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Table of Contents
CPP Study Group............................................................................................................ 1 Section 1 The Employer-Employee Relationship ......................................................... 2 Section 2 Federal and State Wage-Hour Laws .......................................................... 18 Section 3 Part 1 Taxable and Nontaxable Compensation .......................................... 43 Section 3 Part 2 Taxable and Nontaxable Compensation .......................................... 67 Section 4 Health, Accident, and Retirement Benefits ................................................. 88 Section 5 Paying the Employee ............................................................................... 114 Section 6 Withholding Taxes.................................................................................... 122 Section 7 Unemployment Insurance......................................................................... 139 Section 8 Depositing and Reporting Withheld Taxes ............................................... 152 Section 9 Other Deductions From Pay ..................................................................... 173 Section 10 Recordkeeping and Record Retention ................................................... 184 Section 11 Payroll Accounting.................................................................................. 192 Section 12 Payroll Systems and Technology ........................................................... 204 Section 13 - Managing a Payroll Department............................................................. 215 Section 14 Payroll for U.S. Employees Abroad and Aliens in the U.S...................... 229
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Contact Us
For additional support regarding this topic, please contact: Debbie Mathewson, Compliance and Payment Solutions Sr. Learning Specialist (909)592-6411 x4422 debbie_mathewson@adp.com
Proprietary Information
The information contained herein constitutes proprietary and confidential information and must not be distributed without the express written permission of ADP. All rights reserved.
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Under the Internal Revenue Code (IRC), am employer has the following obligations for employees: Withholding _____________ _______ Withholding ___________ _____________ Withholding ______________ Paying employers share of ___________ ___________ Paying employers share of __________________ Paying ___________ __________________ ______
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Type of Relationship
There several factors that generally indicate how the worker and the business perceive their relationship to each other. These include:
Form SS-8 - Determination of employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding
This form can be submitted by the employer or a worker when a definitive ruling from the IRS is required.* While waiting for the IRS to respond to the Form SS-8, the employer should treat the worker(s) in question as an ____________________. Taxes paid by the employer to the IRS while waiting for a ruling will not be refunded to the employer even if it is determined that the worker is not an employee. *The Payroll Source does not reference the fact that an employee can file a form SS8; however PayTrain does indicate this.
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Statutory Employees
While statutory employees are not employees under the Common Law Test, they are treated as employees for certain employment tax purposes. These employees have no substantial investment in the business. Payments made to statutory employees are not subject to __________ but they are subject to ____________ and ___________. Although employers are not responsible to withhold FIT, employees are still responsible for filing these taxes.
The four categories of statutory employees are: (remember DISH) An agreement must exist that the worker will personally perform all services for the employer. The worker cannot make a substantial investment in the business equipment or facilities. The work performed must be on a continuing relationship, not just one lone transaction.
Statutory Nonemployee
While they may qualify to be classified as employees under the Common Law Test, statutory nonemployees are treated as __________________ for all employment tax purposes. The payments an employer makes to a statutory nonemployee are not subject to FIT, FICA, or FUTA withholding. The two categories of statutory non-employees are: (remember REDS) Wages for statutory nonemployees are based on service, not on hours worked. A statutory nonemployee is responsible for depositing all taxes, much like an independent contractor.
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Leased employees
Employees that work for an Employee Leasing company are usually employed for longer periods of time than Temporary Help Agency employees. These workers usually offer a specialized service to potential clients of the Leasing Company. The Client Company should be watchful of the level of control they maintain over the employee. The more control they retain, the greater likelihood that they may be considered the employer rather than the leasing company.
Note: The employer should always make sure they are dealing with a financially secure and reputable Temporary Help Agency or Employee Leasing Company since the companies failure could lead to the client company being liable for any withholding or employment taxes that remain unpaid.
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ABC Test
For State Unemployment Insurance (SUI) the ABC test is used in more than half the states to determine the employer-employee relationship. ABC stands for: A_________________________________ the worker is free from control or direction in performing the work both by agreement and in reality B_________________________________ the work is performed outside the usual course of the companys business or away from any of the employers facilities C___________________________________ the worker is customarily engaged in an independent trade, occupation, or business
For those states that require state disability insurance, the employment status is determined under the same test the state uses for its unemployment insurance.
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Worker Misclassification
IRS Penalties
Penalty Employer pays ____% of employees portion of social security/Medicare Employer pays % of wages paid for not withholding federal income tax
Not Intentional
Employer pays ____ % of employees portion of social security/Medicare Employer pays _____% of wages paid for failure to withhold federal income tax Employer pays ______ % of all employer and employee taxes
Intentional
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FLSA Complaints
Employees who feel they are being improperly treated as independent contractors and are not being paid minimum wage or overtime can file a complaint with the U.S. Department of Labors Wage and Hour Division More than 75% of the audits are the result of individual complaints Huge back pay and damage rewards can result
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Form I-9
Form I-9 is the Employment Eligibility Verification form. Guidelines for Form I-9 include: Keep Form I-9 for ____ years from date of hire or ____ year form date of termination, whichever is longer Present Form I-9 upon request to U.S. Bureau of Citizenship and Immigration Services (US-CIS)* or Department of Labor (DOL) *Formerly known as the Immigration and Naturalization Services (INS)
Example: Fred Jones is hired by ABC Company on March 6 of the current year. Fred works for one day and then terminates his employment on March 7. ABC Company must retain Freds Form I-9 until ___________________________.
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Remember the employer cannot demand specific documents to prove the right to work in the U.S. The employee can provide any document on the list to prove identity and work authorization.
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Employee or Non-employee?
In the list below, classify the worker as an employee or non-employee. Also list the form the worker would receive at the end of the year and what taxes the employer would be required to withhold:
Worker
Leased Worker
Classification
Form
Taxes Withheld
Real Estate Agent Temporary Help Worker Common Law Worker House Painter (to home owner) Driver
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Employer
Financial Control
IRC IRS
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Employees of a leasing agency who are hired and trained for the client firm through the agency. The reporting of newly hired and rehired employees to state agencies to facilitate the collection of child support payments or to uncover abuse in the states unemployment compensation, workers compensation, or public assistance programs. A standard used to determine whether a worker can be treated as a independent contractor whether or not the common law test is met, based on prior court and administrative rulings, IRS audits, or longstanding practice in the industry. In payroll, a relationship between status under which privileges granted are returned by the other. Special groups of employees identified by law (full-time life insurance sales, homeworkers, agent drivers, traveling salespersons) whose wages are not subject to FIT withholding but are subject to social security, medicare, and FUTA. Special group of workers who may qualify as common law employees but are treated under the law as independent contractors (real estate salespersons and direct sellers). Workers hired through temporary help agencies that are screened and trained by the agency to provide services for client firms.
Reciprocity
Statutory Employees
Statutory Nonemployees
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Forms
I-9 Form used to verify that an individual has the legal right to work in the United States. Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding Form which an employer can use to get a definitive ruling from the IRS as to a newly hired workers status as an employee or an independent contractor.
SS-8
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What it covers: What it does not cover: Even though these items are not covered under FLSA they are governed under state laws or by other federal laws or regulations. Although the FLSA does not require that wages be paid within a certain amount of time, it does require that the employer have a regularly scheduled pay date and that the employees be paid by the pay date. Delaying the pay date due to a permanent change in pay cycle does not violate the FLSA. The U.S. Department of Labor (DOL), Wage and Hour Division administers the federal wage-hour law. The Equal Employment Opportunity Commission (EEOC) enforces the equal pay provisions.
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Federal/State Relationship
Employers must also be aware of state wage-hour laws in the state(s) in which they operate. Areas left unregulated by the FLSA are likely to be regulated by the state. Even in areas that are governed by the FLSA, the state may also have regulations and THE EMPLOYER MUST COMPLY WITH THE LAW THAT IS MOST FAVORABLE TO THE EMPLOYEE!
Examples: The FLSA requires overtime pay of 1- times the regular rate of pay for hours worked over 40 in a workweek. The State of California requires overtime pay for hours worked over 8 in a workday. If an employee in California works four 10-hour days, how many overtime hours is the employer required to pay? ______________________________ The Federal Minimum wage at the beginning of 2010 is $7.25 per hour. The minimum wage in Connecticut is $8.25 per hour. What minimum wage rate must be paid to employees in Connecticut? ______________________________ FLSA does not restrict the number of hours that are worked by children ages 1617. Michigan limits the number of hours that a 16-17 year old can work to 48 hours per week. How many hours can a 16-year-old employee work in the state of Michigan? ______________________________
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Enterprise Coverage
Under the Enterprise Coverage test, all the employees of a business are covered and protected by the FLSA if: At least two employees of the business are employed in jobs closely related and directly essential to interstate commerce or the production of goods for interstate commerce AND The business has annual gross sales of at least $500,000 Certain businesses are also covered regardless of annual sales volume. They are: Hospitals Nursing Homes Elementary and secondary schools and colleges (public or private) Government agencies
Individual Coverage
An individual employee is covered by the FLSA if he or she is engaged in interstate commerce or in the production of goods for interstate commerce. It then does not matter if the business is covered under the Enterprise coverage as long as the employee is eligible under the individual coverage.
Note: Interstate commerce is any trade, transportation, or communication between one state and another state (or states) or between a state and a foreign country.
Most businesses, unless they are Mom and Pop shops, are covered by the FLSA or may be covered by similar state wage-hour laws.
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The following job duties are considered exempt from the FLSA: A non-exempt employee must be paid at least the minimum wage for all hours worked and an overtime premium for hours worked over 40 in a workweek. A workweek can be any 7 consecutive 24-hour periods or 168 hours. Each workweek stands alone for overtime purposes.
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Administrative Employees
Primary duties must consist of:
Must also: Customarily and regularly exercise discretion and independent judgment Regularly assist a proprietor or executive Perform work along specialized or technical lines that require special training, experience, or knowledge Carry out special assignments and tasks under only general supervision Can spend only 20% (40% in retail or service) of time worked in a workweek on nonexempt work Must be paid at least $455 per week on a salary or fee basis
Executive Employees
Primary duty must be: Must also: Regularly direct the work of at least two or more other employees Have the actual authority to hire and fire or can suggest/recommend hiring, firing, promotion, or other employment status changes Regularly exercise discretionary powers Spend no more than 20% (40% in retail or service) on nonexempt duties unless a 20% owner or in charge of an independent or physically separate part of the business Receive a salary of at lease $455 per week, not including board, lodging, or other employer-paid facilities
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Professional Employees
Primary duties must require:
Other requirements include: Consistently exercise discretion and judgment Have duties which are intellectual and varied Can spend no more than 20% of the time worked in a workweek on nonexempt work Must be paid at least $455 per week on a salary or fee basis. This requirement does not apply to lawyers, doctors, interns or residents, or teachers working in an educational institution NOTE: Just having a degree is not enough; the employee must also meet the first two items listed above.
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Outside Salespersons
Must customarily and regularly work away from the employers place of business and be employed for the purpose of: Selling tangible or intangible items OR Obtaining contracts or orders for services or use of facilities AND Must spend no more than 20% of time worked in the workweek on nonexempt work. NOTE: There is no salary test for outside salespersons. Remember: CAPES for Exempt Employees Computer Professionals Administrative Professional Executive Salesperson
Minimum Wage
The federal minimum wage rate is ________ per hour at the beginning of 2010. This wage must be paid to all covered employees who are not exempt for all hours worked. This can be done on an hourly, piecework, salary, or commission basis as long as the wages at least equal the minimum wage.
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Employers can take the tip credit as long as: Employees tips bring them up to the current minimum wage; otherwise the employer must make up the difference Employee is informed of tip credit provisions before the credit is taken All tips received are kept by the employee (tip pooling is only allowed if it is among tipped employees only) Credit card tips must be given to the employee by _________________ even though the employer can deduct the card companies percentage charge for the use of the card from the tip The tip credit cannot be increased for overtime hours that are paid at a premium rate Employers must pay the minimum wage based on what is more beneficial to the employee. If the state minimum wage is higher than the federal minimum wage, then the state minimum must be paid to all covered employees. If the federal minimum wage is higher than the state, then the federal wage must be paid.
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The Workweek
The workweek is defined as a regular recurring period of _____ hours or ___ consecutive ____ hour periods. The workweek does not have to coincide with the calendar week, the start of a day, or with the pay period. The important factor is that the workweek is established and although the employer may change the workweek, any change must be intended to be permanent. Examples: Fred is paid bi-weekly. In the first week of the pay period Fred worked six days for 7 hours each day. In the second week of the pay period, Fred worked five days at 7 hours each day. What were Freds total regular and overtime hours for the pay period?______________________________________________ Stacy is paid semi-monthly. She works 78 hours over 15 days. What other information would you need to know in order to determine the regular and overtime hours for Stacy? ______________________________________
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How many hours of overtime would Sallys employer have to pay? _______________________________________________ When workweeks do have to be changed special rules apply. Where workweeks overlap the following steps must be taken: 1. Add the overlapping days to the old workweek and calculate the regular and overtime hours. 2. Add the overlapping days to the new workweek and calculate the regular and overtime hours. 3. Pay the employee the greater amount or, in other words, the amount that provides the greatest benefit to the employee.
Hours Worked
Hours that employees are paid for but during which no actual work is done do not have to be counted when calculating the number of hours worked for overtime purposes. Hours paid but not actually worked include: vacation, sick time, holiday, etc. Payments for hours not worked cannot be offset against any overtime pay due for hours actually worked over 40 in a workweek. FLSA places no limit on the number of hours an employee over 16 years of age can work so long as the employer pays the required overtime premium for all hours physically worked over 40. States may have maximum hour restrictions.
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The following items are included in the determination of the regular pay rate:
What items does the FLSA exempt from the regular rate of pay calculation?
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Example: Fred works for 25 hours at $10.00 per hour on the day shift and then works for an additional 20 hours at $12.00 per hour on the night shift in the same week. What would the calculation be to determine Freds regular rate of pay?
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Example: George earns $1.00 for every paper airplane he produces. In one week he produced 420 paper airplanes and worked for 41 hours. He also received a production bonus of $.50 for every airplane over 400. His total earnings for the week would be as follows:
420 airplanes @$1.00 per plane 20 airplane bonus @ $.50 Total Piecework Earnings
Regular Rate of Pay 430.00 41 Overtime Premium 10.49 x .5 Total Overtime 1 hour x 5.25 Total Earnings $430.00 + 5.25
Tipped Employees
When computing the overtime premium for tipped employees whose employer is taking a tipped credit the full hourly wage must be used including any tips or additional income.
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Fluctuating Workweeks
The Fluctuating Workweek allows an employer to enter into an agreement with the employee to provide a guaranteed fixed salary for all hours worked, whether the actual hours worked are more or less than 40 for the week. If the employee works more than 40 hours, the employer must pay the overtime premium for the hours over 40 however they can divide the salary by the total number of hours worked in the week to determine the regular rate of pay. Because the employees hours may differ from week to week, the employer has the potential to save money in weeks when the employee works more hours because the regular rate of pay decreases as hours increase.
Example: Fritz is guaranteed $440 for work up to 50 hours per week. This rate is based on $8 per hour for the first 40 hours and $12 for the additional 10 hours. Fritz is guaranteed this salary regardless of the number of hours he works up to 50 hours per week. If he exceeds the 50 hours he must be paid an additional $12 per hour for the additional hours worked. If he only works 40 hours he is still paid the $440.
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Public Sector Employees State and local government employers can give their nonexempt employees at least 1 hours of paid compensatory time off for each hour of overtime worked instead of paying the overtime premium if the following conditions are met: Agreement must be made between the employer and the employee or union The employees must be allowed to take the time within a reasonable period Employees can be required to use their compensatory time Outstanding time must be paid upon termination Maximum amount of accrued time is 240 hours (160 overtime hours) employee must be paid overtime once the maximum is met Some occasional part-time work for the same public agency in a different job can be excluded from overtime Public safety, emergency response, and seasonal employees can accrue up to 480 hours (320 overtime hours) Includes fire, police, paramedics, etc. There are also additional exceptions for firefighters.
Unauthorized Overtime
Unless the employer has a rule that is strictly and consistently enforced with disciplinary action regarding unauthorized overtime, the employee must be compensated.
Travel Time
The rules of travel time as compensable time are covered in the Portal-to-Portal act of 1947.
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On Call Time
An employee who is on call on the employers premises or close enough to seriously curtail their use of the time for their own purposes must be paid. An employee who is on call but is able to carry on his or her own activities does not have to be paid.
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Sleeping Time
Employees working for less than 24 hours must be paid for all time on duty even though they may sleep or engage in other personal activities when not busy. For shifts of more than 24 hours, actual meal or sleep periods of at least 8 hours may be excluded.
