Advisory Committee on Tax Exempt and Government Entities (ACT ...

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* You advance or pay an amount to your employeewithout regard for anticipated or incurred businessexpenses.See section 7 for more information on supplementalwages.Per diem or other fixed ailowance. You may reimburseyour employees by travel days, miles, or some otherfixed allowance. In these cases, your employee is consideredto have accounted to you if your reimbursement doesnot exceed rates established by the Federal Government.The 2007 standard mileage rate for auto expenses was48.5 cents per mile. The rate for 2008 is 50.5 cents permile. The government per diem rates for meals and lodgingin the continental United States are listed in Publication1542, Per Diem Rates. Other than the amount of theseexpenses, your employees' business expenses must besubstantiated (for example, the business purpose of thetravel or the number of business miles driven).If the per diem or allowance paid exceeds the amountsspecified: you must report the excess amount as wages.This excess amount is subject to income tax withholdinand payment of social security, Medicare, and FUT Rtaxes. Show the amount equal to the specified amount (forexample, the nontaxable portion) in box 12 of Form W-2using code L.Wages not paid in money. If in the course of your tradeor business you pay your employees in a medium that isneither cash nor a readily negotiable instrument, such as acheck, you are said to pay them "in kind." Payments in kindmay be in the form of goods, lodging, food, clothing, orservices. Generally, the fair market value of such paymentsat the time that they are provided is subject tofederal income tax withholding and social security, Medicare,and FUTA taxes.However, noncash payments for household work, agriculturallabor, and service not in the employer's trade orbusiness are exempt from social security, Medicare, andFUTA taxes. Withhold income tax on these payments onlyif you and the employee a ree to do so. Nonetheless,noncash payments for agricu 9tural labor, such as commoditywages, are treated as cash payments subject to employmenttaxes if the substance of the transaction is a cashpayment.Moving expenses. Reimbursed and employer-paid qualifiedmoving expenses (those that would otherwise be deductibleby the employee) paid under an accountable planare not includible in an employee's income unless youhave knowledge that the employee deducted the expensesin a prior year. Reimbursed and employer-paidnonqualified moving expenses are includible in incomeand are subject to employment taxes and income taxwithholding. For more information on moving expenses,see Publication 521, Moving Expenses.Meals and lodging. The value of meals is not taxableincome and is not subject to income tax withholdin andsocial security, Medicare, and FUTA taxes if the mea 9s arefurnished for the employer's convenience and on the employer'spremises. The value of lodging is not subject toincome tax withholding and social security, Medicare, andFUTA taxes if the lodging is furnished for the employer'sconvenience, on the employer's premises, and as a conditionof employment."For the convenience of the employer" means that youhave a substantial business reason for providing the mealsand lodging other than to provide additional compensationto the employee. For example, meals that you provide atthe place of work so that an employee is available foremergencies during his or her lunch period are generallyconsidered to be for your convenience.However, whether meals or lodging are provided for theconvenience of the employer depends on all of the factsand circumstances. A written statement that the meals orlodging are for your convenience is not sufficient.50% test. If over 50% of the employees who are providedmeals on an employer's business premises receivethese meals for the convenience of the employer, all mealsprovided on the premises are treated as furnished for theconvenience of the employer. If this 50% test is met, thevalue of the meals is excludable from income for all employeesand is not subject to federal income tax withholdingor employment taxes. For more information, seePublication 15-B.Health insurance plans. If you pay the cost of an accidentor health insurance plan for your employees, includingan employee's spouse and dependents, yourpayments are not wages and are not subject to socialsecurity, Medicare, and FUTA taxes, or federal income taxwithholding. Generally, this exclusion also applies to qualifiedlong-term care insurance contracts. However, for incometax withholding, the value of health insurancebenefits must be included in the wages of S corporationemployees who own more than ~O/O of the S corporation(2% shareholders). For social security, Medicare, andFUTA taxes, the health insurance benefits are excludedfrom the wages only for employees and their dependentsor for a class or classes of employees and their dependents.See Announcement 92-16 for more information.You can find Announcement 92-16 on page 53 of InternalRevenue Bulletin 1992-5.Health Savings Accounts and medical savings accounts.Your