Utility Tax Guide
2016-2017
UTILITY TAX GUIDE
2016-2017
Olsen Thielen & Co., Ltd.
Certified Public Accountants & Consultants
2675 Long Lake Road 300 Prairie Center Drive #300
Roseville, MN 55113 Eden Prairie, MN 55344
(651) 483-4521 (952) 941-9242 FAX (651) 483-2467 FAX (952) 941-0577
www.otcpas.com [email protected] Copyright © 1992 Latest Revision 2016
All Rights Reserved
Printed in the United States of America
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the information is presented in general terms and is not intended to be used as a basis for specific action without obtaining the services of a competent tax professional.
UTILITY TAX GUIDE TABLE OF CONTENTS CHAPTER PAGE
1 Employee vs. Independent Contractor 1-7
2 Payments to Employees, Form W-2 8-25
3 Fringe Benefits 26-35
4 Payroll Taxes and Deposit Requirements 36-47
5 Qualified and Nonqualified Deferred Compensation (Retirement Plans) 48-55
6 1099 Information Returns 56-66
7 Payments to Directors 67-68
8 Expense Accounts 69-77
9 Travel, Entertainment, Business Gifts and Club Dues 78-82
10 Lobbying Expenses 83-84
11 Recordkeeping for Business Vehicles 85-87
12 Personal Use of a Company Auto 88-92
13 Business Use of a Personal Auto 93-94
14 "Luxury" Auto Rules 95-109
15 Taxation of Capital Credits 110
16 Unclaimed Property 111-112
17 Energy Conservation Subsidies 113
18 Federal Heavy Vehicle Use Tax 114-115
19 Heavy Vehicle Excise Tax 116-117
20 Federal Telephone Excise Tax 118-124
21 Gross Receipts Tax Provisions 125-136
22 Sales and Use Tax Provisions 137-144
23 Corporate Income Tax 145-149
24 Amortization of Intangible Assets 150
25 Minnesota Minimum Fee 151
26 Form 990, Exempt Organization Return (Cooperatives) 152-154
27 Form 990-T, Exempt Organization Income Tax Return (Cooperatives) 155-156 28 Alternative Legal Structures for Nonutility Activity of Cooperatives 157-160
29 Minnesota Limited Liability Companies 161-162
30 General Partnerships, Limited Partnerships and Limited Liability Partnerships 163-166
CHAPTER 1 - EMPLOYEE vs. INDEPENDENT CONTRACTOR
Payroll Tax and Employee Benefit Differences
Any worker who receives compensation for services is either an independent contractor or an employee. Depending on how a payee is classified, certain rules apply. The following chart summarizes the more significant differences between the treatment of an employee and an independent contractor:
Independent
Compensation Related Item Employee Contractor
State and federal income tax Withheld from employee's wages
Paid by worker
State and federal unemployment tax Paid by employer None paid
Social Security tax 6.20% paid by employer Self-employment
6.20% withheld from
employee's wages
tax of 12.40%
Medicare Tax 1.45% paid by employer Self-employment
1.45% withheld from employee's wages; 2.35% withheld on wages over $200,000 tax of 2.90% paid by worker; 3.8% on wages over $200,000
Health insurance and other employee
benefit plans Covered Not covered
Pension or profit-sharing plans Covered Not covered
Annual payment reports Form W-2 Form 1099-MISC
How To Determine Who Is An Independent Contractor Or Employee
Form SS-8 may be completed and submitted to the IRS for a determination of employee or independent contractor status. However, it is not required that you receive a determination. If you do request one, you would normally be bound by the decision.
Formerly, the Internal Revenue Service published a standard list of 20 factors (commonly known as the common-law test or 20-factor test) for businesses to consider when determining whether a worker is an employee or an independent contractor. The table at the end of this chapter lists these factors and describes how they relate to an employee versus an independent contractor. In its official guidance the IRS has replaced this list with the categories-of-evidence methodology shown below. On the whole, the categories-of-evidence guidance is broader and less specific than the 20-factor test.
CATEGORIES OF EVIDENCE
Behavioral Control: Facts that show whether the business has a right to direct and control
how the worker does the task for which the worker is hired including the type and degree of:
1. Instructions the business gives the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. Even if no instructions are given, sufficient behavioral control may exist if the business has the right to control how the work results are achieved.
2. Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors normally use their own methods.
Financial Control: Facts that show whether the business has a right to control the business
aspects of the worker’s job including:
1. The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their employer.
2. The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not required.
3. The extent to which the worker makes services available to the relevant market.
4. How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
5. The extent to which the worker can realize a profit or incur a loss. An independent contractor can make a profit or loss.
Type of Relationship: Factors that show the parties’ type of relationship including:
1. Written contracts describing the relationship the parties intended to create.
2. Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
3. The permanency of the relationship. If a worker is engaged with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that intent was to create an employer-employee relationship.
4. The extent to which services performed by workers is a key aspect of the regular business of the company. If workers provide services that are a key aspect of regular business activity, it is more likely that the business has the right to direct and control their activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
If You Have Independent Contractors Rather Than Employees
If you decide that your payees are independent contractors, we recommend that you do the following:
Draft and sign a formal written contract. Consider using language in the contract that would
take into account the guidance provided by the Internal Revenue Service including factors such as right to discharge, right to terminate, payment of travel and business expense, and do not preclude these individuals from working for others.
File Form 1099-MISC for all payments to individuals, even if the amount is less than $600, to
minimize the potential tax liability in the event of independent contractors being reclassified as employees.
Consequences of Having the IRS Reclassify Independent Contractors as Employees
If the IRS is successful in reclassifying independent contractors as employees, the following could happen:
If Forms 1099-MISC were filed and the IRS determines that the failure to comply is not due to
intentional disregard the employer may be liable for the following:
1. the employer's share of FICA, FUTA and SUTA;
2. 20% of FICA that should have been withheld from employee's wages; and
3. 1.5% of the total wages paid for income tax withholding purposes.
If any Forms 1099-MISC were not filed due to willful neglect, the above liabilities are doubled
to 40% and 3%, respectively.
If no Forms 1099-MISC were filed and the IRS determines that the failure to comply is due to
intentional disregard the employer may be liable for the following:
1. the employer's share of FICA, FUTA and SUTA;
2. FICA that should have been withheld from employee's wages; and
3. 100% of the federal income tax that should have been withheld from the employee’s wages.
Employer's withholding liability can be offset by payments of income tax and self-employment
tax made by the employee. Employer must submit proof of payments obtained from worker.
Penalties can range from a 5% negligence penalty to a 100% penalty for willfully failing to
collect and pay the tax.