Waiting Time
Time spent engaged to be waiting is generally when an employee is at work but is waiting for a customer or repairs to a machine, etc. This time is compensable. Time waiting to be engaged generally refers to time when the employee can pursue other activities and is not compensable.
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Minors age 14 and 15 can work in a limited number of non-hazardous jobs in:
Minors age 14 and 15 cannot work during school hours and are limited to ___ hours a day and _____ hours a week when school is in session. When school is not in session they are limited to __hours in a day and ____ hours in a week. They can only work between the hours of ______ and ______ (______ to ______ between June 1 and Labor Day.)
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Learn@ADP Minors under the age of 14 are generally prohibited from working unless for a parent. Restrictions are greatly relaxed for workers in agriculture, entertainment, news carriers, and home workers making Christmas wreaths. Minors ages 14 and 15 who are working as Professional Sports Attendants (batboys and batgirls) are not limited from the maximum hours restriction as long as work is performed outside of school hours (Americas game!). State laws may be more restrictive than FLSA.
The Portal-to-Portal Act protects employers as long as they have relied in good faith on a written interpretation of the FLSA by the Division or an administrative practice or enforcement policy of the Division.
Employers who move goods through interstate commerce that have been produced in an establishment where there were minimum wage, overtime, or child labor violations are in violation of the FLSA unless they relied on an written statement from the producer of the goods that they were in compliance with the law.
Employees can sue for back pay for minimum wage and overtime violations, plus an equal amount in liquidated damages for willful violations. The employers violations are considered willful if they knew or should have known that they were acting unlawfully.
Statute of limitations on minimum wage and overtime complaints are 2 years (up to 3 years if the violation was willful).
Civil and criminal penalties include fines and prison time if the violation is serious and/or repeated.
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Davis-Bacon Act
This act sets prevailing wage standards for laborers and mechanics working on federally financed construction contracts of $2,000 or more. Under this act wage determinations for specific job classifications, not just industry-wide wage determinations.
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Example: The federal minimum wage at the beginning of 2010 is $7.25 per hour while the minimum wage in Connecticut is $8.25. Covered employees in Connecticut must be paid at the higher minimum wage of $8.25 per hour.
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Exempt Employees
Interstate Commerce
Minimum Wage
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Nonexempt Employees
Employees who are covered by the minimum wage and overtime provisions of the Fair Labor Standards Act. They may be paid on a salary or hourly basis. Nonworking time during which employees are required to be available to handle job-related emergencies. A reduced minimum wage that can be paid to teenagers during their first 90 days at work. Hours worked in excess of maximums set by federal or state law that must be compensated at a premium rate of pay (e.g. under the FLSA, all hours worked over 40 in a workweek must be paid at no less than 1 times the employees regular rate of pay. The period of service for which an employer pays wages to its employees. Time spent by employees to get ready for work or to get ready to leave work, which is generally not compensable time unless the activities are essential to the employees principal work activity. In a payroll context, it can have two meanings. It can be the extra pay above an employees regular rate of pay that is paid for working overtime hours. Or it can be a special pay rate for work done on weekends, on holidays, during undesirable shifts, or for doing dangerous work. An hourly pay rate determined by dividing the total regular pay actually earned for the workweek by the total number of hours worked.
On-call Time
Payroll Period
Premium Pay
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Shift Differential
Extra pay received by employees for working a less-thandesirable shift (e.g. evenings or late nights). A workday that is divided into two parts separated by a spread of hours longer than the conventional rest or meal period. The standard number of work hours during a workweek for which an employees regular rate of pay will be paid. Payment of 1 times an employees regular rate of pay for hours worked over 40 in a workweek, as required by the Federal Wage-Hour Law (for nonexempt employees only). A reduction in the minimum wage allowed for tipped employees (e.g. 50% of the federal minimum wage). In the context of the Federal Wage-Hour Law, these are executive, administrative, professional (including computerrelated professions), or outside sales employees who are exempt from the laws minimum wage, overtime pay, and certain recordkeeping requirements. The basis for determining an employees regular rate of pay and overtime pay due under the Fair Labor Standards Act. It can be any consecutive 7-day (168-hour) period chosen by the employer (e.g., Saturday through Friday, Wednesday through Tuesday).
Split Shift
Straight Time
Time-and-a-half
Tip Credit
Workweek
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Example: Saras employer pays for of her parking space each month. Her space rental is $500 a month, which is the same amount paid by all renters. Her employer gives her $250 and Sara pays $250. The calculation is as follows IFBA = $500 - ($250 + $220) IFBA = $500 - $470 IFBA = $30
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No-additional-cost Services Employer provided services that meet the following conditions:
Qualified employee discounts Employer may offer discounted goods or services to the employee without adding the fair market value to wages if:
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Working Condition Fringes Employers may offer certain work-related property or services to employees under the following conditions:
Working Condition Fringes include: Business use of company car or airplane Chauffeur or bodyguard provided for security Dues and memberships in professional organizations Employee subscriptions to business periodicals Job-related education Goods used for product testing by employees Use of demo vehicle by full-time car salesman Outplacement services Tax preparation services are not a working condition fringe and are taxable for FIT, SS, Med, and FUTA.
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De Minimis Fringes De minimis fringes are small items or services that are not taxable. To be considered de minimis the following conditions must be met:
De minimis fringes include: Occasional preparation of personal documents (typing and copies) Occasional parties and picnics for all employees Occasional tickets to sporting events or theater Traditional holiday gifts (turkey, ham) with a small value (No cash or cash equivalent) Coffee, donuts, bagels provided to employees Occasional use of company phones for local personal calls Occasional meals, supper money, or cab fare provided to employees who work late but not based on hours worked Cab fare for employees not on their regular shift and under unsafe conditions Operation by the employer of an eating facility on or near the employers premises if the facility does not operate at a loss
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Qualified Transportation Fringes The three types of qualified transportation fringes that are non-taxable include:
Exclusion limits:
Other factors: Items can only be provided to employees. These fringes apply to both private and public employees Plan need not be in writing Cash reimbursement are only allowed for transit passes if the employer cannot provide the passes directly without incurring more than a 1% fee plus $15 delivery If the employer reduces the employee wages for employer provided parking and then adds the amount back the amount is taxable Salary reduction plans can be provided as long as the plan is in writing and is a fixed dollar amount or fixed percentage (up to $350 in 2010) Stored value cards that can be used only for fare or at transit terminals are generally within the limit for exclusion as long as it cannot be used to purchase items other than fares or transit passes.
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Valuation
Qualified parking is any parking provided by the employer, which is on or near the employers premises. The value of the qualified parking is the amount that an individual would pay in an arms length transaction for parking at the same site or a spot in the same general location.
Vanpools provided by the employer or run by a third party for the employer can be valued using all the facts and circumstances or one of the special valuation rules used for employee use of a company provided vehicle. If an employee vanpool also receives parking, one member must be designated as the prime member any amount over the exclusion must be charged to just the one employee.
The value of a transit pass, fare card, or voucher is its purchase price, not the face amount of the pass.
The amount of any qualified transportation fringe that is included in income is the amount by which the fair market value of the benefit exceeds the exclusion amount plus any amount paid by the employee. The exclusion must be calculated monthly and excess amounts cannot be carried over.
Example: Karen is given a transit pass each month by her employer to take the bus to work. The price of the transit pass is $290.00. Karen does not pay her employer for any portion of the pass. The amount included in Karens income each month is determined as follows:
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On-premises athletic facilities These can be provided to employees by an employer free of charge without including the fair market value in the employees income if: The facility is located on the employers premises The facility is operated by the employer through its employees or another entity Substantially all use is by employees, their spouses, their children, and retired employees, and widowers The facility is not a resort or other residential facility
Exceptions include: If the vehicle is used mainly for business, infrequent side trips are considered de minimis A vehicle is considered a qualified nonpersonal use vehicle if it is unlikely to be used for personal travel because of its special design (i.e. hearses, police cars, delivery trucks with one seat). Use of a demonstration vehicle by full-time car salespersons or sales managers within the sales area of the dealership is excluded as a working condition fringe. A full exclusion or partial exclusion method can be used.
Accounting for vehicle use: Employees must account to their employer for the business use of a company provided vehicle. Any use which is not substantiated as business use is defined by the IRC to be personal use and is included in income.
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Valuation methods
General valuation method The fair market value of a company provided vehicle is the price an individual would pay to lease the same or a comparable vehicle in an arms length transaction in the same area for the same length of time. Because use is generally divided between business and personal, one of the special valuation methods is normally used. Special valuation methods There are three special valuation methods for determining the fair market value of the personal use of a company provided vehicle: The following general rules apply to all methods: If either the cents-per-mile or annual lease method are used, they must be used for any subsequent year that the vehicle is provided to any employee, although the employer can switch to the commuting method Neither the employee or employer can use a special valuation method unless at least one of the following is met: o The employer reports the value of the benefit as wages by January 31 of the following year o The employee includes the value of the benefit as income within the prescribed time period o The employee is not a control employee o The employer demonstrates a good faith effort to treat the benefit correctly for reporting purposes The same special valuation method does not have to be used for all company provided vehicles or all employees If the employer uses a special valuation method, the employee must use the same rule or the general valuation method on their personal tax return If a single vehicle is used by more than one employee, the employer must use the same method for all employees using that vehicle and allocate the amounts based on facts
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Commuting valuation method This method allows an employer to value an employees personal commuting use of an employer-provided vehicle at ______ per one-way commute (______ round trip).
Annual lease valuation method The fair market value of an employees personal use of a company-provided vehicle is determined by multiplying the annual lease value of the car by the percentage of personal miles driven. IFBA = ALV*PM% The value of employer provided fuel is not accounted for in the value and must be included by using the actual cost of the fuel or an IRS approved rate of ________ per mile. The amount under this method is reported as taxable income in boxes 1, 3, and 5 of form W2. Note: Per the IRS Publication 15b, the employer has the option of not withholding the FIT from the value of personal car use. However, if they choose to do that, they must notify the employee in writing by January 31 of the election year or 30 days after the vehicle is provided, whichever comes later.
Example: Dave drives an employer-provided car that he uses for both business and personal use. Dave drove 11,300 business miles and 3,700 personal miles. The cars fair market value is $26,300. The amount of the cars fair market value that must be included in Daves income for the year is calculated as follows: Annual Lease Value (ALV) of $26,300 car (per IRS table) % of personal miles (personal miles total miles) Fair Market Value of personal use to add to Daves taxable wages $_____________ $____________ ____________%
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Vehicle cents-per-mile method The fair market value of a company provided car is determined by multiplying the IRS standard business mileage rate of _____ by the number of personal miles driven. To use this method, the following conditions must be met: The employer must expect the employee to use the vehicle while conducting the employers business or the vehicle must actually be driven at least 10,000 annually (including personal use) and be primarily used by employees. The fair market value of the vehicle cannot exceed _________ for cars placed in service in the current year.
If the employee pays for fuel, the mileage rate is reduced by no more than _____ cents per mile in 2010. Example: Jenny drives a qualifying car 18,000 miles in 2010 and 5,200 miles were for personal use. If Jennys employer pays for the gasoline for the car, the fair market value of her personal use of the car is calculated as follows: FMV of personal use = 5,200 miles x $________ = $__________
If Jenny pays for the cars gasoline, then the fair market value is calculated as follows: FMV of personal use = 5,200 miles x ($______ - $_______) = 5,200 x $_________ = $_____________
Personal Use of Employer Provided Aircraft Business travel in a company-owned aircraft is excluded as a working condition fringe. However, personal air travel is included in the employees income. Travel that combines business and personal must be allocated to each.
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The value of the employees air travel can be determined by: The general valuation rule charges the employee an amount equal to what an individual would pay in an arms length transaction for a comparable flight. If more than one employee is on the flight then the costs can be allocated among them. The non-commercial flight valuation rule is calculated by using an aircraft multiple based on the weight of the aircraft and a cents-per-mile rate known as the Standard Industry Fare Level (SILF). Seating capacity exception if at least 50% of the regular seating capacity in an employer provided aircraft is by individuals flying on the employers business, the valuation is zero.
Free or Discounted Commercial Flights Under the commercial flight valuation rule, the value is 25% of the airlines unrestricted coach fare in effect for that particular flight. This means that 25% of the fare must be included in the employees income and is subject to tax.
Discounts on Property or Services Employee discounts on goods or services normally sold to customers that do not qualify as non-taxable fringe benefits must be included as income.
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Example: Freds employer has a non-discriminatory Group Term Life (GTL) plan that covers Fred for 2x his annual salary of $70,000.00. Fred turned 40 on May 31 of the current year. Fred contributes $2.00 per pay period for his coverage and is paid on a biweekly basis. Calculate the following: 1. Total amount of coverage $_________ - $__________ (Amount excludable by law) = the taxable amount $____________ 2. $_________ 1,000 = ___ units 3. ___ units times the monthly premium amount _____ (from the IRS table) = $_____ 4. $_____ x 12 months = $_____ 26 pay periods = $_____ per pay period 5. Per pay period amount less employee contribution = imputed income $_______ The imputed income will be added to the employees taxable earnings for _____ and _________ Dependent coverage up to $_______ for a spouse or child is not included as income. If the coverage is over this amount, the entire cost of the coverage is included as income and is subject to FIT as well as SS and MED.
Example: Freds employer offers their employees dependent coverage for spouses and children. Fred earns $65,000.00 per year and accepts coverage for his spouse of $2,500.00 and for each of his two children at $1,500.00. The amount of the coverage for the children is not subject to withholding but because the spouse coverage is over $2000.00 it must be included in the GTL calculation and is subject to FIT withholding along with SS and MED.
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Moving Expenses
An Employer may pay for the cost of a move by a new or existing employee either by reimbursing the employee for the move or by paying a third party for the move. Some moving expenses are considered deductible while others are taxable to the employee for ALL federal taxes.
Amounts should be displayed on the employee W2 in box 12 with code ___________ Amounts are also displayed on the employer 940 part 2, lines 3 & 4.
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Non-deductible expenses
The following items are not deductible and must be included in the employees income for FIT, SS, MED, and FUTA: Cost of meals while traveling from the old residence to the new residence Pre-move house hunting expenses Temporary living expenses after starting work in the new location Qualified real estate expenses
Example: Sues employer paid for or reimbursed her for the following expenses related to her permanent move from New York to San Francisco: Moving of her household goods and personal effects Mileage for travel from NY to SF (3000 miles @ $0.165 per mile) Hotel in route Meals in route Hotel while house hunting Meals while house hunting Car rental on house hunting trip Real estate commissions Appraisal Fees Relocation Bonus Total What amount will be excluded from Sues income? $__________ How much of this amount will be included in income? $_____________ Which boxes on the W-2 would be affected by these amounts? ________________________ Which code would be use in box 12 of the W-2 for excluded moving expenses? ______________________ $ 7,500 495 450 125 1,100 375 300 12,000 500 5,000 27,845
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Educational Assistance
Educational Assistance that is related to the employees current job is excluded from income as a working condition fringe if: The course is not necessary to meet minimum requirements of the current job The course is not taken to qualify for a promotion or transfer to a different type of work The education must be for maintenance or improving the skills for the current job There is no dollar limit on employer provided education if related to the current job.
Non-job related education assistance is an employer paid fringe benefit with a limit of $_________ excludable from income per year. To qualify the course must be part of an Education Assistance Program (EAP). Non-qualified or excess amounts are subject to all federal taxes.
Away from home and Temporary Employer reimbursements can only be excluded from income if the expenses are incurred while the employee is temporarily away from home on the employers business. The work is considered temporary if the assignment is realistically expected to last less than one year.
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Reimbursements for Daily Transportation Expenses Employers can reimburse for an employees daily transportation expenses without including the amount in income if:
Or
Or
Reimbursements Under an Accountable Plan To be considered an Accountable Plan, the following qualifications must be met: The amounts reimbursed must have a business connection and cannot be for personal expenses (transportation, meals, lodging, tips). The employee must substantiate the expenses by providing the employer with evidence of the amount, time, place, and business purpose of the expense within a reasonable period of time. This is normally done through Expense Reports with receipts attached for any amount over $75.00. The employer has to approve the expenses and inform the employees about the recordkeeping requirements. The employer must also collect any excess reimbursements or treat the excess as being paid under a non-accountable plan. In general, amounts paid by the employer that exceed amounts spent by the employee must be returned to the employer in a reasonable period of time. o Fixed Date - If an advance is given no more than 30 days before the expense was incurred, the expense must be substantiated within 60 days of payment. Any excess amounts must be returned within 120 days of payment. o Periodic Statement - The employer can issue a periodic statement to the employee detailing the amounts that have been paid and not substantiated. It also requires substantiation or the return of the excess amount within 120 days of the statement receipt.