contributions to an employee's Health Savins Account (HSA) or medical savings account (ArcherM~A) are not subject to social security. Medicare, or FUTAtaxes, or federal income tax withholding if it is reasonableto believe at the time of payment of the contributions thatthey will be excludable from the income of the employee.To the extent that it is not reasonable to believe that theywill be excludable, your contributions are subject to thesetaxes. Employee contributions to their HSAs or MSAsthrough a payroll deduction plan must be included inwa es and are subject to social security, Medicare, andFU9A taxes and income tax withholding. However, HSAcontributions made under a salary reduction arrangementin a section 125 cafeteria plan are not wages and are notsubject to employment taxes or withholding. For moreinformation, see the Instructions for Form 8889.Medical care reimbursements. Generally, medical carereimbursements paid for an employee under an employer'sself-insured medical reimbursement plan are notwages and are not subject to social security, Medicare,and FUTA taxes, or income tax withholding. See Publication15-8 for an exception for highly compensated employees.Military differential pay. Military differential paymentsare made voluntarily by an employer to make up some orall of the difference between the regular salary of anemployee called to military active duty and the amountbeing paid by the military if the regular salary was higher. Italso includes military continuation pay and active dutydifferential payments required by state statutes or paymentsmade by certain states or commonwealths that paya stipend or a set dollar amount to their employees calledto military active duty.Military differential payments are not wages and are notsubject to social security. Medicare, or FUTA taxes or toincome tax withholding. Employers should report militarydifferential pay on Form 1099-MISC in box 3, Other income.For more information about the tax treatment ofmilitary differential pay, visit the IRS website at www.irs.Publication 15 (2008) Page 1 1
15. Special Rules for Various Types of Services and PaymentsSection references are to tl?e Internal Revenue Code unless otherwise noted.Special Classes of Em loyment andSpecial Types of Bayments Aliens, nonresident.Income Tax WithholdingTreatment Under Employment Taxes Federal UnemploymentSee pages 14 and 16 and Publication 515. Withholdin of Tax on Nonresident Aliens and Foreign Entities, and Publication 519, U.S.Tax ~uidefor Aliens. Aliens, resident1. Service performed in the U.S. Same as U.S. citizen. Same as U.S. citizen. Same as U.S. citizen. (Exempt if any part of service as crew member of foreign vessel or aircraft is performed outside US.) 2. Service performed outside U.S Withhold Taxable if (I)working for an Exempt unless on or in American employer or (2) an connection with an American American employer b vessel or aircraft and either agreement covers u.L performed under contract citizens and residents made in US.. or alien is employed by its foreign employed on such vessel or affiliates.aircraft when it touches U.S. port.Cafeteria plan benefits under section If em loyee chooses cash, subject to all employment taxes. If employee chooses another125. ( benek, the treatment is the same as if the benefit was provided outside the plan. SeePublication 15-Bfor more information.Deceased worker:1. Wages paid to beneficiary or estate in Exempt Taxable Taxable same calendar year as worker's death. See the Instructions for Forms W-2 and W-3 for details. 2. Wages aid to beneficiary or estate Exempt Exempt Exempt after cagndar year of worker's death. Dependent care assistance programs Exempt to the extent that it is reasonable to believe that amounts are excludable from gross (limited to $5.000; $2,500 if married filing income under section 129. separately). Disabled worker's wages paid after year Withhold Exempt, if worker did not Taxable in which worker became entitled toperform any service for disabilit insurance benefits under theemployer during period for Social Jecurity Act.which payment is made. Employee business expense reimbursement: 1. Accountable plan.a. Amounts not exceeding specified Exempt Exempt Exempt government rate for per d~em or standard mileage. b. Amounts in excess of specified Withhold Taxable Taxable government rate for per diem or standard mileage. 2. Nonaccountable plan. Withhold 1 Taxable TaxableSee page 10 for details.Family employees:1. Child employed by parent (or Withhold Exempt until age 18; age 21 Exempt until age 21 partnershl In which each partner is afor domestic service. parent of tEe child). 2. Parent employed by child. Withhold Taxable if in course of the Exempt son's or daughter's business. For domestic services, see section 3. 3. Spouse employed by spouse Withhold Taxable if in course of 1 Exemptspouse's business. See section 3 for more information.I1 IFishing and related activities,See Publication 334, Tax Guide for Small Business.Foreign governments and international Exempt Exempt 1 Exemptorgan~zations.IPublication 15 (2008) Page 31
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