Payroll professionals discussed tips for distinguishing between taxable and non-taxable benefits at the American Payroll Association’s 40th Annual Payroll Conference.
Among the advice given were reminders that IRS documents are crucial resources for compliance advice and that money is always taxable to employees. The taxation of prizes, educational assistance and loans was also discussed.
When the tax-free status of a payroll benefit is in question, consult the Internal Revenue Code and IRS publications for guidance, said Fred Basehore, senior director of payroll taxes and compliance at Guidehouse. Baseshore is also a member of Bloomberg Tax’s payroll advisory committee.
Anything an employer provides to an employee is taxable income, unless otherwise provided, Baseshore said on May 11.
“Why is it called a 401k? Because it refers to the current Internal Revenue Code,” he said. “We have a section of code that tells us what we can exclude from income.”
Finding guidance on non-taxable benefits will likely be easier than trying to find language that explicitly states a benefit is taxable, Baseshore said. “When you look at things like Publications 15 and 15B, when you read them, it’s extremely rare that you find a sentence that says ‘such and such is taxable’.”
Instead, assume a benefit should be included in income if you can’t find guidance that lets you exclude it, Baseshore said. “That’s what the premise of this is all going to be. We are looking for proof.
Benefits and De Minimis awards
There is no actual value threshold for determining de minimis benefits, Baseshore said. Rather, it’s whether the benefit is easy to track — if it’s unreasonable to track it, even if it costs a reasonable amount, it’s not taxable, he said. However, any benefit or award that you can easily track is taxable to the employee.
It might seem counterintuitive to think that a $10 toaster and a trip to Hawaii could receive similar tax treatments, Basehore said. But if both were given as prizes at an employee event, you would know the value of the gifts and who would receive them, so they would be taxable, he said.
If an employee brought a guest who won a taxable prize, the item would be taxable to the employee, he said.
Baseshore pointed out that gift cards are always taxable income whether or not the employee uses the card. “Whenever you give money to your employees, the money is still taxable,” he said.
When giving employees the option to choose between multiple prizes, make sure all prizes are tangible, not monetary, Baseshore said. If you add a gift card to the prize pool, all items become taxable because the employee had the option of receiving cash.
Rewards must meet certain conditions to be non-taxable, Baseshore said.
For example, for a seniority bonus to be excluded from income, it must be awarded for at least five years of service and awarded in increments of at least five years, he said. “Maybe yours is every seven years – seven, 14, 21, 28. But if your company hands out seniority bonuses every three years – three, six, nine, 12 – that won’t be enough.”
A qualified length of service award must also be presented in a ceremony with at least two people. “Imagine this. The boss walks into the office, closes the door, shakes your hand, hands you a watch and says, ‘Thank you for being here for 24 years,’” Basehore said. “Is it a gathering of two or more? No, because you don’t count. Pull someone from the hallway.
For employment-related educational assistance to be excluded from income, it may not be necessary that the minimum requirements of the position be met, said Linda Werts, regional payroll manager of Cargotec Holding Inc. There is no There is no dollar limit for education assistance tied to an employee’s current job.
Education assistance that is not directly related to the employee’s job cannot discriminate in favor of highly paid employees and cannot provide employees with the opportunity to receive money, Werts said. May 12. Employees should also be told generally that the program exists because a handful of employees could be seen as discriminatory, she said.
The tax-exempt limit for non-vocational educational assistance is $5,250 per year, Werts said. Reimbursement amounts in excess of the taxable limit must be reported as income for the year in which they were paid. For example, if a class was scheduled to run from December 2022 to March 2023 and the classes were paid for in December, the amounts would be included in the returns for the 2022 tax year, she said.
Werts noted that expense reimbursements must be offered as part of a responsible plan. “If you can’t prove it’s used for its intended purpose and not taxable, then it’s taxable,” she said.
Below-market loans are those offered to employees by employers with an interest rate below the federal interest rate, said Andy Garboden, training and enablement manager for Check Technologies.
If the outstanding balance of all of an employee’s below-market loans reaches $10,000, the difference between the interest charged by the employer and the federal interest rate becomes taxable, Garboden said May 12. The taxable amount is subject to Social Security, Medicare, and federal unemployment tax, but not federal income tax.
If the loan is canceled, the entire balance becomes income and therefore subject to all employment taxes, including federal income tax, on the day the loan is canceled, Garboden said.