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Learn@ADP Employers may provide reimbursement in the form of a per diem allowance for each day of travel under an accountable plan as long as the reimbursement does not exceed the IRS established rates. IRS rates are established for CONUS (500 locations in the Continental US) and OCONUS (out of the Continental US). Per Diem amounts are also established for meals and incidentals only (M&IE).
Non-accountable Plan If an employers reimbursement plan fails any single item of the qualifications, then the plan is considered a non-accountable plan. Under a non-accountable plan, all payments are included as income and are subject to FIT, SS, MED, and FUTA taxes. If one associate has a non-accountable expense it does not affect the balance of the accountable plan. The IRS allows elements of both as long as they are treated separately.
Example: Freds company reimburses his business travel expenses while away from home under a plan that requires him to substantiate his expenses within 14 days of returning home. He also receives $50.00 per month to cover office supplies that he purchases but his employer does not require Fred submit any listing or receipts for this amount. How are the payments treated?
__________________________________________________
Mileage Allowances An employer can reimburse their employees for the cost of using their personal vehicle for business purposes. The federal business standard reimbursement is _____ per mile. This mileage rate covers fuel and vehicle wear and tear.
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Employer Provided Meals Generally, meals furnished by an employer are excluded from the employees income and are not subject to FIT, SS, MED, or FUTA taxes as long as the following conditions are met: The meals are furnished on the employers business premises The meals are furnished for the convenience of the employer Employer Provided Lodging Employer provided lodging is excluded from the employees income if: The lodging is on the employers premises (including a camp provided by the employer near the worksite) or a remote location in a foreign country The lodging is furnished for the convenience of the employer The employee is required to accept the lodging as a condition of employment Cash allowances are excluded from for both meals or lodging but may qualify as a business expense.
Adoption Assistance
Internal Revenue Code 137 excludes from an employees income employer provided adoption assistance that is furnished under an adoption assistance program in connection with the employees adoption of an eligible child. Dollar limitation The maximum exclusion amount for qualified adoption expenses for the current year is $_________ per eligible child over all taxable years related to the particular adoption. The exclusion applies even if the adoption process fails. The exclusion applies to the adoption and not to the number of incomes involved. Income limitations also apply. Eligible Child An eligible child is an individual who is under the age of 18 or is physically or mentally incapable of caring for him or herself. A child with special needs is an eligible child who a state has determined cannot or should not be returned to the parents and cannot be placed for adoption without adoption assistance because of a special factor or condition. A child of special needs must be a citizen or resident of the U.S.
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Learn@ADP Qualified Expenses Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorneys fees, travel expenses (including meals and lodging) while away from home, and other expenses directly related to the legal adoption of an eligible child. Qualified expenses do not include any expenses incurred in violation of federal or state law, in carrying out any surrogate parenting arrangement, or in connection with the adoption of a child of the employees spouse.
Withholding and Reporting Although adoption assistance is not included as income for FIT, it is still subject to SS, Med, and FUTA taxes. The amount should be included on Form W-2 in boxes 3 and 5 (SS and MED wages) and the amount withheld in boxes 4 and 6 (SS and MED tax withheld).The total assistance is displayed in box 12 with code ______________.
Now, complete the table on the following page to determine if each of these items is taxable for the employer (EE), the employer (ER), or both. Then determine if each item would affect the wages (Effect on Gross Pay), and finally if its reported on the W-2, which boxes and if affects box 12, which code would be used?
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No-additional cost services Qualified employee discounts ____% services and ______ _________ sales) Working condition fringes De minimus fringes Qualified transportation benefits Trans. ______ Parking ________ On-premises athletic facilities Qualified moving expense reimbursement (Covers _________ ____________ _______ and _____ per mile) Personal use of employer vehicle Group Term Life (over $__________ ) Qualified education assistance (up to $_________ per year)
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Substantiated business expense reimbursement Unsubstantiated business expense reimbursement Mileage reimbursement ( ________ per mile ) Employer provided meals and lodging Adoption Assistance (up to $________ per adoption)
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Other Payments
Advances and Overpayments
Advances and Overpayments must be included in the employees taxable income for the pay period when it is received and is subject to _____________________. When an employee repays the amount, the treatment varies depending on the timing of the repayment.
If the advance or overpayment is paid in the same year, wages and taxes can be reduced and the repayment can be made for the net amount. If the amount is repaid in a subsequent year, the employee should pay the gross amount. In some instances the SS and Med amounts can be refunded.
Length of Services or Safety Achievement Awards need not be included in employees income as long as the award is deductible as a business expense and: Must be tangible personal property (no cash, stocks, bonds) Must be presented in a meaningful presentation Must not be disguised compensation
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FIT
SS/ Med
FUTA
Requirements
Cannot be for less than 5 years or be awarded to the same employee within the past 4 years. Cannot be presented to more than 10% of employees in the tax year or awarded to management, professional, or clerical The recipient cannot actively seek the award, cannot be a conditioned on performing future services, and must be turned over to a government or charitable organization Receives special treatment as it relates to taxes and taxables
Civic/ Charitable
When an employee wins a lawsuit or settlement against an employer for alleged violations of federal and state employment laws, the amounts are generally subject to FIT, SS, Med, and FUTA.
Bonuses Amounts paid to employees as bonuses in addition to their usual compensation must be included in the employees income and are subject to_________________________. An exception is made for push money which is given to a salesperson by a manufacturer to push its products. This type of bonus is issued by a third party and as such is not subject to withholding but must be reported as income by the salesperson on their personal income tax.
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Commissions Commissions on the sale of goods or insurance premiums are subject to ____________ ___________ when paid to an employee or former employee whether or not the employee was directly involved in the sale. The exception to this is that full-time life insurance salespeople are not subject to federal withholding, but are subject to SS and Med when paid. They are also not subject to FUTA if they are paid strictly commissions.
Commissions (as opposed to push money) paid by the manufacturer directly to an employee are considered wages and are subject to all federal taxes which become the responsibility of the manufacturer. Conventions If an employee attends a convention or conference related to their job and substantiates any expenses reimbursed by the employer then the amount is considered excluded from the employees income as a working condition fringe. Death Benefits Death benefits paid upon an employees death to their estate or beneficiary should be reported on form 1099-R. These amounts are not subject to SS or Med. Dependent Care Assistance Programs Dependent care assistance paid by an employer is excludable from the employees wages and is not subject to federal taxes up to $___________ per family per year. Children must be under 13 and care must be necessary. Amounts are considered paid when incurred. Must be administered under a written non-discriminatory plan and employees must be notified of the availability and terms of the program. Directors Fees Fees paid to nonemployee directors of a corporation are not considered wages or subject to federal tax withholding. These amounts must be reported on form _________ and the individual is responsible for reporting payments on their personal income tax return. Disaster Relief Payments The Victims of Terrorism Tax Relief Act provides that any amount received by an individual as a qualified disaster payment is excluded from gross income and is not subject to federal taxes.
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1. Identify the desired net amount. 2. Verify the employees YTD SS taxable wages will not be exceeded with this payment. 3. Compute the net tax percentage (100% - [Federal % + SS % + Med % + State % + Local %]). In most cases the supplemental federal rate is used. 4. Divide the desired net amount by the net tax % 5. The result is the gross amount. Check the calculation by taking the computed gross pay and calculating the net amount. 6. Check your calculation.
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Example: Fred Frolic is receiving a net bonus from his company for $3,000.00. He is in Florida and the amount should be calculated using the federal supplemental rate. Freds YTD SS Taxable is $55,000.00. 1. Desired Net Amount 2. Reaching SS Limit? 3. Net Tax % (100 Total Tax %) 4. Desired Net divided by net tax % 5. Gross Amount 6. Check!
Grossing-up SS Limit will be met If the employee will meet their Social Security taxable limit with the gross-up calculation then an additional step is needed. Calculate the amount needed to withhold the balance of Social Security and then add it to the desired net amount before calculating the total tax percentage. The formula will then be: 1. Identify the desired net amount. 2. Calculate the balance due for Social Security 3. Add the balance due for Social Security to the desired net amount 4. Compute the net tax percentage (100% - [Federal % + Med % + State % + Local %]). 5. Divide the desired net amount by the net tax % 6. The result is the gross amount. Check the calculation by taking the computed gross pay and calculating the net amount. 7. When checking the calculation, dont forget to also deduct the Social Security amount calculated in step 2.
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Example: Susie Summer is receiving her annual bonus of $3,000.00. Her current SS taxable wages is $106,300.00. She is in Nevada. 1. Desired Net Amount 2. Calculate SS Tax Due 3. New Net Amount 4. Net Tax % (100 Total Tax %) 5. New Net divided by net tax % 6. Gross Amount 7. Check!
Equipment Allowances Allowances paid to employees for use of their own tools or heavy equipment on the job is not included in the employees wages and is not subject to federal tax. The amount must be kept separate from wages and cannot be paid to all employees regardless if they use their own tools.
Gifts Gifts given to employees must be included in the employees income and are subject to FIT, SS, Med, and FUTA unless they can be excluded as a de minimis fringe or are given between relatives and not related to employment.
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Golden Parachute Payments A parachute payment is compensation paid to an officer, shareholder, or highly compensated employee only after a change in corporate ownership or control that is at least three times the employees average compensation during the five most recent tax years. The entire payment is subject to FIT, SS, and Med. Any excess amount (over the three times average compensation) is also subject to a 20% excise tax. The amount is reported on form W-2 in Box 12 with code _________________.
Guaranteed Wage Payments Wages paid under a guaranteed annual wage plan are wages subject to FIT, SS, Med, and FUTA.
Jury Duty Pay If the employer pays the employees regular wages while on jury duty, they are subject to all taxes. If the regular wages are paid less the jury duty pay then only the balance is taxable. If the employer makes the employee give up the jury duty pay then only the balance is taxable and the employee may deduct the amount from their personal income tax. The jury duty payment received from the courts should be included on the employees personal income tax return.
Leave Sharing Plans Days taken from a leave-sharing plan are taxable for all taxes. Employees who donate paid leave days and then do not use any of the banked days cannot deduct the compensation donated from their income.
Loans to Employees The interest on loans made to employees is taxable for SS, Med, and FUTA if the interest rate is below the applicable federal interest rate on any day that the loan amount exceeds $10,000. The difference between the actual interest rate and the federal rate is the taxable amount.
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Military Pay Supplemental military pay to an employee on temporary assignment in the National Guard or Armed Forces Reserve is subject to ___________________________.
If the employee is on active service or an indefinite assignment, then the employment relationship is considered broken and the wages are reported as 1099-Misc income and not subject to FIT, SS, Med, or FUTA.
Outplacement Services Outplacement services are generally not taxable if due to a layoff or reduction in workforce and the amount cannot be traded for a higher cash severance package.
Retroactive Wage Payments Retroactive wage payments are subject to taxes when paid at the current rate.
Security Provided to Employees Security provided to employees for bona fide business-oriented security concerns is not taxable for FIT, SS, Med, or FUTA. Security provided to family members for the same business reason is also not taxable.
Severance or Dismissal Pay Severance or dismissal pay is included in income and subject to FIT, SS, Med, and FUTA.
Stocks and Stock Options Stocks and stock options are taxable if given in lieu of wages. Incentive stock options (ISO) are not taxable as long as the time restrictions are followed. Any income is treated as a capital gain at the time the stock is sold. Employee stock purchase plans (ESPP) provide similar benefits.
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Learn@ADP Strike Benefits Strike benefits are not treated as wages and are not subject to withholding. Money paid at an hourly rate for picketing is considered wages.
Supplemental Unemployment Benefits These benefits are provided to employees in addition to State Unemployment and are considered wages subject to FIT but not SS, Med, and FUTA. If given as a lump sum payment, the amount is subject to SS, Med, and FUTA as well as FIT. Tips Tips and gratuities provided voluntarily by customers are taxable wages and must be reported by the employee to the employer on form _______. The employer is then responsible for adding the tipped amounts to the employees wages and withholding and paying all taxes. Food and beverage establishments with more than 10 employees must allocate tips if the tips reported by employees are less than 8% of the establishments gross sales subject to tips for the period. An employee must make at least $20.00 per month in tips to be classified as a tipped employee.
Allocated tips are not subject to FIT, Med, SS, or FUTA, but must be reported in Box ___ of form W-2.
Uniform Allowances Uniform allowances to purchase and clean uniforms that cannot be used as regular street clothes are not taxable.
Vacation Pay All vacation pay is taxable. When an employee is paid and does not take the leave, the amount can be treated as supplemental wages.
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Wages Paid After Death If an employee dies after receiving their check but before cashing it, the check should be issued for the same net amount to the employees representative. The amount is reported on the employee W-2.
If the employee is paid wages following his death but in the same calendar year, the wages are not subject to FIT but are taxable for SS, Med, and FUTA. The amounts will display on the employee W-2 and the taxable amount should also be in Box 3 of the Form 1099-Misc in the name of the beneficiary.
If the employee is paid wages the year following his death, the amount is not subject to taxes and should only be reported in Box 3 of the Form 1099-Misc in the name of the beneficiary.
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Withholding Methods
The employer can use one of the following two methods to withhold FIT, SS, and Med: 1. Add the included fringe benefit amount to the employees regular wages for a payroll period (imputing) and calculate withholding on the total. The fringe benefit amount may be spread over several payroll periods. 2. Treat the included fringe benefit amount as supplemental wages and withhold federal income tax on the amount from the regular wages at the supplemental wage rate of 25% (35% for payments over 1 million).
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In fact, IRS Officials contend that the use of the rule is restricted to the taxable income attributed to the personal use of a company-provided vehicle or jet and non-cash transportation fringe benefits.
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EE Taxability
ER Taxability
Awards and Prizes LOS ______________ Safety ________________ Back Pay Awards Bonuses Commissions Conventions Death Benefits Dependent Care Assistance (up to$____________) Directors Fees Disaster Relief Payments Equipment Allowances Gifts Golden Parachute Payments Guaranteed Wage Payments Jury Duty Pay Leave Sharing Plans Loans to Employees (amount exceeds 10,000) Military Pay Outplacement Services Retroactive Wages
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Security Provided to Employees Severance or Dismissal Pay Stocks and Stock Options In Lieu of wages Incentive Stock Option Employee Purchase Plan Strike Benefits Picketing Pay Supplemental Unemployment Benefits Tips (Allocated at ____ percent) Uniform Allowances Vacation Pay Wages Paid After Death Pending check In year of death In year after death
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Adoption Assistance
Compensation
De Minimis
Deemed Substantiation
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Dependent Group- Term life insurance that gives an employee death benefits should the employees spouse or other dependents die. Term Life Insurance Discrimination In the context of employee benefits, favorable treatment of highly compensated employees under an employers plan. Amounts paid to employees who are terminated from employment, also known as payments in lieu of notice, termination pay, or severance pay. An employer plan providing for payment or reimbursement of an employees educational expense. Amounts spent by an employee for travel, lodging, meals, etc., while on the employers business. Reimbursements for such expenses may be excluded from income if they are properly accounted for. An employer plan under which all employees are given the opportunity to buy employers stock at a discount, subject to strict limitations. Compensation other than wages provide to an employee, such as health and life insurance, vacations, employer-provided vehicles, public transportation subsidies, etc., that may be taxable or nontaxable. Payments made to business executives in excess of their usual compensation in the event the business is sold and the executives are terminated from employment. An IRS-approved formula that employers can use to determine the taxable gross payment when the employer wishes to pay the employees share of tax.
Dismissal Pay
Golden Parachute
Gross-up
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Term life insurance that is provided to employees, with the cost being borne by the employer, employee, or both. The premium is taxable for the amount of coverage paid by the employer that exceeds $50,000. A plan guaranteeing employees their annual income (regardless of the work available) or that they will be kept on the payroll (although possibly at a lower wage). A safe-harbor method (deemed substantiation) for reimbursing lodging, meals, and incidental expenses incurred by an employee who is traveling overnight on the employers business. In the context of certain fringe benefit plans, an employee who is an owner or officer of a business or whose salary exceeds a certain amount (indexed each year for inflation). Many benefits offered by employers do not qualify for favorable tax treatment if they discriminate in favor of highly compensated employees. The addition of the value of cash/noncash compensation to an employees taxable wages in order to properly withhold income and employment taxes from the wages. A stock option plan that gives an employee the opportunity to buy the employer corporations stock at a fixed price for a certain period of time, and that offers favorable tax treatment if certain conditions are met. In the context of certain fringe benefit plans, an officer or owner (of all or a significant part) of a business whose annual pay exceeds a certain amount. Many benefits offered by employers do not qualify for favorable tax treatment if they discriminate in favor of key employees.
Impute
Key Employee
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No-AdditionalCost Services
A tax-free fringe benefit for employees consisting of free services offered by an employer at no substantial additional cost to the employer. An employers business expense reimbursement plan that does not meet the requirements regarding business connection, substantiation, and returning excess amounts. Payments made under the plan are included in employees income. Benefits provided to employees in some form other than cash (e.g., company car, health and live insurance, parking facility, etc.), which may be taxable or nontaxable.