Interest at the applicable rate is assessed on the tax liability and the penalty.
Employee retirement, health and other benefit plans may be adversely affected because of
failure to meet minimum coverage requirements.
The financial consequences of a reclassification can be disastrous. Therefore, extreme care should be taken in your initial classification.
Provisions For Relief From Employment Taxes
If your business is selected for an employment tax examination to determine whether you correctly treated certain workers as independent contractors you will not owe employment taxes for these workers if you meet the following relief requirements:
Reasonable Basis. You must have a reasonable basis for not treating the workers as
employees. To establish that you have a reasonable basis for not treating the workers as employees you can show that:
1. You reasonably relied on a court case about Federal taxes or a ruling issued to you by the IRS;
2. Your business was audited by the IRS at a time when you treated similar workers as independent contractors and the IRS did not reclassify those workers as employees; 3. You treated the workers as independent contractors because you knew that was how a
significant segment of your industry treated similar workers; or 4. You relied on some other reasonable basis.
Example: you relied on the advice of a business lawyer or accountant who knew the facts about your business.
Substantive Consistency. You (and any predecessor business) must have treated the workers
and any similar workers as independent contractors.
Reporting Consistency. You must have filed Form 1099-MISC for each worker unless the
worker earned less than $600.
If you do not meet all three of these relief requirements you will be required to pay employment taxes on any independent contractors who are reclassified by IRS as employees.
Voluntary Worker Classification Settlement Program (VCSP)
The VCSP is available for employers that want to voluntarily change the prospective classification of their workers. The program applies to employers that are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. To be eligible, an employer:
Must have consistently treated the workers as nonemployees;
Must have filed all required Forms 1099 for the workers for the previous three years; Cannot currently be under audit by the IRS; and
Cannot currently be under audit concerning the classification of the workers by the
Department of Labor (DOL) or by a state government agency. An employer that was previously audited by the IRS or the DOL concerning the classification of the workers will only be eligible if it has complied with the results of that audit.
Effect of VCSP
An employer that participates in the VCSP will agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the employer:
Will pay 10% of the employment tax liability that may have been due on compensation paid
to the workers for the most recent tax year;
Will not be liable for any interest and penalties on the liability; and
Will not be subject to an employment tax audit with respect to the worker classification of the
COMPARATIVE APPROACH OF 20 COMMON LAW FACTORS
Employee Independent Contractor
1. Instructions
Required to comply with instructions about when, where, and how work is to be performed.
May work own schedule and do job in own way.
2. Training
Receives training which can include supervision, correspondence, meetings, etc. to ensure completion of job in a particular method or manner.
Receives no training. Uses own method.
3. Integration
If success or continuation of the business depends upon the performance of certain services, the worker performing these services is deemed to be subject to some control by the business. Employer coordinates the work with that of other workers.
Success and continuation of business are not dependent upon services of the worker.
4. Service Rendered Personally
Must render services personally. Not able
to engage other people to do the work. Able to assign other workers to do or assist in the job.
5. Hiring, Supervising, and Paying Assistance Hires, supervises, and pays workers at the direction of the employer (acts as a representative of the employer).
Hires, supervises, and pays other workers as the result of a contract under which there is an agreement to provide materials and labor, and is responsible for the results.
6. Continuing Relationship
Provides services of a recurring type and
kind over an extended period. Hired to do one job. No continuous relationship.
7. Set Hours Of Work
Hours and days of work are set by the
employer. Hours and days determined by worker.
8. Full Time Required
Works substantially full time for the business of the employer. Possibly restricted from doing other gainful work.
Free to choose when and for whom work is done.
9. Doing Work On Employer's Premises
Requiring a worker's physical presence at a certain time and place indicates that the employer has control. Control over the place of work is also indicated if employer designates route to travel or territory to canvas within a certain time.
Works away from employer's premises. Uses own office, desk and telephone.
10. Order Of Sequence Set
Performs services in the order or sequence set by the employer or sales. Salesperson reports at the office at specified times, follows up on leads and performs certain tasks at certain times.
Performs services at own pace.
Employee Independent Contractor
11. Oral Or Written Reports
Must submit regular oral or written
reports to the employer. May submit progress reports.
12. Payment By Hour, Week, Or Month Paid by the employer in regular amounts
for stated periods. Paid by the job or on commission.
13. Payment Of Business And/Or Traveling
Expenses
The employer pays and reports the employee's business and/or traveling expenses.
Pays own expenses.
14. Furnishing Of Tools And Materials
Employer furnishes tools, materials, etc. Furnishes own tools.
15. Significant Investment
Has a lack of investment and depends on the employer for facilities needed for doing work.
Has a real, essential and adequate investment in facilities needed for doing work.
16. Realization Of Profit Or Loss
Cannot realize a profit or loss by making good or bad decisions.
Can realize a profit or suffer a loss as a result of own services.
17. Working For More Than One Firm At A Time
Usually works for one employer. Works for a number of unrelated persons or firms at the same time.
18. Making Service Available To General Public Does not make services available to
general public except through company or business of employer.
Makes services available to general public on a regular and consistent basis. Could include having own: office, assistants, business licenses, listings in business directories, business
telephone and advertising.
19. Right To Discharge
Can be discharged at any time. Cannot be fired so long as worker produces results which meet contract specifications.
20. Right To Terminate
Can quit at any time. Cannot quit until specific job is done. Responsible for satisfactory completion of job or legally
obligated to make good for failure to complete.
CHAPTER 2 - PAYMENTS TO EMPLOYEES, FORM W-2
Compensation
All compensation for services performed by an employee must be included in wages on Form W-2 unless specifically excluded by law. For this purpose, compensation includes cash, insurance premiums, goods, services, etc.
