As a business owner holiday time is a time when you may want to give your employees a small gift, or a bonus, or just throw a party for everyone to celebrate the season. Here is a guide to what is taxable and what is not.
Nontaxable gifts include small items that you give to your employees as a goodwill gesture or to show your gratitude for their services. The small item could be a ham or turkey for the family or a bottle of wine. There are a lot of popular shows over the holidays and a ticket or two to a show would also not be taxable to your employee. The trick here is that the gifts must be of nominal value and given infrequently. These are known as de minimis gifts and they have the added advantage of being deductible by the business.
Taxable gifts are items like gift cards or gift certificates which have a set amount on the card. To give you an example, a gift certificate for a turkey would be taxable to the employee even though if you gave the employee the turkey itself it would be non-taxable. If a gift is taxable then it is subject to all of the normal payroll tax withholding and tax expenses.
If you throw a company party for the employees (and families) the cost of the party is not taxable to the employees and it is fully deductible by the business (not 50% deductible as other entertainment expenses are). The standard here is that the parties are infrequent and are given to promote employee goodwill, etc.
Under legislation signed today (September 25, 2013), the minimum wage in California will increase from $8.00 per hour to $9.00 per hour on July 1, 2014 and then to $10.00 per hour on January 1, 2016.
California is one of 18 states that have minimum wages higher than the Federal minimum wage ($7.25 per hour) and when the California minimum wage increases to $10.00 per hour it will be one of the highest minimum wages in the country.
You may have heard that as of October 1, 2013 individuals are eligible to apply for health insurance coverage under the Affordable Care Act. Some individuals are eligible for premium subsidies and tax credits based on their income and coverage they may have at their place of employment.
Every employer with gross revenue of $500,000 or more must notify their employees about coverage at their company. Employers must do this by October 1st or be fined $100 per employee notice not provided. A sample notice is provided for employers at the Department of Labor's web site. An employer will use either a notice that says the employee is not provided any coverage at this company or, of coverage is provided, information about the coverage.
Go to the Department of Labor's web site for the correct notice.
by: Jerry Murphy
The IRS’ “Employment Tax Research Project” has identified four main areas of payroll errors: worker misclassification, fringe benefits, executive compensation and payroll taxes. Given that they put this research project together, and the IRS’s increased attention towards employment taxes, we recommend that companies (at a minimum) look at how they handle some of the potential payroll complications identified by the study. Here are a few of the common errors that we have seen companies make and while this list is not exhaustive, it does provide a jumping off point for determining how well your company is doing. We recommend that Companies conduct what is known as a “compliance review” while they still have a chance to fix what's wrong without having to negotiate penalties and interest with an IRS auditor at the same time.
1. Classification of employees as independent contractors.
a. Form W-2 verses Form 1099
b. In case of an error the IRS has a Voluntary Classification Settlement Program which allows eligible employers to voluntarily reclassify workers as employees on a prospective basis and get into compliance by paying 10% of the employment tax liability that may have been due on incorrectly classified workers for the most recent tax year.
2. Failure to subject vendor payments to backup withholding
a. Ask your vendors to fill out Form W-9
b. If a vendor does not supply a company with a tax identification number that should supply one, backup withholding of 28% is mandatory.
3. Failure to issue Form 1099s
a. Form 1099 should be issued to most vendors who are paid $600 or more for services during the calendar year.
b. Failure to issue Form 1099 can be subject to penalties.
4. Not including the Fair Market Value of gift cards, prizes and awards in employees’ income
a. Most employment prizes and awards are considered taxable fringe benefits subject to income and employment taxes. Gift cards are equivalent to cash for this purpose and are always taxable.
b. Certain items can be excluded from wages if they are de minimis in nature. Cash and cash equivalents are never de minimis.
5. Failing to timely deposit withheld taxes
a. Check the deposit frequency rules and make certain you comply.
b. Penalties range from 2% to 15% depending on how late the deposit is made.