Non-accountable Plan
Nondiscrimination Tests that determine whether benefit plans provided by an employer discriminate in favor of highly compensated or key Testing employees. If such discrimination is found, the employer will lose its favorable tax treatment of the benefit. Benefits provided under the plan may be taxable to employees receiving them. Nonqualified Plan In the context of employee benefits, an employer provided plan that does not meet IRS qualification requirements. Compensation not subject to federal income tax withholding that an employer must report on an employees W-2 in Box 1. Services provided by employers to help employees find a new job after a layoff or reduction in force. A flat daily rate of reimbursement for business expenses (e.g., meals, lodging, and incidentals) incurred by employees while traveling overnight on business. A benefit plan that meets IRS qualification requirements for tax-favored treatment (e.g., nondiscrimination).
Qualified Plan
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Certain employer-provided transportation benefits that can be excluded from an employees income up to certain annually adjusted limits (i.e., Transit passes, vanpools, parking). An IRS-approved alternative method (usually a short-cut) for complying with IRS rules, regulations, and procedures (e.g., per diem allowances and high-low substantiation). A safe-harbor rule that allows employers to treat certain noncash fringe benefits provided to employees in November or December as received in the following year. If an employer uses the special accounting rule, the employee must also report the benefit for the same period. An arrangement where an employer pays that part of an annual life insurance premium representing the increase in the cash surrender value of the policy during the year, while the employee pays the remainder of the premium. An Incentive Stock Option or an option exercised under an Employee Stock Purchase Plan. In the context of reimbursed employee business expenses, the requirement that employees keep records of the time, place, and business purpose of reimbursable expenses they incur, including receipts (also used to track the business use of employer provided vehicles). The irregular and occasional payment of amounts to employees who work late to cover the cost of meals eaten during that extra working time. Payments made by an employer to an employee who is serving in the U.S. armed forces to make up the difference between the employees military pay and his or her regular wages.
Supper Money
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Supplemental Wages
Compensation received by employees other than their regular pay, such as bonuses, commissions, and severance pay. Income tax may be withheld from such payments at a flat rate under certain circumstances. Refers to IRS Uniform Premium Table I, which is used to calculate the value of group-term life insurance over $50,000. An agreement by an employer with the IRS on a certain tip percentage and a requirement that 75% of the tipped employees agree to report at least the tip percentage found in the agreement. An agreement between a hospitality employer and the IRS that bases FICA assessments on employee audits and requires the employer to educate its employees on tip reporting.
Table I (Uniform Premium Table Tip Rate Determination Agreement (TRDA) Tip Reporting Alternative Commitment (TRAC)
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Health Insurance
Most mid-size to large employers provide some type of heath or medical insurance to their employees. There are several different types of health plans that an employer can provide.
Traditional Health Insurance Plans The employer either purchases an insurance policy from a third-party provider (i.e., Aetna) or self-insures and pays claims to employees or health care providers from its own insurance fund. When insurance is purchased from a third-party, the employer (and usually also the employee) pay premiums to the insurer which then reimburses the employee for medical expenses incurred or makes payments to health care providers. Employers who are self-insured pay benefits out of their own insurance funds and either administer the plan or contract with a third-party administrator. o Stop-loss insurance may be purchased from an insurance carrier to pay claims once the employer has paid out a certain amount (for catastrophic illnesses). o Minimum premium plans combine third-party insurance and self-insurance by the employer paying a portion of a calculated premium to the insurer to cover administrative costs and the insurers profit, while placing other funds into an account to cover benefit claims. If benefit claims exceed the calculated premium, the employers liability is limited to the amount of the premium. If not, the employer gets to keep the difference.
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Health Maintenance Organizations (HMO) A HMO provides health care services on a prepaid basis with employers contributing to the plan on behalf of the employees choosing the HMO. HMOs typically have no forms to complete for treatment and have low or no deductibles The employee typically must use health care providers within the HMO network to receive maximum benefits
Point-of-Service (POS) A Point of Service plan is also a HMO plan; however, these plans allow covered employees and their dependents to use non-HMO health care providers, with the inclusion of deductibles and insurance co-payments. The employee can use health care providers outside the HMO network The employee must select a Primary Care Physician (PCP) that serves as the gatekeeper and oversees the delivery of all health care services Preferred Provider Organization (PPO) This type of health care system gives participants a choice of a higher level of benefits and lower out-of-pocket costs if they use doctors who are part of the PPOs network. Provides for a higher _______________ and lower _____________________ Employee is subject to deductibles and co-payments but costs to the employee are lower if a Preferred Provider is used
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Must be part of a written plan and satisfy at least one of the following: Written or known to employees Referred to in the employment contract Employees contribute to the plan Employer contributions are to a fund separate from employers salary account Employer is required to contribute Contributions in lieu of cash are fully taxable according to the IRS
Employer Cash in Lieu of Contributions Employee Contributions (not 125 Plan) Employee Contributes (125 Plan)
Contributions made by the employee which are not part of a 125 Cafeteria Plan are fully taxable Must be made through a valid IRC 125 Cafeteria Plan. Any portion accepted as cash is taxable Non-taxable up to the amount actually spent or incurred by the employee
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Non-Medical Care
Procedures that do not qualify as medical care are taxable. This includes Plastic Surgery unless medically necessary. For IRS, the covered individual must be a spouse and/or dependent by definition
Nondiscrimination requirements No nondiscrimination requirement exists for Fee-for-Service plans that are provided through a 3rd party insurer.
Companies that are self-insured (whether self administered or administered by a third party) cannot discriminate in favor of highly compensated employees in terms of either benefits or eligibility. If the plan is discriminatory, only amounts paid to the highly compensated employees must be included in income.
For purposes of nondiscrimination, highly compensated employees include: The 5 highest paid officers An owner of more than 10% of the employers stock The top paid 25% of employees
In order to be nondiscriminatory in terms of eligibility, the self-insured plan must benefit one of the following: At least 70% of all employees At least 80% of all employees who are eligible to participate in the plan if the above is true A classification of employees deemed nondiscriminatory by the Secretary of the Treasurer
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Employees include full-time and part-time workers, agents, independent contractors, and directors, and certain self-employed individuals who are eligible to participate in a group health plan. Qualifying Events Periods of Coverage The following qualifying events and periods of coverage apply to COBRA: Qualifying Events Death of a covered employee Termination of employment (other than gross misconduct) or reduction in hours of a covered employee Period of Coverage ___ months ___ months unless another qualifying event occurs during the 18 months (other than bankruptcy) then extended to 36 months
If a qualified beneficiary (employee or dependent) is disabled under the Social Security Act at any time during the first 60 days of continued coverage 29 months for all qualified beneficiaries entitled to coverage due to same event (extended to 36 months for another event other than bankruptcy as above) Divorce or separation of the covered employee Entitlement of the covered employee to Medicare benefits ___ months ___ months
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Dependent child of a covered employee losing the dependent status ER Bankruptcy proceedings that cause the retired covered employee or the employees dependents to lose coverage
___ months The life of the retiree or the retirees spouse; but once the retiree dies, 36 months from the retirees death for spouse and dependent children
Coverage will end before the maximum periods if: The employer ceases to provide group coverage to employees The required premium is not paid within 30 days of due date The qualified beneficiary becomes covered under any other group health plan with no pre-existing restrictions The qualified beneficiary becomes entitled to Medicare benefits unless bankruptcy is the event Premium Requirements The premium may be up to 102% of the group premium paid for similar coverage under the plan by the employer and employee. The maximum increases to 150% for disabled qualified beneficiaries after the 18th month. The first premium may not be required earlier than 45 days after the qualified beneficiary elects continuation coverage.
Election and Notice Procedures Employees or other qualified beneficiaries must make an election of the coverage. The election period must be at least 60 days and cannot start before the date on which coverage was terminated or when the beneficiary receives notice. Notice procedures are as follows:
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Type
When
Requirements Summary Plan Description (SPD) should contain information regarding COBRA The employer must notify the Plan Administrator
General Notices must be Within 90 days after furnished to covered participation in a medical employees plan Specific Notices Within 30 days of a qualifying event or employer becoming aware of a qualifying event Within 14 days of receiving information
The plan administrator must provide a notice of election rights to qualified or beneficiaries This period is measured from the later of the following: 1. Coverage loss date 2. Date notice to elect COBRA coverage is sent
Penalties for failure to notify a qualified beneficiary are $100 per day/per individual or $200.00 per day/per family. For unintentional failure, the employer pays the lesser of 10% of contributions paid to group health plans in the previous year or $500,000.00 per year.
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HRAs are generally excluded from an employees income as long as it only reimburses for expenses for medical care as defined in IRC, requires that all medical expenses submitted for reimbursement are substantiated, and does not reimburse a medical care expense attributed to a medical expense deduction for a prior taxable year or before the HRA was in existence.
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Sick Pay
The tax treatment of amounts paid to employees while out sick depends on several things including who makes the payments for sick leave programs, who bears the risk, and if the employee is temporarily or permanently unable to work. Sick Leave Pay Payments made to an employee to replace wages while out on a non-job related illness where the employee is out for a brief amount of time is considered regular wages and so is fully taxable. This is also the case if flex days are used for sick days. Sick Pay Under a Separate Plan When an employee is out for a more extended period of time but is still expected to return to work at some point then wages are usually received through some type of short or long-term disability plans. Benefits that are attributable to employer contributions or to employee pre-tax contributions through a cafeteria plan are taxable income to the employee.
Plans that are funded by both the employer and the employee are subject to special rules to determine the taxability of the sick payment received. If the employer knows the amount of the premium they paid to the insurance company during the last three years, then the following formula applies: Employee sick pay x (Employer paid 3-year premium [Employer and Employee premiums paid for the past 3 years]) Example: Mike was injured in a non job-related accident on March 2, 2010 and was out of work until January 1, 2011. Mike received payments of $2,500 per month while out of work from his employers insurance company. During the 3 policy years before 2010, Mikes employer contributed $30,000 in net premiums to insure its employees, while the employees paid $12,000 in after-tax dollars. The amount of Mikes monthly sick pay that is included in income is: Taxable sick pay = $3,000 x [$30,000 ($30,000 + $12,000)] Taxable sick pay = $3,000 x ($________ $__________) Taxable sick pay = $3,000 x ____ Taxable sick pay = $____________ Remember: Where the employee paid the premium with pre-tax dollars, the amount is fully taxable.
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Withholding Requirements
Type of Sick FIT SS/MED FUTA Pay/Contributor Withholding Sick leave or sick days STD/LTD Contributions by employer who is self insured
Explanation Fully taxable on payroll The employer uses the most recent W-4 form for FIT. FICA and FUTA are paid and matched for the first 6 full months of leave. Employer is responsible for reporting on W-2. Treated as above. The 25% supplemental rate can be used. Employer is responsible for reporting on W-2. FIT can be withheld with a W-4S. The minimum withheld is $20.00 or 10%. The employee must receive at least $10.00 net. Third party can report on separate W-2.
STD/LTD Employers pays an agent on a cost-plus-fee basis STD/LTD Employer pays a premium to a 3rd party who assumes withholding and reporting risks
Any sick pay that was nontaxable because it was attributed to employee contributions to premiums is included in Box 12 of the Form W-2 with code _____.
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Permanent Disability Benefits Payments made to an employee who is not expected to return to work are income to the employees and are subject to federal income tax withholding by the party making the payments to the extent the employer paid the premiums or the employee paid the premiums with pre-tax dollars.
Amounts paid under a definite plan or system on or after the employment relationship is has been terminated due to death or disability retirement are not subject to social security, Medicare, or FUTA tax.
All employers are entitled to use a low risk code for office staff, outside sales, and drivers regardless of the business.
Cafeteria Plans
Cafeteria plans are a benefit that gives employees a choice from a menu of cash compensation and non-taxable (qualified) benefits. The plan is authorized by section 125 of the Internal Revenue Code.
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Premium Only Plans (POP) One type of cafeteria plan, known as a Premium-only Plan (POP) is used by employers who require their employees to contribute towards benefits, usually health insurance.
Deferred Compensation Certain rules governing cafeteria plans prohibit the inclusion of any plan providing for or allowing the deferral of compensation. A cafeteria plan violates this rule if it allows employees to: Carry over unused contributions or benefits from one plan year to another (such as purchased vacation days) Use contributions from one plan year to purchase benefits the employer will provide in a later plan year How Cafeteria Plans Are Funded Cafeteria plans and other flexible benefit plans are generally funded by either or both of the following: Flex dollars or flex credits - each employee is provided with a certain amount of flex dollars or flex credits with the employee can then use to buy selections from the plan menu or elect to receive them in cash. Salary reduction employees use part of their own salary to purchase their benefits selections through pre-tax or after-tax deductions.
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What Cafeteria Plans Must Contain The plan must be a written document laying out the particulars of the plan and it must be intended to be a permanent plan. The plan document must contain: Description of the benefits available under the plan The plan rules for becoming an eligible participant Procedures governing participants elections under the plan The manner in which contributions are made The maximum amount of employer contributions (including salary reduction) available to any participant A definition of the plan year If the plan offers time off, the ordering rule for using nonelective and elective paid time off The plans provisions complying with any additional requirements for flexible spending arrangements The plans provisions for HSA distributions from a health FSA
Revocation of Benefit Elections Employees must make irrevocable benefit elections before the plan year begins. Changes can only be made during the plan year, under the following limited circumstances:
Who Can Participate in the Plan Cafeteria plan participation must be restricted to employees (including former employees but not self-employed individuals) and the plan must be maintained for their benefit. The plan may not be maintained solely for the benefit of former employees. Spouses and children cannot participate in the plan, but they may benefit from the employees selection of benefits
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Nondiscrimination Testing Nondiscrimination tests must be processed every plan year to ensure the integrity of the plan. To qualify for favorable tax treatment for all cafeteria plan participants there are three main nondiscrimination tests that cafeteria plans must satisfy.
Eligibility Test Plan must meet the following conditions: Must not favor highly compensated employees Employees may not be required to have more than three years of employment All employees must have the same length of service requirement Eligibility must start no later than the first day of the first plan year after they meet the length of employment requirement
Contributions and Benefits Test Either the total qualified (nontaxable) benefits and the total benefits or employer contributions for such benefits do not discriminate in favor of highly compensated employees
Concentration Test The qualified (nontaxable) benefits provided to key employees do not exceed 25% of such benefits provided to all employees under the plan
Flexible Spending Arrangements Flexible Spending Arrangements (FSA) give the employees a chance to pay for certain covered health care and dependent care expenses with pre-tax dollars.
To qualify as an FSA, the benefit program must provide coverage under which: Specified expenses incurred by employees may be reimbursed up to certain maximums and subject to reasonable conditions; and Maximum reimbursement amounts cannot be substantially more than the total premium for the employees coverage (ER and EE); less than 500% of the premium is allowed as a maximum reimbursement amount.
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Health Care FSA rules Flexible Spending Accounts that provide medical, dental benefits are governed by several rules, including: Elections cover a full plan year No deferred compensation employees must use it or lose it Plan can allow a grace period Uniform coverage throughout the coverage period 12-month period of coverage
Tax Treatment of Cafeteria Plans Contributions Included in Income? FIT SS/Med FUTA Comments Taxable Taxable Taxable Must relate to non-taxable benefits selected by the employee *If the selection is 401K, it is subject to SS/Med
Employer
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Reporting Requirements
Pre-tax contributions to a Cafeteria Plan are not reported on form 941 or the employee W2; however they are reported on the employer 940 in Part one on lines one and two (exempt payments).
Cash or deferred arrangements (401K) These contributions are not subject to federal income tax, but they are subject to social security, Medicare, and FUTA taxes. Therefore, they must be reported on the W-2 in Boxes __________________________________. Dependent Care FSA rules Dependent care assistance FSAs must report the total amount of dependent care on Form W-2, Box _____ Non-taxable limit on dependent care is $_________. Amounts in excess of the limit are taxable and reported on Form W-2 in boxes 1, 3, and 5. Unlike health care FSAs, employees can only be reimbursed up to the year-to-date contributed amount.
Example: Fred contributes $100 per month to a health care FSA and $50 per month to a dependent care FSA. As of May 31 he has contributed $500 to his health FSA and $250 to his dependent care FSA. He submits reimbursement requests for $600 in health care expenses and $350 in child care expenses. How much will he be reimbursed? _________________________________
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Type of Plan
Included in Income?
