An Employer’s Guide to Paying Fringe Benefits to Employees - PowerPoint Presentation

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An Employer’s Guide to Paying Fringe Benefits to Employees

William Hays Weissman, Esq.Littler Mendelson, P.C.925-927-4545wweissman@littler.comOctober 8, 2015

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Today’s Agenda

Payments to Employees:

The Basics

Gifts, Prizes and Awards

Other Payments to Employees

Travel Expenses

Leave Sharing and Disaster Payments

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Payments to Employees:

The Basics

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Wage and Tax Basics

The IRS takes the position that all remuneration from employment (“any services, of whatever nature, performed … by an employee for the person employing him”), including previously unpaid or back wages as well as front pay are

wages for federal income tax purposes

Rev. Rul. 72-268

All wages are subject to income tax withholding, FICA, FUTA and state counterparts

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Payments to Employees =

WagesIf an employer gives something to an employees, whether cash or not, it is likely wages The definition of “wages”

is very broad

All exemptions from wages are

expressly stated, not implied

Wages are subject to taxes and

get reported on IRS Form W-2

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Gifts, Prizes and Awards

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Taxable Gifts and Awards

Employers cannot give gifts to employees

IRC § 102(c)(1) (“Subsection (a) shall not exclude

from gross income any amount transferred by or for

an employer to, or for the benefit of, an employee.”)

Employer awards are generally taxable wages

Gross income includes amounts received as prizes

and awards with certain limited exceptions

IRC § 74

This includes cash and noncash gifts (e.g., clock radio)

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Achievement and Longevity Awards

Exception to general rule that awards are taxableBe given for length of service or safety achievement.

Be tangible personal property, other than cash,

gift certificates or equivalent items.

Be given under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation.

Be given as part of a meaningful presentation.

Be no more than the specified dollar limits

($1,600 or $400 if not a qualified plan award).

IRC § 274(j)(3)(A)

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De Minimis Gifts

Employers may give gifts to employees as de minimis fringe benefits

Amount must be so small that it would be administratively burdensome to account for it

Old rule of thumb was $25 in value, but IRS recently suggested it could be $50 and that there is no set amount

Cash, no matter how little, is never de

minimis

This includes gift cards, no matter the amount

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Tips When Giving Employees Gifts

Employees gifts such as a turkey, ham, gift basket or other item of nominal value given this holiday season will not be treated as either wages or income to the employee, and thus not subject to income or employment taxes

Gift values should be about $25.00

Gift cards or certificates will always be taxable wages

If giving a taxable gift to employees, coordinate with the payroll department so that the amount of the gift can be included in the employees' wages during a payroll period and appropriate income and payroll taxes can be withheld

Good idea to do before last pay period of the year,

however, there is a special rule for payments

made in November or December - can be

treated as paid in the following year

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Other Payments to Employees

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Bonuses, Commissions, Severance

All three are wages for federal income and employment tax purposes

All are generally supplemental wages

Can generally use flat rate withholding or aggregate method

Rev. Rul. 2008-29 – examples of supplemental wages

There are some state employment tax exceptions to how severance is treated

Designed so that a person receiving a severance is

not disqualified from obtaining UI benefits

Severance under Supreme Court’s

Quality Stores

is wages, but can still have non-taxable SUB Plans

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Tax Exempt Business Expenses

Accountable plansThe expenses must have a business connection

The employee must adequately account to his or her employer for these expenses within a reasonable period of time

The employee must return any excess reimbursement or allowance within a reasonable period of time

IRC §§ 62(a)(2)(a), (c); Treas. Reg. §§ 1.62-2(c)(1), (d)-(f)

Amounts paid to an employee under an accountable plan are exempt from income tax withholding and employment taxes

Treas. Reg. § 1.62-2(c)(4).

