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

An Employer’s Guide to Paying Fringe Benefits to Employees William Hays Weissman, Esq.Littler Mendelson, P.C.925-927-4545wweissman@littler.comOctober 6, 2016 1

Today’s Agenda Payments to Employees: The BasicsGifts, Prizes and Awards Other Payments to EmployeesTravel ExpensesLeave Sharing and Disaster Payments 2

PAYMENTS TO EMPLOYEES: THE BASICS 3

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 counterparts4

Payments to Employees = Wages If 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 impliedWages are subject to taxes and get reported on IRS Form W-2 5

Gifts, Prizes and Awards 6

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 wagesGross income includes amounts received as prizes and awards with certain limited exceptions IRC § 74 This includes cash and noncash gifts (e.g., clock radio) 7

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) 8

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 amountCash, no matter how little, is never de minimisThis includes gift cards, no matter the amount 9

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 10

Other Payments to Employees 11

Bonuses, Commissions, Severance All three are wages for federal income and employment tax purposesAll are generally supplemental wages Can generally use flat rate withholding or aggregate methodRev. Rul. 2008-29 – examples of supplemental wagesThere 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 12

Tax Exempt Business Expenses Accountable plansThe expenses must have a business connectionThe 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 timeIRC §§ 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). 13

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 substantiationNot requiring employee to return excess payments Payments under a nonaccountable plans are taxable wages to the employee14

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 billingsIncidentals 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 directlyMust prorate day of travel at 75 percentDifferent rates apply across the US and by time of yearwww.gsa.gov NY, NY : Room is $181 in January 2016, $270 in June 2016, and $306 in October 2016; M&IE is $74 all year long Sacramento , CA : room is $112 and M&IE is $64 all of 2016 15

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). 16

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. 17

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. 18

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 businessMany states have limited requirements IA – employer pays for alcohol or drug testsNY – employer pays for work related medical examsGenerally cannot require employees to pay the cost of worker’s compensation or unemployment benefits 19

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 logUsually reimbursed based on standard mileage rate $0.54 per mile for business use in 2016Can use an actual expense method, but very cumbersomeSpecial lease valuation rule for higher value vehiclesAn employer can approximate travel expenses for FLSA purposes29 C.F.R. § 778.217 20

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 21

Employer Provided Lodging Employer provided lodging Employee lives on employers premises for its convenienceExempt 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 22

Employer Provided Meals Employer provided mealsOccasion office lunch is de minimis fringe benefit and exempt from taxationMeals 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 23

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 employeesProvided on equal terms (cannot discrimination in favor of “highly compensated employees”) Qualified employee discountsFor goods, cannot exceed “gross profit percentage”(Total sales – COGS) / Total salesFor services, 20 percentSame line of business, nondiscrimination rules apply 24

Fringe Benefits Working condition fringesUse of employer’s property related to the trade or businessMust be able to take a business deduction on personal returnE.g., business use of company car, due in professional organizations, business periodical subscriptions, outplacement services, etc. De minimis fringesValue so small administratively impractical to accountE.g., occasional use of copy machine, occasional tickets to theater or sporting events, coffee/donuts, etc. 25

Cell Phones Notice 2011-72 Effective for periods after December 31, 2009Employer provided cell phone is not taxable, including personal use if there is a legitimate business reason for the cell phoneGetting in touch with clients after hours Need to reach employees at all times for work-related emergenciesCalifornia 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 26

Moving Expenses Initial Test : New workplace 50 miles further from old residence and must work in new location for 39 weeksTransport of household goods and 30 days storageTravel by most direct route from old home to new homeDoes not include house hunting trips, closing costs, temporary living expenses 27

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 relatedNo limit on the amountNon-job related education Pursuant to a written plan$5,250 per year tax exempt limitMay be tied to a gradeMade permanent in 2013 28

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 usePersonal use of property likely wages but not tracked and administratively burdensome E.g., personal use of company computer, which is listed propertySpecial rules for personal use of company plane 29

Travel Expenses 30

Temporary Travel Away from Home Three requirements for expensesReasonable and necessaryIncurred while away from homeIncurred 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 restException for employees to participate in work functions, such as offsite meetings 31

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 officeIs possible for a person not to have a tax home 32

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 expenses33

Commuting Expenses General rule Commuting is a personal expense$1.50 special commuting valuation rule Payment of personal expenses is wagesExceptionsTravel to temporary work locations Rev. Rul. 99-7 – three situations Travel in employer non-personal use vehicles at requirement of the employer Transit passes 34

Leave Sharing and Disaster Payments 35

Leave Sharing Programs Intended to allow employees to help other employees for medical emergencies and natural disastersEmployees 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 36

Leave Sharing Programs Should have written plan and application formObjective criteria for use of bank, including exhaustion of other available leaveControls in place to ensure confidentiality Controls in place to ensure employees do not donate all leaveNeed to consider financial implications to company 37

Disaster Assistance Payments Employers may make payments to employees for certain natural disasters, common carrier accidents and terrorist or military activitiesDoes not include medical emergenciesMay be for reasonable living expenses or to replace a residence and its contents Exempt from employee’s income IRC § 139 38

Thank you Please remember to complete your evaluation of this session 39