FIT Taxable
SS/Med Taxable
FUTA Taxable
Contribution Limit
Catch-up Provision
401(k) For profit companies with over 99 employees 403(b) Schools & Churches
457 State & Local government and other taxexempt organizations 501(c) (18) (D) Pension plans prior to 6/25/59
IRAs
Employer Contributions
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SIMPLE Plans
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Cash or Deferred Arrangement Catch-up Contributions CODA Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Control Group
A group of key or highly compensated employees in a company whose proportion of benefits is limited under the qualification requirements of certain benefit plans (e.g. 401K or 125 plans).
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Deferred Compensation
In general, the postponement of a wage payment to a future date. Usually describes a portion of wages set aside by an employer for an employee and put into a retirement plan on a pretax basis. A retirement plan that uses a formula (generally based on an employees salary and length of service) to calculate an employees retirement benefits and is not funded by employee contributions to the plan. A retirement plan with benefits determined by the amount in an employees account at the time of retirement. The account may be funded by contributions from both the employer and the employee. The earliest age at which social security retirement benefits can be received currently age 62. Individual company retirement plans may provide for benefits at an earlier retirement age. The amount of pretax dollars that an employee chooses to have the employer contribute to a qualified deferred compensation plan (e.g., 401K) on the employees behalf, also known as pretax contributions or employer contributions. Federal law regulating the operation of private sector pension and benefit plans.
Elective Deferral
Employee Retirement Income Security Act of 1974 (ERISA) Excess Deferral Flexible Benefits Flexible Spending Arrangement (FSA)
The amount of an employees deferred compensation that exceeds the IRSs annual contribution limit. The option to choose from a menu of benefits offered by an employer. An arrangement that allows an employee to have pretax dollars deducted from wages and put into an account to pay for health insurance deductibles and co-payments and dependent care assistance (separate accounts).
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401K Plan
A cash or deferred arrangement that allows employees to authorize their employer to place pretax dollars in a retirement plan that invests the money. The contributions (including those matched by the employer) and any earnings on them are not subject to federal or state income tax until they are withdrawn. An annuity or mutual fund hat provides retirement income for employees of public schools and certain tax-exempt organizations. A deferred compensation plan that provides retirement income for employees of public sector employers (e.g. state and local governments) and certain tax-exempt organizations. Law passed in 1996 restricting the right of group health plans to limit participation by newly hired employees and their dependents because of preexisting medical conditions.
403B Annuity
457 Plan
Health Insurance Portability and Accountability Act (HIPPA) Health Reimbursement Arrangement (HRA) Health Savings Account (HSA) Individual Retirement Arrangement (IRA) Long-term Care Insurance
An employer-funded arrangement under which the employer reimburses an employee and the employees spouse and dependents for medical care expenses up to a maximum dollar amount for the coverage period. Tax-exempt trusts or custodial accounts created exclusively to pay for the qualified medical expenses of the account holder (employee) of his or her spouse and dependents. A trust created or organized for the exclusive benefit of an individual or his or her beneficiaries.
An insurance contract providing for coverage of qualified longterm care services, including diagnostic, preventative, treating, mitigating, and rehabilitative services, which is treated as an accident and health insurance contract for payroll tax purposes. An arrangement through which an employer or an employee (but not both) can put tax-preferred contributions into an account for the payment of health care deductibles under a high deductible health insurance plan.
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Monopolistic State Normal Retirement Age Pretax Deduction Qualified Plan Qualifying Event
A state that administers workers compensation premiums and benefits solely through a state fund, prohibiting employers from purchasing insurance from a private insurance carrier. Currently 65 and 2 months, the age at which retirees may receive unreduced social security benefits. Individual company retirement plans may use a different age. A deduction taken from gross pay that reduces taxable wages. A benefit plan that meets IRS qualification requirements for tax-favored treatment (e.g. nondiscrimination). One of several events that results in the loss of group health insurance coverage for employees or their dependents and entitles them to continued coverage under COBRA. An individual retirement arrangement to which nondeductible contributions may be made (subject to certain AGI phase-outs) and the distributions of which are generally nontaxable. Retirement plans for employees of small employers (no more than 100 employees) that have simpler administrative and nondiscrimination requirements than other retirement plans.
Roth IRA
Savings Incentive Match Plans for Employees of Small Employers (SIMPLE Plan) Simplified Employee Pension (SEP) Third-Party Sick Pay
An Individual Retirement Arrangement (IRA) with special participation requirements that is available to certain small employers. Payments made by a third-party, such as a state or private insurer, to employees because of non-job related illness or injury.
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Pay Frequency The Federal Wage-Hour Law (FLSA) does not regulate how often employees must be paid by their employer or how soon they must be paid after performing services (only that paydays must be consistent). Each state has rules that govern these frequencies.
State regulations for frequency of pay vary from at least every 30 days to weekly. Regulations for lag time from the date services are performed also vary with some states having no provision at all.
Payment on Termination FLSA does not regulate when an employee must be paid upon termination. Most states have a separate set of rules governing when employees must be paid when they separate from employment, either through discharge, layoff, or resignation. Most states also have rules governing what must be included in an employees final wage payment (such as commissions, fringe benefit final payments) and a few even require severance pay where the employer shuts down, is acquired, or moves out of state.
Payment Methods
FLSA does not regulate the payment methods used to pay employees. Individual states have assumed the task of making sure employees actually receive cash or its equivalent when they are paid for services performed.
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Cash or Check All 50 states and DC either expressly allow by law or regulation the payment of employees by cash or check or do not have a law or regulation regulating the method of payment. States generally require that employees be able to cash their paychecks or other negotiable instruments provided by the employer for face value without a charge or discount by a financial institution. Direct Deposit Direct Deposit which is a type of electronic funds transfer (EFT) allows the employer to deposit the employees pay (full or partial) directly into their designated bank accounts without having to handle a paycheck. Direct Deposit eliminates many of the problems associated with employee paychecks, including:
How the process works Employee Role: Provides authorization to the employer for direct deposit Provides the name and routing number for the financial institution designated to receive the payments Provides the type of account into which payments will be deposited Provides the account number
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Employers Role: Process Prenotification (voluntary but recommended) o Checks the accuracy of the bank routing (ABA) and account number (DDA) o Sends a zero dollar amount through the network to test for account accuracy o Must be sent at least 6 banking days before any actual pay is sent o Inaccuracies will be sent back to the employer o Employer must make corrections and send a new prenote Creates the electronic pay transactions for direct deposit Sends the file to the Originating Depository Financial Institution (ODFI) Must send the file early enough so that the deposit can be credited to the employees account no later than the beginning of the banking day on pay date Generate a _________ _________ _____________ through the ACH network within five business days from the date of entry for deposits sent in error
Originating Depository Financial Institution (ODFI) Employers Bank Validates that the file has been prepared correctly Checks for any exceptions and processes any entries for accounts maintained at their institution Processes the remaining entries through the Automated Clearing House (ACH) network
Automated Clearing House (ACH) Network Processes the remaining entries to the Receiving Depository Financial Institutions (RDFI) Coordinates the financial settlement between the participating financial institutions Operates under the rules developed by the National Automated Clearing House Association (NACHA) Receiving Depository Financial Institution (RDFI) Employees Bank Accepts the employees electronic payment and credits the employees account Sends periodic statements showing the credits Sends exceptions back to the ACH Network to be routed back to the employer through the ODFI
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Electronic Paycards The newest form of payment for employees is Electronic Paycards. These cards are especially helpful for situations where an employee cannot have direct deposit due to lack of a banking relationship (unbanked). These paycards are actually a prepaid debit card that the employer funds with the amount of the employees net pay. The employee then accesses their pay by using the card to make purchases or withdraw cash.
How paycards work Generally, a paycard is a pre-funded, host-based, stored value card that the employee can use to access his or her net pay at an ATM or a bank, or to make point-of-sale (POS) purchases.
Branded vs. nonbranded paycards Branded cards have either the Visa or MasterCard logos imprinted on them and are accepted wherever these cards are accepted. They can be used in a signature transaction or a pin transaction. Non-branded cards have the logo of one or more major ATM or POS networks imprinted on them and can be used to make POS purchases, access account information, or withdraw funds from any ATM. These cards require a PIN for all transactions and can only be used if there is enough in the account to fund the transaction. Branded cards that are lost or stolen are more susceptible to unauthorized use since only a signature is necessary to make purchases whereas Non-branded cards cannot be used unless the PIN is also known. Also, if an employee is under the age of 18 they are only liable for their Branded paycard if he employer gets the written approval of the employees parents before the card is issued.
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Unclaimed Paychecks
Most often, the problem of unclaimed paychecks occurs when an employee is discharged or resigns and fails to pick up or claim any wages owed at the time. These wages become a form of abandoned property. The employer must then follow the escheat laws for the state in which the wages were earned and pay over to the appropriate agency any amount that remains unclaimed for a certain number of years. Most states also require that the employer attempt to contact the employee to keep the unclaimed wages from becoming abandoned property.
Employers are free to reduce salaried employees pay as long as there is no contract guaranteeing a certain amount of pay each week or biweekly. However, this is not a common practice due to the strain on the employer-employee relationship. Hourly employees are not affected.
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Check 21 and the Check Clearing for the 21st Century Act Direct Deposit
Electronic Funds Transfer (EFT) Originating Depository Financial Institution (ODFI) Participating Depository Financial Institution (PDFI) Paycards
Financial institutions that can accept direct deposits and transmit or receive entries.
Stored value debit cards that are funded by employers with employees net pay. Employees can access their net pay by sing the cards to make purchases or withdraw cash.
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Payroll Period
Period of service for which an employer pays wages to its employees. A financial institution that qualifies to receive direct deposit entries from an Automated Clearing House.
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The employee is not required to have actual possession of the wages, it is enough that the wages are available to be drawn on or controlled by the employee. For example: Employee is paid by direct deposit Employee is not in the office on payday but the check is in the office and available to be picked-up Employees that are sent their check through the mail are generally not paid when the check is sent but when the check arrives to the employees address regardless of the date printed on the check Regardless of the date on the check the date it is actually or constructively provided to the employee is the date that triggers the employers withholding and deposit obligations as well as the employer matching contributions. Short delays that sometimes occur will not necessarily affect the employers or employees withholding, however if these delays occur at the end of the year there could be a substantial difference in the amount of tax that should be withheld.
Example: Fred earns 120,000 per year and is paid monthly. He works remote and his paycheck is mailed. At the end of the year due to the holidays he does not receive his final check dated December 30 until January 3. What should his employer do? ___________________________________________________________________ ___________________________________________________________________
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In addition to the original purpose, the SSN is used as the following: An identification number used by IRS in dealing with individuals An identification number for employers when wages are paid and taxes withheld are reported to the Social Security Administration (SSA) and IRS
Employers are required to have each new employee provide their original social security card when the employee is hired to help make sure the employees SSN is transcribed properly onto all forms. This should be done on the first day of work if available or promptly thereafter. Invalid SSNs include: 111-11-1111, 333-33-3333, 123-45-6789 All 000 or 666 in the first three numbers Numbers greater than 773 in the first three numbers 00 as the fourth and fifth digits 0000 in the sixth through ninth digits
Asking to see the original card cannot be done to establish the right to work in the US but only to verify the name and number of the employee.
An individual can apply for a SSN with Form SS-5 Application for a Social Security Card. Because all children who are claimed as dependents on a personal income tax return are now required to have an SSN, few new employees will be hired without already having a number.
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When an employee requests a name change due to marriage or divorce, the employer should refuse to make the change until they receive a new social security card. Making the change before the SSA has it in their system could result in the mis-posting of the employees wages.
The SSA now sends Social Security Statements to all individuals 25 years old and older who are not already collecting benefits. This information can also be requested using form SSA-7004 Request for Earnings and Benefits Estimate Statement.
Event Starting a new job (or the employer must withhold as Single-0) Decrease in number of dependents No longer eligible for exempt status Increase in dependents or eligible for exempt status
Date
A new W-4 form becomes effective for a new employee on the first payday. For changes on existing employees, an amended W-4 form must take affect by the first pay period ending _________ of being submitted. Employers are required to ask their employees to file an amended W-4 form by _________________ of each year if their allowances will change for the following year.
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An employer should never advise the employee as to how many allowances they are eligible to claim. This information can be obtained from IRS Publication 919.
Exempt Employees
The employer must keep Form W-4 on file for every employee. An employee may claim exempt from withholding if: They had a right to a refund of all federal income tax withheld in the prior year because there was no tax liability AND They expect to have no tax liability in the current year ALSO They cannot be claimed as a dependent on someone elses income tax return and their income cannot exceed $950 and include more than $300 of unearned income in 2010
New W-4 forms must be filed by ____________ for the exempt status to continue. High school and college students are not automatically exempt but are only exempt if they meet the same requirements as stated above.
The employer should reject the employee W-4 if: _____________________________________ _____________________________________ _____________________________________
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Learn@ADP Employees who claim more allowances than they are entitled may face a civil penalty of $500.00 in addition to criminal penalties.
The Employer must submit Form W-4 to the IRS if: _______________________________________________ _______________________________________________ The Form W-4 must be submitted to the IRS by the due date of the 941. The employer must continue to withhold based on the employee W-4 until the IRS informs the employer that the form is defective. When the IRS informs the employer of a defective W-4, the employer must withhold using the information from the IRS. The employee can complete a new form as long as the number of exemptions does not exceed the amount on the IRS notice. Forms may be filed magnetically or electronically. The employer must retain the employee W-4 form for at least ____ years after the date the last return was filed using the information contained on the Form W-4. Example: Greg terminated his employment with XYZ Company on May 19. His Form W-4 is used to withhold and pay taxes, which will be on the 2Q tax returns due July 31. The employer must retain Gregs Form W-4 until four years from ___________.
Form W-4P
Unless directed otherwise, payers and plan administrators must withhold FIT from pension and annuity payments made to retired employees. Retirees can have input into the amount withheld by submitting a Form W-4P, Withholding Certificate for Pension or Annuity Payments. By completing this form they can: Elect not to have any income tax withheld Designate a certain number of withholding allowances to be used in calculating the amount withheld or Indicate an additional dollar amount to be withheld
If no Form W-4P is filed, the payer must withhold on periodic pension payments as if the payee is _____ claiming _______ withholding allowances.
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Form W-4S
When an employee who is disabled by a non job-related illness or injury is being paid sick pay by a third party insurer, no federal tax will be withheld unless the employee requests it by submitting Form W-4S, Request for Federal Income Tax Withholding from Sick Pay. Guidelines include: The employee used the form to request a _______________ be withheld from sick pay The minimum amount that can be requested for withholding is _______ per week After withholding, the employee must receive at least ___________ If the payment is smaller or larger that the regular payment, the amount withheld must be changed in the same proportion as the payment
No matter which method us used, there are five key pieces of information needed in order to determine the taxability of a payment. They include: ___________________________ ___________________________ ___________________________ ___________________________ ___________________________
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Use the following procedure to calculate FIT using the Wage Bracket Method:
1. Find the table that applies to the Marital status and _freq. for the employee. 2. Determine the employees wages subject to FIT withholding by adjusting for any taxable or non-taxable benefits (Adjusted Gross Income). 3. Locate the wage range that includes the taxable amount in the first two columns of the table. 4. Move across the table in the wage range row to the column that coincides to the number of allowances claimed by the employee on Form W-4. The amount in this field is the FIT withholding amount for the employee. 5. Add any additional FIT withholding amount from line 6 of Form W-4 to the amount. Also remember: When using the daily method, calculate the daily wage amount to determine the daily taxes. Then multiply the daily tax by the number of days to determine the withholding. If the Adjusted Gross Income (AGI) is more than the maximum amount on the table the Percentage Method must be used. If the AGI equals the amount in the But less than column of the table, the next line which includes the same amount in the At least column must be used. If the employee is claiming more than 10 allowances, the employer may deduct at a maximum of 10 or multiply the allowance in excess of 10 by the corresponding amount on page 36 of Circular E and then deduct this amount from the wages that are subject to FIT to come up with a new AGI. Calculate the FIT using the new AGI and 10 allowances.
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Common Mistakes made when using the Wage Bracket Method include: Selecting the incorrect marital status Selecting the incorrect pay frequency Using the Percentage Method instead when the Wage Bracket Method is called for Looking down the wrong column Deducting the allowances from page 36 of Circular E Not going to the next row when the But Less Than amount is reached
Percentage Method
Because of the flexibility and accuracy of the Percentage Method it is the preferred method for employers with automated payroll systems and service bureaus. To use the percentage method, the following steps must be followed: 1. Find the number of withholding allowances claimed on Form W-4 in the left hand column of the Allowance Table. 2. Move across the row to the corresponding payroll frequency for the employee to find the value of the withholding allowances claimed by the employee.* 3. Determine the employees wages subject to FIT withholding by adjusting for any taxable or non-taxable benefits (Adjusted Gross Income). 4. Subtract the amount from step 2 from the employees AGI. 5. Locate the Percentage Method Withholding Table for the employees payroll period and marital status [(a) for Single, (b) for Married] 6. Use the formula detailed in the table to calculate the withholding tax. 7. Add any extra dollar amount of withholding from line 6 of the employees Form W4.