Items Excluded From Federal Wages on Form W-2
Certain types of compensation provided to employees may be excluded from wages. The most common
items are:
employer contributions to an Employee Health Savings Account (HSA) up to $6,750 for 2016 and 2017
for family coverage and $3,350 for 2016 ($3,400 for 2017) for single coverage. A maximum additional contribution of $1,000 for 2016 and 2017 is allowed for individuals age 55 and over;
employer contributions to pension and profit sharing plans;
payments made under a cafeteria plan;
deductions from compensation under an elective deferral plan;
payments up to $5,250 per year for both graduate and undergraduate classes;
life insurance premiums on up to $50,000 of group term life insurance (except for more than
2% shareholder employees of S corporations);
life insurance premiums on group term life insurance for spouse and/or dependents if individual coverage
does not exceed $2,000 (except for more than 2% shareholder employees of S corporations);
accident, health, and disability insurance premiums (except for more than 2% shareholder employees of S corporations);
advance or reimbursement for travel and other ordinary and necessary expenses incurred or reasonably expected to be incurred and accounted for by the employee while performing the business of the employer
(see Expense Accounts chapter for details);
personal use of employer's vehicle to the extent that the employer is reimbursed by the employee for the value of the personal use (see Personal Use of a Company Auto chapter for details);
employer provided cell phone for a sales or service representative who spends a substantial amount of
time traveling for company business and requires a telephone to communicate with clients and/or with the employer;
benefits provided to the employee at no additional cost to the employer, such as free local telephone
service for telephone company employees;
employee parking on or near the business premises limited to $255 per month for 2016 and 2017; and
$255 per month in 2016 and 2017 for commuter transit passes;
employer payments up to $5,000 ($2,500 for a married taxpayer filing a separate return) for dependent
care assistance (report in Box 10 on Form W-2);
qualified adoption assistance benefits up to $13,460 in 2016 ($13,570 in 2017) over all taxable
years related to a particular adoption provided by employer under an adoption assistance program. Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to, and whose principal purpose is for the legal adoption of an eligible child. A $13,460 ($13,570 in 2017) exclusion is allowed for the adoption of a child with special needs regardless of whether the employee has qualified adoption expenses;
meals furnished to the employee on the employer's business premises for the employer's
convenience;
meals provided to the employee on an occasional basis to enable the employee to work overtime;
qualified moving expense reimbursement (see Rules for Reporting Moving Expenses later in
this chapter);
achievement awards consisting of tangible personal property (not cash) given for length of service or for a safety achievement in a meaningful presentation and not exceeding $1,600 (qualified plan) or $400 (nonqualified plan) per employee per year. Average cost of all such awards may not exceed $400 per year. To be considered a qualified plan, the Employee Achievement Award Plan must be in writing and may not discriminate in favor of highly compensated employees; and
gifts of hams, turkeys and other merchandise of nominal value distributed to all employees at Christmas or a comparable holiday.
Items Included in Federal Wages on Form W-2
Certain types of compensation provided to employees must be included in wages. The most common
items are:
value of group term life insurance coverage over $50,000 for employees (see table at the end of
this chapter);
entire value of each group term life insurance policy over $2,000 for spouse and/or dependents
(see table at the end of this chapter);
all nonqualified moving expense reimbursements (see Rules for Reporting Moving Expenses
later in this chapter);
personal use of employer's vehicle to the extent that the employer is not reimbursed by the employee for the value of the personal use (see Personal Use of a Company Auto chapter for
details);
accident, health and disability insurance premiums paid by S corporations for more than
2% shareholder-employees;
entire value of group term life insurance coverage paid by S corporations for more than
2% shareholder-employees and their spouse and/or their dependents;
gifts of cash, gift certificates or similar items of readily convertible cash value; and
Certain information only items must also be reported on Form W-2:
cost of employer-sponsored health care coverage (see pages 24 and 25 of this guide for more
information);
dependent care benefits;
employee contributions to elective deferral plans;
sick pay not includable in income;
SEP (Simplified Employee Pension) contributions by employer (if not separately reported to employee);
distributions from nonqualified deferred compensation plans if included in Boxes 1, 3 or 5;
qualified moving expenses (except direct payments to a third party and services furnished in kind);
income from the exercise of nonstatutory stock options; and employer contributions to an HSA (Health Savings Account).
Rules for Reporting Moving Expenses
The following rules apply to the treatment of moving expense reimbursements (including payments made directly to a third party and services furnished in kind).
Qualified Moving Expenses: Moving expense reimbursements are treated as a fringe benefit excludable
from employee's wages if:
the expenses would be deductible by employee if directly paid or incurred by employee
(see Deductible Moving Expenses); and
employee did not deduct the expenses in a prior year.
Qualified moving expenses paid directly to an employee must be reported in Box 12 of Form W-2 and coded "P."
Qualified moving expenses an employer pays to a third party, such as a moving company, on behalf of an employee, and services that an employer furnishes in kind are not reported on Form W-2.
Nonqualified Moving Expenses: Moving expense reimbursements that do not qualify as an excludable fringe
benefit are included in wages and subject to all payroll taxes including withholding.
Deductible Moving Expenses: The following rules apply to determine if moving expenses are deductible:
the move must be job related;
an employee must work full time for at least 39 weeks in the first 12 months at the new job location;
a self-employed person must work full time for at least 39 weeks in the first 12 months and at least 78 weeks in the first 24 months at the new job location; and
The following expenses (with no dollar limit) are deductible:
the cost of moving furniture and household goods including:
1. packing; 2. crating; 3. transporting;
4. storing and insuring (for any consecutive 30 day period after the move);
5. connecting and disconnecting utilities;
6. shipping the car; and
7. shipping household pets.
the cost of traveling (one trip per individual) of the employee and other members of the household including:
1. actual transportation expenses such as airline tickets, gas and oil or 19¢ per mile for 2016 (17¢ in 2017) for car plus parking fees and tolls (family members need not travel together at the same time, but only one trip per individual is allowed);
2. lodging on the road;
3. lodging for the first day in the new area;
4. lodging in area of old home for one day before move; and
5. no meals.
Overtime Pay
The basic concept of overtime pay is a fairly simple idea. For hours worked over forty in the workweek, employees are paid time and one-half of their regular rate of pay. However, each of these concepts has its own unique meaning under the Fair Labor Standards Act (FLSA).
Workweek: The workweek is defined as a period comprised of seven consecutive twenty-four hour days. The
employer may select any seven day period. However, once a workweek is chosen it becomes standard and may not be changed unless it is replaced by a new permanent workweek.
Regular Rate: The regular rate of pay for any workweek is derived by dividing the employee’s total
compensation by the total number of hours worked in a particular workweek. Compensation includes:
hourly rate; salary; piece rate; shift differential; commissions; and
bonuses.
Example 1: An hourly employee works 40 hours and is paid $10.00 per hour. The hourly employee receives a bonus of $60.00. The regular rate for overtime is $11.50 per hour.
Total pay = (40 x $10.00) + $60.00 = $460.00 = $11.50 Total hours 40 40
Example 2: A piece-rate worker prepares 100 pieces at $4.00 per piece in 40 hours. The regular rate for overtime is $10.00 per hour.