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Taxable Business Expenses

Nonaccountable plans are plans that do not meet the accountable plan requirementsPaying an employee a flat amount per monthNot requiring employee to return receipts or other substantiation

Not requiring employee to return excess payments

Payments under a

nonaccountable

plans are taxable wages to the employee

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Per diems

Per diems that do not exceed IRS limit meet the substantiation requirement of an accountable planPer diems for lodging, meals and incidentalsIncidentals include tips, mailing costs for filing travel vouchers, paying employer-sponsored charge card billings

Incidentals do not include laundering services, telephone or fax charges, taxi or limousine fares

Can pay only M&IE if pays lodging at actual expense or directly

Must prorate day of travel at 75 percent

Different rates apply across the US and by time of year

www.gsa.gov

NY, NY

: Room is $268, in June 2015, but room is only $197 in January 2015, and $304 in September 2015; M&IE is $71

San

J

ose,

CA

: room is $162 and M&IE is $56 all year

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Federal employment law

Fair Labor Standards Act does not require expense reimbursement – it is matter for private agreement of the partiesSee Wage-Hour Opinion Letter, DOL (Sept. 10, 1998) 1998 DOLWH LEXIS 78.An employer must reimburse employees for expenses that are primarily for the benefit of the employer, to the extent that such expenses cut into minimum wage or overtime compensation.

Employers must pay minimum wage and overtime premiums "free and clear.”

29 C.F.R. §§ 531.35 (Free and clear payments), 531.36 (Deductions in

nonovertime

weeks), 531.37 (Deductions in overtime weeks).

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What is for the employer’s benefit?

“Tools of the trade" and other materials or equipment incidental to carrying on the employer's business are considered business expenses of the employer and may not be transferred to employees if doing so cuts into minimum wage or overtime compensation. 29 C.F.R. §§ 531.3(d), 531.35.

E.g.,

Castellanos

-Contreras v. Decatur Hotels, LLC,

622 F.3d 393 (5th Cir. 2010) (Visa and physical presence were not "tools" particular to the hotel "trade" within meaning of § 531.35 – Concerning H-2B workers and not reimbursable.)

Uniforms required by the employer, the law or the nature of the work, when an employee is required to purchase a uniform, cannot reduce the cost below minimum wage or overtime.

29 C.F.R. § 531.3(d); USDOL, Field Operations Manual 30c12(e),

http://www.dol.gov/whd/FOH/FOH_Ch30.pdf.

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What is for the employer’s benefit?

Transportation and visa expensesU.S. Dep’t of Labor, Wage & Hour Division, Field Assistance Bulletin No. 2009-2 (Aug. 21, 2009) (“under the FLSA . . . transportation expenses and visa fees of H-2B employees are primarily for the benefit of the employer”),

Salazar-Martinez v. Fowler Bros.

, 781 F. Supp. 2d 183 (W.D.N.Y. 2011) (employer required to reimburse H-2A employees for travel and visa expenses to the extent they reduce wages during first week of work before minimum wage), and

Teoba

v.

Trugreen

Landcare

LLC

, 769 F. Supp. 2d 175 (W.D.N.Y. 2011) (“visa and transportation costs of H-2B employees are unique costs of doing business, primarily benefitting employers, which cannot be passed on to employees either directly or indirectly, if doing so would reduce the employees' wages below minimum wage

.”)

Safety equipment required by OSHA standards

Exceptions

include lost or intentionally damaged PPE;

nonspecialty

safety shoes; and everyday and ordinary clothing.29 CFR Parts 1910, 1915, 1917, 1918 and 1926.

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State law requirements

Five states generally require reimbursement of business expensesCA, MT, NH, ND, SDMinnesota has limited reimbursement requirementsEmployer pays for uniforms, travel and items consumed in the business

Many states have limited requirements

IA – employer pays for alcohol or drug tests

NY – employer pays for work related medical exams

Generally cannot require employees to pay the cost of worker’s compensation or unemployment benefits

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The Company Car

Personal use of a company car must be segregated from business use and treated as taxable wagesRequires some kind of journal or log

Usually reimbursed based on standard mileage rate

$0.575 per mile for business use in 2015

C

an use an actual expense method, but very cumbersome

Special lease valuation rule for higher value vehicles

An employer can approximate travel expenses for FLSA purposes

29 C.F.R. § 778.217

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The Company Car Exception

Certain vehicles that cannot reasonably be used for personal use are exemptAmbulances, hearses, fire trucks, utility vehicles, garbage trucks, etc.Do not have to track personal use

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Employer Provided Lodging

Employer provided lodging

Employee lives on employers premises for its convenience

Exempt from tax (IRC § 119)

Classic example is apartment manager that lives on site in

case of problems

Cannot have option to live

there or take cash

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Employer Provided Meals

Employer provided mealsOccasion office lunch is de

minimis

fringe benefit and exempt from taxation

Meals provided before, during or at

end of shift on employers premises

for its convenience are exempt from taxation

Waitress that eats breakfast before starting shift

If lunch is provided to more than 50 percent of workforce at location, exempt if for convenience of the employer

