cafeteria Plan
It cannot favor only highly compensated employees or key employees. The test is failed if 25% of all benefits are given to HCE and key employees.
If a company fails this annual testing it should include all fringe benefits as taxable
What is a difference between HCE and key employees
compensation salary threshold is lower for HCE:
$135,000 and being in top20% ranked by compensation vs $150,000 and holding more than 1% of ownership.
But if an employee holds more than 5% of the business he is automatically classified as an HCE AND key employee regardless of his salary
What if HCE is hired in the middle of the year?
He will not receive HCE status until the start of the following year regardless of the salary level
Adoption Assistance Programs
$14,890 expenses related to adoption of a child
Group Term Life Insurance
first $50,000 are excludable. and less than $2,000 on dependents
Health Savings Accounts (HSA)
The health account that is OWNED by the employee and under his control. An HSA is also PORATBLE. Used to pay medical expenses of the account holder, spouse and any dependent.
Can the funds be withdraws from HSA account
if not for medical expenses before age 65 -> income tax and a 20% penalty
if not for medical expenses after age 65 -> income tax
Who can contribute to an HSA?
an employee should be covered by a high-dedcutible health plan (HDHP) at work. A self-employed taxpayer is also eligible to have a HSA account
If an employee becomes enrolled in Medicare no contributions can be made to HSA. An excess contribution is subject to a 6% penalty
Non-dicrimitaion Rules to HSA contributions
They should be comparable for all employees, otherwise 35% excise tax
But the employer can favor non-highly compensated employees
FSA
an agreement to reduce an employee’s salary to pay out-of -pocket expenses
Dependent Care FSA
Limit is $5,000 per calendar year (2,500 if MFS). Tax-free if used for Qualifying dependent who is a child under 13 age, a disabled spouse or parents in eldercare. It is reported in box 10 on W-2.
Health Care FSA
Voluntary salary reductions, they are not included in wages. Reimbursements from FSA used to pay qualified medical expenses are not taxed. Limit is $3,200. Use-it-or-lose-it Rule.
Limited carryover in 2024
$640