Total pay = (100 x $4.00) = $400.00 = $10.00 Total hours 40 40
Exclusions from Regular Rate: A few very limited forms of payment may be excluded from the regular rate:
gifts (such as Christmas bonuses);
reimbursement for employer expenses incurred by the employee;
discretionary bonuses (amounts paid in recognition of services performed during a given period when
the fact that they are to be given at all as well as the amount to be given is determined at or near the end of the period in question). There can be no contract, promise, agreement or indication to employees that they will or might receive a bonus;
payments made for periods when no work is performed because of:
1. vacation; 2. holidays; 3. sickness; or
4. failure of employer to provide work.
contributions to bona fide profit-sharing plans or trusts or a bona fide thrift or savings plan; talent fees paid to radio or television personalities;
contributions made irrevocably to a third party pursuant to a bona fide plan for providing: 1. retirement benefits;
2. life, accident or health insurance; or 3. similar fringe benefits.
premium pay:
1. for working more than eight hours per day or beyond the employee’s normal hours or beyond forty hours in a week. These premiums need not be paid at time and one-half to be excluded.
2. for working on Saturday, Sunday, a holiday, a regular day of rest, or the sixth or seventh day of
the workweek. These premiums must be paid at time and one-half or more to be excluded. 3. paid to an employee pursuant to an employment contract or collective bargaining agreement for work outside what the contract or agreement has established as the basic, normal or regular
in which 37½ has been bargained as the basic or normal workweek. These premiums must be at time and one-half to be excluded.
Note that the premium payments in these categories are not only excludable from the regular rate, they may be credited toward overtime due under the Fair Labor Standards Act.
Time and One-Half: Time and one-half under different pay plans is calculated as follows:
Hourly employees: If an employee is paid solely on an hourly rate, the hourly rate is multiplied by 1.5,
and he/she is paid the resulting overtime rate for hours over forty.
Example: Employee gets $10.00 per hour and works fifty hours: 40 x $10.00 = $400.00 $10.00 x 1.5 = $15.00 10 x $15.00 = $150.00
Gross Pay Due: $550.00
A better way to look at overtime for the same hourly employee is: 50 x $10.00 = $500.00 straight time pay
10 x $ 5.00 = $ 50.00 overtime pay Gross Pay Due: $550.00
Hourly employees with a bonus: If an hourly employee receives a nondiscretionary bonus overtime
pay is calculated as follows:
Example: Employee gets $10.00 per hour, works fifty hours and receives a $100 bonus: Regular Rate = (50 x $10.00) + $100.00 = $12.00 per hour
50
50 x $10.00 = $500.00 straight time pay
Bonus $100.00 bonus
10 x $ 6.00 = $ 60.00 overtime pay Gross Pay Due: $660.00
This example assumes a bonus paid weekly. If a bonus is paid less frequently, such as monthly, quarterly, or annually, the bonus is simply allocated back across the period in which it was earned.
Employees paid entirely by the piece, by commission, etc.: The law does not require that employees
be paid hourly. It permits any method or any combination of methods of payment. However, when overtime is worked, it is based on the regular rate, which is a rate per hour.
Example: A piece-rate worker is paid $6.00 per piece, prepares 100 pieces and works for 50 hours:
Regular Rate = 100 pieces x $6.00 = 600.00 = $12.00 per hour 50 50
100 x $6.00 = $600.00 piece rate pay 10 x $6.00 = $ 60.00 overtime pay Gross Pay Due: $660.00
Salaried employees: Many employers believe that when they put an employee on salary they do not
have to pay overtime. This is not true. The only salaried employees who are exempt from overtime are those employees who are functioning as executive, administrative, or professional employees as those terms are defined by federal regulations. Merely being on salary does not exempt an employee from overtime. Many non-exempt salaried employees must be paid overtime. There are two different methods to compute overtime for salaried employees:
1. Salary designed to pay for a specific number of hours: If the salary is designed to compensate the employee for a specific number of hours, then the employee’s regular rate is the amount of the salary divided by the number of hours the salary is intended to compensate. This is an exception to the general regular rate rule, which divides total compensation by all hours worked.
Example: A salaried employee is paid $600.00 per week. It is clearly established that this salary is intended as compensation for forty hours of work. If such an employee works 50 hours, overtime is due for the ten overtime hours which have not been paid for at all (not even at straight time). Consequently, the employer must pay full time and one-half of the employee’s regular rate for the ten overtime hours:
Regular Rate = $600.00 ÷ 40 = $15.00 per hour Weekly Pay = $600.00 salary
10 x $15.00 = $150.00 regular pay for overtime 10 x $ 7.50 = $ 75.00 overtime pay
Gross Pay Due: $825.00
This is the way most salaried employees wish to be paid overtime, and it is the only way many employers know of to pay overtime to salaried employees. This method is, of course, perfectly legal. It is, however, extremely expensive, in that full time and one-half is due for every overtime hour. This method even has one advantage for an employer; if a salaried employee paid this way misses some time, his pay may be docked accordingly. This is not, however, the only way to pay overtime to salaried employees. The second method is far cheaper, but it has some drawbacks as well.
2. Salary designed to pay for all hours (the “Fluctuating Workweek” Method): It is possible to pay a salaried employee a fixed salary with the clear mutual understanding that the salary is intended to be the employee’s straight time compensation for all hours worked, many or few. If this is the case, then the employee’s regular rate is the salary divided by the hours actually worked.
Example: An employee is paid a salary of $600.00 per week with the understanding that the salary is intended as compensation for all hours worked. The employee works fifty hours in a week.
Regular Rate = $600.00 ÷ 50 = $12.00 per hour Weekly Pay = $600.00 salary
10 x $ 6.00 = $ 60.00 overtime pay Gross Pay Due: $660.00
This method is called “fixed salary for fluctuating hours” by the government, or just “fluctuating workweek.” Its most striking feature is how cheap it makes overtime. The same salary and the same number of hours yields $225.00 in one case and only $60.00 in the other. The fluctuating workweek method may not be used unless the employee’s salary is guaranteed. “Guaranteed” means that even if employees work fewer than 40 hours, they must be paid their full salary. Reporting Items on Form W-2
All compensation to employees should be reported on the employee's Form W-2. The W-2 should include taxable employee fringe benefits, even if they are not subject to federal income tax withholding. (See the table later in
this chapter for additional information on treatment of items other than wages on Form W-2). Some
common items to consider when preparing Form W-2 are:
Gross Wages - Box 1 - FICA withholding is required on some fringe benefits. The employee's share
of FICA paid by the employer rather than withheld from the employee is additional wages to the employee. The benefit is divided by .9235 (for 2016) if the employee is subject to social security and Medicare tax, or .9855 (for 2016) if the employee is only subject to Medicare tax. For workers with wages in excess of $200,000, the benefit is divided by .9765. This gross amount is reported in Boxes 1, 3 and 5. The net amount may be reported in Box 14 (required if 100% of the annual lease value is included in Box 1). The employee's share of social security tax is reported in Box 4 and Medicare tax in Box 6.