Need to be on site for emergencies, not enough time to leave or no place to eat close by

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Fringe Benefits (IRC § 132)

No additional cost servicesProvided in regular line of business and no additional cost E.g., plane tickets for airline employees, rooms for hotel employees

Provided on equal terms (cannot discrimination in favor of “highly compensated employees”)

Qualified employee discounts

For goods, cannot exceed “gross profit percentage”

(Total sales – COGS) / Total sales

For services, 20 percent

Same line of business, nondiscrimination rules apply

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Fringe Benefits

Working condition fringesUse of employer’s property related to the trade or businessMust be able to take a business deduction on personal return

E.g., business use of company car, due in professional organizations, business periodical subscriptions, outplacement services, etc.

De

minimis

fringes

Value so small administratively impractical to account

E.g., occasional use of copy machine, occasional tickets to theater or sporting events, coffee/donuts, etc.

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Cell Phones

Notice 2011-72

Effective for periods after December 31, 2009

Employer provided cell phone is not taxable, including personal use if there is a legitimate business reason for the cell phone

Getting in touch with clients after hours

Need to reach employees at all times for work-related emergencies

California requires reimbursement of personal cell phones used for business

Cochran v. Schwan’s Home Services, Inc.

, B247160 (Aug. 12, 2014)

Sweeping decision with far-reaching potential consequences – need to review policies

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Moving Expenses

Initial Test

: New workplace 50 miles further from old residence and must work in new location for 39 weeks

Transport of household goods and 30 days storage

Travel by most direct route from old home to new home

Does not include house hunting trips,

closing costs, temporary living

expenses

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Educational Expenses

May be a working condition fringe benefit if job relatedCannot help employee obtain a new or different jobE.g., a paralegal going to law school is not job related

No limit on the amount

Non-job related education

Pursuant to a written plan

$5,250 per year tax exempt limit

May be tied to a grade

Made permanent in 2013

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Other Property to Employees

Most other property given to an employee is likely to be wagesE.g., country club duesMay be partially exempt if for business use

Personal use of property likely wages but not tracked and administratively burdensome

E.g., personal use of company computer, which is listed property

Special rules for personal use of company plane

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Travel Expenses

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Temporary Travel Away from Home

Three requirements for expensesReasonable and necessaryIncurred while away from home

Incurred in pursuit of a trade or business

Employee must be away from home for substantially longer than an ordinary day’s work, the employee cannot reasonably be expected to make the trip without being released from duty for sufficient time to obtain substantial sleep or rest

Exception for employees to participate in work functions, such as offsite meetings

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What is a Tax Home

?A “tax home” is the city or location of the employee’s principal place of business

It is not where the employee’s personal residence is located

But can be a person’s residence

if it qualifies as a home office

Is possible for a person not to

have a tax home

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What is temporary?

If it the assignment is intended to last less than one year?How much of a break between assignments?If longer than one year, IRS believes you should move to where your tax home is

Otherwise employer is paying personal expenses indefinitely disguised as tax-exempt business expenses

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Commuting Expenses

General rule Commuting is a personal expense

$1.50 special commuting valuation rule

Payment of personal expenses is wages

Exceptions

Travel to temporary work locations

Rev. Rul. 99-7 – three situations

Travel in employer non-personal use vehicles at requirement of the employer

Transit passes

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Leave Sharing and Disaster Payments

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Leave Sharing Programs

Intended to allow employees to help other employees for medical emergencies and natural disasters

Employees can donate vacation, sick or PTO time

to bank to be used by other employees in need

Rev. Rul. 90-29, Rev. Proc.

2006-59

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Leave Sharing Programs

Should have written plan and application formObjective criteria for use of bank, including exhaustion of other available leave

Controls in place to ensure confidentiality

Controls in place to ensure employees do not donate all leave

Need to consider financial implications

to company

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Disaster Assistance Payments

Employers may make payments to employees for certain natural disasters, common carrier accidents and terrorist or military activitiesDoes not include medical emergencies

May be for reasonable living expenses or to replace a residence and its contents

Exempt from employee’s income

IRC § 139

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William Hays Weissman, Esq.

Littler Mendelson, P.C.wweissman@littler.com925.927.4545

Thank you and please remember to complete your evaluation for this session

.