Employee wages are taxable, but what about other income and benefits from an employer?

Posted On January 20, 2015 / Under , , , , / With 0 Comments
Brenda DiCarlo Founder, IAAB

Brenda DiCarlo
Founder, IAAB

After December’s perennial last-minute congressional tax code changes, the IRS says it will be ready to begin accepting 2014 tax returns on Jan. 20, starting the annual mad frenzy among taxpayers looking for fat refund checks. (Loaning the government money interest free is a bad idea, but that’s a topic for a different day.)

When it comes to confusing rules, the IRS spares no one. While the tax return for a self-employed individual is generally more complicated than that of her W2 wage-earning cousin, those who work full- or part-time for an employer often have tricky issues to deal with as well.

For W2 wages, the tax-filing task at hand for employees is pretty simple…wages are taxable and the employer withholds income tax and sends it to the IRS throughout the year.

But what about gifts from employers and other reimbursements that are not part of the regular salary? Are items such as payments for miles driven to and from appointments, refunds for client meals, and bonuses considered taxable income?

Bonuses, cash or otherwise — For cash bonuses, the answer is pretty straightforward and not a surprise for most: Yes, cash bonuses are taxable income and typically the employer will withhold income tax (and FICA contributions for Social Security) at the same rate as for a regular paycheck. But let’s suppose instead of a $1,000 bonus, you provide an employee with a $1,000 television …is that taxable? Yes it is! According to the IRS, if an employee receives a “bonus or award (cash, goods, services)” they must include its value in their income. (See IRS Publication 17 for more information.)

Reimbursement for transportation and entertainment costs — Employees can itemize and deduct unreimbursed business expenses on their Schedule A, but most don’t have to, because their employer reimburses them for these expenses. These expenses include mileage driven to meet clients, business lunches, and out-of-pocket supplies. Reimbursement for these expenses is NOT taxable and should not be included as income on a 1040, so long as the following IRS criteria are met:

  • The employee must have incurred the expenses while performing job duties.
    The employee must adequately account for these expenses “within a reasonable time period.”
    The employee must return any excess reimbursement “within a reasonable time period.”

(See IRS Topic 514 for more information.)

Health insurance and accident coverage — When an employer pays for all or part of an employee’s health care premiums, this is not a taxable benefit, and any contribution the employee makes is with pre-tax income. However, there are a few exceptions. Premiums paid by an employer for long-term care coverage are not taxable unless the contributions are made through a flexible spending or similar arrangement, in which case it would be taxable. (See IRS Publication 17 for more information.)

Life insurance premiums — Up to $50,000 of employer provided life insurance is not a taxable benefit. However, the IRS considers any premium paid for an amount above $50,000 taxable income. (See IRS Publication 17 for more information.)

Professional services — If an employer pays for personal professional services for an employee — e.g. accounting, tax prep, or legal services — that is a taxable benefit. However, retirement planning services are NOT a taxable benefit.  (See IRS Publication 17 for more information.)

Transportation — This is a complicated area. Company cars and gas or toll reimbursement are taxable benefits. (Note this does NOT include mileage reimbursement for bona fide work-related activities as described above.) Benefits that are not taxable include commuter transportation (like a shuttle van), a transit pass, certain parking reimbursements, and bicycle commuting reimbursements, but all of these have exceptions and income limits. (See IRS Publication 17 for more information.)

Brenda DiCarlo
Founder and President

 

 

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