Example: Employee has $50,000.00 of wages in 2016 and must include $500.00 for personal use of the company auto. ($500.00 ÷ .9235 = $541.42). $50,541.42 of wages is reported in Boxes 1, 3, and 5. “Auto - $500.00” is reported in Box 14. $3,133.57 of social security tax is reported in Box 4 and $732.85 of Medicare tax in Box 6.
Social Security Wages - Box 3 - Maximum amount is $118,500 for 2016 ($127,200 for 2017). Do not
include noncash wages not subject to social security tax.
Social Security Tax Withheld - Box 4 - 6.20% of the social security wages reported in
Box 3 (maximum $7,347). For 2017, 6.20% of wages reported in Box 3 (maximum $7,886.40).
Medicare Wages - Box 5 - There is no limit on the amount of wages subject to Medicare tax.
Medicare Tax Withheld - Box 6 - Report aggregate Medicare tax of 1.45% on Medicare wages up to
$200,000 and 2.35% on Medicare wages in excess of $200,000. There is no limit on the amount of Medicare tax that must be paid.
Dependent Care Benefits - Box 10 - Total dependent care benefits paid under a cafeteria plan. Also
report the amount in excess of $5,000 in Boxes 1, 3 and 5 as additional compensation.
Information Required by IRS - Box 12 - Do not enter more than four items in this Box. Use an
additional Form W-2 if more than four items need to be reported. Enter IRS code, one space, and the amount without dollar signs or commas for the following items:
Code Description of Item
A social security tax not withheld on tips B Medicare tax not withheld on tips
C cost of group term life insurance coverage in excess of $50,000 D employee contribution to 401(k) plan
E employee contribution to 403(b) annuity plan
F employee contribution to 408(k)(6) salary reduction SEP plan
G employee contribution and employer contribution to 457(b) state or local government plan H employee contribution to 501(c)(18)(D) tax exempt organization plan
J nontaxable sick pay
K 20% excise tax on excess golden parachute payments to certain key corporate employees, if the excess payments are wages, report the 20% as withholding in Box 2
L substantiated employee business expense (Federal rate) if reimbursement is at more than Federal rate
M social security tax not withheld on cost of group term life insurance in excess of $50,000 provided to former employee
N Medicare tax not withheld on cost of group term life insurance in excess of $50,000 provided to former employee
P excludable moving expense reimbursements paid directly to employee Q nontaxable combat pay
R employer contributions to a medical savings account
S employee salary reduction contributions to 408(p) SIMPLE plan
T employer provided adoption benefits. Includes payments made under a cafeteria plan V income from the exercise of nonstatutory stock options
W employer contributions to an HSA
Y current year deferrals (including earnings) under a Section 409A nonqualified deferred compensation plan
Z income under a nonqualified deferred compensation plan AA designated Roth contributions to a Section 401(k) plan
BB designated Roth contributions under a Section 403(b) program
DD cost of employer-sponsored health coverage (reporting optional for 2011) EE Designated Roth contributions to a Section 457(b) plan
USERRA Makeup Contributions – Box 12 – Makeup contributions under the Uniformed Services
Employment and Reemployment Rights Act of 1994 (USERRA) to a pension plan for a prior year must be reported separately and identified by year. For example: $2,250.00 contributed for 2015 to a 401k plan is reported as D 15 2250.00. Report the code and the year to the left of the vertical line in Box 12a through 12d. A 2016 contribution does not require a year designation.
Lease Value and Other - Box 14 – Personal use of company car must be reported here if 100% of
annual lease value is included in Box 1. This Box also may be used for any other information you want to provide to your employees. Label each item. Some examples of items are:
1. educational assistance payments; 2. health insurance premiums deducted;
3. moving expense reimbursements not reported in Box 12; 4. personal use of company auto;
5. union dues; 6. uniform payments;
7. parsonage allowance and utilities for a member of the clergy; 8. nonelective employer contributions to a pension plan;
9. voluntary after-tax employee contributions to a pension plan; 10. required employee contributions to a pension plan;
11. employer matching contributions to a pension plan; and 12. employee contributions to an HSA.
Filing Requirements
The due dates for Forms W-2 are:
Employee’s Copies of Form W-2 must be postmarked on or before January 31, 2017. Terminated employee W-2 due date:
Minnesota - within 30 days of request if employee requests in writing Idaho - within 30 days of termination if an employee requests
Illinois - within 30 days of termination
Iowa - within 30 or after the last payment of wages if an employee requests Wisconsin - with the last payment of wages
Federal - Copies A are due to the Social Security Administration on or before January 31, 2017 when filing on paper or electronically. Mail paper copies with Form W-3 to the Social Security Administration Data Operations Center, Wilkes-Barre, PA 18769-0001. Laser-printed black and white Forms W-2 and W-3 may be submitted to the Social Security Administration. They must
contain a four-digit vendor code which identifies the software producer of the forms for the Social Security Administration.
Minnesota - Copies No. 1 must be mailed to Minnesota Revenue, Mail Station 1173, St. Paul, MN
55146-1173, on or before February 28, 2017.
Idaho - Copy 1 of Form W-2 and Idaho Form 967, Idaho Annual Withholding Report, must be filled with the Idaho State Tax Commission no later than the last day of January either in electronic or paper form. Forms can be submitted electronically at www.accessidaho.org/secur/istc/withholding/portal.html or by mail to Idaho State Tax Commission, PO Box 76, Boise, ID 83707-0076.
Illinois - Employers with less than 250 W-2’s are not required to send state copies of W-2’s to Illinois. State copies must be retained by the employer for three years. Employers with 250 or more W-2’s are required to electronically file by February 15, 2017.
Iowa - Withholding agents with 50 or more employees must electronically file W-2’s by January 31,
2017.
North Dakota - Copies No. 1 with Form 307 must be mailed to Office of State Tax Commissioner,
PO Box 5624, Bismarck, ND 58506-5624 on or before January 31, 2017.
Wisconsin - Copies No. 1 must be mailed to Wisconsin Department of Revenue, P.O. Box 8920,
Madison, WI 53708-8920 on or before January 31, 2017. Businesses terminating operations must file Forms W-2 by:
Employee’s Copies - Employee’s copies (B, C and 2) must be postmarked no later than the due
date of the final Form 941.
Federal - File Copies A with Form W-3 with the Social Security Administration by the last day of the
month that follows the due date of your final Form 941.
North Dakota - Copies No. 1 with Form F-307 must be mailed to Office of State Tax Commissioner
by the last day of the month that follows the due date of the final Form 941.
