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
What options can employer allow
Either:
- limited carryover
or
- grace period of up to 2.5 months from the end of the plan year
Qualified Small Employer Health Reimbursement Arrangements
- 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
Working Conditions Fringe Benefits
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)
What is Qualified Nonpersonal Use Vehicles
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)
Non-personal Use vehicles
- any vehicle to carry cargo of over 14,000 pounds
Accountable Plan
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
Nonaccountable Plan
Doesn’t require proof of expenses, but the expenses are reported as wages and subject to payroll and withholding
Achievement Awards
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
Athletic Facilities
Deductible if on-site
De minimis Benefits
Minimal benefits to employees:
coffee
donuts
occasional personal use of copier machine
Meals and lodging
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
Education Assistance
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
Tiution Reduction Benefits
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
Employee Discounts
20% of discount. Has to be offered to all employees.
Employee Stock Option
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
Moving Expense Reimbursement
They are taxable for employee. The employer deduct as wages
No additional cost services
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
Employee Transportation Benefits
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
Use of Employer-Provided Vehicles
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”
Affordable Care Act (ACA)
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
ACA Penalties
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.
Minimum Essential Coverage
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