*NOTE: CPP exam supplemental booklet may not have the full allowance table. They will most likely give the amount for one allowance and expect the tester to know to multiply that amount by the number of W4 allowances referenced in a question.
Example: Harold is paid federal income taxable wages of $2,613.00 bi-weekly and is claiming married with 1 allowance on his Form W-4. Calculate his FIT withholding using the Percentage Method. _____________________________________________________________________ _____________________________________________________________________
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Annualized Wages The Annualized Wage method is used in many automated payroll system. In this method, the withholding calculation is based on the annual wage amount and then divided among the number of payroll periods in the year.
Average Estimated Wages An employer may withhold based on the employees estimated wages during a quarter. The employer must make an adjustment each quarter to bring the withholding on the estimated wages in line with the amount required to be withheld on the wages actually paid.
Cumulative Wages The Cumulative Wages method is used for adjusting withholding amounts for employees whose wage payments are inconsistently high and low. Employees must request this method in writing and the request is valid until revoked by the employee. This method: Is usually used for commissioned salespeople Allows for lower withholding when payments are low and higher withholding when payments are high Also beneficial for employees who receive bonus payments much larger than regular wages The employee must have been paid at the same frequency since the beginning of the calendar year
Part-Year Employment
Similar to the cumulative wages method, this method reduces withholding for employees who work only during part of the calendar year, usually on a seasonal basis or because they have been unemployed.
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Combining Wages If supplemental wages are combined with regular wages and are not clearly identified, then the employer must withhold taxes based on the combined wage payment for that payroll period.
Aggregate method The employer must use this method if no FIT withholding occurred on the last payment. The amount of the supplemental wages are combined with the wages from the last payment and treated as one payment. The difference in taxes is used for the supplemental wages.
Flat Withholding Rate When supplemental wages are paid separately from regular wages or when they are clearly identifiable from regular wages the employer can withhold FIT at a rate of ___%. If the total amount of supplemental wages totals $1 million or more for the year, the rate is increased to___% for all supplemental wages in excess of $1 million.
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Periodic Payments Periodic payments are those made over a period of more than one year. Employees can elect federal withholding using Form _________ If no form is submitted, the withholding must be calculated at ____________ The employee must be notified of their right to revoke or change their withholding elections six months prior to the first payment and annually thereafter.
Nonperiodic Payments Not Eligible for Rollover Nonperiodic payments are all payments which are not considered periodic. All nonperiodic payments made after December 31, 1992 that are not eligible for rollover to another qualified plan and are at least $200 are subject to withholding at the rate of ___%. The recipient may use W-4P to elect no withholding or increase withholding by a specific dollar amount.
Eligible Rollover Distributions Eligible rollover distributions are nonperiodic payments of all or any portion of the balance of a recipients account in a qualified deferred compensation plan under IRC 401(a)(9) (including a 401K), 403(b), 457 plan, or IRA. If distributions are not directly rolled over into another qualified plan they are subject to a mandatory federal income tax withholding of 20%.
Backup Withholding
The IRS requires that payments of $_____ or more be reported as income. Businesses are required to withhold a ___% backup withholding tax from non-employees under the following conditions: The payee fails to provide the payer with a Taxpayer Identification Number (TIN) and/or a Employer Identification Number (EIN) The IRS notifies the payer that the TIN or EIN is not valid The IRS notifies the payer that the payee has underreported interest or dividend payments The payer has not received a certification from the payee that they are not subject to withholding
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Learn@ADP Form W-9 The Form W-9, Request for Taxpayer Identification Number and Certification is used by persons required to file information returns with the IRS to get the payees correct TIN. Part I requests the TIN, which is either the Social Security Number (for individuals) or the Employer Identification Number for businesses. Part II is the certification that the payee is not subject to backup withholding.
A Form W-5, Earned Income Credit Advance Payment Certificate, is used by any employee who is eligible to receive part of their EIC in advance with his or her regular payroll and wished to do so. The following rules also apply: Employers must reject any invalid certificates. The employer must know if the employees spouse has also filed a Form W-5 with their employer as the EIC percentage tables are based on this information. If an employees circumstances change, the employee must either revoke the W-5 in writing if they are no longer eligible for credits or submit a new Form W5 if an eligibility change is required due to the spouses filing If an employer does not honor an eligible Form W-5 and does not make the advance EIC payments, the employer is subject to penalties equal to the advance payments.
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Learn@ADP How to pay advance EIC Advance EIC payments are not wages and do not change the amount of federal income tax, social security, and Medicare taxes that must be withheld from the employees wages. Because the amount is a credit to the employee, the amount does not increase the taxability of the wages. The taxes are considered to have been withheld and paid to the IRS and then the employer adds the credit to the net pay. The advance EIC payment is calculated based on the employees wages subject to income tax withholding.
Example: Fred is eligible for advance EIC and files a W-5 form with his employer as Single Head of Household. He earns $325.00 per week and claims Single with one withholding allowance on Form W-4. He also has a pre-tax medical deduction of $5.00 per week. Calculate Freds net pay using the Percentage Method for Federal and advance EIC.
Remember, as soon as the employees wages reach the maximum gross taxable amount of $__________ for single or head of household or $___________ for married filing jointly the employer is required to stop making EIC payments. The maximum credit that can be given to the employee is $_______. Amounts that are paid in excess will be reconciled when the employee completes their Form 1040.
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Depositing and Reporting Advance Payments of EIC The employer must maintain a separate record of federal tax liabilities and advance EIC parents. At the end of the deposit period the employer adds together the FIT taxes withheld and the employee and employer SS/Med taxes. From this total, the employer subtracts the total advance EIC payments made to employees and deposits the net amount.
Advance EIC payments are reported on line 9 of Form 941 and Box 9 of Form W-2 and W-3. Line 9 of Forms 941 filed for the tax year must agree with the total advance EIC payments reported in Box 9 of the Form W-3.
Required Notices to Employees Employers are required to notify employees of their potential eligibility for advance EIC by providing them with copies of IRS Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC), no later than January 31 of each year. This reporting requirement is also met by providing employees with the notification on the reverse side of Form W-2, Copy B.
Social Security and Medicare Rates and Limits Withholding rates: Social security Medicare Total Combined ER and EE ______ ______ ______ ______
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Total Calculated Withholding: Social security $____________ X _______ = $__________ Medicare Because Medicare taxable base is unlimited the tax is also unlimited at the rate of 1.45%.
Remember: If an employee reaches the social security taxable wage base with one employer and changes jobs to a new employer: The new employer must deduct social security and pay their matching share The employee can claim a credit when filing their Form 1040 and receive a refund of overwithheld social security Neither the former or new employer will receive a refund for the employer share
Common Paymaster
When two or more related corporations concurrently employ one or more employees and pay them through one of the corporations as a common paymaster, the total social security and Medicare taxes that must be paid are determined as if the employees had one employer (the common paymaster) paying all of their wages.
Concurrent employment is the primary qualification that must be met by the employees of the common paymaster. This means that the employees must have an employment relationship with each of the related employers at the same time.
The common paymaster is responsible for all payroll records and the depositing and filing of all related taxes and returns. If the common paymaster fails to pay taxes, the common paymaster remains liable for the unpaid taxes but each of the separate corporations is jointly and severally liable for its appropriate share of the taxes.
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Learn@ADP Remember, using a common paymaster is not the same as using a common pay agent. A Common Pay Agent is a corporation that processes the payroll for multiple corporations with each companys payroll processing separately from the other using their own respective employer IDs.
Special rules apply for third parties who supply funds to an employer for the purpose of paying wages to that employers employees, knowing that the employer cannot or will not deposit the required taxes. The third party is then liable for up to a maximum of 25% of the funds supplied to pay wages.
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Unemployment Insurance
Federal Unemployment Insurance
The Federal Unemployment Tax Act (FUTA) requires employer contributions in the form of unemployment tax. The FUTA tax is paid by the employer only and is calculated as a percentage of covered wages for each employee.
Who Pays FUTA All non-farm employers paying $______ or more in covered wages in any calendar quarter during the current or preceding year or who employ at least one employee at least part of one day in 20 different weeks during the current or preceding year are subject to FUTA. For farm employers the amount of covered wages increases to $________ and the number of employees to 10. Employers paying domestic employees $1,000 or more in any calendar quarter of the current or preceding year also pay FUTA.
Federal, state, and local government employers as well as nonprofit religious, charitable or educational organizations that are tax exempt are not subject to FUTA tax.
Although most employers must pay FUTA contributions, there are several items such as qualified moving expenses, group term life, and meals and lodging that are exempt from FUTA. Some types of employment (similar to the types exempt from SS/Med) are also exempt from FUTA. FUTA Tax Rate and Wage Base
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______ ______
General Rules Constructive receipt rules apply Where employees work for more than one employer, each employer is subject to the wage limit Successor/predecessor rules apply similar the rules for Social Security Common paymaster rules also apply
______
If the FUTA tax deposit due date falls on the weekend or a federal or state legal holiday then the deposit is due ________________________.
In the first three quarters, if the total amount due at the end of the quarter is below the limit of _______ then the liability is carried over and added to the liability for the next quarter.
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Final Quarter Liability Employers determine their fourth quarter FUTA liability when they complete Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return. Completing the 940 determines if the employer is entitled to the full 5.4% credit and determines the balance of FUTA due for the year. If the total balance due is more than $_____ it must be deposited by January 31. If the total balance due is less than $______ then it can be attached to the employers Form 940 when the form is filed (by _____________).
Calculating Tentative Credit There are two types of credits against FUTA liability. The normal (or 90%) credit provides a reduction in FUTA liability for payments required and actually made under state unemployment compensation laws. The additional credit allows employers whose state unemployment rate is less than 5.4% to receive credit for the difference between 5.4% and the actual state percentage paid. Credits cannot exceed 5.4%.
Full credit for paying to the state can only be taken under the following requirements: Payment must be made by Form 940 due date State must have certified unemployment insurance program Payments must be required by state law Amounts owed must actually be paid by the employer
If an employer is exempt from coverage under state unemployment insurance laws but is subject to FUTA, then it must pay the full 6.2% FUTA tax rate. In some states they may be able to submit voluntarily to state coverage and receive credit for payments made to the state.
Credit Reduction States with a high rate of unemployment that have difficulty meeting their benefit obligations can borrow money from the federal unemployment insurance fund to pay benefits. If the loans taken out during one year are not repaid by the end of the following
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Learn@ADP year, the FUTA credits for employers in those states are reduced and the extra amounts paid by the employers are applied against the states loan balance.
Sometime after November 10 of each year (the deadline for loan payments) the credit reductions for that year are announced by the IRS and are included on Schedule A (Form 940). Credit reduction amounts start at .3% the first year, which changes the Tentative Credit from 5.4% to 5.1% and in effect changes the FUTA rate from .8% to 1.1%. For 2008, there were no credit reduction states, so the areas relating to credit reductions on the 2008 940 have been shaded out.
Reporting FUTA Tax on Form 940 Employers covered by FUTA must report their liability annually on Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return. Form 940 EZ is being eliminated for 2006 and beyond If the client is doing business in more than one state, or if they are in a credit reduction state, they must also complete Schedule A (Form 940).
Form 940 must be filed by ________________ of the year after the FUTA tax liability was incurred. If this date falls on a weekend or holiday, then the form is due on the next business day. Employers receive an automatic extension to ______________ if they have deposited their FUTA tax liability in full and on time for all four quarters. An extension of up to 90 days may also be granted as long as the extension was filed by the due date of the form and all FUTA tax payments were made timely.
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Learn@ADP Penalties for FUTA Noncompliance Item Initial Penalty Limits or Additional Penalty Notes
Above items are raised to 1% per month following levy notices or demands for immediate payment from the IRS. Accuracy related penalties
Failure to make timely deposits - Up to 5 days - 6-15 days - >15 days - >10 days after IRS notice EFTPS mandated employers
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If an employee is working in more than one state, the following factors can be used in determining to which state an employee should be allocated for state unemployment purposes: Are services localized with any services performed outside the state merely incidental? Does the employee have a base of operations? Is there a place of direction or control? What is the employees state of residence? SUI taxable wages vary from state to state but are always at least equal to the FUTA taxable wage base of $7,000. Rate Determination Contribution rates and experience rates also vary from state to state and are determined by one of four methods depending on the state: Reserve Ratio Under the Reserve Ratio method, each employer is assigned an account into which it pays unemployment taxes. The account is then reduced by the amount of unemployment benefits paid to the employers former employees during the year. The reserve ratio is the balance (reserve) in the employers account divided by the employers average taxable payroll for a specific number of years. The higher the ratio, the lower the tax rate. (Used by the majority of states.) Reserve ratio = Unemployment taxes paid Benefits charged Average taxable payroll
Example in Payroll Source: Company had a balance of $34,600 in their unemployment account and had $2,200 charged to them for the previous year and an average payroll of $800,000 34,600 2,200 = 32,400 = .041 = 4.1%
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Learn@ADP 800,000 800,000 Benefit Ratio The Benefit Ration method considers the relationship between the unemployment benefits charged to the employer during a stated period and the employers total taxable payroll for the same period. Benefits charged Total taxable payroll
Benefit ratio =
Example in Payroll Source: Company had $4,800 in benefits charged to their unemployment account over the past three years and a total taxable payroll during that time of $400,000. 4,800 400,000 Benefit Wage Ratio Two states (Delaware and Oklahoma) use this method, which focuses on the taxable wages used to determine the benefits payable to employees who were terminated during the applicable time period, rather than the benefits themselves. These wages are then compared to the employers total taxable payroll during the same period. Benefit wages paid Total taxable payroll = 0.012 = 1.2%
Example in Payroll Source: Company terminated 6 employees whose wages totaled $140,000. Company had a total taxable payroll of $900,000 during that time. 140,000 900,000 = .1556 = 15.56%
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Learn@ADP Payroll Stabilization This method, which is only used in Alaska, uses fluctuations in an employers payroll from quarter to quarter to determine the tax rate. As more employees are terminated and the payroll decreases, the employers tax rate will increase. As long as the employers payroll remains stable or increases, the tax rate will not be increased and may be decreased.
Employers in nearly all of the reserve ratio states can also elect to make voluntary contributions to their unemployment tax accounts which in turn increases the balance of their account and decreases their unemployment tax rate.
Voluntary Contributions Employers in 27 states can make voluntary contributions to their unemployment tax accounts. This increased their reserve ratio, resulting in a lower unemployment tax rate. Not all employers are eligible.
Reporting Requirements Each state requires employers to submit quarterly contribution and wage reports which contain some or all of the following: _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ _____________________________
Generally, the quarterly reports and deposits are due on the last day of the month following the end of the quarter.
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Example: For calendar year 2010, the Form 941 lookback period is July 1, 2008 through June 30, 2009.
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The following thresholds apply to both payroll and non-payroll withholdings: If the total federal tax liabilities deposited during the lookback period are greater than $____________ the ER is a ______________ depositor. -If the total federal tax liabilities deposited during the lookback period are $__________ or less, the ER is a ___________ depositor.
Non-payroll withholding
Withholding on nonpayroll wages (backup withholding, gambling winnings, pensions, IRAs, etc.) is not reported on Form 941, but annually on Form ______, Annual Return of Federal Income Tax. Depositing frequency for these liabilities follows the rules as 941 filers. New Employers Because new employers do not have a lookback period, they must begin filing as __________ depositors unless they either incur a liability of over $___________ or develop a lookback period of over $50,000.
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Deposit Frequency
Check Date
Cutoff Date
Due Date
Monthly
Semiweekly
Next Day
*Note: All semi-weekly depositors are guaranteed at least three banking days after the end of the semiweekly period. Also, if any deposit day falls on a non-banking day, then the deposit is due on the next banking day.
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Shortfall rule
The IRS allows safe harbor shortfall where an employer can deposit less than the entire amount of its liability and still be in compliance. The underdeposited amount can be the greater of $_____ or __% of the liability if deposited timely.
Monthly depositors must make up the shortfall by ______________. Semiweekly depositors must make up the shortfall by ___________________________________.
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EFTPS Enrollment
All businesses receiving a new EIN will be automatically pre-enrolled in EFTPS. New business taxpayers will activate their enrollment by calling an 800 number, entering their banking information, and completing an authorization for EFTPS to transfer funds. Employers that will be required to use EFTPS because their tax deposits have increased must enroll by completing and submitting Form ________. A separate enrollment must be submitted for each EIN. When paying by check, employers can use Form _________, FTD Coupon. These coupons are sent to each employer several weeks after the employer receives its EIN.