Wisconsin - Copies No. 1 must be mailed to Wisconsin Department of Revenue within 30 days after
termination of business or permanently ceasing to pay wages.
Electronic Reporting
Employers who prepare 250 or more Federal Forms W-2 are required to file the information electronically.
A waiver from filing electronically for undue hardship is available by filing Federal Form 8508. It is difficult to receive a waiver.
Minnesota requires electronic filing when 10 or more state forms W-2 are filed.
Idaho requires electronic filing for employer who meet the IRS requirements for electronic filing and file 50 or more state Forms W-2.
Illinois requires electronic filing when 250 or more state Forms W-2’s are filed. Iowa requires electronic filing when withholding agent has 50 or more employees. North Dakota require electronic filing when 250 or more state Forms W-2 are filed. South Dakota has no income tax therefore no state Forms W-2 are required. Wisconsin requires electronic filing when 50 or more state Forms W-2 are filed.
TREATMENT OF INCOME OTHER THAN WAGES
Include on W-2 Subject to
Box 1&16 Box 3&5 Box 10, 11, FICA
(Gross (FICA 12,or 14 (5) FUTA
Wages) Wages) (Other) SUTA
401(k), 403(b), 408(k)(6), 408(p), 457(b),
501(c)(18) or 409A (Elective Deferrals)(1) No Yes 12-D,E,F,S,
G, H, Y
Yes
Designated Roth Contributions to 401(k)
Plan or 403(b) Program Yes Yes 12-AA, BB Yes
Group Term Life in Excess of $50,000 Yes Yes 12-C(2) FICA only
Employee Business Expenses
Substantiated (Accountable Plan) No No 14-EBE No
Unsubstantiated (Nonaccountable Plan)
or Unreturned Excess Under
Accountable Plan) Yes Yes No Yes
Mileage Reimbursement
At More than the Federal Rate Yes(3) Yes(3) 12-L(4) Yes(3)
At or less than the Federal Rate No No 14-EBE No
Per Diem Reimbursement for
Meals and/or Lodging:
At More than the Federal Rate Yes(3) Yes(3) 12-L(4) Yes(3)
At or Less than the Federal Rate No No 14-EBE No
PS-58 (Life Insurance) Costs (11) Yes No 14-PS-58 No
Simplified Employee Pension (SEP)(6) No No 14-SEP No
Moving Expenses
Qualified No No 12-P (10) No
Nonqualified Yes Yes 14-Moving Yes
Personal Use of Company Car(7) Yes Yes 14-Auto Yes
Dependent Care Benefits No No 10 SUTA only
Cafeteria Plan (Section 125) No No No SUTA only
TREATMENT OF INCOME OTHER THAN WAGES
Include on W-2 Subject to
Box 1&16 (15) Box 3&5 Box 10, 11, FICA
(Gross (FICA 12,or 14 (5) FUTA
Wages) Wages) (Other) SUTA
Third Party Sick Page (12)
Taxable - employer paid for plan Yes Yes(17) 14-sick Yes(16)
Nontaxable - Employee paid for plan with No No 12-J No
after tax contributions
Nonqualified Deferred Compensation
Subject to FICA but Not Yet Paid No Yes 11 Yes
Subject to FICA & Paid Now Yes Yes 11 Yes
Paid Now but Previously
Subject to FICA Yes No 11 No
Medical Savings Account No No 12-R Yes (8)
Adoption Assistance Benefits No Yes 12-T Yes
Exercise of Nonstatutory Stock Options(9) Yes Yes 12-V Yes
Employer Contributions to Health
Savings Account (HSA) and Employee Contributio
through a Cafeteria Plan No No 12-W No
Directors Fees Paid to Employees(13) No No No SUTA only
Premiums and Contributions Paid by
S Corps for 2% Shareholder-Employees(14)
Long-Term Care Insurance Yes No 14-LTC No
Contributions to Health Savings Accounts
(HSA) Yes No 14-HSA No
Long-Term Disability Yes Yes 14-LTD Yes
Short-Term Disability Yes Yes 14-STD Yes
Group Term Life Insurance
$50,000 and less Yes Yes 14-GTL FICA only
Over $50,000 Yes Yes 12-C FICA only
Health, Dental and Vision Insurance Yes No 14-HLTH No
(1) Retirement plan in Box 13 must be checked.
(2) Report uncollected social security tax (M) and uncollected Medicare tax (N) on group term life in excess of $50,000
provided to former employee.
(3) Amount in excess of federal rate (the taxable portion). (4) Amount equal to federal rate (the non-taxable portion).
(5) Reporting in Box 14 is optional except for 100% of annual lease value.
(6) Retirement plan in Box 13 must be checked. This does not include Elective Deferrals under SARSEP’s(408(k)(6)). (7) Required in Box 14 if 100% of annual lease value is in the employee's income.
(8) Not subject to FICA.
(9) Spread between exercise price and fair market value at time of exercise. (10) Not reported on W-2 if paid directly to third party.
(11) If not reported on Form 1099R. See table at end of chapter. (12) Third party sick pay in Box 13 must be checked.
(13) Report on Form 1099-MISC.
(14) Includes owner’s spouse, children, grandchildren and parents. (15) Box 16 state wages vary based on the benefit and the state. (16) SUTA reporting of sick pay paid by a third party varies by state.
UNIFORM PREMIUMS FOR $1,000 OF GROUP TERM LIFE INSURANCE PROTECTION
Coverage on to $50,000 of employer provided group term life insurance is excluded from employee compensation. The taxable value of coverage provided in excess of $50,000 is included as additional compensation on the employee's W-2. The amount is determined based on the IRS rate from the table below.