6. Incorrectly excluding expense reimbursements from reportable wages
a. Expenses paid under an Accountable Plan can be excluded from an employee’s compensation, but expenses paid to an employee outside an Accountable Plan are not excluded.
7. Not including the appropriate value of taxable fringe benefits in employees’ income
a. Some fringe benefits are specifically excluded from tax but the rest are taxable compensation to the employee who receives the benefit.
b. Spousal travel; company-provided automobile; country club dues; housing benefits are examples of taxable fringe benefits.
c. Calculating the value of these fringe benefits can be complicated.
8. Excluding travel and commuting expense reimbursements from employees’ incomes
a. Most of the time, travel and commuting expenses are not taxable income to an employee. But if what started out as a short-term assignment is extended beyone a year, or if an employee is traveling to a permanent work site that is not in the same place as his or her permanent residence, those company-provided commuting benefits may need to be included in the employee’s income
Health Care – It’s not time to panic, yet.
With the Supreme Court upholding most of the Affordable Care Act business owners will need to acquire an understanding of what the Act means to them and their business. Here is a quick rundown on what you need to know –
1. How many employees do you have in your business?
If you have 50 employees or more, beginning in 2014 you must start providing health insurance for them. If you have less than 50 employees you do not come under the mandate to provide employees with health insurance.
2. How about the fines for not providing health insurance?
Any company with 50 or more full-time employees must start providing health insurance for its employees but if you don’t do so and a single worker needs to turn to the government for a health care tax credit or subsidy on the new health exchanges then your company will be subject to fines. The penalty starts at $40,000 and increases with the size of your company.
3. If your company is subject to the mandate to provide insurance for your employees there is specific coverage required.
How will the Act affect a sole-proprietor? Everyone must purchase some sort of health insurance by 2014. If your company has less than 50 full-time employees then the responsibility to purchase the health insurance falls on the employees not the business. The Act includes a fine for an individual who needs health care but doesn’t have insurance. The fine will begin in 2014 at $95 or 1% of their income, whichever is higher. By 2014 there should be state insurance exchanges up and running which will spread the risk among a large number of people and (in theory) bring the cost of the insurance coverage down for everyone.
This is just a summary; there is a lot more to learn and fortunately there is some time to take in the lessons.
Do you provide your employees with cell phones or pay their cell phone bills? Well then you will be interested in this news, as this week the Internal Revenue Service (IRS) issued guidance on how a business should be treating employer-provided cell phones. As you know, providing something of value to an employee is going to be taxable to the employee and deductible by the business. The exception to this situation is when a business provides an employee with a tax-free fringe benefit. How does a benefit get to be “tax-free” is summarized as follows: Congress says so. Congress hasn’t said cell phones are a tax-free fringe benefit so they are taxable to the employee at the fair market value of the employer gift or payments.
But, now, with the new guidance from the IRS, the situation is a little better. For instance, the cell phone you gave to your employee may be exempt from tax for the employee if you gave it to the employee for “noncompensatory business reasons.” An example of this would be if you gave your employee the cell phone so they could talk to clients when they are away from the office. The IRS guidance specifically says that if the cell phone is provided to promote employee morale or goodwill then it is not provided for noncompensatory business reasons and the value of the phone is taxable income to the employee.
If you can get over the “noncompensatory business reasons” for giving the employee a cell phone then the IRS will treat the employee’s use of the cell phone as related to the employer’s business and thus as a working condition tax-free fringe benefit. That means that the payment of the cell phone bill is also not subject to tax to the employee. And one more benefit of clearing this hurdle, is that the IRS will treat any personal use of such a cell phone as a de minimis fringe benefit, excludible from the employee’s income.
This guidance is effective as of December 31, 2009 and thereafter. (Notice 2011-72)
Jeremiah K. Murphy, CPA is an accounting firm providing tax services, audits and business consulting.