If an employer uses EFTPS voluntarily and is not mandated, then the employer is not subject to any failure-to-deposit penalty.
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Responsible party includes corporate officers and partners as well as accountants and others who had even less control over the employers funds. However, it excludes nonowner employees who work under the direction of a manager and other clerical type positions.
Criminal Penalty
In addition to the 100% penalty, responsible persons are guilty of a felony and can be fined up to $__________ and/or imprisonment for up to ______________.
Who must file Form 941 All employers that withhold FIT and are subject to withholding and payment of social security and/or Medicare taxes generally must file Form 941.
Exempt Employers
The following employers are exempt from filing the 941: ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________
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Successor Employers
For the most part, if an employer sells or transfers its business, a separate Form 941 must be filed by the previous and the current owners. In certain situations, successor employers may be able to consider wages paid by a predecessor when determining whether an employee has reached the social security wage limit.
Mergers or Consolidations The surviving corporation that is the result of the merger or consolidation must file the 941 for the quarter during which the change took place and report the wages earned by both companies. A ___________ should be filed which will explain the discrepancies in the totals of wages and tips and FIT withheld. When an acquisition occurs and the successor hires the predecessors employees one of two procedures must be followed:
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Learn@ADP The successors __________ should also be filed after Forms ________ are prepared for the year of acquisition and should be filed with the successors first quarter form _____ for the year after the year of the acquisition or with the successors final Form _____ if the successor goes out of business.
Schedule B
Semiweekly depositors at any time during a quarter must file an attachment to form 941 Schedule B. The Schedule B records an employers liability, not their deposits.
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When and where to file Form 945 Due by Jan. 31. And extension to February 10th for the employers that have timely deposited all their non-payroll withheld taxes for the year. Employers that are required to file Forms 945 for one year must file Form 945 for subsequent years only if the employer has non-payroll withheld income taxes for that year. Depository status is determined by the tax liability of the calendar* year. *Note The 2010 lookback period for non-payroll tax is the 2008 calendar year.
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Form 941-PR/941-SS Form 941-PR, Employers Quarterly Federal Tax Return Puerto Rico is filed by employers whose principal place of business in Puerto Rico.
Form 941-SS: American Samoa, Guam, and Virgin Islands is filed by employers whose principal place of business is one of the following locations: Guam American Samoa Virgin Islands Northern Mariana Islands
Employers of domestic employees Employers who hire domestic workers will deduct the payments made on their personal 1040 on Schedule H. No withholding for social security and Medicare is required for babysitters under the age of 18 unless the employment is their principal occupation.
Form 943 Employers Annual Tax Return for Agricultural Employees Filed (frequency) annually. Filed to employers who pay wages to one or more farm workers to whom federal income tax, social security and Medicare tax apply. To report wages and employment taxes of household employees in a private home on a farm operated for profit.
Annual reporting by small employers Beginning is 2006, employers with total annual employment taxes of $________ or less will file Form _____, Employers Annual Federal Tax Return rather than Form 941 and will be able to deposit their tax liability annually.
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Scenario 1: FIT, SS, Med underpaid and discovered before filing: ___________________________________________________________________ ___________________________________________________________________
Scenario 2: SS, Med underpaid and discovered after filing: ___________________________________________________________________ ___________________________________________________________________
Scenario 3: FIT underpaid and discovered after filing: ____________________________________________________________________ _____________________________________________________________________ Scenario 4: FIT, SS, Med overpaid and discovered before filing: _____________________________________________________________________ ______________________________________________________________________
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Scenario 5: SS, Med overpaid and discovered after filing: _________________________________________________________________ _________________________________________________________________ Scenario 6: FIT overpaid and discovered after filing: _________________________________________________________________ _________________________________________________________________
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Filing Extension
If an employer needs an extension for filing Copy A to the SSA, they may request it by filing Form ______, Application for Extension of Time to File Information Returns.
One tip that might help is knowing that the first 6 numbered boxes reflect FIT, SS, & Medi respectively. The odd-numbered boxes (1, 3, 5) are for the wages and the evennumbered boxes (2, 4, 6) are for the taxes. Another tip is knowing that box 8 is for Allocated Tips, which are reported for anything under 8% of the gross receipts.
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Form W-3 If filing paper W-2 forms, the employer must send them along with Form W-3, Transmittal of Wage and Tax Statements. The due date for filing Form W-3 is the same as the due date for filing paper copies of Form W-2 to the SSA.
Correcting Information Statements When errors have been made on a previously file Form W-2 or W-3, the employer must correct them by filing Forms ______ and _______.
If the only correction made is to employees addresses, then a Form W-2c does not need to be filed. Electronic Filing Requirement Employers filing 250 or more Forms W-2c must file them electronically to correct forms for the immediate prior year.
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Penalties will be waived for an employer if it can prove there was a reasonable cause for failing to file. Reasons might include: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________
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Failure to provide information statements to employees If an employer fails to provide an employee or other payee with a require information statement on time or incorrect, a penalty of $_____ per statement may be imposed, up to a maximum of $_______.
Forms 1099 & 8027 & 1042-S Requirements Employers that file more than ______ forms are also required to file electronically.
Electronic wage reporting over the internet Employers that are required to file electronically must file their Forms W-2 over the internet through SSAs _______________________________.
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Reporting Requirements
Employers must report special wage payments for federal income, social security, and Medicare tax purposes in the year the payments are received on Form W-2.
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Involuntary Deductions
An Involuntary Deduction is a deduction from an employees paycheck over which an employee or employer has no control.
Things to remember when processing involuntary withholdings include: The employer or employee has no control over the withholding. The employer is required by law to deduct a certain amount of the employees pay and remit it to a person or government agency to satisfy the employees debt. Failure to deduct and remit these amounts will generally subject the employer to a penalty equal to the amount required to be deducted plus possible fines and interest. If there is not enough pay left in the employees wages after any exempt amounts have been taken into consideration to pay all the orders, the employer must decide which order should be deducted first.
Key Considerations: The employer must always choose the option that will be most favorable to the employee. These options include federal limits, state limits, specific percentage amounts requested, specific dollar amounts requested, and dollar amounts in excess requested.
Tax Levies
Employees who fail to pay their taxes timely may become subject to a federal or state tax levy after other collection efforts have been exhausted. The levy requires the employer to deduct the amount owed (plus penalties and interest) from the employees wages and remit it to the proper government agency.
A federal tax levy is accomplished by ______________ or _____________ an employees wages to the extent that they are not exempt from the levy.
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The employer receives notice of the levy when the IRS sends _______________, Notice of Levy on Wages, Salary, and Other Income. The form consists of six parts: Part 1 is the employers copy informing the employer of the amount of the levy and the employers obligation to withhold and remit the levy amount. Part 2 it the employees copy of the levy. Parts 3-5 require the employee to provide information to the employer and the IRS regarding his or her tax filing status and any dependents who can be claimed as personal exemptions (except children covered by a child support order against the employee that takes priority over the levy). Parts 3-4 must be returned to the employer within three days of the date that the employee received the form. After completing the reverse side, the employer keeps part 4 and sends part 3 to the IRS. Part 5 is the employees copy of the tax filing status and exemption information. Part 6 is retained by the IRS.
Tax levies must be satisfied before all other garnishment or attachment orders except for child support orders that were in effect before the stat of the levy.
All amounts paid to an employee are subject to levy unless specifically exempt by IRS regulations. The wages exempt from levy include: Unemployment compensation Workers compensation Annuity and pension payment under the Railroad Retirement Tax Act and to certain armed forces personnel Certain armed service connected disability payments Certain public assistance payments (welfare and supplemental Social Security) Amounts ordered withheld under a previously issued court order for child support In addition, each employee is entitled to an amount exempt from levy equal to the employees standard deduction and personal exemptions including one for the employee divided by the number of pay periods in the year.
If the employee does not return a completed and verified Form 668-W, the employer must withhold as if the employees filing status is ____________________________ ___________________________________________________________________
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Learn@ADP If the employee does not complete a new Part 3 Form 668-W each year, the employer must continue to use the table for the year during which the levy notice was received. Take home pay: The amount of an employees wages that is ultimately subject to the federal tax levy is the amount remaining after the exempt amount has been subtracted from the employees take home pay. The following items can be deducted from the employees wages when determining take home pay: _______________________________________________, even if amounts increase while the levy is in effect due to salary or tax rate increases or changes in the employees W-4 form _______________________________________________ in effect before the employer received the levy, including child support withholding orders and other garnishments, elective deferrals, health and life insurance, charitable donations, etc. _______________________________________________ beyond the employees control such as elective deferrals of a certain percentage of salary and those caused by increases in the cost of benefits such as health or life insurance premiums ________________________________________________ and made as a condition of employment, such as required union dues
Special Conditions: If the employee has two jobs and only one employer receives the levy notice, the employer must withhold as usual unless notified by the IRS differently.
When to stop withholding: The employer must continue to withhold until the receipt of _________________, Release of Levy/Release of Property from Levy.
When employment ends: If a notice is received after termination the employer must return Part 3 of Form 668-W to the IRS with the employees last known address on the back. If the employee terminates while the notice is in effect, the employer notifies IRS of last known address and new employers information if known. The employer must continue deducting the levy on all final payments to the employee.
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Learn@ADP Penalties: The employer must withhold and pay over amounts not exempt from levy after receiving Form 668-W or are liable for the full amount required to be withheld, plus interest from the wage payment date. In addition, the employer is liable for a penalty equal to 50% of the amount recoverable by the IRS after the failure unless there is a genuine dispute as to the amount to be withheld.
Voluntary Payroll Deduction Agreement: Employees who owe federal taxes may be able to avoid the imposition of a federal tax levy through a Payroll Deduction Agreement.
Situation The employee is supporting another spouse and/or children The employee is not supporting another spouse and/or children The employee is supporting another spouse and/or children and is in arrears The employee is not supporting another spouse and/or children and is in arrears
Percentage
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Learn@ADP Calculating disposable earnings: Disposable earnings are different from take home pay and are determined by subtracting _______________________________ from an employees gross earnings. Deductions required by law include FIT, SIT, CIT, SS, Med, SUI/SDI, and mandated payments for state employee retirement systems.
Voluntary deductions (health and life insurance, retirement plans) ________________ from earnings to calculate disposable earnings.
Wages already subject to withholding for tax levies, bankruptcy orders, other child support withholding orders, or wage garnishments are not considered deductions required by law. Therefore, they ___________________ subtracted from gross earnings when determining the maximum amount subject to child support withholding. However, if the tax levy or other order has priority over the current child support withholding order, the amount required to be deducted under the order having priority must be taken into account when determining whether the CCPA maximum has been reached.
This means that several steps must take place to implement electronic payment child support withholding orders.
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Learn@ADP What Employers Must Do: _____________________________________________ will provide employers with the agencys bank account information Employers will have to modify their systems to set up a payroll deduction with the ACH file information Systems changes may be required to send an additional batch behind the payroll ACH file Other solutions besides modifying the existing payroll system may be needed Once the employers system is ready to transmit, they should contact each State Disbursement Unit (SDU) to which payments will be made. The ACH file for payroll and child support withholding must be sent to the employers originating depository financial institution (ODFI) Multiple Withholding Orders: If an employer receives more than one child support withholding order for an employee, _______ governs how they must be handled. If the orders are from different states, the law in the worked-in state applies. States handle this problem in one of several ways: Allocate the available wages to each order depending on its percentage in relation to the total amount required to be withheld Allocate the available wages equally toward each order until each order is individually complied with or the maximum amount of allowable withholding is reached. Current support must be calculated prior to past due amounts Give the orders priority depending on when the employer received the orders. This method is currently only used in Montana. When medical support has also been ordered, nearly all states require its satisfaction after current child support obligations
Collecting Arrearages: _________________________________must be paid before any past due amounts. The total current support and arrearages may never exceed the applicable state or federal maximum withholding amount. Where more than one order has been received for an employee, generally current amounts due on each must be paid before any past due amounts.
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Creditor Garnishments
When an employee has a debt that remains unpaid, a wage garnishment is one legal means by which the person who is owed the money can obtain payment. These may also be known as ______________________ or ________________. The employer can be required to withhold a portion of the employees wages for a wage garnishment only if the creditor first brings a court proceeding where proof of the debt is offered and the employee has a chance to respond. Garnishment Limits: The federal Consumer Credit Protection Act (CCPA) Title III places restrictions on states in the regulation of both the amount that may be garnished and the freedom to discharge an employee because the employees wages have been garnished.
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Learn@ADP The CCPA states that the maximum amount of an employees disposable earnings that can be garnished to repay a dept is the lesser of: ____ percent of the employees disposable earnings for the week OR the amount by which the employees disposable earnings for the week exceed 30 times the federal minimum hourly wage then in effect.
Disposable earnings are determined by subtracting all deductions required by law from an employees gross earnings including withholding for federal, state, or local income tax, social security or Medicare tax, state unemployment and disability tax, and mandated payments for state employee retirement systems. In some states, health insurance contributions may be included in the calculation of disposable pay, especially if the contributions are mandated under a child support order. Other creditor garnishment items to remember: Tips given directly to employees by customers are _____________________ _______________________________ but service charges added automatically to the bill and then given to the employee are considered. The federal garnishment maximum applies no matter how many garnishments are received for an employee. If a child support withholding order, tax levy, or bankruptcy order has priority over the creditor garnishment and constitutes at least 25% of the employees disposable wages, no amount can be withheld for the creditor garnishment. Employers are prohibited by the CCPA from terminating an employee because the employees earnings have been subject to garnishment for any one indebtedness. Generally, public sector employees wages are exempt from garnishment unless specifically provided otherwise by state law.
Bankruptcy Orders
Bankruptcy is governed by the federal Bankruptcy Act and is issued under Chapter ___. When an employer receives a bankruptcy order from the trustee of a court-approved plan requiring a certain amount of the employees wages to be paid to the trustee to satisfy the employees creditors, the employer must stop withholding on any other garnishments against the employee. REASON: Debts underlying the previous garnishments will be paid by the trustee out of the money withheld under the bankruptcy order. Federal bankruptcy law prohibits employers from terminating an employee because they become the subject of a bankruptcy proceeding.
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Voluntary Deductions
An employee can voluntarily agree to a wage deduction that must be implemented by the payroll department. These deductions include amounts for wage assignments, charitable deductions, wages withheld to purchase savings bonds, or credit union loan repayments. Because the employee authorizes these amounts, they are permitted even if they bring the employee under minimum wage.
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Wage Assignments
Wage assignments are voluntary agreements by the employee to have a portion of their wages assigned to a third party, usually to secure a debt. The assignment gives the creditor an opportunity to recover unpaid amounts of the employee defaults. Garnishment limits do not apply and federal or state laws do not restrict these items.
Union Dues
In order for union dues to be deducted from an employees wages, a written agreement must be obtained. These amounts can only be used for dues, initiation fees, and assessments.
Charitable Contributions
Employers can work with national or local charities to provide their employees an opportunity to make voluntary donations to those charities through payroll deductions. Employees should obtain receipts for donations made in excess of $______ to a charitable organization in one lump sum. An employees check stub can serve as proof that a donation was made on his/her behalf.
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Hospital Employees
Hospitals must keep records of the written agreement allowing the use of a 14-day work period between the hospital and the employee. For 14-day work periods the employer must record: The time and day this period begins The Hours worked each day Straight time and overtime premium earnings paid in this period.
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Tipped Employees
Employers using the tip credit to pay employees must keep records for: Records must note that employees wages are earned partly in tips. Amount reported by the employee to the employer as tips on Form ________ Amount of tip credit taken by employer Hours worked and straight-time earnings for time worked other than as a tipped employee. Hours worked and straight time earnings for time worked as tipped employee. .
If an employer keeps their records in a central location, then they must be made available for inspection within ___________.
*Note Employers can suffer heavy financial losses if involved in an employee generated lawsuit. In these cases, incomplete records will weigh against the employer.
Government Contractors
For government contractors, separate logs of occupational injuries and illnesses must be retained for 5 years under the Walsh-Healey Public Contracts. OSHA has a similar requirement that logs of injuries on the job and logs of death in the workplace be maintained for 5 years.
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Retention Period
The above mentioned records must be kept for at least ___ years after the tax due date. Example: An employee complete Form W-4 and is terminated on March 2nd of the current year. The employer must retain the Form W-4 until four years from______. This date is the last time a filing was done using the information on the Form W-4. If an employer files a claim for a refund, credit, or abatement of withheld income and employment taxes, these records must be kept for at least ____ years after the filing date of the claim.
Form 941 IRS requires 4 years of retention after the tax is due or paid
FUTA Records Employers subject to FUTA must keep records for at least ___ years after the later of the due date of Form 940 or the date the required FUTA tax was paid. Heres a good tip: Remember that the tax forms belong to the IRS and the SSA. These agencies have 3 letters and they require 4 years of record retention. 3 letters = 4 years
Remember: These years apply to the date that the information on the return was last used.