Cost Per $1,000 of
Protection For
Age Bracket 1-Month Period
Under 25 $ 0.05 25 to 29 0.06 30 to 34 0.08 35 to 39 0.09 40 to 44 0.10 45 to 49 0.15 50 to 54 0.23 55 to 59 0.43 60 to 64 0.66 65 to 69 1.27 70 and above 2.06
PS-58 RATES (TABLE 2001)
One-Year Term Insurance Premium for $1,000 of Life Insurance Protection In Qualified Retirement Plans and Split Dollar Life Insurance Policies
Age Premium Age Premium Age Premium Age Premium
0 $ 0.70 25 $ 0.71 50 $ 2.30 75 $ 33.05 1 0.41 26 0.73 51 2.52 76 36.33 2 0.27 27 0.76 52 2.81 77 40.17 3 0.19 28 0.80 53 3.20 78 44.33 4 0.13 29 0.83 54 3.65 79 49.23 5 0.13 30 0.87 55 4.15 80 54.56 6 0.14 31 0.90 56 4.68 81 60.51 7 0.15 32 0.93 57 5.20 82 66.74 8 0.16 33 0.96 58 5.66 83 73.07 9 0.16 34 0.98 59 6.06 84 80.35 10 0.16 35 0.99 60 6.51 85 88.76 11 0.19 36 1.01 61 7.11 86 99.16 12 0.24 37 1.04 62 7.96 87 110.40 13 0.28 38 1.06 63 9.08 88 121.85 14 0.33 39 1.07 64 10.41 89 133.40 15 0.38 40 1.10 65 11.90 90 144.30 16 0.52 41 1.13 66 13.51 91 155.80 17 0.57 42 1.20 67 15.20 92 168.75 18 0.59 43 1.29 68 16.92 93 186.44 19 0.61 44 1.40 69 18.70 94 206.70 20 0.62 45 1.53 70 20.62 95 228.35 21 0.62 46 1.67 71 22.72 96 250.01 22 0.64 47 1.83 72 25.07 97 265.09 23 0.66 48 1.98 73 27.57 98 270.11 24 0.68 49 2.13 74 30.18 99 281.05
The lower of the insurance company’s rates or the IRS’s rates from the above table can be used.
Form W-2 Reporting of Employer-Sponsored Health Coverage
The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable. The value of the employer’s excludable contribution to health coverage continues to be excludable from an employee’s income, and it is not taxable. The reporting is for informational purposes only and will provide employees useful and comparable consumer information on the cost of their health care coverage.
Transition Relief
Employers filing fewer than 250 Forms W-2 in 2015 will not be required to report the cost of coverage on the 2016 Forms W-2. The transition relief will apply to future calendar years until the IRS publishes additional guidance.
Reporting on the Form W-2
The value of the health care coverage will be reported in Box 12, with Code DD.
In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee. The chart below illustrates the types of coverage that employers must report on the Form W-2.
Form W-2 Reporting of Employer-Sponsored Health Coverage
Coverage Type Form W-2, Box 12, Code DD
Report Do Not
Report
Optional
Major medical X
Dental or vision plan not integrated into another medical or health plan
X Dental or vision plan which gives the choice of
declining or electing and paying an additional premium
X
Health Flexible Spending Arrangement (FSA) funded solely by salary-reduction amounts
X Health FSA value for the plan year in excess of
employee’s cafeteria plan salary reductions for all qualified benefits
X
Health Reimbursement Arrangement (HRA) contributions
X Health Savings Arrangement (HSA) contributions
(employer or employee)
X Archer Medical Savings Account (Archer MSA)
contributions (employer or employee)
X Hospital indemnity or specified illness (insured or
self-funded), paid on an after-tax basis
X Hospital indemnity or specified illness (insured or
self-funded), paid through salary reduction (pre-tax) or by employer
X
Employee Assistance Plan (EAP) providing applicable employer-sponsored healthcare coverage
Required if employer charges a COBRA premium Optional if employer does not charge a COBRA
Form W-2 Reporting of Employer-Sponsored Health Coverage (continued)
Coverage Type Form W-2, Box 12, Code DD
Report Do Not
Report
Optional
On-site medical clinics providing applicable employer-sponsored healthcare coverage
Required if employer charges a COBRA premium Optional if employer does not charge a COBRA premium Wellness programs providing applicable
employer-sponsored healthcare coverage
Required if employer charges a COBRA premium Optional if employer does not charge a COBRA premium Multi-employer plans X
Domestic partner coverage included in gross income X Governmental plans providing coverage primarily for
members of the military and their families
X Federally recognized Indian tribal government plans
and plans of tribally charted corporations wholly owned by a federally recognized Indian tribal
government
X
Self-funded plans not subject to Federal COBRA X
Accident or disability income X
Long-term care X
Liability insurance X
Supplemental liability insurance X
Workers’ compensation X
Automobile medical payment insurance X
Credit-only insurance X
Excess reimbursement to highly compensated individual, included in gross income
X Payment/reimbursement of health insurance
premiums for 2% shareholder-employee, included in gross income
X
Other Situations Report Do Not
Report
Optional
Employers required to file fewer than 250 Forms W-2 for the preceding calendar year (determined without application of any entity aggregation rules for related
employers)
X
Forms W-2 furnished to employees who terminate before the end of a calendar year and request, in
writing, a Form W-2 before the end of that year
X
Forms W-2 provided to third-party sick-pay provider to employees of other employers
X
CHAPTER 3 - FRINGE BENEFITS
Fringe Benefits Excluded From Employee Compensation
The following fringe benefits are excludable from employee compensation. Some of these benefits must be offered to employees on a nondiscriminatory basis:
accident and health plans; educational assistance programs*; health reimbursement arrangements; dependent care assistance plans*; disability income plans; no-additional-cost fringe benefits*; group term life insurance; de minimis fringe benefits*;
cafeteria plans; qualified employee discounts*;
qualified transportation; working condition fringes*; and adoption assistance programs; health savings accounts. employer-provided cell phone;
*These fringe benefits are also eligible for exclusion by partners who perform services for a partnership and by a more than 2% shareholder of an S-corporation.
State wage exclusion may vary based on the benefit and the state. The discrimination rules are different for each fringe benefit.
Accident and Health Plans
An employer can provide unlimited accident and health coverage (including long-term care insurance) for an employee, and the employee's spouse and dependents both before and after retirement.
Insured Plans - Premiums paid to insurance companies for health insurance are deductible
by the employer. Benefits received by employees are not taxable as compensation.
A group health plan may not establish rules for eligibility based upon an employee’s health status. Employers who establish health plans that base eligibility on health status are subject to a penalty of $100 for each day of noncompliance.
Insured Plans – The Affordable Care Act (ACA) requires non grandfathered fully insured
health plans to satisfy nondiscrimination rules regarding eligibility to participate in the plan and eligibility for benefits. This requirement was originally set to take effect for plans years beginning on or after September 23, 2010. However in late 2010, the IRS announced that the nondiscrimination requirement for non-grandfathered plans is delayed indefinitely, pending the issuance of regulations or guidance on how to comply with the requirement.
Premiums paid to insurance companies by the employer and benefits paid by the insurance company to the employee for personal injury or sickness are not taxable to the employee. This exclusion does not include payments received in lieu of wages.
Self-insured Plans - These medical reimbursement plans are subject to discrimination rules.
Failure to meet the tests results in additional compensation for highly compensated individuals.
