Unit 5. Employee Compensation

Question 1

What is employee compensation

Answer 1

wages and other benefits

Question 2

requirements for a compensation to be deducted

Answer 2

• 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

Question 3

Supplemental wage

Answer 3

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

Question 4

How wages are valued paid not in cash?

Answer 4

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

Question 5

Can employment taxes be deducted?

Answer 5

Yes. but for self-employed individuals only one-half of his self-employment tax

Question 6

Examples of taxed fringed benefits

Answer 6

• 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

Question 7

Health and accident insurance premiums paid on behalf of an S corp shareholder

Answer 7

deductible as wages (W2) and subject to income tax withholding, but are no subject to Social Security, Medicare a or unemployment (FUTA) taxes

Question 7

Health and accident insurance premiums paid for an employee

Answer 7

Deductible as business expenses

Question 8

Health and accident insurance premiums paid for an employee or shareholder in C corp

Answer 8

all deductible.
That is one of the advantages of C corp. They can deduct many non-taxable fringe benefits

Question 9

What is cafeteria plan (Section 125 Plans)?

Answer 9

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)

Question 10

Qualified cafeteria plan benefits examples

Answer 10

• 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)

Question 11

Nondiscrimination Rules for Cafeteria Plan

Answer 11

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

Question 12

What is a difference between HCE and key employees

Answer 12

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

Question 13

What if HCE is hired in the middle of the year?

Answer 13

He will not receive HCE status until the start of the following year regardless of the salary level

Question 14

Adoption Assistance Programs

Answer 14

$14,890 expenses related to adoption of a child

Question 15

Group Term Life Insurance

Answer 15

first $50,000 are excludable. and less than $2,000 on dependents

Question 16

Health Savings Accounts (HSA)

Answer 16

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.

Question 17

Can the funds be withdraws from HSA account

Answer 17

if not for medical expenses before age 65 -> income tax and a 20% penalty

if not for medical expenses after age 65 -> income tax

Question 18

Who can contribute to an HSA?

Answer 18

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

Question 19

Non-dicrimitaion Rules to HSA contributions

Answer 19

They should be comparable for all employees, otherwise 35% excise tax

But the employer can favor non-highly compensated employees

Question 20

FSA

Answer 20

an agreement to reduce an employee’s salary to pay out-of -pocket expenses

Question 21

Dependent Care FSA

Answer 21

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.

Question 22

Health Care FSA

Answer 22

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.

Question 23

Limited carryover in 2024

Answer 23

$640

Question 24

What options can employer allow

Answer 24

Either:
- limited carryover
or
- grace period of up to 2.5 months from the end of the plan year

Question 25

Qualified Small Employer Health Reimbursement Arrangements

Answer 25

• less than 50 employees
• funded by employer
• $6,150 for a single employee’s coverage ($512.50 per month), and $12,450 for family coverage ($1,037.50 per month)
• reimbursements are deductible and not taxable to employees

Question 26

Working Conditions Fringe Benefits

Answer 26

Deductible Benefit to employees so that they can perform their job:
- safety glasses
- instructive courses
- technical publications
- protective clothing
- use of a company car for business (can be partially taxable if used for personal use or commuting from home to office)

Question 27

What is Qualified Nonpersonal Use Vehicles

Answer 27

Vehicles that cannot be used minimally for personal use, e.g.:
- police cars
- school buses
- cement mixers
- tractors
- any vehicle to carry cargo of less than 14,000 pounds if they are modified (logos, paintings, equipped)

Question 28

Non-personal Use vehicles

Answer 28

• any vehicle to carry cargo of over 14,000 pounds

Question 29

Accountable Plan

Answer 29

Can be established by the employer for the business-related expenses of the employees. They are deductible for employer and non-taxablefor employees

Employees should provide documentary evidence, return excess if received in advance

Question 30

Nonaccountable Plan

Answer 30

Doesn’t require proof of expenses, but the expenses are reported as wages and subject to payroll and withholding

Question 31

Achievement Awards

Answer 31

To be qualified needs to be without discrimination to non highly compensated employees.
Non-taxable part for employee and deductible for employer is:
$400 of non qualified plan
$1,600 for all awards (both qualified and non qualified)

Cannot be cash, gift cards, vacation, meals, tickets, stocks, bonds, lodgings, and other similar items

Question 32

Athletic Facilities

Answer 32

Deductible if on-site

Question 33

De minimis Benefits

Answer 33

Minimal benefits to employees:
coffee
donuts
occasional personal use of copier machine

Question 34

Meals and lodging

Answer 34

on the employer’s business premises
for the employer’s benefit

50% is deductible, but nontaxable for employees

Lodging is 100% deductible and not taxable, BUT it must be required as a condition of employment

Question 35

Education Assistance

Answer 35

Job-related is 100% deductible and not taxable, no limits

Non-job-related - Limit of $5,250 per year. the excess is a wage

Cost of meals, lodging, transportation are not qualifying expenses

Question 36

Tiution Reduction Benefits

Answer 36

Educational organization can exclude the value of qualified undergraduate tuition for en employee, spouse or dependent child. Is non taxable for the employee.

Graduate only qualifies if it is for a graduate student who performs teaching for educational organization

Question 37

Employee Discounts

Answer 37

20% of discount. Has to be offered to all employees.

Question 38

Employee Stock Option

Answer 38

Statutory stock options:
- Incentive Stock Options (ISO) - purchase stock at a predetermined price (exercise price)
- ESPP purchase of stocks often at a discount from the regular market price

Income is not reported when the option is granted or excercised

Drawback - corporation cannot deduct these compensation expenses

The employee must report income when he sells the stock

Question 39

Moving Expense Reimbursement

Answer 39

They are taxable for employee. The employer deduct as wages

Question 40

No additional cost services

Answer 40

If services do not create additonal cost for the company they can be non taxable for the employees and certain family members:
- gym membership to employee who works at gym
- airline tickets (empty seats) for employees of airline

Question 41

Employee Transportation Benefits

Answer 41

Employer can offer tax-free transportation and parking benefits (but cannot deduct these expenses) up to :
$280 per month for commuter transportation (except for bicycle)
$280 per month for parking

Question 42

Use of Employer-Provided Vehicles

Answer 42

Personal use is taxable EXCEPT FOR:
a company vehicle is used for commuting because the employee works in a public safety profession (school buses for lunch stops, pick-up on holidays to be “on-call”

Question 43

Affordable Care Act (ACA)

Answer 43

Mandates Certain employers provide health insurance for full-time workers (30 hours per week), substantially all (95% of their full-time employees and dependents up to age 26)
Penalizes employers if they do not provide coverage that meets minimum value

ALE - Applicable Large Employer >50 employees

Question 44

ACA Penalties

Answer 44

For not providing Minimum Essential Coverage
$2,750 for each full-time employee after excluding the first 30 employees from calculation

Employer DOES provide health insurance but at least one full-time employee receives the Premium Tax Credit (purchased on Marketplace)
$4,120 for each employee who receives Premium Tax Credit.

Question 45

Minimum Essential Coverage

Answer 45

The insurance is designed to pay 60% of the total cost of medical services AND
The insurance benefits include substantial coverage of physician and inpatient hospital services