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There are no general recordkeeping requirements under the law issued by Equal Employment Opportunity Commission (EEOC). However, employers must make and keep employee records related to _________________________________________ _____________________________________________________________________
These records must be kept for at least ____________ from the date of action. These rules also apply to the ______________________________________________________.
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Other records must be retained for 1 year Records required by ADEA must be made available for EEOC inspection within 72 hours.
The form must be available within ________ days upon request from the Department of Labor.
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Some requirements are: Medical records for FMLA must be kept separate and confidential Covered employers with no eligible employees for FMLA need only keep the basic payroll and identifying employee data. The Department of Labor may only inspect the employers records once during a 12-month period. The record format is flexible and need not be kept in any particular order or form. The recordkeeping requirements for these follow those of the Fair Labor Standards Act (FLSA) and can vary depending on the records. Refer back to 10.1 of this chapter for more details.
Heres a good tip: Remember that these forms belong to the FMLA, IRCA and FLSA. These agencies have 4 letters and they require 3 years of record retention. 4 letters = 3 years
Employee Master File To comply with the varying federal and state recordkeeping requirements, employers should create a master file of employee data that meets the most stringent of those requirements. In general, if the federal requirements are met, state requirements will be met as well.
There are no legal requirements as to how often employee information should be updated, but the records should be as up-to-date as possible.
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Document Verification of tax deposits Form I-9 Copies of Quarterly Tax Returns Wage and hours records for minimum wage compliance Employee time cards Canceled checks showing tax deposits Name, address, and occupation of each exempt employee Work time schedules Form W-4 Total wages and tips to verify tip allocation Overtime information to verify OT compliance Time cards to verify overtime compliance Payroll register to verify withholding Form 940 Returned W-2s Form W-3 Injury Logs (Walsh-Healey)
Agency
Retained for:
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Accounting Principles
The Financial Accounting Standards Board (FASB) has set all standards for recording financial transactions since 1974. Prior to 1974, a variety of organizations set the concepts and principles, which have come to be known as the Generally Accepted Accounting Principles (GAAP). They include: Business Entity Concept Every organization that operates separately is treated as a business entity and the transactions for each entity should be kept separate from all other transactions. Continuing Concern Concept Assumes that a business entity will continue to operate indefinitely as a business. Time Period Concept Each organization must determine its own 12-month accounting period based on the type of business it is engaged in (fiscal year). The end of the fiscal year for a business generally coincides with their least busy time of year. Cost Principle Because each business is considered an ongoing concern, goods and services purchased (assets) are recorded at their cost. Objectivity Principle Transactions must be recorded objectively and without bias to insure that the information is useful to lenders and investors. Matching Principle Expenses and revenue are recorded in the accounting period in which they are incurred or earned. Realization Principle Revenue is recognized (or realized) and reported when earned, which is during the accounting period when the good have been transferred or the services provided. The amount realized is the actual cash received or the fair market value of goods or services received. Consistency Principle Transactions must be recorded in a consistent manner based on the particular accounting method, principle, or period.
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Account Classifications
All of a companys transactions are recorded and classified into various accounts using a double entry accounting system that is based on two equations:
In order for each equation to remain in balance, each entry must have two sides where one account is increased while the other is decreased.
Types of Accounts
The five types of accounts are: ________ Accounts An Asset is anything that provides an economic benefit or value to the company over a period of time. The three types of assets include: Current; Property, Plant, and Equipment; and Intangible or Deferred. ________ Accounts Expense accounts show the cost of goods and services incurred over the accounting period. _________ Accounts Liability accounts hold debts that must be paid in the future. _________ Accounts Revenue accounts identify the amounts received for goods sold or services rendered during the accounting period. _________ Accounts Equity accounts represent the owners investment in the company.
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Account Balances
The double entry accounting system is used to keep the accounting equation in balance. Each account will not balance but as a whole the entire group of accounts will balance.
Each type of account has a normal balance, either debit or credit. Do not think about a debit being positive and a credit being negative the balance of an account actually depends on the type of account. Think of debit as left and credit as right. Using the chart below, place an X in the column to indicate where each accounts normal balance would be.
Normal Balances
Account Type Debit Credit
For example, the cash account is an asset with a normal debit balance. When a check is written from the account it creates a credit entry and when a deposit is made to the account it creates a debit entry. The other side of the entry will depend on what is being paid or where the deposit is coming from.
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Another way to look at this is to define the increase or decrease to each account type.
Chart of Accounts
The Chart of Accounts lists each account by name and number with the number being used to identify the account. The numbering also identifies the type of account. 12345Assets Liabilities Owners Equity Income Expenses
Journal Entries
The Journal is known as the book of original entry and is where all financial transactions are recorded in the double entry method. All journal entries are made up of at least one debit and one credit. Entries with multiple debits or credits are called Compound Entries.
Subsidiary ledgers are used to record specific types of entries. These subsidiary ledgers may include a Payroll Register for recording all payroll entries.
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Learn@ADP After all entries have been recorded in the journal they are posted to the General Ledger, which is also known as the book of final entry. Financial statements are then prepared from the balances in the general ledger.
Gross Pay Federal income tax withheld State income tax withheld Social Security tax withheld Medicare tax Health insurance premiums
$ 372 87 48 324
Recording an individual payroll is really a multi-step process. The first step is to record the gross pay for the period.
Account/description
Debit
Credit
Type of Account
6,000 6,000
Expense Liability
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Learn@ADP The next step is to record the amounts that were withheld from the employee and will be paid to a third party. These items include taxes, insurance premiums, garnishments, etc. Account/description Debit Credit Type of Account
Salaries/wages payable Federal income tax withheld State income tax withheld Social Security tax withheld Medicare tax Health insurance premiums
When the employees are actually paid, an entry must be made to reduce the liability and reduce the amount of cash.
Account/description
Debit
Credit
Type of Account
3,841 3,841
Liability Asset
The employer taxes must also be recorded in order for the company to incur the expense and show that they have taxes due.
Account/description
Debit
Credit
Type of Account
Payroll tax expense Social Security tax payable Medicare tax payable FUTA tax payable SUI tax payable
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Learn@ADP The final step would be to record the payment of taxes and other liabilities. Assuming that all of these items were paid at once, the entry would be:
Account/description
Debit
Credit
Type of Account
Federal income tax withheld State income tax withheld Social Security tax withheld Medicare tax Health insurance premiums Social Security tax payable Medicare tax payable FUTA tax payable SUI tax payable Payroll checking account
Liability Liability Liability Liability Liability Liability Liability Liability Liability Asset
Accounting Periods
The tax year or accounting year can be the usual January 1 to December 31 but it does not have to be. Many companies adopt an accounting year that ends when the company is less busy. When an accounting year runs other than the calendar year it is called the fiscal year.
An accounting period is any time frame, monthly, quarterly, semi-annual, or annual, which is covered by an income statement.
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For example, Freds Fishing Supplies fiscal year ends on June 30. The last pay period ended June 20. The company must accrue 10 days of payroll in order to show the proper payroll expenses for the fiscal year. Considering a payroll of $3,000 per day, the following accrual entries would be made:
Account/description
Debit
Credit
Type of Account
30,000 30,000
Expense Liability
Account/description
Debit
Credit
Type of Account
Accrued Payroll Tax Expense Accrued Social Security Payable Accrued Medicare Payable Accrued FUTA Payable Accrued SUI Payable
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Learn@ADP Accrued vacation time and nondiscretionary bonuses must also be recorded as an accrual at the time the amount is earned and then reversed when paid.
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Balance Sheet
The Balance Sheet generally lists all Assets, Liabilities, and Owners Equity. Each major section is also divided into smaller sections: Assets o Current assets o Plant, property and equipment o Deferred assets Liabilities o Current liabilities o Long-term liabilities Shareholders or Owners Equity
Income Statement
The Income Statement summarizes the revenues and expenses, which then determines the organizations earnings. The items included: Gross margin on sales Operating income Nonoperating revenue Nonoperating expenses Net earnings or loss Earnings per share
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Internal Controls
Internal controls are checks and balances used to make sure that financial data is accurate and that the companys assets are secure. Some internal controls that affect the payroll department include: Segregation of job duties Rotation of job duties Payroll distribution responsibilities Phantom employees Negative pay deductions Payroll bank account Blank checks Time reporting Computer system edits Internal auditor SOX impacts
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Service Bureaus
Pros Cons
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Off-the-shelf software
Pros Cons
Vendor-Supplied Software
Pros Cons
Customized Software
Pros Cons
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1. _______________________________________
2. _______________________________________
3. _______________________________________
4. _______________________________________
5. _______________________________________
6. _______________________________________
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System Edits
This is a warning or alert built into the system that checks for errors and either corrects the error or notifies the operator. Some commonly used system edits are:
Batch Controls
Batching the data into groups of similar data, developing totals of the data to be entered, and then comparing the totals of the data entered is one method of batch controls.
Correction procedures
If system-generated totals do not agree with the batch control totals, procedures must be in place to determine the error, how it was caused, and how it should be corrected.
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System Documentation
Documentation is a very important part of a companys overall control mechanism. The documentation should be simple and complete enough to allow an employee to perform functions described in the documentation with little or not other assistance.
What to include: ___________________________ ___________________________ ___________________________ ___________________________ ___________________________ ___________________________ ___________________________ ___________________________ ___________________________ What to leave out: ________________ ________________
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Providing Security
Personnel concerns
Some personnel-related security measures include: ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________
System Security
Some automated system security measures include: _________________________ _________________________ _________________________ _________________________ _________________________
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Disaster Recovery
As part of the security measures for a payroll system, the project team needs to develop a plan that includes the following disaster recovery procedures. ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________
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System Terminology
In addition to the topics covered in the Payroll Source, be prepared to know about general system terminology. An additional job aid will be made available during our session called System Terminology. You may also want to consider doing some internet searches for sites such as www.webopedia.com which contain additional system terminology. In particular, there is a section of this site dealing with data formats that you might find helpful: http://webopedia.com/Data/Data_Formats Click on the terms to view their definitions.
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Management Theories
The skills needed to manage a payroll department are vastly different from those needed to work in the payroll department. There are many management theory, but below are some of the most commonly recognized theories.
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Supporting
Coaching
Delegating
Directing
Empowerment
The purpose is to give employees the tools to accomplish an objective and allow them the space to develop the methods of attaining those objectives.
The empowerment process involves five steps: 1. Establish the desired results 2. Provide guidelines 3. Identify resources available to accomplish the task 4. Hold people accountable 5. Identify consequences
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Organizing/ Staffing
Controlling/ Problem Solving Establishing quality targets Monitoring results Creating fail-safe, riskfree work processes Motivating/ Inspiring
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Management Skills
There are certain fundamental skills that must be mastered and that make up the duties and responsibilities of most managerial positions.
Staffing
Hiring the right employees __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________
Delegating tasks and responsibilities __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________
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Directing Employees
Providing feedback __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________
Example 1: Assume that Sonia in HR has been given the responsibility of maintaining new-hire files to ensure state and local compliance. Sonia has done an excellent job and a recent audit proved her efficiency. As she is walking past the manager in the hallway, he pats her on the back and says: Sonia, good job.
Is this effective feedback? Why or why not? ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ Listening ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________
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Coaching deals with performance improvements that can be gained by increasing technical knowledge and performance skills. Some of the work situations that may require coaching are: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________
Counseling used to help an employee resolve a personal or attitude problem that is adversely affecting job performance. Occasions when you might need to counsel EEs include: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________
Leadership while coaching and counseling are one-on-one, leadership must be provided to groups or an entire department. Qualities include: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________
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Controlling Performance
Steps to controlling performance: _______________________________________ _______________________________________ _______________________________________ Motivators in general, most EEs are more or less motivated by any of five different motivators: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ Leadership for EEs who place importance on leading others, influencing the group, giving direction, and having control. Some ways to motivate them effectively are: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ Affiliation for EEs who place a good deal of emphasis on the social aspects of the workplace being liked by other EEs and accepted into the group. Some ways to motivate them effectively are: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ Recognition for EEs who are motivated by receiving recognition of their efforts as evidence of their importance and prestige in the department. Some ways to motivate them effectively are: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________
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Reporting
A manager must be able to communicate to his or her immediate supervisor, other department heads, and other management in written reports detailing payroll developments that will affect the organization. Reports required might include: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ Some of the key questions you need to ask yourself when analyzing your reporting skills are: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________
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Crisis Management
The ability to prevent and control a crisis so that damage to the department and the company is minimal can sometimes make or break a managers career. Preventing a crisis be proactive ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ Managing or controlling a crisis ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________
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Time Management
Prioritizing is up to the manager Four combinations of time categories tell the manager what their priorities should be Urgent & Important Not urgent but important Urgent but not important Not urgent and not important Scheduling and delegating are keys to time management Controlling your email
Team Building
Characteristics of a successful team Four stages of team development Stage 1 ______________ Stage 2 ______________ Stage 3 ______________ Stage 4 ______________
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Performance Evaluations
These are a formal way of giving feedback. The purpose is to improve the employees performance in relation to the goals that have been set. Other reasons are: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ Effective performance evaluations Several elements are generally found in a successful system: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________
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Promoting Quality Customer Service in Payroll What is customer service in payroll? There are several basic principles: _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ How to instill quality customer service values in your department ________________________________ ________________________________
Research Needs
One of the most important aspects of payroll managers responsibilities is keeping on top of current developments in the payroll field.
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Union Contracts
Payroll managers in organizations that have employees working under a union contract have certain obligations to fulfill regarding those contracts.
Additional Theories
As with the Payroll Systems chapter, there are additional theories that are not in the Payroll Source, but which might be on the exam. In our additional session handouts, also see Additional Management Theories and Total Quality Management.
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Section 14 Payroll for U.S. Employees Abroad and Aliens in the U.S.
Objectives
Review FIT Withholding and Employment Taxes for U.S. Employees and Resident Aliens Working Abroad Review Foreign Earned Income and Housing Exclusion Review U.S. Income Tax Treaties Discuss Employer Tax Reimbursement Policies Review Resident and Nonresident Alien Status Discuss FIT and Employment Taxes for Resident Aliens Review FIT and Employment Taxes for Nonresident Aliens Review Depositing and Reporting Requirements
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To alleviate the burden of double social security taxation and to integrate coverage of employees, the U.S. government has entered into binational social security agreements, also known as ________________________________.
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____________________ This test is met if the expatriate employee is physically present in a foreign country for 330 full days during any 12 month period. These days do not have to be consecutive, and all periods spent in foreign countries during this period are totaled to determine whether the test has been met. Foreign Housing Cost Exclusion In addition to the foreign earned income exclusion, employees who have a foreign tax home and qualify under the bona fide residence or physical presence test can take an exclusion for reasonable foreign housing expenses exceeding a base housing amount.
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Housing expenses eligible for the exclusion include the reasonable expenses paid during the time that the employee qualified for the exclusion. Reasonable expenses do not include: ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________
To claim a treaty benefit, the employee will have to produce proof of U.S. residency in the form of a letter from the IRS Form 6166, Certification of U.S. Residency.
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Lawful permanent resident or green card test Based on the aliens legal right to be in the U.S., not on their physical presence.
Substantial presence test An alien is considered a U.S. resident for income tax purposes if: They are present in the U.S. for at least 31 days during the current calendar year The total number of days in the U.S. during the current calendar year, plus onethird of the U.S. days during the first preceding calendar year, plus one-sixth of the U.S. days during the second preceding calendar year is at least 183 days.
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Federal Income Tax Withholding and Employment Taxes for Resident Aliens
In general, wages paid to U.S. resident aliens are subject to federal and state income withholding and employment taxes to the same extent that wages paid to U.S. citizens are.
Wages earned by nonresident agricultural workers temporarily admitted to the U.S. under H visas are exempt from FUTA.
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Wages paid to employees - all taxes must be deposited according to the general rules and must be reported on form 941. Each employee must be sent a W-2.
Other compensation - Compensation paid to independent contractors for services, plus other nonwage income, may also be subject to withholding, but the depositing and reporting rules are not the same.
Types of Visas
There two types of visas for foreign nationals seeking admission to the U.S. immigrant visas and nonimmigrant visas. Immigrant visas Also called green cards, these are issued to foreign nationals entering the U.S. as lawful permanent residents.
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Nonimmigrant visas Nonimmigrant or temporary visas are issued to foreign nationals who wish to enter the U.S. for a specific purpose and will not be in the country indefinitely.
Visa B-1 D-1 E-1 E-2 E-3 F-1 H-1B J-1 L-1 M-1 O-1 and O-2 P-1 Q R-1 TN
Type
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