1. Eligibility tests
a. one of the following three tests must be met:
i. the plan must cover 70% or more of all employees;
ii. at least 70% of all employees must be eligible, and 80% or more of all eligible employees must be included; or
b. The following employees may be excluded from the eligibility test:
i. employees with less than three years of service;
ii. employees under age 25;
iii. part-time (generally less than 25 hours per week) or seasonal employees (generally less than seven months per year);
iv. union members; and
v. nonresident aliens.
2. Benefits test
a. A plan will be discriminatory unless all benefits and features provided for highly compensated participants and their dependents are also provided for all other participants and their dependents on the same basis.
b. Highly compensated participants include:
i. the five highest paid officers;
ii. more than 10% shareholders; and
iii. the highest paid 25% of all nonexcludable employees.
3. Taxable amount
a. discriminatory eligibility - If the plan discriminates in eligibility to participate, only a portion of the benefit is taxable. The taxable amount for each highly-compensated participant is the benefit paid to that person times the total amount paid to all highly compensated individuals divided by the amount paid to all plan participants.
b. discriminatory benefit - If the benefit is available to highly compensated participants, but not other participants, the entire value of the benefit is taxable. For example, if only officers are reimbursed for dental expenses, the amount of dental expenses claimed by each officer is taxable to them (assuming there are less than six officers).
Health Reimbursement Accounts (HRAs)
An HRA is a type of employee benefit plan reimbursing employees for medical expenses not covered by other forms of insurance. Benefits are paid up to a specific dollar amount from funds provided exclusively by the employer. HRA’s are not subject to the strict requirements of health flexible spending arrangements.
The plans:
must be funded solely by the employer;
may only provide benefits for substantiated medical expenses; and may allow the carryover of unused amounts to a later year.
Affordable Care Act (ACA) Impact on HRAs
For employers that are Applicable Large Employers (ALE), as defined by the ACA as greater than 50 full-time equivalents, pre or post-tax reimbursement of employees' individual policy premiums is not permissible and will subject the employer to $100 per employee, per day penalty for noncompliance. This also includes ALEs that offer HRA plans that are not fully-integrated with the group health plan.
Employers that are not ALEs can now provide a Qualified Small Employer HRA provided that the arrangement meets all of the conditions below:
1. It is maintained by an employer that is not an ALE and does not offer a group health plan to any of its employees.
2. It is provided on the same terms to all eligible employees. An employer may exclude employees who have not completed 90 days of service, have not attained age 25, are part-time or seasonal, covered by a collective bargaining unit, or are nonresident aliens.
3. It is funded only by the employer and there are no employee contributions to the plan.
4. Employee must provide proof of insurance coverage and the plan will provide reimbursement of eligible medical care expenses under Code Sec. 213(d).
5. Reimbursements cannot exceed $4,950 (single) and $10,000 (family). For employees who are covered by a qualified arrangement for less than an entire year, the amounts are prorated. 6. Employer must provide written notice to employees 90 days before the beginning of the plan year
describing:
a. The employee's benefit amount under the plan.
b. A statement that the eligible employee must disclose the HRA benefit to any health insurance exchange for which the employee applies for advance payment of the premium assistance tax credit.
c. A statement that if the employee is not covered under minimum essential coverage for any month the employee may be subject to tax for such month and reimbursements under the arrangement are includible in income.
It is important to note that employees who are eligible for both the Small Business HRA and premium tax credits, the premium tax credit will be impacted by the HRA benefit. The employer must also include the HRA benefits in the W-2 reporting of health benefits after December 31, 2016.
Disability Income Plans
A disability income plan is an employer-sponsored program to provide income to employees who are disabled. This can apply to short or long term situations.
Uninsured Plan
1. employer paid benefits are deductible as compensation by the employer; and
2. benefit payments are fully taxable to the employee as compensation.
Insured Plan
1. employer paid premiums are deductible as compensation; 2. these premiums are not taxable to the employee; and
3. benefits received from the insurance company while disabled are taxable to the employee.
These plans are not subject to any discrimination rules by IRS unless funded through a voluntary employees' beneficiary association (VEBA).
NOTE: If employees pay the premiums themselves with after-tax dollars, the benefit payments are not taxable when received.
Group Term Life Insurance
Coverage on up to $50,000 of employer provided group term life insurance is excluded from an employee’s wages. In certain circumstances, tax-free coverage is still available to retired employees. The taxable value of coverage provided in excess of $50,000 is included as additional wages on the employee's W-2. The amount is determined based on the IRS rate from the following table:
UNIFORM PREMIUMS FOR $1,000 OF GROUP TERM LIFE INSURANCE PROTECTION
Cost Per $1,000 of
Protection For
Age Bracket 1-Month Period
Under 25 $ 0.05 25 to 29 0.06 30 to 34 0.08 35 to 39 0.09 40 to 44 0.10 45 to 49 0.15 50 to 54 0.23 55 to 59 0.43 60 to 64 0.66 65 to 69 1.27 70 and above 2.06
Discrimination rules - The plan must not discriminate in favor of key employees. Key
employees cannot receive more benefits than other employees. If they do, the entire amount of group term life insurance coverage provided to all key employees is a taxable fringe benefit. Key employees are:
1. officers whose salary exceeds $170,000 for 2016 and $175,000 for 2017;
2. more than 5% owners; or
3. more than 1% owners whose salary exceeds $150,000.
Discrimination test - There are two discrimination tests that must be met. These are applied
separately to active and former employees.
1. Test for benefits - benefits must be provided to all employees on a uniform basis. This basis may be in relation to compensation.
2. Test for eligibility - one of the following four tests must be met:
a. at least 70% of all employees must benefit from the plan;
b. at least 85% of participants are not key employees;
c. participants constitute a classification of employees that the IRS determines is not discriminatory; or
d. the plan is part of a cafeteria plan and meets those requirements (discussed later
in this chapter).
3. For the eligibility test, the following employees may be excluded:
a. employees with less than three years of service;
b. part-time (less than 20 hours per week) and seasonal employees (less than five months per year);
c. nonresident aliens; and
d. union employees.
Dependent coverage - Up to $2,000 of group term life insurance may also be provided for an
employee's spouse or dependent as a "de minimis" fringe benefit. If more than $2,000 of coverage is provided, the entire cost of the dependent insurance is additional compensation for the employee. Any amount the employee reimburses the company is excluded from the W-2. The cost of this insurance is determined using the preceding table.
Cafeteria Plans
A cafeteria plan, or "flexible benefit plan", is a plan in which choices can be made among several types of nontaxable fringe benefits or cash. The fringe benefits that can be offered include:
medical and dental benefits;
insurance premiums through an employer sponsored group plan (excluding long term care insurance premiums);
disability insurance;
dependent care expenses;
extra vacation time;
group term life insurance;
401(k) plans; and
